Mercer International Inc (MERC) 2015 Q3 法說會逐字稿

Good morning, and welcome to Mercer International's third quarter 2015 earnings conference call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International; and David Ure, Senior Vice President Finance, Chief Financial Officer, and Secretary. I will now hand the call over to David Ure.

Thanks, Sally, and good morning, everyone. Please note that in this morning's conference call, we will make forward-looking statements. And 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 in the Company's filings with the Securities and Exchange Commission.

In Q3 we achieved EBITDA of $61.1 million, compared to $50 million in Q2.

Pulp demand was stable in the quarter, with sales volumes up almost 19,000 tonnes. However, currency movements and some negative market sentiment put pressure on NBSK pricing.

The quarterly average RISI list price in Europe fell to $843 per tonne from $855 per tonne in Q2. In addition, the quarterly average list price in China went down to $638 per tonne from $670 per tonne in Q2. Both the European and China list prices have come under some pressure early in Q4.

Our mills were stable, with good energy efficiency in the quarter. And as a result, EBITDA was positively impacted by approximately $1.6 million of additional energy revenue relative to Q2.

Our Q3 results also benefited from lower planned major maintenance costs of about $5 million, when comparing the annual Stendal shut in Q2 to a smaller scale shut at Rosenthal in Q3.

After considering those annual maintenance shuts in Q2 and Q3, our pulp production was down slightly this quarter. However, our Stendal mill achieved record production during the quarter.

We reported net income of $23.8 million for the quarter, or $0.37 per basic share compared to net income of $16.4 million, or $0.25 per basic share in Q2.

Our current taxes totaled approximately $2.8 million this quarter, which is a consequence of our growing profitability. We continue to have significant tax assets, but certain tax jurisdictions limit their use, which will continue to create a modest current tax expense.

The US GAAP IFRS differences relating to annual maintenance had an impact this quarter, when comparing our EBITDA to those of many of our competitors. In Q3 we expensed direct costs of approximately $4.1 million on annual maintenance, the majority of which would have been eligible for capital treatment under IFRS.

With regards to our cash flow, our consolidated cash position was up significantly in Q3 compared to Q2, as our total cash increased by about $46.4 million. Our cash build this quarter was despite repaying almost $13 million of our outstanding revolvers.

Capital expenditures drew approximately $10.4 million during the quarter, and generally comprised high-return projects split roughly equally amongst our mills, along with approximately $1 million toward our new ERP project. The ERP project is progressing well, and remains on target to be completed in 2016.

Included in the high-return projects are evaporator plant upgrades at our Rosenthal and Stendal mills. These projects are aimed at debottlenecking both mills and ultimately, adding incremental production capacity. The projects also have environmental benefits and as such, we are eligible for a program of the German government that provides a waiver of certain wastewater fees provided the planned environmental benefits are realized. Both projects are expected to be completed in Q4.

In addition during the quarter, we completed our woodchip infeed automation project at Rosenthal, a project that provides a number of cost savings benefits in addition to the expected fiber yield improvements.

Our cash flow also reflects a temporary reduction in working capital totaling $25.4 million, primarily due to lower receivables resulting from the timing of sales and higher payables due to increased accruals for debt service.

In terms of our liquidity, our consolidated cash balance was sitting at approximately $146.8 million at September 30, 2015. And we had approximately EUR28 million of undrawn revolvers available at Rosenthal, EUR57 million of revolver availability at Stendal, and approximately CAD38 million available at Celgar. Combined with our $147 million of cash, our total liquidity is about $271 million.

Our $147 million of cash at the end of Q3 includes approximately $9.5 million of restricted cash. These are funds that have been set aside to act as collateral for our Stendal interest rate swap. The collateral amount is contractually based, and as interest rate swap balance declines, so will the collateral amount, subject to certain minimum requirements.

Looking forward to Q4, a reminder that we paid our first dividend to shareholders in early October. And as you will have seen from our press release yesterday, our Board has approved that same $0.115 dividend for early January.

On a trailing 12-months basis, our net debt is about 2.2 times EBITDA. And this level, combined with our debt profile, gives us considerable flexibility when considering capital allocation decisions in the future.

That ends my overview of the financial results. And I'll now turn the call over to David Gandossi to discuss market conditions, our operational performance, and strategic activities.

Thanks, Dave. I would like to start by saying we're pleased with our third quarter operating results. Our mills performed well during the quarter, and our sales exceeded production.

