Mercer International Inc (MERC) 2014 Q1 法說會逐字稿

Good morning and welcome to Mercer International's First Quarter 2014 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'll now hand the call over to David Gandossi.

Thanks, Aaron. Good morning, everyone. As usual we will begin with formal remarks, after which we'll be happy to 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'd 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 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 quarterly report on Form 10-Q, our annual report on Form 10-K, and our earnings Press Release has been translated to reflect this change as if it has 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 will now cover some of the key financial aspects of the quarter, and then I'll pass the call over to Jimmy. In Q1 we achieved EBITDA of $59 million, an increase of almost $32 million relative to the fourth quarter. In Q1, pulp pricing was up and solid demand across all markets led to higher sales volumes.

Pulp list prices rose in the quarter to $925 per ton in Europe, and $760 per ton in China as of the end of Q1. On average, list prices were up close to $20 per ton in both markets. Also positively affecting EBITDA this quarter were the impact of favorable foreign-exchange movements on our Canadian dollar costs and lower SG&A costs.

In addition, not having a major maintenance shut and no restructuring costs in the quarter further contributed to the higher EBITDA compared to Q4. Overall our mills set a new quarterly pulp production record in Q1, led by Stendal, who are benefiting from the recently completed Blue Mill Project, coupled with solid production at both Celgar and Rosenthal. Our finished goods inventory volumes were essentially flat as strong sales kept pace with our record production.

We reported net income of $21 million for the quarter, or $0.38 per basic share, compared to a net loss of $9.8 million, or a loss of $0.18 per basic share in Q4. Our Q1 2014 net income includes a non-cash unrealized gain of approximately $3.2 million on a mark to market valuation of our fixed interest rate swap. The US GAAP IFRS differences relating to major maintenance did not have an impact this quarter when comparing our EBITDA to those of many of our competitors because we did not have a major maintenance shut in Q1.

Switching to cash flow, our consolidated cash position was up approximately $24 million compared to Q4, sitting at over $172 million. Quarterly working capital movements increased cash by almost $18 million on a net basis, primarily due to an increase in accounts payable and a decrease in inventories, partially offset by an increase in accounts receivable.

Capital expenditures, including intangible asset expenditures, drew approximately $8.3 million during the quarter; of this total, roughly $4.4 million was spent at Stendal, the majority of which comprised final payments on Stendal's Blue Mill Project. In addition $1.7 million was spent on the development of our new enterprise-wide software system, while the remainder was spent on high-return capital projects at Rosenthal and Celgar.

On the financing side, Stendal made the scheduled principal payments on its Stendal and Blue Mill facilities, totaling approximately $30 million, and Rosenthal made the final payment on its investment term loan. As at the end of the first quarter, Stendal had received a total of approximately EUR8.8 million of the EUR11 million worth of government grants it is eligible for regarding the Blue Mill Project. The outstanding government grant balance is expected to be received by the end of Q2.

Our working capital in the 12-month period ended March 31, excluding cash and short-term debt, increased by approximately $12 million to $201 million. The increase was primarily due to higher inventories and prepaid expenses and lower payables. In terms of liquidity, at March 31 we had approximately EUR28.4 million of undrawn revolvers available at Rosenthal and approximately CAD38.3 million available at Celgar.

Our $172 million of cash at the end of Q1 is comprised of approximately $108 million for the Restricted Group, and about $64 million at Stendal. Net debt to equity on a consolidated basis at March 31 is down slightly from Q4 at approximately 2.1 times equity, while the Restricted Group's net debt to equity was also down slightly, at less than 0.6 times equity.

In July 2013 we announced a workforce reduction at the Celgar Mill. At March 31, 2014 this process is on target with no significant costs incurred in Q1, and we continue to expect that this risk workforce reduction will realize pretax savings of between $8 million and $10 million annually, with about 80% of those annual savings being realized this year.

I would also like to provide a quick update on our project to implement a new Enterprise Resource Planning, or ERP, solution; as I noted in Q4 we have selected SAP as it best meets our current needs, and is flexible enough to meet our needs going forward as our business evolves. This project is going as planned and is on target to be completed in stages over the next two years.

