Mercer International Inc (MERC) 2015 Q4 法說會逐字稿

Good morning and welcome to Mercer International's fourth-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, Chris, and good morning, everyone.

As we typically do, I will begin by taking a few minutes to speak about the financial highlights of the quarter, and then I will pass the call to David to discuss the markets, our operational performance and our outlook entering 2016.

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 would 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 Q4 we achieved EBITDA of $61.5 million compared to $61.1 million in Q3. Pulp demand was solid in the quarter, but due to vessel scheduling complications created by the holidays, along with the timing of some maintenance downtime, sales volumes were down 38,000 tons.

Currency movements continued to put pressure on NBSK pricing in the quarter, and pricing slipped on average about $30 per ton in Q4. The quarterly average [received] list price in Europe felt $817 per ton from $843 in Q3. In addition the quarterly average list price in China went down to $600 per ton from $638 per ton in Q3. Both the European and China list prices appear to have stabilized early in Q1. Overall our mills ran well, and as a result EBITDA was positively impacted by approximately $2 million of energy cost savings, relative to Q3.

In addition, our Q4 results benefited from lower planned major maintenance costs of about $2.6 million, when comparing the small four-day shut at Stendal in Q4 to Rosenthal's 11-day shut in Q3. Q4 also benefited from a one-time $6.1 million settlement resulting from a successful appeal before the BC Utilities Commission over disputed electricity rates at our Celgar mill.

We reported net income of $21.7 million for the quarter or $0.34 per basic share compared to net income of $23.8 million or $0.37 per basic share in Q3.

Our current taxes totaled approximately $2.6 million this quarter, which is a consequence of our steady 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 Q4, we expensed direct cost of approximately $2.4 million on annual maintenance, the majority of which would've been eligible for capital treatment under IFRS. And so, with the completion of Q4, it closes what has been a fairly solid year financially. EBITDA for the full year was $234 million, and net income was $75.5 million or $1.17 per basic share.

Turning to cash flow, we made some tactical investments in working capital and fully repaid the balance of our Stendal revolving credit facility during the quarter, activities that contributed to a cash reduction of $38 million in the quarter. The $20 million repayment of the Stendal revolver leaves us with no cash drawings on any of our revolving credit facilities at year-end.

Q4 was also a big quarter for capital projects. Capital expenditures drew approximately $19.3 million during the quarter, the majority of which was spent on high return evaporation plant upgrades at our Stendal and Rosenthal mills. These projects are not only potentially eligible to offset future wastewater fee payments because of their environmental benefits, but they also helped debottleneck both mills, thereby adding modest incremental pulp capacity.

We also spent approximately $1 million towards our new ERP project, and the ERP project is progressing well and remains on target to be completed later in 2016.

Our cash flow also reflects a temporary increase in working capital due to lower Accounts Payable and a modest inventory build of wood. Rounding out cash flows in the quarter were our regularly scheduled semiannual notes interest payment of about $24 million, $7 million of scheduled interest rate swap settlements, and of course our quarterly $7 million dividend.

In terms of our liquidity, our consolidated cash balance was sitting at approximately $109 million at December 31, 2015 and we had approximately EUR25.6 million of undrawn revolvers available at Rosenthal, EUR75 million of revolver availability at Stendal, and approximately CAD38.3 million available at Celgar. Combined with our $109 million of cash, our total liquidity is approximately $246 million.

Our $109 million of cash at the end of Q4 includes approximately $9.2 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 the interest rate swap balance declines, so will the collateral amount subject to certain minimum requirements.

In early February we negotiated an extension to Rosenthal's EUR25 million revolver to October 2019. Among certain other fee reductions, the interest margin has been reduced to 2.95% from the previous 3.5%. Overall we are pleased with the new terms on this revolver since they reflect our improving financial position. On a trailing 12-month basis our net debt is currently about 2.3 times EBITDA, a level that we believe gives us considerable financial flexibility as we consider capital allocation decisions.