The increase in EBITDA in Q3 compared to Q2 was primarily driven by lower maintenance costs and higher pulp and energy sales volumes. Pulp prices continue to adjust partially as an offset to currency movements, but also due to some weakening market sentiment particularly in China.

I'll speak more about our fiber markets in a moment. But compared to Q2, our overall Q3 per unit fiber costs were down slightly.

The timber NBSK producer inventories were at 30 days, up 1 day from the previous quarter-end. We're not surprised to see this increase in producer inventories in Q3, as the summer months are a period where we traditionally see lower demand. At these inventory levels the NBSK market is considered to be generally in balance.

NBSK list prices in October are $830 in Europe and $620 in China. Prices are off slightly in October, but volumes continue to be good. At these current prices, we believe we're very near the floor-level pricing in China. Despite a general negative market sentiment in China, we feel that the price of hardwood being higher than softwood today will increase softwood demand. And we also see the potential for Chinese traders to re-enter the market, which could also positively impact prices.

We recently learned that certain tissue providers in China's Hebei Province are facing up to 2 months of pollution-related downtime late in Q4. We'll watch the market impact of that development closely.

In Europe, the strong US dollar has put downward pressure on prices in the quarter, but overall pricing and demand have been fairly steady.

Looking forward, we expect new tissue machines to continue to start up, especially in China, which will further strengthen demand for NBSK. We also expect the supply/demand fundamentals to keep Chinese and European pricing fairly steady through Q4; although the recently announced temporary pollution-related curtailments at these Chinese tissue mills I mentioned could create some pricing pressure.

We remain optimistic about the future supply/demand fundamentals for NBSK. We see demand growing in developing economies, particularly in China, in a variety of grades including tissue, specialties and board. Specifically, we estimate there are approximately 3.7 million tonnes of incremental tissue capacity coming online globally in 2015 and 2016, with approximately 1.3 million of those coming online in China.

Today, we are in the unusual situation where hardwood prices are higher than softwood. This is not unprecedented, but in the past, the price gap has turned around fairly quickly. As I noted earlier at these price levels, we believe we will see incremental NBSK demand as paper producers will use additional softwood in their furnish recipes to get the benefit of higher productivity.

As Dave Ure mentioned, Q3 was a strong production quarter for us. All of our mills ran well. In total, we produced approximately 369,000 tonnes of pulp this quarter, compared to approximately 359,000 tonnes in the second quarter, and approximately 376,000 tonnes in the third quarter of 2014.

Q3 included a planned 11-day maintenance outage at Rosenthal.

Our pulp sales volumes were up in Q3, and totaled approximately 390,000 tonnes, compared to 371,000 tonnes in Q2 2015 and 387,000 tonnes in Q3 2014.

Turning to our power sales, the mills sold approximately 215 gigawatt hours of electricity in the quarter, compared to 197 gigawatts in Q2, and 207 gigawatt hours in Q3 2014.

Relative to the second quarter, our euro per unit German fiber costs were down slightly. Overall the German fiber market is in balance. We continue to see sluggish demand for fiber from the board and pellet industries. So we expect German fiber prices in euro terms to remain steady through Q4.

In British Columbia our Q3 per unit fiber costs were up marginally this quarter in Canadian dollar terms relative to Q2 primarily due to the impact of currency movements on our US-based wood purchases.

We anticipate that Celgar's Canadian dollar per unit fiber cost will decrease modestly in Q4, due to reduced levels of pulp logs in Celgar's fiber mix. We're currently comfortable with each mill's fiber inventory level.

Our remaining 2015 annual maintenance shut was at Stendal and it was a short shut primarily for the purposes of finalizing the tie-ins for the evaporator, plant expansion project, chips were back on a digester yesterday.

With respect to our NAFTA claim, we now expect a decision in the second half of 2016. In late October, we finalized a settlement with Celgar's electrical utility provider, whereby Celgar will receive a refund related to a fee structure issue that we've been disputing. We expect this refund to be about $6.5 million. This settlement is subject to the approval of the BC Utilities Commission, which we expect should come as a matter of course. Also subject to and upon approval, this settlement will provide Celgar with about CAD2 million of annual electricity cost savings per year.

Now just wrapping up, I'm happy to confirm that our strengthened capital structure and our positive business outlook has allowed our Board of Directors to again approve a quarterly cash dividend. This will be Mercer's second of what we plan to be regular quarterly dividend distributions.

