Mercer International Inc (MERC) 2013 Q4 法說會逐字稿

Good morning welcome to Mercer's International fourth-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, Tracy. As usual, we will begin with our 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 fully described in our press release and with the Company's filings with the Securities and Exchange Commission.

I would first like to begin by reminding everyone that effective October 1, 2013 we have changed our reporting currency from the euro to the US dollar. Our historical financial information in our annual report on Form 10-K and our earnings press release has been translated to reflect this change as if it had been previously reported in US dollars. As a result, all monetary references in today's call will be in US dollars unless otherwise noted.

I should also point out that for those who may have missed it, Mercer furnished a Form 8-K on February 6, 2014, which provides quarterly historical balance sheets and statements of operations in US dollars. I'll now cover some of the key financial aspects of the quarter and then I'll pass the call over to Jimmy.

In Q4, we achieved EBITDA of $27.2 million, down approximately $5.6 million relative to Q3. In Q4, pricing was up significantly in all our markets, however, these higher prices were offset by higher scheduled maintenance costs at Stendal as Stendal had their major annual shut in Q4.

This maintenance shut had an impact of over $10 million in the quarter. We also had slightly higher SG&A costs primarily due to higher stock compensation costs, which are tied to movements in our share price.

Overall, the German mills had solid production in Q4 while Celgar struggled a little. Rosenthal set a new quarterly production record and Stendal produced 60,000 tonnes for the first time in the month of December. Our finished goods inventory were up approximately 6000 tonnes as strong production late in the quarter outpaced sales in December, primarily due to holiday related logistics challenges.

Overall, pulp list prices were up strongly in the quarter. List prices ended the quarter and $905 per tonne in Europe, $750 per tonne in China. On average, prices were up about $35 per tonne in Europe and over $50 per tonne in China.

We reported a net loss of $9.8 million for the quarter, or a loss of $0.18 per basic share, compared to a net loss of $3 million, or about a loss of $0.05 per basic share in Q3. Our Q4 2013 net loss includes a deferred income tax charge of approximately $5.6 million, primarily due to a non-cash adjustment to our deferred tax asset account.

The loss also includes a non-cash unrealized gain of approximately $4.1 million on the mark-to-market valuation of our fixed interest rate swap, partially offset by a realized loss on our pulp swaps. Also included in the loss this quarter is a charge of approximately $2.6 million related to our restructuring projects at both Celgar and Stendal.

The US GAAP IFRS differences relating to major maintenance had an impact this quarter, when comparing our EBITDA to those of many of our competitors. In Q4, we expensed approximately $10 million for major maintenance and almost $25 million for the year to date, the majority of which would've been eligible for capital treatment under IFRS.

Switching to cash flow, overall our cash position was down approximately $34 million compared to Q3, sitting at approximately $148 million. Quarterly working capital movements decreased cash by approximately $34 million on a net basis, primarily due to a large decrease in accounts payable and an increase in finished goods.

Capital expenditures grew about $7 million during the quarter. Of this total, roughly $3.6 million was spent on Stendal's Blue Mill project, while the remainder was spent on other high return capital projects at Rosenthal and Celgar.

On the financing side, Celgar repaid approximately $6.6 million on its revolver, and Stendal received at $3.9 million of government grants. At the end of the quarter, Stendal had received approximately $9.3 million of government grants for the Blue Mill project. As a result of this project coming in under budget, it is now eligible for approximately EUR11 million of government grants, the outstanding balance selling to Stendal is expected to be received by the end of Q2.

Our working capital movements in the 12 month period ended December 31, excluding cash and short-term debt, increased by approximately $21 million to $220 million. The increased risk was primarily due to higher inventories a lower payables, partially offset by lower receivables.

In terms of our liquidity, at December 31 we had approximately EUR28.3 million of undrawn revolvers available at Rosenthal, and approximately CAD33.3 million available at Celgar. Our $148 million of cash at the end of Q4 is comprised of approximately $83 million for the Restricted Group and about $65 million for Stendal. Net debt to equity on a consolidated basis at December 31 is up slightly from Q3 at approximately 2.4 times equity, while the Restricted Group's net debt to equity remains flat at approximately 0.6 times equity.

In July, we announced a workforce reduction at the Celgar mill that would reduce the workforce by approximately 85 employees. At December 31, this process was nearly complete. And in the fourth quarter, Celgar incurred about $1.2 million of restructuring expense, or approximately $5 million for the year. We estimate that this workforce reduction will realize pretax savings of between $8 million to $10 million annually, with about 80% of those savings being realized in 2014.

In addition, in Q4 as part of our fixed cost reduction initiatives and to improve our management efficiency, we restructured Stendal's management team. As a result, we accrued approximately $1.4 million of related severance expenses. These costs were recorded in the restructuring expense line in our statement of operations.