During the quarter we adopted -- we early adopted two new accounting standards, both prescribed new balance sheet presentation for specific items, but the most noticeable one when looking at the balance sheet relates to our debt presentation. This new standard requires that certain capitalized debt issuance cost be netted against the debt balance, similar to the accounting treatment for a debt discount. In our case, approximately $12 million was reclassified to our debt balance at December 31, 2015. Prior to this standard, these costs were recorded as an asset.

Going forward the capitalized debt issuance cost will continue to be amortized to interest expense at the rate of approximately $2 million per year.

Finally, you will see from our press release yesterday that our Board has approved an $0.115 dividend for shareholders of record on March 28, for which payment will be made on April 5.

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

Thanks Dave, good morning, everyone. But the open by saying that we are pleased with our fourth-quarter operating results. Our mills performed well and pulp demand was steady.

Overall EBITDA in Q4 was comparable to Q3; slightly lower pulp pricing and lower sales volumes were partially offset by the impact of the stronger US dollar, lower major maintenance and energy costs. I'll speak more about our fiber markets in a moment, but compared to Q3 our overall Q4 per unit fiber cost were down slightly.

As Dave noted Q4 EBITDA also benefited from a settlement reached with Celgar's electricity provider. We received approximately $6.1 million as a refund for past years, and we will also benefit from lower energy costs going forward, the savings being about $1.4 million per year. The dispute was over standby rates that we paid to ensure electricity is available at the mill at times it is unable to sell supply its energy needs.

We felt the stand by rates were too high and the electricity regulator in the province of British Columbia ultimately agreed, though it took almost five years to get a final settlement. We are, however, pleased with the result.

Once again this quarter, currency movements had a significant impact on our results. Our operating costs are primarily incurred in euros and Canadian dollars, while NBSK pulp is quoted in US dollars. As a result our business and operating margins materially benefit from the current strength of the US dollar; however, our Energy & Chemicals sales are made in local currencies and our realizations decline in US dollar terms when the US dollar strengthens.

In addition, the strengthening of the US dollar increases the cost of pulp to our European and Asian customers, which results in downward pricing pressure and reduces our realizations. December NBSK producer inventories were 29 days, down one day from the previous quarter end. We were not surprised to see this decrease in producer inventories in Q4 as we continue to see steady NBSK demand in all markets.

At these inventory levels, the NBSK market is considered to be generally in balance. NBSK list prices in February are $800 per ton in Europe and $600 in China, and we continue to see steady demand for pulp in all markets. Total pulp imports into China were up over 1.7 million tons in 2015 compared to the prior year. And despite the secular decline of printing and writing paper, European pulp imports were up 6% year-over-year.

Through 2015 and into 2016, producer inventories are reflective of balance market, despite foreign currency driven price declines. Currently we believe that both the European and Chinese markets are stabilizing.

Looking forward, the expectation is that global tissue market will continue to grow between 3% and 4% annually; as a result 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 Q1.

Regarding the much-discussed incremental supply coming later this year and next, we do believe that it will create temporary conditions where supply exceeds demand. Our view on this is that overall, NBSK prices are near floor levels for many producers on the high-end of the cost curve. Should prices slide we believe that high-cost producers will be under significant financial pressure.

Moving to operations, as Dave mentioned, Q4 was a strong production quarter for us. In total we produced approximately 367,000 tons of pulp this quarter compared to approximately 369,000 tons in the third quarter and approximately 374,000 tons in the fourth quarter of 2014. Q4 included a four-day planned maintenance outage at Stendal.

Our pulp sales volume were down in Q4 and totaled approximately 352,000 tons compared to 390,000 in Q3 and 361,000 in Q4 of 2014. As Dave mentioned we had some holiday-related shipping delays that kept our sales results below last year's total.