Our Board has approved an $0.115 per common share dividend that will be paid January 5, 2016, for shareholders on record at December 28. We're excited to be returning cash to our shareholders, while continuing to grow shareholder value by investing in our business and pursuing accretive opportunities.

So, operator, that's the conclusion of our prepared remarks. And I'll turn the call back over now, so that we can open the call for questions.

Thank you. (Operator Instructions) Bill Hoffman, RBC Capital Markets.

David, can you just talk a little bit more about what's going on in China with this curtailment? It sounds like it's in one province, but I just wonder is the issue broader than that? And if you guys have any indication of like how many of these tissue mills are, quote, unquote, sort of environmentally unfriendly.

Yes, sure, Bill. I think it's a fairly localized issue. So and Hebei Province is a -- it's a tissue production area called -- I think so colloquially called tissue town. It's called -- the name there is [Baoding] and there's just a big slug of tissue capacity and a whole number of producers all together in a region. I've visited there with Eric Heine --not even a year ago, I guess -- and everybody was talking about these big centralized power stations that were being built.

Basically, you can imagine 40 or so different individual producers all having coal-fired boilers for their energy source and then having these big installations built so that they could, one by one, shut down their own power and take a more modern source of steam for their operations. And I guess they've been cutting over and cutting over.

And we just recently read that in an effort to get everybody on side, they've just forced them all -- as of November 1, anybody who's not hooked up yet has to curtail for a couple of months and presumably, do the tie-ins and come back up again, so a fairly localized situation.

I think it's a good example of how serious China is about fixing some of their pollution problems. But in my mind, it's -- the amount of capacity, it's not really all that serious in the context of you can lose 200,000 tonnes a month in the maintenance schedules in the spring and the fall. I'm talking global softwood here. So a 2-month curtailment of some of the guys in that region is not that big a deal.

The reason we highlight it though is it's predominantly Russian pulp that goes through Baoding and so there will be -- we'll see some softness possibly in their pricing strategies. And that may ripple over or have some impact on psychology of the market, but certainly not from a volume perspective, not anything that really changes the fundamentals.

Thanks, that's helpful. And then just the other question, just in regards to pulp pricing trends. Obviously, things are sliding a little bit anyway. Can you just talk a little bit more about your thoughts with the hardwood prices going up and the Latin Americans basically pushing prices up on the hardwood side? How much more of that do you think they can achieve and whether you expect, at some point in time, you'll be able -- in a position to start pushing price up on your side? Thanks.

Yes, Bill, the way we're thinking about the fourth quarter, as we indicated in our disclosure materials, is we're sort of generally flattish and hoping that some of the accelerated consumption of softwood due to the price gap will give us some strength towards the end of the year. So it feels to me like we're bottom-ish right now and more likely to get some positive traction before the end of the year, rather than the reverse.

We're still arguing over nickels in Europe, $830 versus $825. We'll stick the line at $830, we hope. China, we think we can see the pricing pattern for what we know what October was. We see November being pretty similar. We think no big changes there; a little bit of deterioration possibly as a result of some of these issues I just mentioned, but generally flattish.

And the producers really will switch and use as much softwood as they can get their hands on with the pricing dynamics the way they're being. And it's also -- it's maintenance season, so there are -- there is some curtailment of capacity both hardwood and softwood. So things could -- should stay relatively stable and possibly improve a bit by the end of the year.

Thank you.

Dan Jacome, Sidoti & Company.

Maybe I missed it. Can you -- the full production by mill, do you have that handy?

Yes, I do. Do you have it there, Dave?

Yes, yes.

Why don't we do that?

Okay. So for the third quarter, production for Rosenthal was 78,000 tonnes; production at Stendal, 174,000 tonnes; and production at Celgar, 118,000 tonnes.

Great, appreciate it. And then on the energy side, it looks -- you got a nice modest rebound there. I'm just wondering, do you have any thoughts here? It looks like you were able to monetize a little bit better the surplus space you generate. Is this kind of a function of the capital investments you've been making in that area?

Yes, Dan, we're -- we run very modern facilities. Both Stendal and Celgar have incremental generation capacity. We built larger generators there than the capacity at the time that we put it in. We did that for a bunch of good reasons. As we continue to produce incremental tonnes and when the mills run well like they did, the generation curve improves sort of exponentially. It's not even; it's not linear.