One final point: on April 2 we closed on an equity offering and issued 8.05 million new common shares, which included the underwriter's full option of 1.05 million common shares. The shares were offered to the public at a price of $7.15 per share with the net proceeds from the offering totaling approximately $53.6 million. This offering was a strategic initiative to ensure our Stendal Mill has strong financial flexibility, and to also allow us to proceed with certain targeted high-return capital projects. Due to the timing of this transaction it will be counted for in Q2 and that ends my overview of the financial results so I'll now turn the call over to Jimmy.

Thanks, David. Good morning, everyone.

Let me start by saying we're very pleased with our first quarter results; compared to Q4, pulp prices were up and our sales volumes increase significantly. The success of our Blue Mill Project is also reflected in our results, as Stendal's strong production led the way in our achieving record pulp production and record electricity sales volumes.

In the first quarter a steady demand pushed average NBSK list prices up across all markets. In Europe the quarterly average list price rose to $920 per ton, while the Chinese quarterly average list price was up to $753 per ton. March NBSK producer inventories were at 28 days, down one day from February. At these inventory levels, the NBSK market is considered to be in balance.

It is worth noting that inventory levels came down despite the logistical issues facing certain Canadian producers, which limited sales and forced producers to build finished good inventories. Specifically, extreme winter conditions in North America, which created unreliable rail car availability through the winter, while currently, Canadian rail cars mandated priority for grain shipments continues to severely limit rail car availability for pulp shipments. And in February, container truck drivers went on strike at the Port of Vancouver, which effectively stopped all pulp shipments through the port for most of Q1.

The truckers are now back at work, but the cargo backlog will take weeks to unwind. Not surprisingly, given the new capacity that is coming online, the March hardwood pulp inventories are up three days from February, at 48 days. I'll speak a little bit more about this in a moment.

NBSK list prices in April are $130 in North America, $925 in Europe, and $750 in China. We believe that despite the slightly lower April prices in China, that low customer inventories will force buyers back into the market in late Q2 or early Q3, which should create upward pricing pressure. Adding to the expected pricing pressure is the fact that NBSK production will start to slow down as mills begin to take their annual maintenance shuts, and in Europe supply will be further reduced in the short term as a recovery boiler issue at an Austrian NBSK mill forces it to curtail production.

Overall, we do not expect prices to drop significantly in Q2. In addition, when thinking about the demand for NBSK, it is worth noting that there are approximately 3 million tons of incremental tissue capacity coming online globally in 2014, with approximately 1.8 million tons coming online in China. In addition, there are approximately 1.3 million more tons 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.

With regard to the approximately 1.6 million tons of new hardwood capacity coming online in 2014, certain analysts expect it will create a drag on the NBSK market. We do not share this view and 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 the machines to run at the high speeds that they're designed for.

However, it is clear that certain customers are expecting NBSK prices to fall, with some analysts predicting Chinese pricing as low as $700 per ton. We believe that the lower April pricing in China to be the result of this market psychology, but we expect that this will be short-lived given the current NBSK supply situation, including that we were seeing fewer tons of NBSK being shipped through China from Europe due to the strong European demand. Consequently, we don't believe that a large price gap between hardwood and softwood will be significantly negative -- will have a significant negative impact on NBSK pricing in the near future.

Turning to our pulp production for a moment, Q1 was a record production quarter for us, Stendal achieved its second-best quarterly production, while Rosenthal had another strong production quarter, and despite some unplanned downtime, Celgar also had solid production. In total we produced approximately 382,000 tons of pulp this quarter compared to approximately 365,000 tons in the fourth quarter and approximately 361,000 tons in the first quarter of 2013.