I would also like to highlight that in January, we commenced a project to implement a new enterprise planning solution, or ERP, to replace certain of our existing business software applications. This is an important project for us as it will be the foundation for our business for the foreseeable future.

The solution we have selected is SAP and as it best meets our current needs and is flexible enough to meet our needs as our business evolves in the future. We estimate this project will cost approximately $12 million, and is designed to be completed in stages over the next two years. That ends my overview of the financial results, so I'll now turn the call over to Jimmy.

Thanks, David. Good morning, everyone.

Overall, our fourth-quarter results were satisfactory. Compared to Q3, pulp prices were up, but higher major maintenance costs offset the price gains. In addition, we incurred an additional $2.6 million of restructuring costs at Celgar and Stendal. I am pleased with the success of our Blue Mill project, and we are already benefiting from it in the form of incremental energy revenues and increased pulp production.

In the fourth quarter, steady demand pushed average NBSK list prices up across all markets. In Europe, the quarterly average list price rose to $902 per tonne while the Chinese quarterly average list price were up to $737 per tonne.

In December, NBSK producer inventories were at 27 days, up approximately 2 days from November. At these inventory levels, the NBSK market is still considered to be below balance. December hardwood pulp inventories are down 1 day from November at 39 days.

As a result of this market tightness, producers have recently announced an additional $10 increase in all markets beginning February, which brings list prices to $1010 in North America, $920 in Europe, and $760 in China. We are currently optimistic that this pricing momentum will be maintained through the first half of 2014, due to the increased demand, primarily from China, and low inventories at both the producer and consumer levels.

We estimate that there are approximately 3 million tonnes of incremental tissue capacity coming on globally in 2014, with approximately 1.8 million tonnes coming online in China. In addition, there are approximately 1.3 million more tonnes of tissue capacity scheduled to come online in 2015. This growth in tissue capacity is unprecedented and is expected to further tighten the NBSK market. As a result, we continue to be optimistic about the demand for NBSK going forward.

On the supply side, we see certain previously integrated European pulp becoming market pulp with the closure of certain paper mills. However, we believe that this incremental demand will more than offset new market pulp supplies.

In addition, certain analysts believe that the approximately 2.1 million tonnes of new hardwood capacity coming online in 2014 will create a drag on the NBSK market. We do not share this view. We believe that the papermaker's ability to substitute hardwood for softwood is limited due to the fact that modern paper machines require certain strength characteristics from their raw materials in order for their machines to run at high, at optimum speeds that they were designed for. Consequently, we don't believe that a large price gap between hardwood and softwood will be a significant negative impact on NBSK pricing in the near future.

Turning to our pulp production for the moment, after several years of steady improvement, we were disappointed with our overall production in 2013. However, we are encouraged by the positive results late in the year. Rosenthal set a quarterly production record in Q4, on road to achieving a new annual production record.

Stendal was down for 12 days for its planned major maintenance shut, but otherwise their production was strong and benefited from the Blue Mill project in reaching the milestone production level of 60,000 tonnes in December. Unfortunately, Celgar had some unplanned maintenance issues that reduced their Q4 production. In total, we produced approximately 365,000 tonnes of pulp this quarter, compared to approximately 609 -- 69,000 tonnes (sic - see press release "369,000") in the third quarter, and approximately 350,000 tonnes in the fourth quarter of 2012.

Our fourth-quarter production was broken down as follows. Stendal produced 151,000 tonnes, Celgar produced 117,000 tonnes, and Rosenthal produced 97,000 tonnes. In addition, the mills produced approximately 436 gigawatt hours of electricity in the quarter, compared to 444 in Q3, and 406 gigawatt hours in Q4 of 2012. Our pulp sales volume totaled approximately 359,000 tonnes in Q4, compared to 357,000 tonnes in the third quarter, and 335,000 tonnes in Q4 of 2012.

Sales breakdown by mill in the quarter were as follows. Rosenthal sold 90,000 tonnes, Stendal sold 148,000 tonnes, and Celgar sold 121,000 tonnes, while our Q4 sales by region in Europe were 209,000 tonnes, China 112,000 tonnes, and all others combined were about 38,000 tonnes.

Let me now take a moment to discuss developments in the wood markets. In the fourth quarter, German wood prices remained essentially unchanged from the elevated levels in Q3. However, we are seeing chip demand come off slightly, which is creating downward pricing pressure, while hardwood costs -- while roundwood costs are up slightly due to the steady demand and less than optimal harvesting rates.

In 2013, a number of factors conspired to create some of the highest fiber costs we have ever seen in Europe. Going back to last winter, unusually cold weather coupled with heavy snowfall severely limited harvesting and sawmill residual supply. The limited supply combined with the heavy demand for fiber from pellet producers pushed prices up the early in 2013.