It's incremental tonnes from these levels are all quite valuable to us. The pricing is all fixed, as you know, so it's really just a function of what we generate and to some extent, what we consume. And when the mills run well, they -- their energy efficiency is quite high as a result.

Okay. That makes sense. And then lastly, it sounds like the 2X leverage here may be a little bit still too low for you guys. How reasonable an assumption or realistic would it be to maybe have a higher dividend, a modest hike next year, even if things are just status quo? Or would you need to see something, a much larger improvement in pricing?

Dan, that's an awkward -- a bit awkward for me in the capital markets context. I think what we've tried to signal is that we feel comfortable with our leverage levels. We feel business conditions are great. Free cash flow generation is healthy and we're very pleased to be returning cash to shareholders. We've signaled that we're starting at a level which we expect that we'll never have to roll back on. That's not for sure, but that's our intention. So the shareholders can expect us to manage our balance sheet and manage our business so that we can maintain the current levels.

And as conditions -- as time goes by and we continue to build our balance sheet, and we do discuss the objective of continuing to delever within that strategy, that balancing our capital allocation decisions to temper our interest to continue to delever, continue to provide cash to shareholders.

And as and when we feel comfortable, our intention would be to step up the dividend sort of consistent with that view. So I can't say when that's going to happen, but that's -- what we've got today is what we expect to continue with. And as events unfold, we would hope to improve upon it.

Okay. I appreciate all the color. Thanks a lot.

Anthony Young, Macquarie.

Just with respect to the issue in British Columbia, the payment that you guys are receiving, $6.5 million, is this a completely separate issue from the NAFTA issue? Or are they somehow sort of linked? And is this some sort of capitulation possibly from the British utilities, British Columbia?

They're separate.

Yes, they're separate, Anthony. So the NAFTA complaint stems from the treatment we received as we were entering into a power purchase agreement with BC Hydro. This particular dispute had to do with the behavior of our utility, a separate utility, as it relates to a rate matter. And it gets complicated, but this really stems to what they charge us as a standby rate for what little bit of power we do purchase.

And again, we just felt like we're a very unique mill in the province in the sense that we're the only pulp mill in Fortis's region. And we've got this unique treatment from BC Hydro, and BC Hydro and Fortis -- they behave in concert vis-a-vis us because of some contractual power supply arrangements they have between themselves.

So long story short, this was one of those things that we were complaining about and we fought it in the BCUC and it's been -- we've been fighting this for years and we finally won. So it's great to get our money back. It's going to mean a $2 million a year cost saving to the mill going forward. And it's -- I think it's an indication of the stuff that we've been complaining about is real. And hopefully, the province takes notice of that.

Okay. Okay. And then just on the hardwood/softwood mix, how long does it take for a tissue producer or -- I mean tissue producers specifically to sort of make that decision? Do they want to see that differential be in place for 3 months, 6 months, or is it really more real time?

Well, I'm not a tissue producer. I think -- how can I answer that? When you're -- when you have the big price gap in this -- where softwood is more expensive than hardwood, then it's a cost objective. So the guys will tighten up on the amount of softwood they use to the point where they feel like they don't want to go any further because of the risk either to the quality of the sheet or the runnability of the machine, that kind of thing.

But when the prices of softwood and hardwood start to equate, it's an easy thing just to say, well, let's put some more softwood in. We can run the machine harder, we get a better quality sheet. And as long as we can get supply, they'll do that fairly quickly, I would expect.

Okay. That's helpful. Thanks, guys.

Andrew Kuske, Credit Suisse.

I guess the question relates on -- just on the pricing side. So we've seen realizations really slide with list prices that you realized, but it looks like you're really trending on mid-cycle EBITDA generation. And you've had decent margins, given the fact that you've benefited from currency. So how should we think about just your realized pricing dynamics out into the future and maybe margin expansion? Because the currencies continue to look favorable for you and your commentary on pricing generally sounds somewhat positive.

Well, I think -- I almost think you summed it up well. I do -- things are relatively simple.

Answered my own question.

I think so. I think things are stable and like you say, mid-cycle type of margins. And we've -- it looks like we're giving up on price, but we're getting the same benefit on our costs, obviously. And a lot of the softwood producers globally all have the same currency devaluation issues. It doesn't matter whether it's the Chilean peso or the Russian ruble, the Canadian dollar and the euro have all kind of moved the same way. So that explains price and improves our cost position at the same time and the margins are holding on. And supply-demand fundamentals are good enough that we should expect mid-cycle returns.