Turning to our power sales, the mill sold approximately 204 gigawatt hours of electricity in the quarter compared to 215 gigawatt hours in Q3 and 202 gigawatts in Q4 2014.

Relative to the third quarter, our euro per unit driven fiber cost were down slightly; overall the German market 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 Q1 2016. In British Columbia our Q4 per unit fiber costs were up marginally this quarter in Canadian dollar terms relative to Q3, primarily due to the impact of currency movements on our US-based wood purchases.

We anticipate that Celgar's Canadian dollar per unit fiber costs will remain essentially flat in Q1 2016. We are currently comfortable with each mill fiber inventory level as the mills work through their winter inventories. Our 2016 annual maintenance shuts are scheduled as follows. We do not have any major maintenance schedule for Q1, but in Q2 Celgar will be down for 12 days and Stendal will also take three days of maintenance. In Q3 Rosenthal will have a 12-day shut and finally in Q4 Stendal will be down for 12 days.

With respect to our naphtha claim, we continue to expect a decision in the second half of this year.

So to wrap things up, I'm pleased to confirm that our Board of Directors has again approved a quarterly cash dividend. We are excited to be returning cash to our shareholders while continuing to grow shareholder value by investing in our business and pursuing accretive strategic opportunities.

So that's the conclusion of our prepared remarks and we will now turn the call back to the operator so we can open up this call for questions. Thank you.

(Operator Instructions). Dan Jacome, Sidoti & Company.

Good morning, how are you? I appreciate you taking the questions. Just on Celgar fiber cost you said you're going to be flat in the first quarter. Is that sequentially or year-over-year?

Sequentially.

Great. And I was just wondering, given the pullback in stock price, despite the fundamental staying pretty strong for you guys, if the Board had any incremental discussions on possibly a stock buyback, I think like stocks that are 20% earnings yield on your cost of debt is around 7%, I don't know, just wondering on that respect.

We certainly did discuss capital allocation choices at recent Board meetings. You'll notice we didn't put anything in our press release regarding share buyback, so I don't have anything to report today. But it's definitely something on the agenda that we continue to discuss.

Great. And last question, the demand picture you said remained stable across most markets. I was wondering if you could provide any more granular details, maybe tissue versus paper side?

I think tissue in North America and Europe is a very stable business and growing slightly. Tissue capacity in Asia has been growing quite rapidly. I don't think all the guys in Asia right now are running at 100% for sure. I think they are more down in the 70%, 80% range where they have been for some considerable period of time here, it's just the way it works over there.

But tissue demand keeps going, and the big producers continuing to put in more capacity. I think the margins for the tissue guys in Asia are really good. We get that feeling when we meet with our customers over there. It's a good business, they are just managing situation so that they don't destroy their business the way some things have happened in the past on the freesheet side.

So it's generally -- I would describe it is a very stable, stable demand in all three markets right now.

That's terrific, thanks a lot and good luck with the rest of the quarter.

Richard Kus, Jefferies.

Good morning. So first question from me -- in China can you give a little more color as to what you're seeing on the ground there, how the inventory levels look? I know right now they're kind of in the middle of their New Year's holiday so maybe the picture is a bit distorted. But just curious for any kind of real-time input you may have.

I think on the pulp inventory side, long fiber, I think inventories are quite low. Like very low, in fact. We've been trying to push price increases through that kind of guys hold off and withhold orders as a way to try to temper against that. And then, you've got the new year impact where stuff can't ship because you can't arrive in that timeframe, there will be nobody at the port to receive it, that type of thing. So the producer, it's weighted more to the producer in this timeframe and yet inventories went down to 29 days and at the producer level, and our customers are living off inventories.

So, our view is going into March, things should -- when you combine that sort of issue with the beginning of spring maintenance for a lot of the mills, things are going to be pretty tight for inventory in China.

Sure sounds like it. So I've got to believe that you're pretty optimistic that you might be able to get some pricing through as you kind of move into springtime.

That's our intention, to push in that direction for sure.

