Mercer International Inc (MERC) 2014 Q3 法說會逐字稿

Good morning, and welcome to Mercer International's Third 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 will now hand the call over to David Gandossi.

Thank you, Steve. As usual, I 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.

So, I am going to cover some of the key financial aspects of the quarter, and then I am going to pass the call over to Jimmy.

In Q3, we achieved EBITDA of $67.6 million compared to $41.9 million in Q2, an increase of $25.7 million. In Q3, pulp pricing was essentially flat in China and North America, while at the end of the quarter list prices in Europe were up slightly to $935 per tonne. However, relative to Q2, our Q3 results benefited from the impact of the stronger US dollar on our Euro and Canadian dollar costs, as well as lower German fiber costs. In addition, our major maintenance costs were down approximately $12.1 million compared to Q2, due to Rosenthal's third quarter shut would be much smaller than the combination of Celgar's and Stendal's Q2 shuts.

Despite our Rosenthal mill being down for 10 days for major maintenance in Q3, our mills achieved near-record production this quarter. We also had strong sales volumes this quarter, which resulted in a decrease in our finished goods inventory volumes relative to Q2.

We reported net income of $88.3 million for the quarter, of $1.38 per basic share, compared to net income of $0.6 million, or $0.01 per basic share in Q2.

Our Q3 net income includes a non-cash, unrealized gain of approximately $3.4 million on the mark-to-market valuation of our fixed interest rate swap. Our Q3 net income also includes a non-cash gain on a settlement of debt totaling approximately $31.9 million. This gain is a result of the acquisition of all of the shareholder loans of Stendal's non-controlling shareholder for less than their book value.

In addition, we regularly review our deferred tax positions, and in Q3 based on a development of our taxable earnings and our estimate of future taxable earnings, we concluded it was more likely than not that we will use certain tax assets, and as a result we recognize $31.3 million of deferred tax assets at our Stendal mill.

The US GAAP IFRS differences relating to major maintenance had an impact this quarter when comparing our EBITDA to those that many of our competitors. In Q3, we expensed direct costs of approximately $4.4 million on major maintenance, the majority of which would have been eligible for capital treatment under IFRS.

Switching to cash flow, our consolidated cash position was essentially flat compared to Q2. Our cash balance is currently sitting at approximately $239.9 million. Quarterly working capital movements decreased cash by approximately $14.7 million on a net basis, primarily due to an increase in accounts receivable.

Capital expenditures including intangible asset expenditures drew approximately $10.6 million during the quarter. Of this total, the majority was spent on high-return capital projects at Rosenthal and Celgar and $1.1 million was spent on the development of our new enterprise-wide software system.

On the financing side, we paid approximately $14.7 million of scheduled principal payments on Stendal's debt facilities. Stendal also received approximately $2 million worth of government grants for its Blue Mill project. The final minor installments of grants are expected in Q4.

Our working capital in the 12-month period ended September 30, excluding cash and short-term debt, increased by approximately $22 million, to $202 million. The increase was primarily due to lower payables. In terms of our liquidity at September 30, we had approximately EUR28.4 of undrawn revolvers available at Rosenthal, and approximately $38.3 million available at Celgar.

Our $240 million of cash at the end of Q3 is comprised of approximately $137 million for the restricted group, and about $103 million at Stendal.

Net debt to equity on a consolidated basis at September 30 is down significantly from Q2 at approximately 1.3 times equity, primarily due to our strong earnings this quarter, combined with a lower debt balance.

I would also like to provide a quick update on our project to implement a new enterprise resource planning system or ERP solution. As I have noted previously, we have selected SAP as it best meets our needs today and in the future. This project is going as planned and is on target to be completed in stages over the next two years.

As previously reported, we have successfully completed an important amendment to Stendal's debt facilities. The amendment to both of Stendal's credit facilities were designed to provide the mill with improved financial flexibility. The amendments include loosening the financial covenant ratios, reducing scheduled principal payments under the Stendal project loan by 50%, while keeping the cash sweep mechanism in place.

In connection with these amendments we've provided Stendal with additional capital of $20 million. During the quarter, we also finalized an agreement to require all of the shareholder loans and substantially all of the shares and other rights of the non-controlling shareholder in our Stendal mill for EUR12.85 million, of which [EUR2.85 million] were paid in cash and EUR10 million by way of a one-year payment-in-kind note, which can be paid in cash or in Mercer common stock at our option.