So what margin are you -- or what market are you most concerned about just from price realizations or market realizations?

Well, I guess the biggest battleground has probably been the US market. We don't really play there anymore. As you know, we've moved most of our stuff to Asia because of that and it's a combination of where the -- it's a bunch of factors. Like where are the mills that are producing the pulp and where they try to sell compared to where the auctions to them are.

And the big freight disadvantage for some of those Eastern producers is to try to get to Asia. So we benefit, being a Western producer. And some of these guys have to fight harder for market share in the US market where they're more or less locked in.

Europe is pretty stable, nice and steady, good demand. And China, there's this negative sentiment. So many things that happened in China with the currency devaluation and the stock market issues, some bank tightness and so on.

But having said all that, there's a real -- all these policies are pushing for improved consumer conditions. Like they're trying to increase the standard of living generally within China. So I think there's some negative sentiment there for the reasons we can see. But I'm hopeful and expecting it's not going to be as negative as maybe some might think it would be.

And then just maybe on China -- you clearly mentioned the curtailment issue in Hebei Province. So that may cause some near-term pressure. Do you see things restoring to more normal conditions maybe just ahead of Chinese New Year in the new year, or shortly after Chinese New Year?

Yes, well, you won't see anything just before the New Year. I guess that's always -- following New Year when we really start to see the lay of the land, but no, I'm optimistic. This tissue town area I mentioned, when we were there, not even a year ago speaking, we went to a number of the producers there. And so we know the history of the region and how it -- how quickly it's built up and all those guys are planning to double their capacity.

Like it's not a doom and gloom thing. It's just they've got to get off their small little coal-fired boilers and get plugged into the main utility. And then they all have foundations poured for increased capacity. So I think things are going to -- the premise of increased tissue capacity in China is real and it continues. So I'm not worried about that because of the short-term thing.

And then maybe finally, just how are you thinking about currency relationships on your USD and CAD-USD just as you look ahead? Are you thinking major deviations from where we are now or pretty much status quo?

Well, you're asking a pulp producer to forecast currencies and we've -- I don't know. I kind of think I got a [131] and a [113] for next year just high-level forecasting. But when you read the Bloomberg screens, the difference between the bulls and the bears is pretty wide.

Yes.

And I'm not really qualified to call it. We don't hedge right now. We're watching it carefully. We don't want to make a mistake and we don't want to take a bet. We want our investors to be able to see clearly what the line of sight is on our margins. So it is what it is. So there's volatility for sure. My guess is probably a continuing strong US dollar is sort of how I think about it.

Okay, perfect. Thanks so much.

DeForest Hinman, Walthausen & Company.

Some of my questions have been answered. I got on the call a little bit late though. Did we give any indication at this point of what we're thinking about for CapEx heading into 2016? And then maybe can we touch more broadly on our thoughts on capital deployment as it relates to some projects we're looking at? Any interest in calling the bonds? And then also you're almost in a position where you can maybe do an acquisition. So there's a lot of questions there, but go ahead.

Yes, hi, DeForest; yes, happy to take those. Yes, so no, we didn't give any guidance yet on 2016. But we just completed a set of Board meetings here in Berlin, so I can give you some numbers. So for 2016 in US dollars, both the Stendal and Rosenthal mills, round numbers, we'll do about $13 million capital. And the Canadian mill will do about $17 million, $17.5 million of capital.

And a number of really interesting projects in there, a part of our continuous improvement culture looking for chemical efficiencies, energy efficiencies, increased production levels, that kind of thing. So in our world, some of it's MOB, but the MOB collectively, if it gives you more tonnes, could have a pretty attractive return. So I'm generally describing this bundle of initiatives as strategic good returns on the packages in general. So that's CapEx.

In terms of calling the bonds, I think we've always -- this might, to my earlier comments, we'll have a balanced approach to everything, maintaining a strong balance sheet, maintaining strong liquidity, really honoring that cash dividend to shareholders. At some point in time, if the pricing is right and if it makes sense in the context of the day, we'll chip away at those. I would guess we may refinance them if we get a NPV-positive scenario at some point, all kinds of -- there's lots of possibilities. It's a nice option to have.

