Mercer International Inc (MERC) 2016 Q4 法說會逐字稿

Good morning and welcome to Mercer International's fourth-quarter 2016 earnings conference call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International; and David Ure, Senior Vice President of Finance, Chief Financial Officer and Secretary.

I'll now hand the call over to David Ure. Please go ahead.

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'll pass the call to David to discuss the markets, our operational performance and our outlook into Q1.

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 $57.8 million compared to $47.9 million in Q3 2016. Our Q4 result reflects steady pulp demand, favorable foreign-exchange movements and the reversal of a wastewater fee accrual at our Stendal mill, all partially offset by an increase in the level of scheduled annual maintenance.

Our pulp sales were down about 15,000 tonnes and electricity sales were down 29,000 megawatt hours relative to Q3, primarily due to Stendal's 12-day scheduled-maintenance downtime. Pulp sales realizations were essentially flat compared to Q3 with strong demand mostly offsetting the downward price pressure from the rapid appreciation of the US dollar.

However, the stronger US dollar did help reduce our euro and Canadian dollar costs when translated to US dollars. In terms of significant items impacting our results when comparing to Q3, the scheduled maintenance shut at Stendal is notable. Including direct costs, lost production, and reduced energy and chemical sales, we estimate that our Q4 EBITDA was negatively impacted by approximately $7.2 million relative to Q3.

After taking consideration the major maintenance downtimes, our mills ran well in Q4 with total production similar to that of Q3. In addition to the tailwind provided by a strong US dollar, Q4 also benefited from the reversal of $13.6 million of previously accrued wastewater fees at Stendal. Wastewater fees are attacks on the industrial use of water in Germany and are payable at the end of three-year assessment periods.

The fees could be waived if the company can demonstrate lower effluent levels as a result of emission-reduction capital expenditures. US GAAP requires that we accrue these fees until the regulatory authorities validate that the capital project we undertook has accomplished its emission reduction goals. In this case of -- in the case of the Stendal project, we received regulatory approval in Q4.

This accounting treatment creates an unusual EBITDA effect of accruing the $13.6 million of fees during the previous three years only to reverse it all at the end of that period. We reported net income of $18.5 million for the quarter, or $0.29 per basic share, compared to net income of $11.9 million, or $0.18 per share, in Q3. Our Q4 interest expense was stable at $12.9 million and was roughly the equivalent of two-thirds of our energy and chemical revenue, which means that our debt-carrying costs are comfortably covered by our byproduct revenue.

Income tax expense in the quarter was $5.3 million, of which about $0.8 million was current, current taxes reflect our continued use of tax assets to shield cash taxes. Turning to cash flow, our cash balance decreased by about $8.5 million in Q4, compared to an increase in cash in Q3 of about $28.9 million.

Our Q4 operating results were comparable to Q3 but this was more than offset by negative working capital movements and scheduled interest and derivative payments. Despite the high demand on working capital this quarter, our free cash flow was about $15 million in Q4, compared to just under $28 million in Q3 when working capital movements were significantly more favorable.

In addition, our year-to-date free cash flow was a solid $96 million. Capital expenditures drew about $14 million during the quarter, the majority of which was spent on high return projects, some of the more notable projects include the expansion of Rosenthal's lime kiln capacity and Stendal is working on the first stages of some debottlenecking projects as well as a modest expansion of its tall oil plant.

Our cash outflows in the quarter also included our quarterly $7.4 million dividend payment. Our liquidity remains strong. Our consolidated balance sheet was approximately $141 million at December 31, 2016, and we had about $133 million of undrawn revolvers between our three mills. Combined, our total liquidity remains over $270 million.

Our $141 million of cash at the end of Q4 includes approximately $4 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. This balance is down about $9 million at the end of 2015 and the final settlements of this instrument will be made in April and October of this year.

On a trailing 12 month basis, our net debt is about two times EBITDA, which is consistent with that of Q3. And you will have seen 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 4, 2017. And finally, we have recently completed an issue of $225 million of senior notes.