As a result of this transaction, we have adjusted certain equity accounts to reflect our current ownership interest including a loss on the current purchase of equity of approximately $4.8 million, and as I noted earlier, we have recorded a gain on the settlement of debt in our statement of operations totaling approximately $31.9 million.

So, that ends my overview of the financial results, and I'd like to turn the call now over to Jimmy.

Jimmy Lee: Thanks, David. Good morning, everyone. Let me start by saying that overall, we're very pleased with our third quarter results. As David noted, compared to Q2, our EBITDA is up approximately $26 million. Our mills ran well in Q3, and that of course has the effect of lowering operating costs in general. However, the more significant positive impacts on EBITDA quarter-over-quarter with the stronger US dollar or major maintenance costs, and lower fiber costs in Germany.

In the third quarter, prices in all markets were essentially flat. The quarter average NBSK prices in Europe and China were $932 and $728 per tonne respectively. While in North America, the quarterly average list price was $1,030 per tonne.

September NBSK producer inventories were at 27 days and down two days from August. At these inventory levels the NBSK market is considered to be below balance.

In addition, September hardwood producer inventories are down six days from August, at 40 days.

NBSK list prices in October are $1,030 in North America, $935 in Europe, and $730 in China. Looking forward, we believe that low customer inventories in China will ensure steady demand through Q4 when paper production traditionally increases.

Similarly, in Europe and North America, we believe these markets are in balance and expect them to stay in balance through Q4. Overall, we expect pricing in all markets to be essentially flat through Q4. However, given the low customer inventories and market tightness, any significant winter-related logistical challenges could create upward pricing momentum.

We remain optimistic about the future supply-demand fundamentals for NBSK pulp. We see demand growing in developing economies, particularly China, in a variety of grades including tissue, specialties, and board. Specifically there are approximately 2.1 million tonnes of incremental tissue capacity coming online globally in 2014 with approximately 1.1 million tonnes of this coming online in China.

In addition, there are approximately 2.2 million tonnes of tissue capacity scheduled to come online in 2015.

As we have discussed at length in our previous calls, certain analysts continue to predict that the recent hardwood capacity increases will be a drag on NBSK markets. We do not share this view. We continue to believe that a paper maker's ability to substitute hardwood for soft wood is limited, due to the fact that modern paper machines would require a certain [banked] characteristics from the raw materials in order for the machines to run at the high speeds that they're designed for.

We believe that the strong NBSK demand, we have experienced through 2014, and most notably in the traditionally slower months supports our belief. However, given the current market fundamentals, we believe that there is a negative market psychology associated with this new hardwood capacity that is holding NBSK pricing back. We expect this effect will be short-lived due to the strong demand in other markets and low producer inventory levels. Consequently we don't believe that a large price gap between hardwood and soft wood will be a significant negative impact on NBSK pricing in the near future.

Turning to our pulp production for a moment, Q3 was a strong production quarter for us. All of our mills had great production including Rosenthal, which has had 10 days maintenance shut in the quarter.

In total, we produced approximately 376,000 tonnes of pulp this quarter compared to approximately 354,000 tonnes in the second quarter, and approximately 369,000 tonnes in the third quarter of 2013.

Our Q3 production was broken down as follows -- Stendal produced 164,000 tonnes, Celgar produced 128,000 tonnes, and Rosenthal produced 84,000 tonnes. In addition, the mills produced approximately 472 gigawatt hours of electricity in the quarter compared to 446 in Q2 and 444 gigawatt hours in Q3, 2013.

Our pulp sales volumes were up in Q3 and totaled approximately 387,000 tonnes compared to 357,000 tonnes in the second quarter, and 357,000 tonnes in Q3 of 2013. Our Q3 sales were up due to the higher sales volumes in both the European and the China markets. Our quarterly sales by mill were as follows -- Stendal sold 174,000 tonnes, Celgar sold 124,000 tonnes, and Rosenthal sold 89,000 tonnes, while our Q3 sales by region were Europe 251,000 tonnes, China 104,000 tonnes, and all other regions combined were 32,000 tonnes.