In terms of bigger capital projects, we're always -- we're good industrialists. Like our guys, they can deliver; they can put iron in the ground on time, on budget. If they say they're going to get a 2.7 year payback, they get a 2.7 year payback typically. So we're always looking for that kind of stuff and we may, and will have, things in the future particularly in our Celgar mill. I think it's got still quite a bit of potential, as we've discussed in previous calls. The German mills are either optimizing well, maybe further work to do there, but generally, they're pretty efficient already.

In terms of acquisitions, we're always -- we're not just sit back and wait guys. We're always looking at things and thinking about how we can create shareholder value. But to be honest today, looking in the pulp space and the valuations that owners would expect for their assets, I don't see anything just at the moment that we can talk about that I'm really excited about. But we continue to look and we're quite open-minded about the areas that we look in. So it's obviously lots of potential with the platform we have here at Mercer. But we're not far enough along to really be talking about things.

Okay. And then last question on the NAFTA claim. The date keeps getting pushed to the right. Do we have some dates that you can give out to us that we can kind of be benchmarking? Or are those still something that's still up in the air?

Yes, DeForest, I wish I could be clearer on it and you're right, we have pushed it out. When -- a few quarters ago, before we went into the hearings in Washington, I think I was signaling that we expected, from the closing of the hearings, it could be -- it should be within 9 months and that was my belief at the time that the general practice of these tribunals was to report within 9 months. And I've subsequently been told that that's a bit aggressive and given the complexity of ours, it might take longer.

And so it's again, it's soft. It should be within 12 months of the completion of the hearings, which would be mid-July 2016. And that's why we've crafted our words the way we have, but we really don't have any line of sight on what those -- what that arbitration proceeding is going to be going forward. There's no input required from us; there's no further discussion. It'll be what it is and they'll announce when they announce. And it'll -- I can't -- I just can't give you anything more than that at this time.

Okay. And -- okay. And I had one last question. I know I think as part of your argument that you're making in this claim, it's something along the lines of like a 5-year lookback. But as this case keeps getting pushed to the right, does that lookback get additive or is it just like a statute of limitations of when the case is finalized?

Yes, there's no statute of limitations and you have to look backwards and forward because the opportunities that you might have had 5 years ago in a power market may be completely different today. And so they have to -- they can't just look at -- they can't just say, okay, we fixed the last 5 years; now you're on your own for the forward 5 years. It -- they have to assess damages for the event that they caused. And that's obviously a lot of different approaches to that type of thing, but both sides had damage consultants that did their best to make those assessments so --

Okay. Okay. That's helpful. Thank you. That was my last question.

Paul Quinn, RBC Capital Markets.

This is Emily Davies on for Paul. My first question is on pricing, primarily the spread between hardwood and softwood. Just wondering if you have a way of looking at the gap that you believe should be more normal to justify the higher strength softwood?

Yes, Emily, it's -- yes, I don't know how much more I can give you. There's a difference in the cost curve is one of the factors, the softwood cost curve versus the hardwood cost curve. There's a supply-demand fundamentals of each grade at a point in time that impact on that. It's really an unusual condition right now to have hardwood trading slightly above softwood when both grades are in reasonably good balance.

Um-hum.

So it's difficult to give you anything more general or anything more specific than that generalization at this stage. Again, our view is that this is going to create additional demand on softwood and that will help tighten things up more rapidly than otherwise. And we should expect to see improving conditions as we move through the year.

Okay great. Thanks. And then on China regarding the increase in demand for pulp that you're expecting, I'm wondering if this is mainly or solely driven by the tissue capacity that is expected to come online. And then on that, do you look at the demand for tissue and your expectations on that or is just the capacity coming online? Because if the demand isn't there, then I guess operating rates will just go down on those -- on that capacity. And then maybe be -- pulp prices won't be benefiting.

Right, yes. So a couple of things there -- so it's not just tissue in China in my mind. We do a lot of business with specialty paper producers as well, so I'm thinking of the decor guys, thermal papers, cup stock, liquid boards, those kinds of guys that need the strength. And they're all growing; they're all profitable. It's really -- it's a consumer consumption pattern. There's millions of people moving into the cities. They're starting to consume more goods that come from packaged products than they have in the past.

So it's -- as the living conditions improve in the developing economies, they consume more paper. I think you can see in one of our presentations, we do show a correlation between the income per capita and the consumption of paper per capita in these developing economies. And it's a pretty tight correlation. So we see that continuing.