Our Q1 production was broken down as follows: Stendal produced 171,000 tons, Celgar produced 119,000 tons, and Rosenthal produced 92,000 tons. In addition, the mills produced approximately 466 gigawatt-hours of electricity in the quarter, compared to 436 in Q4 and 424 gigawatt-hours in Q1 of 2013. Our pulp sales volume were up in Q1, and totaled approximately 301,000 tons compared to 359,000 tons in the fourth quarter and 357,000 tons in Q1 of 2013.

I would also like to highlight that Celgar's Q1 sales were about 21,000 tons lower than expected due to the rail car- and pulp-related logistical issues I mentioned earlier. The sales by mill in the quarter were as follows: Stendal sold 188,000 tons, Celgar sold 98,000 tons, and Rosenthal sold 95,000 tons. While our Q1 sales by region were: in Europe 219,000 tons, China 114,000 tons, and all other regions combined were 48,000 tons.

Now let me take a moment to discuss developments in the wood market. Relative to the fourth quarter our per-ton German fiber costs were down in Q1. Throughout 2013 a number of factors contributed to create some of the higher fiber costs we have ever seen in Europe. Late in Q4 2013 and through Q1 the fiber market dynamics begin to change. An unusually warm winter allowed for steady harvesting rates, and in addition, sawmills continued to run at high rates, which has increased the supply of chips.

On the demand side the warm weather has significantly decreased the demand for wood pellets and in turn the pellet producers' demand for chips. Overall, we have seen our German fiber costs come down and we expect further decreases in Q2. We continue to monitor this market closely, and are very focused on opportunities to reduce our German fiber costs going forward.

In British Columbia, our per-ton fiber costs were essentially flat in the first quarter relative to Q4, primarily due to continued strong saw milling activity in Celgar's fiber basket. We anticipate that Celgar's fiber costs will stay relatively flat through the second quarter. We are currently satisfied with each mill's fiber inventories, and expect they will be able to continue to sort the fiber we need. 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 Q2 for 10 days or approximately 14,000 tons, Rosenthal will be down for 12 days in Q3 or approximately 12,000 tons, and Stendal is not scheduled to have a major maintenance shut in 2014 but instead will have two small, two-day shuts in Q2 and Q4 of approximately 3,600 tons each.

As David mentioned we issued roughly 8 million new common shares in early April. We're very pleased with the demand for our common shares and the fact that we have a number of new shareholders as a result. We believe that this will increase the liquidity of Mercer's shares.

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 mid- to late 2014 with a decision several months after that. We'll provide regular updates as we move through this process.

In closing, there's pressure on the market, most notably in China, for price concessions due to the current supply of hardwood and the widening price gap between hardwood and NBSK. However we believe that the market fundamentals will reverse that pressure late in Q2 or early Q3. Statistically speaking the market is in balance based on the producer inventory levels.

In addition, customer inventory levels are low and demand in the form of new tissue capacity is expected to grow through 2014 and 2015. Consequently, we currently feel pricing momentum will begin to build late in the second quarter, and we remain confident that the new hardwood capacity will not have a significant negative impact on NBSK pricing. 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'll turn the call back to the operator so we can open the call for questions. Thank you.

(Operator Instructions)

Paul Quinn, RBC Capital Markets

Just a question on, you referenced the March stats that show softwood in balance yet we're seeing, I would say, the start of some price weakness in China. How do you reconcile those two, and what do you expect China for the balance of Q2?

If you look at the situation, clearly we believe that the weakness in price is driven by more psychology than anything else. I think everybody's talking the market down, clearly of course from the buyer's perspective in China they're hesitant to buy because everybody is telling them prices will come off. And playing into the situation, clearly, is the fact that certain, not necessarily NBSK producers, but also the Russian, as you know, NBSK producers because of whatever reason, logistical issues, as you know, as well as other reasons have announced significant price decreases.

There's been others which have followed as a result. But I think if you look at the European and North American situation, clearly prices have held up relatively well and at the same time we know that the customer inventory levels, certainly from what I can gather, seems to be pretty much at the lower end.

We know in terms of our own production inventory levels, aside from the Celgar situation because of the port and others, which of course everyone is quite familiar, certainly in terms of our German operations the inventory levels are very low compared to any other similar type of quarters going into the part of this year. So I think this is not because this is really, not a -- I would say it's a psychological-driven price weakness more than anything rather than an absolute pure demand or supply, Paul.