Great. With regards to the energy cost credit that you booked in the cost of sales in this quarter, the 6.1, is it right to assume that that 6.1 is for a five-year period of time?

It sort of in 2011 is really when it all came to a head.

I see. So the real inclusion for EBITDA this year instead of the 6.1 should really be something more like $1 million.

$1.4 million per year is the annual saving on that standby rate.

Great. And then my last question for you, as you guys think about capital allocation with leverage where it currently is, do you think about continued reductions in leverage, or are you going to be more focused on, one, capital projects and, two, returning capital to shareholders at this point?

We've always articulated a balanced approach, and I think you can expect that to continue. You may recall we put a 2019 tranche in, we have $450 million of 2022 and $200 million of 2019. And the reason for that was to continue to chip away at our long-term debt. So I think you should expect us to continue to do that over time. And our capital allocated to CapEx is really focused on a disciplined high-return spending program that is accretive to our share trading multiples.

And in fact because our mills are modern, our high return is to find the better than three year payback, and that's really where we focus.

Very good, thanks, Dave.

Anthony Young, Macquarie.

Thank you for taking the questions. Just a little more on the debt side of things. You guys had paid back the Stendal revolver, I think that was a $20 million. But then there was an additional amount of debt that seems to have been repaid. Is that just the derivative liability, or are you guys also buying some of your bonds back on the open market?

That was -- you are correct. It's -- the derivative combined with some FX movement would be the sum of the total of $35 million.

And then you kind of touched upon it on that $250 million 2019 bonds. Would you guys -- some of the debt is trading at a discount to par. Would you buy back debt on the open market instead of just calling the debt in the premium in December?

I've always said even to the guys that we sold the bonds to that we are putting a short tranche in there so we have some repayable debt and our intention is to chip away at it. And if we can get it at a discount, we would be interested in that. And the question is just about timing. And getting it at the best price we can.

Okay. That's helpful. And then, just on the pulp markets, the articles out a few weeks ago about the price increase, $20 per ton in Europe. Has that been accepted or have you gotten pushback on that or how should we sort of think about that?

We didn't get all of it -- the list is becoming a murky thing in Europe, obviously. And as you know the discounts did widen a little bit with the beginning of the year. All the companies entering into new contracts, so the industrywide discounts to list widened about 3 percentage points. So the price increase caught a bit of that back, but not all of it. And we will know later in the month how the February pricing is going, it will be up marginally, but probably not fully to our expectations.

But again, as we think similar to China, the European market is pretty tight and will be continuing to push to recover what we've slipped on discount market in March and April.

Okay. And maybe just one last one. It seems like last quarter there was some sort of settlement reached with the folks up in Canada, that utility, then there was another when this quarter, then obviously you have been asked the case. What's -- is the relationship still pretty good there? It seems like there's been a couple of decisions here and obviously a big one out in the future possibly -- what's the relationship with you guys in the utilities up there? Is everything sort of in the past now as far as settlements and things of that nature?

Yes, I think -- I hope from our side certainly a relationship with the provincial government here is fine. These are very complicated energy matters and difficult for politicians and senior bureaucrats to weigh in on.

So we really had to go through the NAFTA process on the generator baseline issue, which we completed now. We are awaiting a decision on that. The standby rate issue was an issue with our utility, our local utility, [Fortis], which is not a crown corporation. And it is something that we just considered to be egregious and didn't accept it, so we thought that through the BC Utilities Commission, which is the regulatory body, and we were ultimately successful. But as I mentioned in my opening comments, it was an extraordinarily long process but we are happy with the result.

These are just complicated energy-related matters that -- I don't think they impact our relationships per se. I should certainly hope they don't.

Okay. That's fair, thanks for the time, guys.

Andrew Kuske, Credit Suisse.

Good morning. I guess the first question is just on pulp markets, and you've given -- you look at the NBSK hardwood divide right now on just a spread basis. Do you believe there's going to be some pricing support and maybe potential pricing increases in NBSK, just given that spread you're going to see substitution back into NBSK?