China has just announced a two-child policy today or yesterday, I guess, coming out of their plenary session. So that's generally a positive. So we do look at the demand side and there's always -- when you see so much capacity building up so quickly, you always have to ask is there a bubble? Is it going to hit a ceiling? And lots of guys write about that and talk about that, but the tissue guys are still making tissue and it's still going away so --

Great. All right. And then on the capacity side, do you -- how do you see softwood supply and demand balance? Do you see any new capacity aside from what's already announced in Finland and Brazil into I guess 2017?

No, there's definitely capacity coming and we can see it both on the hardwood side and the softwood side, certainly a lot more on the hardwood side. There's -- the big mill that we all have our eyes on is late 2017 and that's the Aanekoski mill in Finland. Everything other than that is well covered by growth in demand in our view. So that's a -- that's more capacity in 1 year than the demand grows every year. So we're watching it.

As I've mentioned on previous calls, when I think about a 700,000-tonne add to softwood, I think about the shape of the cost curve and the impact that might have temporarily on the industry and that the macroeconomics could come to bear with some of the high-cost guys needing to step aside.

And there's also fiber reality there. That's a big new fiber demand in that region and that could change behaviors from some of the high-cost producers in the region there competing for fiber as well so -- but for 2015, the rest of 2015 and 2016, and most of 2017, it's pretty clear sailing from a capacity-demand balance perspective.

Okay, great. Thank you. That's all I had.

Andrew Shapiro, Lawndale Capital Management.

A few quick follow-ups from what you had said with others and then one or two question s here. In following up on the past projects you've talked about that were to lower cost, increase revenues. I just wanted to touch base whether these things have been optimized or there's still some runway and benefit to be had?

You've had a power specialist from Stendal move over into the Celgar area and you guys were working on increasing the power and byproduct profitability at Celgar. Has that happened or that's still got most of its benefits ahead of us?

Yes, that's a great question, Andy. I wasn't aware you knew we brought [Fabian] over. But yes, he's a strong guy, so we're optimizing the power balances with generation at Celgar. You might have picked up in my comments around CapEx, we've let the club out a bit for Celgar this year and we're quite excited about like a group of projects that the team have identified that -- no single big debottlenecking project per se, but just going to that next level of operating efficiency and reliability of equipment.

So I think as the year progresses, we're going to see continuing improvement I would expect, in the performance of Celgar. That's the commitment I made to the Board on this capital project program. And everything that's -- a project that's done in our world is pretty much a 3-year payback and it starts earning that the day we fire it up so --

Okay. And Celgar is also going to get $2 million a year in power savings from this new award, the new --

That's correct.

-- the judgment from the Utility Commission too, right?

Yes, that's right.

Okay. And then Rosenthal, you had a tall oil project and that's already been up and running for a little while. Has it been optimized or are there still benefits that we should be seeing in coming quarters?

Yes, it's -- total production for us is -- we get it up and running pretty quickly. It was a really dry summer. So the [soak] generation has been not the best. There's a big swing between spring and fall, so I think as we go into -- past Christmas into the New Year, we're cutting pressure wood. I would expect the performance of both tall oil plants to continue to improve.

It's not optimized yet?

Celgar, yes, you haven't seen it in the run rate EBITDAs yet, no. The plant is optimized, but it's -- but you haven't seen the numbers that we'll ultimately get from it, that's correct.

When does the rebate award come from the BC Utilities Commission settlement?

Well, the way -- again, I've got to be vague unfortunately. So it's a joint application by ourselves and the utility, so we've come to terms. We've signed an agreement. We're jointly applying to the commission. Our expectation is the commission will, under those conditions, just say fine, good to go, and we'll just get notified in fairly short order that that's the case.

There is a risk on the other hand that they could decide they want to hear it and hear the reasons that the different sides had. And I can't imagine why they'd want to do that considering all the protracted presentations they've already seen from us over the last 5 years, but there's always that risk. But so we're really hoping we can get this thing done before the end of the year, I would expect it to be done.

All right. But the money hasn't yet been received and there's some steps?

No.

Okay. You had a JV. I think it was in what you call nano-cellular or nano-cellulose technologies. Is that JV coming up with discoveries, developments, opportunities? Is there anything there to be excited about yet?