Now, let me take a moment to discuss developments in the wood markets. Relative to the second quarter, our per-tonne German fiber costs were down in Q3. In Europe, fiber costs remain at historic high levels, however, throughout the first nine months of 2014, there has been downward price pressure in the fiber markets. Steady harvesting rates have allowed sawmills to run at high rates which has increased the supply of chips. In addition, there is a reduced demand on German [saw] and pulp logs from the pellet producers and board manufacturers. Looking forward, we anticipate that our German fiber costs will increase marginally in Q4. 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 Q3 per tonne fiber costs were essentially flat this quarter, relative to Q2. We anticipate that Celgar's fiber costs will also increase modestly in Q4 due to increased demand from the costal mills.

We are currently satisfied with each mill's fiber inventories and expect that we will be able to continue to source the fiber that we need. We regularly get questions about the timing of our annual major maintenance shuts, so I'll highlight that our only remaining major maintenance shut in 2014 is at Stendal. They will have the second of their two-day shuts in Q4, representing approximately 3,700 tonnes of lost production.

However, we are also estimating that Celgar will lose about 4,500 tonnes of production in Q4 as a result of some planned work on its line kiln.

As David noted, we're pleased that we are able to finalize amendments to both the Stendal loan facility and the project Blue Mill facility. These amendments will provide the mill with greater financial flexibility going forward, and allow management to better focus on operations. We're also pleased that we're able to acquire all of the shareholders' loans, substantially all of the shares of the minority shareholder in our Stendal mill, and other rights. We believe that increasing our equity position in the Stendal mill will also give the mill more flexibility, and allow us to unlock value for our shareholders.

With respect to our NAFTA claim, we continue to expect our case to be heard in mid-2015 with a decision several months after that.

In closing, pricing was essentially flat in Q3. Historically, we have seen NBSK price decreases during this period, which we believe highlights the strength of the present NBSK market globally.

Presently, we're forecasting that the European and North American markets will remain steady through Q4. We remain confident that the new hardwood capacity will not have a significant negative impact on NBSK pricing and 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 comes from the line of Bill Hoffmann with RBC Capital Markets. Your line is now open.

Yes, good morning. Jimmy, can you talk a little bit about -- a little bit, we were a little surprised about the drop in the inventories globally here in September, and just want to get a sense on what you guys think is happening. Is there any inventory stacking going on, especially with soft wood grades, just in preparation for the winter or anything else like that going on?

No, I think that basically there was some hesitancy on the part of buyers, certainly in China initially, because of course they all kind of had the feeling that hardwood price declines would of course have an impact on soft wood. As they realized that this was not happening, then I think there was of course a general increase in purchasing, which was pent up and therefore we had very good sales volume and shipments through the summer months, which traditionally as you know is the weaker period.

So, I think what we have seen really is more of a release of that negativity in the sense that now they believe that really the hardwood pricing scenario is really not coming to any reality.

Has there been any change in sort of buying patterns? Even in here, call it now through October?

No, what we're generally saying certainly in China is, the buying pattern is more of an end user buyer pattern rather than any real speculative component. You know, so we're not seeing I guess a lot of buying by the trading organizations which is logical, and we're seeing fairly steady, regular type of demand coming in Europe as well as North America. So, there's really more of a let's say, a sales and ordering pattern which is you know, more industry and consumer-related rather than speculative-related.

And then how about just with the additional tissue capacity that's come out in China, any thoughts from customers over there trying to lock up capacity with you guys, or any others for that matter?

I don't think that there's a general feeling that there is going to be a shortage at this point. The buying pattern certainly from the tissue guys, because you know, I think from a business perspective they of course have been doing much better than any of the other paper grades, and therefore they are taking opportunity when they can to pick up supply at maybe slightly better pricing if they can. And therefore, we're not seeing let's say significant purchasing on the part of the tissue guys, because generally there isn't that market weakness in terms of spot volume being available at a discount to prevailing markets.

Okay, thank you, and if I just ask one more. Looking forward into 2015, can you just talk about capital projects, since you're finished up with a number of major ones here? What are the plans for next year?

Yes, David, maybe you can cover that one?

Yes, I think the way the guidance would be focusing on high return projects, nothing really big in the pipeline, total capital in the plan for next year somewhere around $40 million, most of it high return. A little bit of carry-over from this year, so like the same situation as the year we're just completing.

Great, thanks, appreciate it.