Subsequently, the warm spring weather brought catastrophic flooding throughout most of Germany, which also hampered both harvesting as well as logistics. As a result, supply was unable to catch up with demand throughout 2013, resulting in high fiber prices all year.

Currently, German sawmills are running at high levels in a market where log supply is still relatively low, which has resulted in sawmills using high-quality pulp logs, thereby increasing the supply of chips but also keeping pressure on roundwood prices. We are monitoring this market closely and are looking at opportunities to reduce our fiber costs going forward.

However, we are optimistic that the mild German winter will allow supply and demand to come back into balance as we move through the first half of 2014. We are currently seeing some positive signs in this market, but overall we anticipate that our German wood costs will remain essentially flat in Q1 for 2014.

In British Columbia, our fiber cost is trending downward most of the year on the resurgence of the lumber industry. And we're down slightly in the fourth quarter relative to Q3. We expect that Celgar's fiber costs will also remain flat for Q1 of 2014. We are currently satisfied with each mill's fiber inventories, and expect the mills to work through their winter fiber inventories in Q1.

We also expect that we will be able to continue to source the fiber as we need, but will continue to monitor of course the fiber markets and our inventory levels closely. I'm very pleased to note that our Blue Mill project was completed on time and below budget in Q4.

The new turbine began its ramp-up phase in September and is currently running at planned capacity, and we have also seen improvements in our pulp production capacity. Our investment in this project totaled approximately EUR38 million, with approximately EUR11 million of that coming in the form of non-refundable government grants.

We regularly get questions about the timing of our annual major maintenance shuts, so I'd like to highlight that our 2014 shuts are scheduled as follows. Celgar will be down in Q2 for 10 days or approximately 14,000 tonnes, Rosenthal will be down for 12 days in Q3 or approximately 12,000 tonnes, and Stendal is not scheduled to have a major maintenance shut in 2014, but instead will have two small 2 day shuts in Q2 and Q4 for a total of approximately 3900 tonnes each.

With respect to our NAFTA claim, we are working with our advisors to move this process forward and we continue to expect our case to be heard in the mid- to late-2014, with a decision several months after that. We will provide of course regular updates as we move through this process.

David mentioned the workforce reduction 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 has nearly completed this process. We remain confident that this restructuring will be successful in meeting its productivity and cost saving goals. In addition, as part of our fixed cost reduction initiative, we made the decision to restructure Stendal's management group. And we expect these changes will result in more efficient management team.

In closing, we believe the NBSK markets are continuing to build momentum with steady price increases in all markets. Statistically speaking, the market is slightly below balance based on producer inventory levels, and customer inventory levels are also reasonably low. Consequently, we currently feel pricing momentum will continue to build in the first half of 2014, and we currently do not believe new hardwood capacity will have a significant negative impact on NBSK pricing.

We are also watching our costs closely with European fiber costs at near historic highs. We are dedicated significant resources in the temp to mitigate this issue. We continue to be optimistic about the medium- to long-term NBSK supply demand fundamentals, which we foresee as being driven by increased economic standards globally.

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)

Your first question is from Bill Hoffmann with RBC Capital Markets.

Thanks and good morning. Jimmy, I was just wonder if you -- it looks like with the Stendal project done, all the stuff done up at Celgar, just looking forward what do you expect next with the business? Where do you want to take it?

Well, I think the most critical things that we are working on really is in terms of the input costs and, therefore, our focus really is in regards to of course continuing to reduce our fiber costs back to those levels which we had around in around the mid-2000s. And we believe that there is various ideas that we are working on which we believe will have significant benefits. Unfortunately, of course is not going to occur right away.

But we believe that in the medium- to long-term that we will have much better control in terms of our fiber costs. This of course involves significant logistics issues and others, but we feel very confident that we have the various projects or initiatives that we believe will make a material difference what if they are successful. So that's really our focus in the meantime.

With the target to get the cash generation up to where you were a couple years ago?

Well, I mean if you look at the renewable energy issue, of course it had a very negative impact in terms of fiber costs in Germany as well as in other areas. And of course if you look at 2005 and 2006 prices, you can see that there was a significant change in regards to what was the steady-state price. And of course, we do not believe we could get to those much lower levels, but we think we can make a significant impact in regards to fiber costs that we are presently experiencing.

Okay. Thanks. And then just a thought on use of free cash in 2014, especially if you continue to have these higher prices?

Yes, we are going to have some fairly good build up in terms of cash, and of course our focus as always is to look at deleveraging as the primary objective. Certainly, in terms of the Celgar operation, we believe it is performing quite well now, the restructuring efforts, et cetera, and the changes in the management team I think are showing the benefits, and of course it's got the tailwind of the weak Canadian currency. And the continued of course demand in China, where of course Celgar's major market is.