The new notes have a coupon of 6.5% and mature in 2024. We were able to take advantage of our credit rating improvements from the fall to raise capital at favorable rates for the purpose of redeeming our 7% senior notes due in 2019. In effect, we have extended our senior notes by five years at a favorable rate and maintained our financial flexibility to deploy capital.

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

Thanks, Dave, and good morning, everyone. Overall, we had a solid operating quarter including an ambitious 12-day planned-maintenance shut at our largest mill. Compared to Q3, the strengthening dollar had a large positive impact as well on our results as did the reversal of the wastewater fee accrual at Stendal.

In terms of the pulp markets, demand has been very steady to the point that we're having to say no, in fact, to certain spot pulp sales requests we have been getting. We expect these balanced conditions to continue well into 2017, demand has been strong enough to offset new capacity that entered the market in 2016.

NBSK producer inventories finished the year at 32 days and have been near this level all year. 32 days is up two days from the previous quarter but we believe inventories at this level remain balanced. Growth in global soft wood deliveries continues to be strong at over 3% year-to-date, that's roughly 700,000 tonnes.

And China, in particular, was very strong at about 13% growth when compared to the same 12 month period in 2015. We believe China's strong demand is consumer driven but it is also the result of the closure of highly pollutable Chinese agricultural-based pulp along with the diminishing supply of quality recycled fiber. In addition, the Chinese paper industry continues to advance its capacity with new highly efficient paper machines that require a certain amount of premium NBSK to run efficiently.

The quarterly-average RISI list price in Europe was unchanged at $810 per year -- per tonne compared to Q3 in 2016. Similarly the quarterly average list price in China remained at $595 per tonne compared to Q3. This is remarkable as it occurred during a period of considerable US dollar appreciation.

Looking forward in China, we implemented a $20 per tonne increase effective January 1. There is a $20 increase in early February. Mercer announced a -- $40 in fact, in February, so the March price will be $650.

In Europe, we've recently announced a $20 increase effective February 1. These recent price increases reflect the strong market fundamentals and our belief that the global tissue, and especially paper, markets continue to grow at a steady pace.

Moving to operations overall, our Q4 production was comparable to Q3, the decrease of roughly 12,000 tonnes was primarily due to the timing of our scheduled maintenance shuts. In Q3, we took 10 days of scheduled downtime at Rosenthal compared to a total of 12 days in Q4 at the larger Stendal mill.

Our 2017 annual maintenance shuts are as follows. In Celgar, Celgar will be Q2. That will be a fairly large shut, somewhere between 15 to 18 days, and it will include the completion of a number of capital projects that are designed to improve the mill's reliability and output.

Stendal will also have a short three day shut in Q2. In Q3, Rosenthal will take a 12 day shut and again then in Q4, Stendal will be down for another short three day shut.

In total we produced approximately 350,000 tonnes of pulp this quarter, compared to 362,000 tonnes in the third quarter of 2016, and approximately 367,000 tonnes in the fourth quarter of 2015. As you would expect, based on our lower production, our pulp sales volumes were down slightly in Q4 and totaled 345,000 tonnes, compared to 360,000 tonnes in the third quarter and 352,000 tonnes in Q4 2015.

Turning to our energy sales, the mills sold approximately 180 gigawatt hours of electricity in the quarter, compared to 208 gigawatt in Q3 and 204 gigawatt hours in Q4 2015. This reduction in Q4 sales was primarily due to Stendal shut. I am very pleased with our fiber costs, which were down slightly again this quarter, continuing what has been a fairly steady trend for three years.

Market factors that worked in our favor, but we're also seeing the impact of our strategic wood cost reduction initiatives. Celgar has benefited from our round wood procurement strategies. We now also have our full fleet of new high-volume railcar -- log railcars in Germany.

These railcars are designed to increase the hauling capacity of a train by 50% which reduces our per-unit transportation costs but also creates strategic benefits by expanding our fiber market reach. We have also started to commission a new railcar log unloading facility at Rosenthal so we can efficiently unload different assortments of logs delivered by rail.

We continue to be excited by European wood purchasing joint venture with Mondi that we expect that will allow us to access markets that were previously uneconomic. We call this new organization wood2M and we have already had some -- seen some of the expected benefits from this new organization.