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

Richard Kus: Hi, guys. Good morning. So first, with regards to your cash and cash flow at the restricted group, you certainly have a nice reservoir there and you know, if prices hang up you should be generating a lot of cash flow on a go-forward basis. What are your priorities for allocating that?

You know, Richard, what we've been talking about on several of our previous calls, we're very interested at the right point in time to consider refinancing Mercer, and creating a more efficient balance sheet and an easier-to-understand capital structure. You know, we've moved from Euro reporting to US Dollar reporting, that was sort of first step in the simplification process. You know, our net debt to EBITDA ratios are getting down into very attractive levels. So, we're continuing to focus on that opportunity and I think discussions of free cash flow will sort of follow that activity, you know what I'm saying?

Yes, understood, okay. And then, with regards to the transaction on the equity side for Stendal, are all of your costs related to that behind you? You won't have any more cash coming out for that?

Well, we have a -- are you referring to the purchase of the minority interest?

Yes. I know you have, know that you're going to have -- that you have to, but --

Right, we have a PIK note outstanding that has a one-year term on it.

Yes, okay. Aside from that though, it's --

(multiple speakers) There's no other costs associated with the acquisition.

Okay, very good. And then I guess lastly for me, you guys ran really well in the third quarter, it seems. Do you believe you can run as well in the fourth quarter as far as (multiple speakers) production volume?

Yes, I mean, the third quarter was a good quarter, but it wasn't really what I would call an exceptional quarter from a production perspective. I mean, we did have some minor production problems in all of the mills is normal. I think the Q4, certainly, other than the plan to shut down you know, so far we're running very well on all of these facilities and therefore, we believe that the production volume should be comparable.

All right, great, thank you very much.

Your next question comes from the line of Bruce Klein with Credit Suisse. Your line is now open.

Sorry, hi, good morning. Jimmy, you were starting to touch on, I didn't get what you said on the list price versus the spot price, which I know has widened a lot over the years. I'm wondering, maybe I missed it, maybe you said it, but maybe you can explain a little bit more what you think's going on there? And secondly, just energy has been strong, which is great. What's sort of driving that in your outlook, there? I know you have long-term contracts, etc., but maybe just a little bit more on that?

Yes, in terms of the energy side, I mean, it's driven by of course overall production efficiency, so the more pulp we produce, the more steam we can generate and of course more power, and therefore because last quarter was good, of course generally we produce a lot more power.

We're forecasting moving forward again, similar type of situation, and at Celgar you know, we know that there's a lot of steam that we're not capturing, so there will be further progress in really creating a lot more efficiencies in our steam capture so that we can generate more power from the present amount of black liquor that we're already burning.

In terms of what I meant, in terms of the spot price, list price, what I really meant to say was essentially because there's not a lot of loose tonnes being offered to the tissue buyers, at a discount to what they would get normally, you're not seeing a lot of -- all of this type of loose volume essentially, discounting the market. What we're having really is a market condition which is driven by the buyers needing the supply, and essentially the suppliers having not a lot of inventory so they're not overly-anxious to essentially be discounting whatever they have just to find buyers.

So, it's a very -- seems like a very orderly market, right now, and you're not getting a lot of that speculative part where you know, you have in China these trading organizations as you know, who essentially buy and then hold and then subsequently sell when prices are good. So, you're not having the large speculative component in the market.

I guess I was thinking -- I understand what you're saying but wouldn't the discount widening argue for the opposite, or am I missing something?

No, I mean, the list price widening thing is just basically it's always been widening as related to the buyers wanting to keep a certain price, and of course the discounts imply a certain pricing regime. But the discount really is not reflecting the market, if you know what I'm saying, because you're not seeing further discounting from the price that we got right now. So, a discount is a discount, but we're not increasing that discount just to generate buying.

Okay. Okay. I'm good, okay, thank you very much, guys.

Your next question comes from the line of Sean Steuart with TD Securities. Your line is now open.

Thanks, good morning. Jimmy, wondering if you can talk a little bit more about fiber in Germany, and I guess more on your longer-term outlook, and a couple of questions, I guess. What paths you're taking to mitigate the risk there over the long run, is it just yield optimization at the mills? And then, I guess just more generally what you're expecting for price trends over the long run?