Europe, as you know, is still fairly flat, but it is starting to build momentum. And we believe that the worst of the market conditions are over there, too. And so, we hope that we will continue to build momentum in Europe which will further improve our overall cash generation. And of course, with the continued focus on fiber costs, that in the medium- to long-term of course we will reestablish the significant cash generation at those facilities too.

Thanks and maybe just last question. David, you mentioned bank availability at the Rosenthal and Celgar facilities. Can you go through that again?

Yes, it's about EUR28 million at Rosenthal and $33 million at Celgar. There's nothing drawn on either of our revolvers. It's just the guarantees around what purchases using up a bit of the availability, but they're both fully available to us.

Great. Thank you.

Yes.

Your next question is from Richard Kus with Jefferies.

Good morning. I know that your mill is really more in Western Canada, but is there any disruption you guys have seen from the poor weather we've had here over the course of early 2014?

Yes, there's been a little bit of trickle on impact in terms of the availability of railcars really. I think all the Canadian producers have suffered somewhat. We're fortunate we're not too far away from the port, so we are able to cobble together solutions like trucking and so on.

So no real negative impact on our customers, I'd say. A little bit of increase on Celgar's transportation and logistics costs, but nothing too significant and nothing major, no real negative trend developing. I think it's more likely to start improving.

Okay, and Celgar has operated effectively throughout the first quarter so far, right?

It sure has, yes. They had a great January, yes.

Okay, fantastic. And then, just curious on the discounts. Given that the markets are so tight, why haven't we seen those discounts tighten up?

Well, you know this is been a trend that has been ongoing, and I think there was a push a couple of years ago to really tighten up those discounts. But I think the customers like the list price being fairly high and of course the discount is not always so clear.

I guess it improves their market and pricing strategy, and therefore, there seems to be a resistance to really reduce the discounts, but at the same time of course it just means that list prices are up but it's kind of meaningless at the same time. But we are trying to focus on net pricing, but there seems to be clearly not a consensus to try to get that direction.

Okay. And then lastly on CapEx, what is the outlook for 2014?

Yes, I guess in round numbers we're expecting about $40 million, $3.5 million of that will be covered by government grants. As a deduction, the tail end of the Blue Mill project. Some interesting components in there, Rosenthal is building its own tall oil plant. It used to transfer its soap over to Stendal because Stendal had our first tall oil plant, but Stendal mill has become so effective at recovering its own soap that it's fully utilizing its plant on its own.

So Celgar, Rosenthal will get its own, be completed by the end of the year. We are doing a chip fitness screening upgrade at Celgar. It's very high return project that we've seen in our other mills, has a big impact on reliability and product quality. So that's happening this year.

And then the remainder is just a whole variety of mostly high return projects. There is a little bit of maintenance in there, but -- maintenance of business projects -- but primarily good high return projects at each mill.

Okay, and how does that break out by mill?

It will be $18 million for Rosenthal, about $12 million for Stendal, and $10 million for Celgar.

Great. Thanks a lot guys.

Your next question is from Andrew Shapiro with Lawndale.

Yes, hello. I don't recall any prior mention of the Stendal restructuring, just its maintenance downtime for this quarter. So was this a new development? And you mentioned I think it's about a $1.4 million charge, maybe primarily severance. What is the assumed savings that should be coming from this?

Andy, the savings on that are about the same as the restructuring charge. Really what we did is we took a layer out, five positions, but was really we moved in a new managing director, brought our guy over from Rosenthal; very strong, great, great manager. Stendal just looked like it needed to pick up its game a little bit, so we put him in there and taken the layer out below and restructured. And it's just really, it's one of those -- invigorating the mill.

It's hard to describe, but we are very optimistic and excited about those changes. We can see it in its operations already and you can just feel the energy in the mill is stepped up a notch. It's not really about the fixed cost savings as much as about the morale and the attitude and the engagement in the mill.

So the other positional changes, you don't expect them to come back and be replaced?

No, it's -- (multiple speakers)

Managerial shift and a few spots out, okay. And I'm assuming this is partially related? It appeared that the Stendal operations from your broken out financial statements that Stendal was operating at a loss last quarter, and was that on an operating basis or with one-time items?

That's with one-time items, I guess. I can't answer that question directly, Andy, I don't have that.

Okay, it looked like the unrestricted income statement for the quarter had negative EBITDA on there, so --

Yes, I mean its because of the major maintenance shut. It could be slightly negative or reasonably flat. I don't have those numbers on me, but it's really influenced by the downtime.

Yes.

And then, your release says that Blue Mill, and you talked about how Blue Mill is completed. While on the November call, you mentioned how you are ramping up Blue Mill as of September.

So about what amount of the benefit both on the pulp and energy side do you feel we saw in the currently recently completed Q4? And what are the full quarterly expected benefits the Company should get close to in the current Q1 that we're in?