For a while there, prices were almost the same or virtually the same in Asia for NBSK and hardware. And so I think in that timeframe you would've seen more guys moving into the NBSK space just because they could. Today, with a spread of about $50 and hardwood softening, we might see some -- it's more likely we will see some slippage back where guys push back towards preferring more hardwood where they can.

I don't think it's a big number, but it's more likely that guys will -- I think hardwood is going to continue to weaken. So, I think we're going to start to see more of a shift that direction rather than into NBSK at the moment.

That's helpful. And then, just based on one of your earlier comments, if the market -- the NBSK market really stays in this general malaise, and maybe prices flatten out of it, other players that have higher cost structures would look to get hit more. How do you think about the opportunities that that might present you in the markets, say, 12 months out is your balance sheet is -- you guys you guys mentioned are very clean compared to where it's been in the past, your cash generation really in midcycle range, so a lot of things look good.

So how do you frame the potential financial problems that others may have for the opportunities you can see on the horizon?

I think that's a really important thing to understand about our business is how steep the cost curve is on the right-hand side. There is sort of -- things are tight right now, we've got some creep capacity coming this year and early next, and then we got the big one [Anakoski] at the end of 2017 early 2018. But in the face of that we've got significant volumes of very high cost pulp production today both in Canada, Finland, so while we look out and we see capacity coming and it's -- it is what it is, it just takes a mill or two to go down kind of like [Tofta] did last year. And it's game on again, like it's a whole new world.

And I think the new capacity in Finland is going to put some pretty significant pressure on their fiber baskets, so the high cost guys in that country -- we should keep an eye on those guys. And there's also a number of mills that they got to be $100, $150 higher on a delivered cost than we are. As of the don't have a lot of room, a lot of room to play with here. And if things don't -- if pulp prices don't improve from here or if they start to weaken in any material way, then I would expect we will see some adjustments on the capacity side.

That's extremely helpful. Thank you.

Andrew Shapiro, Lawndale Capital.

Hi David. Regarding the debt and credit issues that you have here because you're pretty much churning here and creating a ton of cash flow, I think there's some credit rating agencies that have Mercer debt on positive credit watch for possible upgrade. Do you have any insight as to the timing of a ratings review?

We meet with them quarterly, and they don't really tell us when they are going to upgrade us. They're frustratingly behind the times it seems, but the pushback we get from them is, you are a single product commodity, you've got three mills, and this is what it is for now. But as you point out our credit metrics are significantly better than the ratings that we are achieving today.

Okay. And as you continue to build cash, reduce this net debt, and you've paid off all your revolvers, at what point since you've targeted staggering with your staggered maturities, at what point is it more realistic to view the Board to be considering the rate of dividend payments that are ongoing and sustainable? Is it middle of this year, end of this year, that the review of the dividend rate and possible increase is on the table for an agenda item?

Yes, I've got to be careful with that, obviously. There's nothing to announce. I could repeat what we've said in the past, that we are going to have a balanced capital allocation strategy, including some debt reduction in there. And since we issued the dividend obviously the stock has not performed well at all. Really caught up in the contagion of the global malaise, if you like.

So the return to shareholders is pretty nice (technical difficulty) today's stock price. I don't think there's a huge incentive to increase that, I think we would be more focused on the debt reduction and building the net cash on the balance sheet. It's -- nothing wrong with having a lot of cash around when the world is in the kind of trouble it's in. Valuation of everything that we might seek to spend it on will obviously be cheaper. In a week cyclical period.

So I'm really focused on being balanced and disciplined here.

Right. I asked the question because obviously with the recent stock price weakness, the dividend yield climbed to well over 7%. So there seems to be some sort of market concern over the sustainability of that dividend baked into the share price. So, have investors expressed concerns on the sustainability of the dividend, which seems to me to be contrary to your balance sheet?