Yes, you know, we just came out two years ago from a very harsh winter condition, as well as flooding conditions which of course had a huge impact in terms of wood pricing and availability, and therefore, what we have done is essentially put a strategy together to minimize those potential type of impacts, and the combination of that of course is to have better logistics operations, having more volume of wood closer to the mill rather than having them in an area that may not be as accessible, increasing the amount of in-house storing rather than outside, so that again, we are not going to be impacted by winter conditions. We also have decided to essentially go into some marketing of pellets because we believe that this of course will countermine some of that sudden increase in demand coming from the heat market through a lack of availability of pellets.

It's not a big area, but we do believe this helps in moderating pricing in very severe winter type of conditions. Also, we've imported a lot more wood from different areas that traditionally we have not really focused too much on, and we intend to stay within these important areas, so that we have a presence, we understand the market pricing, and can readily access wood in the event that we see certain shortages in the other sourcing areas. And therefore, I think the plan moving forward will certainly mitigate a lot of that weather-related problems we've seen in the past hopefully.

We're seeing, certainly in Germany, pricing which historically has been high, they've come down but still remain high and we don't expect that to really change too much. And so, we are really relying on also some degree of cheap imports, and therefore our pricing scenario moving forward is still moderately lower prices than where we are today for German as well as European fiber, but not a material change from where we are.

Okay, and then have you guys set your maintenance schedule for 2015 yet, and if so, can you give us an idea of how that'll unfold quarter to quarter?

The schedule for next year, Sean, is Celgar is going to have their plant shut in Q1, Stendal will be Q2 and Rosenthal will be Q3.

Okay. That's all I had, thanks, guys.

Your next question comes from the line of Andrew Kuski with Credit Suisse. Your line is now open.

Thank you, good morning, and I guess the question ties into a number of other questions that have been asked previously, but maybe a bit more specifically. Just on cash deployment plans, we look at it in the future, I mean obviously you've generated a lot of cash this year, and it's been a huge swing versus past years. So, when you think about just the steps ahead from using those cash and redeploying it, is it really in the order of doing the refinancing, maybe collapsing the structure, effectively de-leveraging, and then how do you think about incremental capital plans, of new capital equipment, whether they be just extensions or minor expansions of existing, versus outright brand new things? Versus things like special dividends, I guess is more of a macro capital allocation question.

Yes, I mean, in terms of the whole refinancing and restructuring of our structure for restricted and unrestricted, of course that is the high priority item because I think that certainly simplifies our structure. It also allows us to de-leverage at the same time, and hopefully the combined impacts will also reduce our cost of the debt. And you know, after that, in terms of the cash usage we really don't have any major projects that we require in any of the mills, so we don't envision that all of a sudden just because we have cash or have excess available, that we will all of a sudden go out and do a major expansion. That's not the plan.

There will be continued ongoing, of course, re-investment in all of the mills, but that will be probably at the levels that we presently have today. In terms of generally, our philosophy, once we have a better balance sheet of course is to look at a distribution program, because we think that of course that would allow our shareholders to now get also some of the benefits aside from the share appreciation.

So I guess just on that point, and it's somewhat topical in the industry on a lot of the MLP chatter that exists on certain names. Do you see some kind of opportunity to effectively pay out on a more steady state basis, especially where NBSK prices are, but maybe more importantly if we think about the roughly $110 million of EBITDA generation you have off the power business, is there this possibility to see some distribution of some sort on a regular basis? In a very tax-efficient fashion?

Yes, I mean clearly, we would look further in terms of the structure to -- in terms of the best structuring for tax purposes, but at the end of the day I think it is the philosophy that we would be looking towards some form of regular dividend policy. Of course, keeping in mind the fact that we are a very cyclical commodity, so of course, whatever distribution or use of cash would have to of course reflect that. But I think that certainly is one of the topics for sure.

Okay, that's very helpful. Thank you.

Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Your line is now open.

Hi. On the last conference call you discussed a logistical issue that began in the middle of the quarter and was to -- you were to have regarding sufficient rail car supply which gave you at the point I guess, a backlog of inventory. Your inventory seems to be moving out, but what's occurred with respect to this logistical issue? Does it continue? How are you dealing with it and how does it impact us?

Hi, Andrew. The things you're referring to, rail congestion with CP primarily, and that --

Basically the competition I think with shale oil and everything else?