Yes, it's -- we're certainly excited about it. Sort of a little humor on the call. David Ure is a director of that joint venture. It's a 50/50 JV with Resolute and it's not nano-cellulose; it's cellulosic filaments, which is a slightly different product. Lots of really interesting applications. We're getting fantastic traction with potential users of it. They have to take the product and work with it for a while and determine a way forward. David would say we've got our first customer and it's in the hundreds of euros a month category.

Okay.

So we do have a customer that's using it in a filtration application, a regular customer. He's done all his trials and he's happy with it. So for his product, it works great; he's regular customer. But it's early days and I've signaled before this is a multiyear -- this is one of those things you do that's a multiyear expectation, but it's certainly very interesting and very exciting for the longer [term].

Okay. Those were my follow-ups. Now the new ones here -- the dividend you recently implemented gives you the opportunity to bring in new institutional investors that would only otherwise invest in dividend companies. I'm just wondering in your road shows and otherwise, have you seen this yet or is this second dividend that's about to be paid -- because we just started being a dividend company -- is this second dividend or even future consistency required first before dividend-only investors take notice? What are you seeing?

Yes, well, what I'm seeing is the big banks have all been very keen to take us out on the road. So I take that as a really positive sign. When they take -- when we've gone out, we've had great meetings. We've met lots of new investors. The follow -- the following write-ups from these gentlemen, the analysts, have been very positive. And so I think we're doing the right thing. We believe that we want to be returning to shareholders in a prudent way. And we think it opens us up to a new group of shareholders and --

Yes, it definitely does. I was just wondering if there's been uptake yet, and if you've seen it?

Yes, well --

The price doesn't reflect it yet.

The prices are reflecting it. I think on the price of the stock, it's a little bit about getting -- throwing the baby out with the bath water with all the other commodities and the negative sentiment around China and those kind of things. I've been trying to signal on this call, I think the fundamentals for our business are better and stronger than that. I'm disappointed with where we're trading, but time will prove us out here.

What are your plans for the upcoming investment non-deal road shows presentations for the coming quarter or two?

Yes, we're going to be with Bank of America in Boston I guess in December; meeting some investors in London as part of the London Pulp Week again next week or the following week. And then I think there's the CIBC in January and as we get into the spring, we'll do some more of these bank non-deal road shows (inaudible).

(Inaudible) was someone had asked about calling in the bonds and all that. I've been in here for so long, I have been accustomed to our bonds being fairly costly, but with the latest refi that was done, I can't -- now I can't recall because those are like normal bonds and I look at distressed stuff. What's the cash -- the rates on these bonds and do you -- do we consider those rates indicative of the risk levels or is there a refi opportunity? And when on the time horizon does that refi opportunity kick in versus the call price -- I mean, the premiums?

Yes, well, the cash coupons on our bonds, the 5 years is 7% and the 2022s are 7.75%. I don't -- we were very happy to refi when we did. You don't get much credit from the credit rating agencies when -- they don't really ever move you more than a notch at a time. So our yield to maturity on those bonds has been better than that since the day we did it, which is an indication of the creditworthiness of the Company. And the creditworthiness is improving every day also.

So there will be a time, as I mentioned -- there may be a time to roll it up and do an NPV-positive refi, some combination of tendering and reissuing. But for now, we've got lots of runway ahead of us and we're just focused on continuing to improve the business, paying the dividend, improving the balance sheet. And we'll look for opportunities to continue to chip away at the debt, but for now, we'll just stay the course.

So with your cash balances, your strong cash flow, and if that NAFTA claim comes in and it's a windfall in terms that we get the full damage award, we're talking about several dollars a share. Has the Board discussed, and is it your thoughts that potentially some of that sizeable non-recurring award might be directly provided to shareholders in some way, whether it's a tender, a buyback, a big special dividend, some other partial sharing of that award if it were to come in?

No, we haven't made any commitments in that regard, Andy. It's still early days.

Okay. Well, we'll ask about it obviously when we get closer.

Yes, well, ask us after we get some money.

Fair enough. Thanks.

(Operator Instructions) David Erb, Merrion.

The previous caller covered my question, thanks.

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

Great. Thank you, Sally, and thanks, everyone, for joining us on this call. It was a great quarter. It was fun to be able to talk about such an exciting EBITDA level, so may it continue. And I'll look forward to speaking to you all again at the close of our fourth quarter call.

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