Thanks for the question. Not to me personally, I haven't heard anybody raise that concern, and I should repeat on the call that we have been very clear that when we issued -- initiated the dividend that it's something we intend to continue and grow over time. We aren't prepared to initiate a dividend until we felt confident we're going to be able to sustain it. And I don't see anything today that changes my view on that. So --

Thank you for communicating that. I have more further questions, but I'll back out into the queue.

Sean Steuart, TD Securities.

Thanks, good morning, guys. A couple questions.

First on CapEx, and I appreciate there's a nuance on how you account for your maintenance expensing, a higher chunk of it than your competitors do. How long do you think you can continue to spend at about -- give or take $40 million a year on CapEx and still maintain your relative competitive position? Is that a sustainable number indefinitely where you will keep ground with your competitors from your perspective?

I think so. We don't have any really big items in there, and what we work on each year kind of evolves and revolves around -- we do have a healthy spending maintenance spending budget as well that doesn't show up in CapEx. So, a lot of the motor replacement and ongoing maintenance gets done every year. We keep our mills in great shape.

Really for the German mills, the bigger numbers in capital tend to be these wastewater offset projects, where we get the opportunity to offset wastewater fees that we incur with capital spending projects. And so we've bundled all that up into a larger project that gives us either capacity improvement or a cost reduction combined with the wastewater offset is accretive and high return.

I wouldn't see any reason to model out a greater capital investment in the future. If we let the club out a little bit in certain areas it's because we see a real opportunity to create some value, and -- but these are not mandatory investments by any stretch.

And the second question is just on -- I guess how you perceive capacity additions coming online. When you guys are modeling out your forecast, for some of the European capacity that's coming on in softwood over the next several years, what sort of ramp-up curve are you expecting for those additions?

That's a great question. So like Merrell this year late in the year, it will ramp through the fourth quarter if it's on time and into the new year. Anaoski, because of the size, I don't think we'll see much of its pulp in 2017; you'll start to see it coming in 2018. The fluff side, you'll see later this year, but again to my earlier comments, there's some pretty high cost fluff stuff still running in the US that is just going to be a trade for one company, I think they're going to bring up their one mill and take up another, that kind of thing. So it's a murky thing, but all in all I'm still optimistic about the balance for the future.

Okay, thanks for the context.

Hamir Patel, CIBC Capital Markets.

Good morning. I joined late so you may have already answered some of these. But David, could you give us a sense as to how much room there may be to further debottleneck your mills and how long that might take?

We didn't talk about that yet, so that's a good question. I think just going through them, Stendal is running right up against the permit level. It's -- runs at a very good rate of efficiency. To create incremental capacity there would require capital investment, I'm not sure it's a three-year payback, so it's something to be studied, but not something to be expected at the moment. Similar sort of thing for Rosenthal, that mill runs right at the top of the industry in terms of availability. Celgar on the other hand has been in the last three or four years has been in the sort of 450, 460 range -- that's 460,000 tons. And we are pretty comfortable we get that mill up to 500,000 tons here in the next couple of years, so that's a focal area.

It's not really as much about capital as it is about some enhanced supervisor training programs, better standard operating procedures, more discipline in the mill, and we've been following the restructuring, the mill management has really focused on building a strong team to lead that charge. And quite impressed with how well they are doing and I'm looking forward to continuing improving results from that mill in the next couple of years.

That's helpful. And just a final question I had was on the chemicals side. Could you give us a sense as to what the sales level was for chemicals in 2015 and how you think that might vary over the next couple of years?

(technical difficulty) specific numbers here but I can definitely give you the tone of it. So we sell a product called [cutall] oil primarily, and so because it's in euros, for one, it's a slight reduction over prior year valuations. There's been a very modest pricing reduction for tall oil, but nothing at all like oil. It's very low, just slightly lower than where it's been steadily for the last three or four years. And then the other driver in it is -- it was a very dry summer last year, so the resin levels in -- going into the tall oil plants has been below average, and it continues to be that way even now. It's just the health of the trees following that drought period.