Yes, and the green shipments, so I mean, that continues. So, you know, we didn't manage to move a lot of tons in the quarter as you saw, so we've worked around it, and strategically we've focused on cost efficient alternatives. So, we're putting a little bit of money, we call it a high-return project, in a reload with another railco that gets us to the cost for roughly the same cost ad provides us with an option to move on CP, or move on BN. Our choice. So, just making more optionality for ourselves. We're not overly optimistic, but the situation's going to improve with CP or CN.

Okay, and --

But we have, we have --

Sorry. Go ahead.

But we have good options going forward.

And with respect to the Rosenthal mill's tall oil capital project you had previously discussed, is the project done? When is it to be done, and generating revenues? And what will be the total cost of that project?

Yes, it's nearing completion. It's coming in on budget which we've guided before, somewhere around $4 million. It'll be up and running and delivering tall oil by the end of the year.

Okay, and the planned road shows and conferences now that the -- we'll call it the financial restructuring process -- is somewhat beginning. What's the upcoming plans for the coming two quarters?

Well, we're hoping to be seeing quite a few of our investors as part of a refinancing at some point in time, in the next couple of orders, and we'll continue the bank conferences and so on in the meantime.

Your next question comes from the line of DeForest Hinman with Walthausen & Company. Your line is now open.

A couple questions. Just on the NAFTA case, and I don't know if you can answer this or not, but you know, I think the last quarter we pushed it out from our previous expectation that it would be a late 2014 event, and we're saying it's a mid-2015 event. Is there any trial date we can be looking towards, or any update you can give us in that regard?

Well, it's a long process, DeForest. I mean, the company management scheduled to testify in Washington DC in July of 2015. We've filed all our paperwork, what we can our [reward all], Canada has filed their reply memorial. We are in the process of answering a series of questions from them, and then they'll do the same to us, and then there's some sort of a hiatus in the Spring of next year, and then it'll be individuals testifying during the summer. We believe that panel will require two or three months to deliberate, and we're hopeful to have a decision by the end of 2015.

So, those are the general milestones, if you like. But I guess from the last call, we've now seen Canada's case, and we're as convinced as ever that we need to continue with this activity.

Okay, and you have a number of questions on the call on the refinancing, but looking at the covenants that you have with the senior notes, you have a call provision that you can use on December 1 that 104.75. You know, the cash flow numbers have been very good. The outlook is pretty good. In terms of timing, is it possible that the refinancing event is a 2014 event, or are we looking at something more in 2015?

It's certainly high priority for us, and we've been working hard to be ready to be in the market, when the markets are suitable. So, I don't want to lead too far in on this, but we are moving to be ready as soon as possible.

Okay, thank you.

(Operator instructions) Your next question comes from the line of Hamir Patel with RBC Capital Markets. Your line is now open.

Good morning, guys. Jimmy, I know you touched on spot discounts being pretty stable, but just to clarify, so is it your view that contract discounts will be steady in 2015 compared to 2014?

Yes, certainly. I mean, you know, in China the discounts projected this versus next year are pretty much the same for the contract volume. What we have done in China market is really [not have] long-term contracts because we felt that selling on spot gave us a better pricing, and so far it has. We don't -- we felt that the discount for a long-term commitment didn't justify it.

In terms of North America, of course there is this continued push to widen the discounts. This is of course due to more supply availability in North America versus the demand side. In Europe, the discounts are pretty much the same. Of course, there's push to try to move that too, but we're not expecting that those discounts will lighten much further.

Interesting, and just more of a longer-term question, I guess in terms of specialty dissolving pulp, is that something that you may have capabilities to eventually produce, and are you doing any sort of R&D work on that front?

Well, from our mills, we undertook the study. We felt that basically because of the size of our mills, it didn't really make a sense for us to be converting into dissolving at the time. Certainly there is technologies available for us to implement if needed, but we don't think that the market generally is attractive. And of course, there's been a lot of conversions in the last few years, so certainly the landscape is way different than a few years ago. And therefore, we believe that our mills certainly are very efficient NBSK producers, and we will continue to focus on that market.

Right, I guess I was referring more to sort of the more specialty grade that people like Rainier and Buckeye sell.