Well, the fourth quarter because of the major maintenance shut, you're not seeing really the full impact of the Blue Mill implementation. Because it didn't --

Right, and you also didn't complete it until December, anyway.

Well, that's when we have the official hand over and in the sense all the tests, et cetera, are finished. That's the official time when -- but of course through September when the turbine was on and everything was being tested, you're generating electricity and improvement in pulp production. But because of the major shut in Q4, really you are not seeing really the potential of that.

As we earlier said, we believe that pulp production easily will increase by roughly about 30,000 tonnes. And coupled with that would be the power generation. And so at this point what we are seeing is really higher power generation than what we originally anticipated.

I think that's probably not just because of the pulp production increase, but overall rebalancing of the turbine, so you're running the turbines much more efficiently. Because clearly were overloading the first one and with the additional cooling capacity, et cetera, it improves the overall energy efficiency and power generation.

So we are very, very happy with the performance to date, and we believe it will exceed the numbers that we originally had put out there in terms of power generation and pulp generation.

So remind me again then, on an annual basis you thought your enhanced cash flow return would be around what?

Yes so, I'll answer that, Andy. Even if we've disclose 109,000 megawatt hours, and that will produce EUR7 million to EUR7.5 million and 30,000 tonnes of incremental pulp. And what's your normalized EBITDA per tonne? Maybe 150 or 160 or something like that so this another EUR5 million-ish, so you could be in the EUR12 million plus range from Blue Mill.

A year?

Yes.

Euro?

Yes.

And so arguably a quarter of that each quarter? Okay. And the tall oil project on Rosenthal you expect completed by the end of the year you mentioned. Is there any feel for the cash flow, incremental cash flows, that could come from that since you already were doing tall oil out of Rosenthal, but via Stendal already?

Yes, we are expecting at current pricing generate at EUR2 million a year of crude tall oil out of that facility.

Okay. Starting at the end of the year. And then on the NAFTA claim, can you remind us the size of the claim that is being asserted? And is that amount that you have said in the past, did that take into account the long time process that the wheels of justice take? Or what has the claim amount accreted up to?

Well, when we filed our claim we were looking back to when we feel this discriminatory action occurred, which was in the 2008, 2009 timeframe, when were attempting to sell the power from our turbine that was under construction and also the current power that we were producing. And that's when BC Hydro stepped in and unilaterally blocked our efforts in a way quite different from the way they were treating other pulp mills in the Province. So that was the beginning.

By the time we filed our claim, we were looking back three or four years and looking forward through the term, and every year that goes by you're looking back one more year and forward one year less. It's a big number. It's in the CAD20 million a year range since 2008 that we feel we've been harmed.

Celgar still sells a reasonable chunk of power as you know, but it's only at surplus power we're required to completely consume all of our own green electricity generation in our own plant. We have no access to power in the Province the way other mills have, and that is what we are fighting for.

The basis of your claim, yes.

Yes, and so it's well advanced. We've been through the discovery stage and all the document trading stage and a lot of the information is now been processed by our legal team and we feel is confident as ever, and so we made the decision to continue to the end. We're not giving up.

Right.

It's going to cost us a CAD2 million more in legal fees, but we are very resolved in our view that we've been harmed and see what happens.

When you are dealing with the few hundred million, is that dollars or euros or Canadian dollars?

That was Canadian dollars.

Okay. And when you run the costs of the litigation through, is that going through the Celgar financials when you break it out, or it's all up at Corporate?

It goes through Celgar's.

I have a few more questions, but I'll back out into the queue but come back to me, would you?

Okay, sure. Will do. Thanks, Andy.

Your next question is from DeForest Hinman with Walthausen and Company.

Hello. Could you give us an overview of your thoughts on the pellet producers within the German fiber basket and how their demand or consumption has changed over time? And how do you see them from a competitive standpoint going forward in that fiber basket?

The pellet industry as such has been very disruptive, clearly in regards to the fiber costs as well as fiber demand, especially for the sawmill residuals. And unlike industrial pallets which are dependent on the various state subsidies or initiatives, and in Germany it's more based on the carbon credit, in UK there's direct subsidization based on substitution.

So each of these states have different kind of programs available. And the industrial pellet pricing as you'll see really reflects the various components of those subsidies equated to the substitution of coal, because primarily it's more of a coal fire. You substitute in coal and using wood pellets. And you have to make certain modifications to your facility to handle the pellets because of dust and other things and as a result, pricing tends to be in the range about EUR120, EUR140 per tonne type of range.

It has been pretty steady. Most of these end users have long-term supply commitments from the producers and, therefore, pricing has been pretty flat.

On the residential side, it's completely different. It's really driven by domestic heating and it's again different. In Italy, it tends to be more based on bags rather than these bulk type of supply. Germany and Austria tends to be more automated, and you have bulk inventories at the home and the distribution is different.