So there's -- it's a wetter winter now so things will be better next summer.

Are there any other projects you might consider to boost the chemical volumes?

For the moment, we've just commissioned the Rosenthal tall oil plant, and there are -- the feedstock for both mills is below our capacity, so there's really nothing to do at the moment in terms of capital. There isn't as much planned in the region for Celgar, so it's not likely we'll put a tall oil plant in there. And on the chemicals side then we continue to focus on other extractive and other specialties like our filament business, which is something that's growing slowly but is quite exciting for us.

So, longer term, we think that filament business will be quite beneficial to the Company, but it's going to take a while to build it. It's an IP-related business. You have to take it slow so you protect all of the developments with intellectual property patents. But down the road we'll have a product that we can sell to customers where we can have a value discussion as opposed to a commodity pricing discussion.

Thanks, David. That's all I had.

Paul Quinn, RBC Capital Markets.

Thanks very much, good morning, guys. Just a couple questions. One, to start off on just wood costs if you could give us a little bit more detail on what's going on in Europe. I know you had a big initiative on railcars last year in Germany, and also what you are seeing on residual prices in BC.

In Germany, Paul, the railcar program, we haven't seen any of the benefit of that yet. We've had the car approved, the test car has been built, and we will start getting cars in significant volumes during the year. And as we deploy those that will bring the transportation costs down quite favorably as much as 20% more wood on those railcars for the lengths. And I think the other thing that it does is if you imagine it broadens out the procurement circle for the same costs, so as you go further East into Europe, the wood costs get lower, but you have the transportation costs to get it to the mill.

So, we can now go further afield, bring wood into Germany, which puts pressure on the domestic wood prices in Germany. So, it's not just the logistics cost saving as much as it's the strategy of driving the domestic supply demand balance. So that's really still to come. The pricing in Germany for whether it's residual chips or round wood are softening.

There's just less and less users, the pellet business is obviously almost nonexistent because of the weathers, the particle guys are not doing that well and there's not much demand coming from them, and it's easier for them to procure wood because they are not competing with pellet producers. And so generally the tone of the market is to come down.

It's also on the biogas side, as the EEG things -- which is the German renewable focus -- shifts more to wind and solar, there will be a sort of a phasing out of these biogas guys in the future which will continue to free up more residuals. So, generally a positive all around on the German side.

In Canada, in British Columbia, on our section of the province, we've got ample wood. There's been a big push for higher utilization of residuals, and we've been so successful to the point that we are almost having to turn off the tap on that because there's too much wood coming up the mill. So we will be recovering some of that working capital as we go through the next quarter or two, as we work some of those inventory levels down. But the impact of the programs we've been running have really sort of freed up a significant volume of wood so that allows us to put some downward pressure on the residual chip markets.

Where the cost inflation comes for us is because of the location of our mill if you draw a circle around it, sort of a chunk of that circle goes down into the US market, and we do buy sawmill chips from sawmillers below the border and those US dollar chip prices are obviously on the higher end of our marginal cost curve. That's a bit of a currency thing that's going on there.

And great color. Can I get you to ballpark sort of what you're expecting in sort of wood cost reductions in Germany? Sounds like I sort of expected some of those railcars -- I guess I misinterpreted that in 2015 but it sounds like it's all to come forward, but do you expect to see something like a 10% or 15% price reduction or cost reduction in the mill?

I can't really answer that without guessing, so I probably better not. But generally we are of the view that we are going to hold the line or push it down.

All right. And just might've missed this because I got on late, but just the timing of the NAFTA decision that you are expecting here. I suspect everything is done, so now you're just waiting for the decision to come down and I suspect there's a set date that that's going to be done by, I'm just wondering what that date is.