Earlier this week we heard from International Paper regarding their Ilim operation in Brask, and they were describing the startup of that machine as challenging which -- but it seems to have been gaining traction and operating rates are 70% and they expect to get that back fully operating by the end of the year. Do you think that will have an effect on the market at all?

No, I think that basically the incremental increase of their production coupled with the fact that, of course, you're getting new capacity being started up, particularly in the tissue area, will support, really, that incremental tons coming into the market. So we're pretty confident that that increase in supply will not really have a big impact.

I welcome your difference of opinion with just about every other company out there that seems to be very cautious on price, and I'm definitely cautious on price going forward, but -- so it sounds like your view is additional hardwood capacity is not going to affect softwood pricing. I'm hoping you are right so best of luck in the quarter.

Andrew Kuske, Credit Suisse.

If you could just give us some perspective on your thoughts and your feelings about the cycle currently, and how it feels, say, versus past cycles. Are we at a point where you feel like you're going to do more mid-cycle numbers or were you trending towards more of a peak cycle? Because the prices would really imply something more on a peak basis.

Yes but if you look at the pricing from a European perspective, really, from a euro, it's certainly not at peak prices. So yes, in dollar terms, yes, certainly it is near to what historic peak pricing has been but at the same time underlying that, of course, is the significant increase in discounts which really do not reflect the existing mill nets that presently the producers are getting.

The other fact, I think, is a little bit different in terms of this cycle that people are not maybe focusing on is the fact that this, probably, is the first cycle that I've seen where pretty much all the mills have run right through. I'm talking about the marginal mills that typically have taken market-related downtime; this cycle they did not. And that's because they have been owned by a different group and it's a significant amount of tons which, of course, continue to run through the cycle.

And considering that these have been running inventory levels at the producer side has continued to be drawn down, and if you look at the impact of the port strikes and the rail car situation, even I was expecting that inventory levels would actually build because of that, but surprisingly there was actually an inventory drop. That is a very positive development in my mind, and it clearly shows that the demand side is strong and the supply is limited. Now unlike past cycles, when prices have been high what you always had is these marginal mills which have taken curtailment all of a sudden starting to come back into the market, and therefore forcing the cycle again to drop, and we go back to the cyclical situation that industry has typically been accustomed to.

Now we don't know what the impact of, really, the non-closures of these marginal mills at this cycle will mean in terms of the shape of the cycle this time around. My expectation is that you got pretty much everybody running who's able to run running, inventory levels are pretty good, there's no new capacity or mothball capacity that I'm aware of which will suddenly come back to hit the market. And so I'm expecting that it's a gradual recovery, price is continuing to improve.

And new customers and new capacity, certainly, will continue to produce that incremental demand growth that should pick up any slack in the system. And that's why I am optimistic, and I don't see quite the reasons why some of my peers in the industry are taking a different view. But as I said market psychology can be a very strong influence on how people perceive things.

That�s very helpful. To follow up on a couple of your points, you have given the operating rates where they are, in the high 90s, on the softwood side and the tightness in the market and some fourth-quartile facilities that are operating pretty much flat-out as far as we can see. What do you think your cost advantage is, say, on a per-ton basis over your economic returns that you get per-ton versus, say, those fourth-quartile mills? What's that delta?

I really haven't looked at the numbers recently, but of course I know that based on the production problems, certainly, of many of these marginal facilities the operating cost is significantly high. And of course that isn't really the main barrier, I think, in terms of the market right now. I think what is really important to understand is that you have everybody running and inventory levels are still dropping.

And this will continue to build pricing momentum rather than, really, a weakness. And at the same time, these guys ran through the weak cycle, so even though they were losing money they continue to operate. So we know that no matter what the pricing situation is going to be, it's likely that these guys will continue to run like they did, and that is why I view this particular cycle very much differently than every other current cycle that we've seen recently

(Operator Instructions)

Andrew Shapiro, Lawndale Capital Management

You made some money on the equity, money raised this quarter, have you already, and to what extent, downstreamed equity dollars down into Stendal, and did your joint venture partner co participate or what has our -- Mercer's ownership percentage in Stendal increased up to now?