Our German fiber prices were essentially flat in Q4 during a period that traditionally sees wood price increases. Looking forward, we are expecting German wood prices to trend up slightly in Q1, mainly due to the current severe winter conditions. In British Columbia, our Q4 fiber prices were down slightly this quarter relative to Q3.

We are currently forecasting that Celgar's Canadian dollar fiber prices will rise just slightly in Q1. Many of you are likely aware of what appears to be another softwood lumber agreement dispute looming between Canada and the United States. We currently believe that our Celgar mill will not be significantly impacted should this dispute escalate.

Overall, we are satisfied with our mills' wood markets and with our fiber inventory levels. Regarding our CapEx plan, we currently expect to invest close to $50 million our mills in 2017. The focus of our CapEx program continues to be a balance of maintaining our mills, while improving reliability and production cost.

These high return spending projects will be spread evenly over all three mills. I am very pleased with the recent refinancing of our 2019 senior notes. The demand for the new notes was very strong and is a nice endorsement of our financial health.

I am also happy that we are able to refinance at a favorable rate while maintaining our flexibility to grow the Company. With respect to NAFTA, we do not have any updates at this time but we continue to expect a decision in the near future. Finally, I am pleased to note that our Board has again approved a quarterly cash dividend of $0.115 per share effective for holders of record of March 28.

That is the conclusion of our prepared remarks, and I will now turn the call back over to the operator to open the call for questions.

(Operator Instructions).

Sam McGovern, Credit Suisse.

Thanks for taking my questions. Just regarding the maintenance downtime schedule that you laid out, can you give us a reminder in terms of the year-over-year cost impact that you had.

I know you had a slower start up on Celgar last year and I'm just try to figure out what we should expect in terms of what won't be in the numbers this year.

Well, from a comparative point of view, the thing to think about in 2017 is there won't be a large shut for Stendal, which there was in 2016. We will have two mini shuts. Stendal is on an 18-month rotation so that is one of the differences.

The other is Celgar will have a 15- to 18-day shut this year in 2017, which is a fairly large one and it has -- the extension has to do with some of the larger capital tie-ins that we need to do. In 2016 in the second quarter, Celgar had a normal shut.

It was expected to be 12 days but then we had three unrelated interruptions immediately following the shut which essentially took Celgar out of production for the full month of April. And we do not expect that to happen again.

Okay. Got it. That is perfect.

And I know we just talked two weeks ago with the bond offering, but I was hoping you could update us in terms of how you are seeing the price hikes go, are those being well received or any sort of pushback?

Yes. So maybe just -- for Europe, it's up 20. And so this is the month of everybody trying to settle accounts at $840 and I think it is a steady market. It is still under discussion.

But it is a steady-type market so I will maybe leave it at that. In China, it is a really strong market. Our team are over there right now. I was just talking to them earlier this morning.

Lots of interest, lots of demand, paper guys are busy. So I think the 630 for February is happening. And I think 650 for March is looking pretty good.

Great. Thanks so much. I will pass it along.

Sean Steuart, TD Securities.

Thanks. Good morning, everyone. A couple of questions. David just wondering if you go into a bit more detail on the pulp market and I am interested in your views on customer inventories.

As you mentioned, 32 days at the mills is not really tight by historical standards but we have clearly got really strong momentum in early 2017. What are you seeing in terms of buyer inventories right now?

Yes. My feeling is inventories at the buyer level are low. And I think that is both softwood and hardwood. Some of the real strength, as an example, some of the real strength you saw in hardwood at the back end of the year was everybody has been going just-in-time for a couple of years and then expecting the [OKI] start up -- expecting all this pulp to come on and it is delayed and there was panic in Asia.

Guys were behind the eight ball and I think that is why saw that price escalation. Going back to November, in China we had customers repeatedly asking us for spot tons and we kept telling them, listen, we are done. We can put something on the vessel for you in January.

But we just -- we do not have any more that is uncommitted and you can see the concern on the customer side. And that was when we went up 20 effective immediately and if the market is -- I think the buyers have been used to just-in-time and, like I have always said, as soon as they know the price is going to go up, then everybody wants more before it does and so you get this flurry. So we're just in the middle of that frenzy just at the moment.