Pricing for domestic pellets, it's surprisingly is not correlated to really coal prices, which would have been kind of the normal assumption. It's actually seems to be correlated to oil price or natural gas price. And natural gas prices in central Europe tends to be set based on fuel oil equivalents, and therefore, it's not like North America because the major supplier is primarily Russia.

And as a result of that, there has been continued price inflation to reflect the continued elevated levels of oil prices. And a lot of that also is taxes from the state, so in Italy of course you have the highest fuel costs versus even Germany or Austria. But if you consider oil prices in Europe as a whole, it's significantly higher than North America. A big component of that is really taxes.

And therefore, there is a motivation on the part of the average consumer to look at savings by maybe shifting to pellets. And this has been a trend that has been pretty steady, let's say the growth rates have been more significant in Italy, but starting coming from a lower base. And I think it also reflects the much higher oil prices as well as depressed conditions of the economy. And so, this is been steadily increasing demand.

Now, if you look at the price difference between pellet, which could be available from industrial sources, versus the domestic, the gap actually is quite ridiculous. Because the gap between what the domestic consumer is paying, which is higher than EUR300 per tonne in some cases, and industrial pellets at around EUR120, EUR140.

So you can see that there is a huge premium, if you may, and really there's only one difference, really domestic one tends to be certified because the manufacturers of these domestic heating will not warranty the equipment unless you use these certified pellets primarily. And the certification process is not really complicated.

As long as it's a softwood, southern softwood certainly qualifies. So you are seeing a huge amount of capacity coming on in southern United States, reflecting really I guess the increase in demand industrially. That's kind of tapered, though, because other areas rely on carbon credits and that market is being pretty weak. But still continued demand in UK because of direct subsidization. Domestic demand continuing to grow fairly steady.

And I believe that with the new capacity in imports potential in south US, and the spread between industrial and domestic, I think you are going to see essentially pellet prices for residential moderate very quickly, because I don't see that this type of premium can really stay for long. This cost in terms of the price of domestic pellets mean they are very competitive for fiber in our markets.

So the faster this correction occurs, certainly it will have beneficial impact in terms of our pricing. And we don't believe that these type of prices are sustainable, especially with this gap in price and the increase in potential export quantities from southern US.

Okay. And then, can you tell me what the cost for the Stendal shut was in the prior-year fourth quarter 2012?

Well, I think, gee DeForest, I'm guessing a little bit, but I'm going to say that this shut was a $2 million higher than the previous year we had.

Okay, thank you.

Your next question comes from Paul Quinn with RBC Capital Markets.

Yes, thanks and good morning, guys. Just a question on your level of confidence with pulp pricing going forward. We've heard a lot of commentary from other management teams about the impending hardwood capacity coming into the market and what they feel is going to be a softer market through 2014 and into 2015. And just wondering what gives you the confidence to go against the grain?

Well, one of the things clearly is the continued growth in tissue. I know that the basic printing and writing grade is under pressure. There is clearly oversupply and capacity in China, as example. Europe has been continued to be very weak. There's a lot of paper machine capacity taken out.

But there's also the positive side clearly is this growth in specialty grades in China, and not just talking tissue now, but a lot of very specialized, whether it's very lightweight type of wrapping tissue or whether it's liquid board or any of these other products, as well as wallpaper base and all this, which typically use a lot more strength required fibers than the basic printing and writing.

And therefore, we do believe that this underlying strength in demand coming from those growth areas certainly underpins our market. In terms of the printing and writing grade, yes, some of the integrated guys certainly has been taking machines down and shifting to market pulp. We've seen that throughout the last year, couple of years. But you are seeing that this has plateaued, too.

So if you look at country by country, you can see the impact of the exports out of Finland, et cetera, and that has grown. And clearly that's integrated pulp now essentially being market pulp. But you'll also see that momentum has now pretty much flattened, so you are not seeing further major increase in supply coming out of Finland, et cetera.

So clearly that means that most of the stuff that is going to be de-integrated has been done already. Because they've already figured out which paper machines to shut and which ones are essentially going to run. And therefore, we believe that the bulk of this restructuring is pretty much done. The integrated stuff coming on market is pretty much done.

Yes, there is some fluff that makes its way into China, but as you know, the fluff grade really is sold primarily in rolls, which is different than the traditional market pulp which is sold in sheets. There is a cost of handling of rolls and it's very cumbersome if you're going to feed it in.

So the pricing and the demand certainly for fluff is not going to be attractive. And therefore, there is going to be certain end users which may, because of the price difference, look towards that. But again, it's not something that is so optimal and so readily available to a lot of the end users.

In terms of the hardwood, really the Chinese capacity has grown, as you know, over the last few years. Chinese cost of production is very high because they rely primarily on imported chips, all from pretty much the same supply area, whether it's Vietnam or Philippines, et cetera, and therefore, what you are saying is very elevated chip costs. And it makes the Chinese hardwood production probably some of the most expensive in the world.