So, there really isn't a date set. As I've -- maybe just to repeat from previous calls, we completed our -- it's a three-year process, a tribunal, it was conducted under the NAFTA tribunal protocols in Washington DC, and in the final stages were in July last year where all witnesses and parties were present -- presented and cross examined. And the tribunal were able to ask their final questions. And so on.

They give us general guidance of case should be reported out within a year. But if it's complicated, it could take longer. And that's as much as I know. So July to July, so we've said we expect the second half, I'm hoping it's going to be in the summer, but it could slip a bit. And we won't know until it comes. There's no -- no need for them to notify us before the decision comes. It will just come.

And then just lastly over to growth initiatives, you mentioned rating agencies, their tendency to look at you as a single commodity producer with only three assets. And obviously your equities have been really taken to the woodshed except for today. I'm just wondering what you're thinking long term in terms of growing the asset base of the Company.

Yes. It's pretty consistent with how we described it before. We do have growth aspirations, we would like to be seen as a growth company in the fullness of time.

Having said that, we are not going to run out and do anything crazy, we are very disciplined as you know. We grow our business in our adjacent areas, that's easy. We like asset-light, we're focused on areas that we know, and where we can earn a better return with less capital invested. We are not going to buy old pulp mills, we leave that point clear to the market.

We're going to stick to the knitting, keep doing what we do best, but continue to look for ways to grow the Company. That's about as clear as I can be, to be honest. But we are quite open-minded about things, but valuation and [subliner] are important things for us.

That's all I had, best of luck.

(Operator Instructions). Andrew Shapiro, Lawndale Capital.

Hi, a few follow-up questions, if I could. Regarding the BC utilities, $6.5 million rebate award, when is that payment expected or was that booked in the December quarter?

So the accrual was booked in December because of the certainty on the issue and the cash has been received by the Company at this stage.

When you say this stage, the cash was on the balance sheet (multiple speakers)

No, it was accrued at the end of the year and the cash came in in January.

Okay. With -- the stock price, I know someone talked about it, we've been in the woodshed but except for today we are still down 15% year to date. What are the plans for your upcoming non-deal roadshows and investment presentations in the coming months?

Dave, do you want to talk about that?

We've got a non-deal roadshow, the Sidoti folks are taking us out in the Southeast US here in a couple of weeks. And that's -- then we have the Barclays conference in the middle of June. Typically as we get into the summer, there will be a couple of other conferences, but they are not quite firmed up yet.

And again, some time you just commissioned Rosenthal tall oil. When it's up at its expected range, I think you've talked about this to be about a $2 million incremental or $500,000 a quarter. Do you have a feel for when the project would be up and running at that rate, or is it there already?

It's there already, Andrew. The only disappointment really on the tall oil front has been how dry the wood has been the last seven or eight months following the climate situation last summer. But the plant ran all year last year, and it meets and exceeds all expectations. So, we are already on plan.

And your release mentioned about the holiday shipments to China that were pushed back from the fourth quarter into this year. Does that mean the timing of the bookings of these sales in the generating of the cash flows of a first-quarter event or does it just push things just back in the amalgam of the warehousing and the inventorying of your customers, and it's not going to be like we'll call it a recovery --

It was a vessel delay, so it would not been recorded as sales. It's going to be a first-quarter sale. The vessel had to sit because it can't arrive and is a [blockout] window where it can't arrive in China there won't be anybody at the port to receive it. So until the vessel pushes off we can't book the sale.

So if it's a vessel delay, and let's say not a deferral by the customer, does that mean we would see potential a one-time bump and blip in the first-quarter volumes?

What we launched in the fourth quarter will move into the first quarter, that's right. Assuming we get everything out, we intend to do that. So it will be helpful for the first quarter.

Excellent. Thanks much, goodbye.

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

Thanks, everyone, for joining the call, and look forward to speaking to you all again in the next quarterly call, and let's hope we get out of the woodshed. Thanks very much.

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