Yea, Rainier basically you know, produces dissolving, and as well as very special dissolving grades, and we don't produce any dissolving at this point. The specialty dissolving market is a very -- it's even a smaller market than the commodity end, and it requires a lot more effort and time before you actually can enter into that. And from our perspective, we really don't feel that our mills really are in the position to really benefit. And therefore, it's not in our plan.

Sure enough, and just a final question for David. You know, with all this MLP discussion, has that maybe changed how you look at potential acquisitions and maybe made US assets look more attractive?

Yes, well, it's certainly an interesting discussion and it's fascinating to watch as it all develops, so we're very aware of it. But there's nothing on the books at the moment that's really worth talking about from Mercer's perspective.

That's great, thanks. That's all I had.

Your next question comes from the line of George Berman of J.P. Turner. Your line is now open.

Good morning gentlemen, thanks for taking my call.

You're welcome.

Hello, George.

First of all, let me say congratulations, very nice quarter, very good timing on the buy-in of the minority interest in Germany. The tax benefit that we received this quarter, I take it that's a one-time item?

Yes it is, George.

Okay. Could you comment on how the strong US dollar versus Euro-Canadian dollar, affects your results going forward?

Well you know, of course the strong US dollar generally is a very, has a very positive impact in terms of our earnings, and overall performance. So far, what we have seen of course is the Euro has been weakening. The full impact of that weakening really was not shown in the prior quarter, because you know, we have this exchange rate averaging. So you know, the prior month average essentially is, determines the pricing for the following month, and therefore there is a lag.

We will see through the Q4, some of those benefits which already have occurred now actually go through, and with the further weakening of the Euro, this will continue through the subsequent quarters.

So, don't take the recent weakness in terms of the Euro already being reflected in our earnings. In fact, most of that has not been reflected in terms of our earnings. So, moving forward clearly we feel very positive about the currency developments, because it makes it much easier for us to compete globally with a very strong Euro. Over the last few years, it has been of course very difficult, but now if you're at 1.256 levels, then you're really looking at a very competitive situation for our German mills. And of course, it helps Celgar as well, the weak Canadian dollar, but the impact really isn't as big as the impact in our German mills.

And it's good to owe a bunch of Euros when the Euro goes to parity with the dollar, huh? (laughter)

Well you know, (multiple speakers) we basically generate our income based on US dollar list prices, and therefore if the Euro is at parity then of course our pricing regime, all things remaining the same, means that in Euro terms the price is very, very attractive.

Very good. Looking forward to the next quarter and the full year.

Thank you.

Your next question comes from the line of Sean Sauler with Redwood. Your line is now open.

Hey guys, just one quick question, or actually two questions, I guess. The first one is, have you quantified -- I think you have in the past -- the effect of every move in the Euro, by penny on your net income or EBITDA, and then secondly related to that, what percentage of mills in the world are in Euro-denominated countries? And then the next, and with that, what percentage of mills, NBSK mills in the world, are in dollar-denominated areas?

I'll certainly take a shot at the first one. So, in our 8-K last year we had some sensitivities to currencies, and we referred to costs in that circumstance. I think it was one cent moves costs by about $5 million on the European side, and a one cent move relative to Canada was $3 million, so a total sensitivity of [$8 million].

So, in terms of the percentage of the mills, I mean, historically there's been like between 40% to 45% within the Euro or Scandinavian zones, so of course the Swedish Krona is not part of the EU. In fact of course, they weakened even further than the Euro, but if you look at the Krona and the Euro zone, it may represent between 40% to 45%. The Canadian dollar zone somewhere around 40%, 45%, and then the balance within the US kind of currency zone for NBSK.

Great, and David, is that -- the $5 million, is that an annual number or a quarterly?

That's annually, yes.

Great, thanks, guys.

You're welcome, Sean.

There are no further questions at this time. I would now like to turn the call back over to David Gandossi and Jimmy Lee.

Well, I thank everyone for again coming to today's conference call, and as I indicated clearly we're having very strong tailwinds of the weakening currency, especially the Euro against the dollar. And as I early indicated, you know, the third quarter doesn't rally capture all of that movement. And of course, you know, with the weak Euro we believe that the pricing regime, considering the weakness of the Euro, has remained reasonably firm, and therefore we're very optimistic about this year and we continue to be very optimistic of next year as well based on the supply and demand.

So, on that note, I thank everyone again.

Thanks, everybody.

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