And you know, so you're going to essentially have a war between the Brazilians and the Chinese domestic producers. And the Chinese producers are wanting to maintain a price, otherwise they will lose a lot of money. So ultimately, the battle is in that front. It's not going to be waged between softwood and hardwood. It's a fight between domestic hardwood and the Brazilian hardwood.

Now, this could mean that ultimately the Brazilians force capacity in China down by driving prices to ridiculous levels. And that could be the strategy. Which means that you would have a sharp correction in the short term rebalancing because essentially that capacity in China is off-line.

Now, this again presents interesting situations because clearly the Chinese government and the industry are not going to want their facility shut. Does it mean then maybe tariffs? If that's the case, then of course hardwood has to shift from China to other areas.

So these are a lot of the variables, but certainly in terms of immediate correction of hardwood prices, I'm doubtful. I see that there is going to be entrenched war between the forces, and at the end of the day whoever has the most amount of money and access to money is likely to win. And it's different for all of these producers.

And you know, at the end of the day if you have excess supply, the only way to correct it essentially, take the capacity out. Right? And it's a war between the low-cost producers and the high-cost producers.

In terms of softwood, we think that we've seen gaps in price of over $150 which have lasted for an extended period of time. Any easily substitution would have been done at that time. It doesn't explain how you can account for the fact that we've had close to $200 gaps for fairly long period. Until the economic conditions changed, we actually had wide gaps for a long time.

And therefore, I see and point to those as really indicating where substitution and other things are at today. And there is nothing clearly that -- other than hardwood prices dropping should influence softwood prices. That's the only kind of correlation that people point to, but it has not been reality as you've seen in the past.

So I don't quite understand how just because hardwood prices are under pressure that automatically we're going to be forced down the same way.

Interesting. Okay, let me just ask one last question just on Illum's Brass expansion. I understand that was a very difficult start. Just wondering if you are seeing more of that tonnage available in the marketplace, especially in China, and whether that's having any influence on the market?

Because they've had such difficulty in start up, clearly you are seeing that their ramp-up has been extremely slow, which means that month over month whatever increase their actually able to do is being easily absorbed. So as long as their ramp-up seems to be constrained and they're predicting now design capacity run rates around the summer of this year, well I don't think that kind of increase month after month will not be taken up very quickly.

Because you are seeing also tissue capacity coming on month after month, and so it's a natural kind of growth in demand, natural supply growth. So it's not going to be disruptive.

Great. That's all I had. Best of luck, thanks.

Thank you.

You next question is from Sean Steuart with TD Securities.

Thanks. Good morning, guys. Dave, just one question for you, and I think you had mentioned these numbers, but I missed it in your upfront comments. The Celgar savings are related to the restructuring there.

How much of that showed up in Q4? And then if you could just reiterate how you expect that to roll out in the results in 2014?

Yes, so how much in the current quarter is difficult because we have some of the severance costs in the quarter and the movement of people out of the mill, sort of like a steady progression, if you like. So I think what we said in our disclosure is by 2014, you could expect about 80% of the benefits from that restructuring, and we've described that as between $8 million and $10 million pretax annually.

So most of the stuff is done. We got a little bit of high return capital to spend to get the final guys out. So 80% of the $8 million to $10 million fixed cost savings will be realized in 2014.

Great. The rest of my questions have been answered. Thanks, guys.

Okay, Sean.

Your next question is from Mark Kennedy with CIBC.

Good morning. I guess my question is more of a general one. So we saw NBSK pulp pricing here in the fourth quarter average about $980 US list, so I would say that's at or above what I would call mid-cycle. So when you look across your pulp asset bases, or pulp asset base right now, I'm just curious, do you have an EBITDA per tonne that you target or want to achieve based on mid-cycle type of pricing?

Mark, we can't really answer that on this call. Getting into uncomfortable areas of forecasting. But I think the first quarter is going to show you a different result from the fourth quarter. I think you'll see in the fourth quarter we went -- we had like a $50 to $60 increase in pulp pricing.

We had some fairly major maintenance, we had winter conditions. I don't think you should think of the fourth quarter as a reflection of what these pulp prices today really mean to the Company. So maybe that's how I'll handle that.

Okay. Thanks.

Your next question is from Andrew Shapiro with Lawndale.

Hello, some follow-ups. Looking at your SG&A for this quarter versus the prior quarter, even the prior year, it seems like it was up in both of the restricted and unrestricted, but it was up pretty sizably. What would account for the increase in the restricted groups increase so sizably?

Yes, well there is a bit of non-cash stuff in there, Andy, like stock comp that moves with the stock price, so we had a bit of a move in the fourth quarter in that. We've got some little bit of professional fees and other things going on, but nothing too significant. Mostly would be the stock comp would be my guess.