So we have not downstreamed any money yet. We're anticipating doing that either late in the third quarter or early in the fourth quarter. As we disclosed in our offering material where we're going to put EUR10 million in as part of our commitment from the amendment that we did in 2009. We're currently negotiating with our minority partner and working with the banks on our structure and we'll just have to update you as that progresses.

And the log shipments due to the port strike and all that -- absent the port strike, were you guys shipping or did you have, were you using the full container capacity up, whereby this, we'll call it rollback, into the current quarter of all the lost shipments pushes something from this quarter into the next quarter? In other words, is there a makeup in some incremental cash flow and revenues we ought to see as a result of the strike now being ended, or is it, in a sense, rolled forward constantly and thus permanently lost?

I would expect it would be pretty much caught up by the end of the second quarter, Andy. So if we left 21,000 tons behind current EBITDA margins, there's $4.5 million to $5 million that will flip from quarter 1 into quarter 2 on those tons, would be my guess.

And since you are talking about a NAFTA claim litigation [timing] for the beginning of the court case itself to be mid-2014 and as we speak it is now May. Are there any particular milestones, hearings, [timing] that is already scheduled, in this case, for presentation of each party's case?

Milestones for us was we filed our memorial which is a massive document with all of our facts and figures and expert testimony and justification of damages and so on. Canada now has a period of time, I think it's three months, two or three months, to respond and file theirs. And then there's questions, replies, back and forth a few times with arbitration, in-person interviews early in 2015.

And when did you make the filing for the three-month time, when did it start clicking away?

Our memorial, I guess three weeks ago.

And is that a matter of public record in Canada?

No it's not.

Okay, not at this stage. Great. And the last thing is, how big is the facility in Austria, I guess it was, that Jimmy referred to where there is some unexpected downtime, lost production, and how long might that kind of remodel or construction take?

We think -- it's an integrated mill right now and they have restarted one of their other older, small recovery boilers so our estimate of the impact, from a market pull perspective, is around, somewhere in the order of about a 14,000 tons per month type of estimate.

How many months is fixing this kind of problem generally take?

Well it's going to take many months, we think probably it could be a year, maybe a little bit more.

David Quezada, Raymond James.

Just a quick question for you, and I apologize if this was addressed earlier, could you -- and I know the Blue Mill Project is complete and was successful. Do you have any other discretionary CapEx projects worth discussing over the next 12 to 18 months?

We've got a few things we're pretty excited about. We're building a new tall oil -- the first tall oil plant for Rosenthal, as a lot of listeners know, we used to -- Stendal is our only mill with a tall oil plant and we used to ship soap from Rosenthal to Stendal and then we got so good at (inaudible) Stendal that they've fully utilizing their -- and we increased the capacity at Stendal so they're pretty fully-loaded with their own soap so we're building a second tall-oil plant at Rosenthal.

For Celgar the focus this year is on their chip screening, which is one piece of equipment that we think has a really big impact -- positive impact if you modernize that, so that's underway. And I guess the other really big focus for us is on the wood side. Here in Europe we're -- got a full-core press on all sorts of strategies that not only will help us reduce our wood costs here in Europe but also help us develop, if you like, a bigger trading business, a bigger footprint that contributes to lower wood costs but also provides some margin for us as well.

So lots to talk about coming in the coming years, things like railcar logistics, we run about 300 rail cars in Germany, so we're focusing on that fleet, finding a way to get a deeper reach, lower the costs and those kinds of things. So early days but quite excited about it, and none of it's really heavy capital but it's all quite accretive, we think, and strategically we're very excited about the wood strategy in particular.

And we have no further questions at this time. I'll turn the call back over to the presenters.

Well I thank everyone for coming to today's call and thank you.

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