And then the unrestricted, that's from the maintenance shut or anything else?

Well, we do have some continuing consulting and legal costs around our settlement agreements, with wrapping up all the EPC contracts and subsidy issues and those kinds of things over there.

So some of these items are in a sense one-timers?

Yes.

Primarily all one-timers.

Oh, so when you say it with that emphasis, is that a quantifiable number? Are we talking about $1 million ex? What are we talking about that you think were one-timers?

Well, consulting fees at Stendal in the $1.5 million range this year, so it's a big number.

Well, I'm talking about Q4? It was Q4 that was up, so much that it stood out.

Yes, I would say it would be $700,000, $800,000.

Well, decent amount. Okay. And when you talk about a bunch of this being non-cash stock comp expense recognition, you were kind enough to provide us the past historical quarters in US dollars for the balance sheet and the income statement, but all we have for the cash flow statement is the fiscal year ends.

Is there any way you could provide or we can be allowed to have off-line, if that is allowed, I guess what you would say is the nine months ended September dollar number? Of which one can then reverse engineer what the Q4 cash flow statements were?

I will have to think about that, Andy. I certainly can't provide full statements off-line. That would be outside Reg FD.

Right. And one more, I mean you do you want to be doing nine month and six month trailing, but that's the only way to create the quarterlies for us to reverse engineer it. But if you could even provide it on a quarterly basis in US dollars that would be great.

Okay. We'll take that under advisement.

Thank you. And did you provide energy sales realizations at all?

Yes, they should be in the front of the press release and will be in the K that is going to come out next week as well.

Okay. So that's then the K earned by plant? And then, am I correct in observing both the Restricted Group and the Stendal are non-Restricted Groups payables were paid down pretty substantially? It seemed like almost more than any other time in previous years.

Is that a correct observation? Is there a particular reason or circumstance that that occurred?

No, it's just completely random. There's no management activity in particular impact on that.

Right.

And you'll see the working capital usage and build will be quite similar to last year. In second quarter last year, we generated quite a sizable inflow of cash from working capital moves, and I'd expect the same thing in Q2 as well for us here.

As you know, we have to build up our winter wood raw material inventory.

Yes.

And so it's a combination of that and typically December, because of the holiday, you always have a larger finished good inventory, which then starts to essentially be drawn down through the first quarter and second quarter. And wood inventories get drawn down right through first and second, and then there is a rebuild through the summer again.

Yes, okay. And when Mercer's ownership interest in Stendal joint venture rose to 83% with your recent equity investment, what percent did it rise from? And did this increase trigger any change in your accounting treatment or presentation with the joint venture?

It increased from 75%, Andy, and I know it didn't result in any change in our accounting methodologies at all.

Okay. So crossing 80% doesn't do anything?

No.

Okay. And the cause of the reason that the deferred tax assets were reduced? Is this based on a projection of the current run rate over this past year in accounting principles or any other reason?

Yes, in US GAAP for deferred tax asset accounting now, the SEC has created some hard-line tests, like the three-year test and so on, so this is just a mechanical application of what is involved in US GAAP. It doesn't make a lot of sense to us, so I would just encourage you to not get too concerned about those numbers that show up on that deferred tax line.

Okay. Two other little ones here. Were there any incremental grants awarded this quarter, outside of course of the release of the Blue Mill funds? Or are there any future governmental grant opportunities that are out there that the Company is in the running for?

Yes, so that program has really pretty much dried up, unfortunately. We do still continue to benefit through really the creativity our of our teams in Germany on the wastewater fee issues.

Yes.

So every three years, we've been able to identify a high return capital project that qualifies as a wastewater fee offset, so instead of having to pay typical wastewater fees every month, if we have a project that's approved by the authorities, we can avoid making those payments.

We do accrue the expenses of them, and then when we complete the project and it's been audited, then we get this reversal coming through the P&L of what had previously been expensed. So we've been doing that quite successfully, so we now have a project that we think is going to win for us, both Stendal and Rosenthal. So that program continues for us. The other ones have pretty much dried up.

Okay. And then finally, now that the fiscal year-end numbers and everything are out, what are your planned road shows and conferences for the coming season?

Yes, we'll be fairly busy. So we've been invited to Credit Suisse, Barclays, we'll do RBC again. We just did CIBC. And I expect we will be on the road a bit as well.

We think it's going to be an interesting year for us and we're quite excited about it, so we're going to get out there on some management road shows and talk about it quite a bit.

Great. Thanks a lot.

Yes, thanks.

There are no further questions at this time. I'll turn the call back over to the presenters for any closing remarks.

Okay, well thanks, everyone, for attending today's conference call. And again, goodbye.

Thanks so much.

Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may now disconnect.