Okay. Thanks for that. And on the NAFTA claim, can you -- you mentioned you expect something soon. Can you put some goalposts around timing there and does the administration change affect anything with respect to this claim?

Okay. First of all, normally, these -- so we finished our in-person hearings in Washington last July of 2015. Okay, and so we would have expected within a year, normally, you get the answer. But then we learned that the president of the tribunal had two other very large files he had been working on in front of ours.

So our view, or our lawyers' view is that the delay is a workload delay. This guy has to write these decisions. And so he's got the other two out-of-the-way now and our assumption is that they are working on ours.

It has not been a procedural problem or necessarily a lack of -- I think it is just a workload thing. And we're at 18 months now so my feeling is it is getting embarrassingly late so, we are expecting it reasonably, reasonably soon. In terms of rhetoric and -- or changes to NAFTA, the announcement that it's going to be a renegotiation with Canada and Mexico, I do not think it has any impact looking backwards.

Protocols are all in place. So I think that is more a forward-looking trade concern.

Okay. Thanks very much. That is all I had.

Dan Jacome, Sidoti Company.

How are you?

Good, Dan.

Great. Can you just give us a little bit more color on all the initiatives you have been doing on the wood procurement side? I know you discussed it a little bit.

I'm just -- it's something I get asked about a lot. I am just looking for a couple more, on the numbers, how much you said your reach to saw log and fiber is expanding and then your unit costs are coming down, probably because you're putting 50% more wood volume on every train. What is exactly is that doing for your cost and then how much did your reach change by? I am just looking for a delta or percentage change.

Yes. The main -- when you look at it from the top down, our strategy in Germany is to relieve the pressure on the domestic wood market. And this strategy started back in the days when bio-energy, home heating with pellets was -- and community heating was sort of a new craze.

It came in very quickly. And pellet demand was greater than pellet supply and that drove wood costs up. So our strategy was, well we got to bring more wood in to take pressure off the market. So we put a lot of effort into things like rail infrastructure, sidings. We entered into long-term arrangements for port facilities.

We have a port in Rostock, for example, in northern Germany where we can bring 1 million meters of wood year in from the Baltics and from Russia. And when you organize solid logistics with rail and ports, all of a sudden wood that was too far away before for the German market becomes competitive with the German market. And then the more you bring into the German market, the more you push the wood down.

And then also the other -- we have had some benefit from the market as well because what was a shortage pellet supply back in those early days is now completely the reverse, that those low barriers to entry to the pellet business. Anybody who wants -- any sawmill that wants to utilize his pins and shavings has got a pellet plant beside it.

There's some -- there's pellets coming in from North America that are getting EN certified and so there's -- it's not as big a force in the market so we've just been able to -- a combination of these factors just steadily drive down the market price of wood in Europe. And if you can move the round wood down, then the sawmill residuals follow.

We've also invested in our mills and in receiving capabilities, automating, unloading, activities, those kinds of things, to help bring unit cost down. And the trains themselves carry 50% more wood relative to what the old trains did. Now we -- Mercer leases all these cars. It's -- we control them and that gives us opportunities to do other -- we are ready to expand our activities into merchandising, complete harvests, moving saw logs around for customers who traditionally were limited to local truck access, those kinds of things.

Okay.

In Canada we are really -- we have been very successful expanding the round wood availability, which is a similar sort of a concept. We are not limited to taking sawmill residuals anymore.

We can take round wood residuals from harvesting and process those ourselves a very efficient cost. So this is a logistics equipment-related endeavor that improves the supply volumes to the mill which helps to keep a lid on prices.

Okay. That's a lot of color. I definitely appreciate it. And then, I am sorry if I missed it. Did you guys give an update on the hardwood capacity swings you are expecting in this year?

I have not talked about it on this call content, Dan, but there is -- I think that is the right question for the hardwood guys. There is -- our understanding is OKI's coming on and I think they're going to try to run it hard and I think they're going to try to knock out some of the high-cost operators. That seems to be what is coming.

There's lots of strong solid demand growth in hardwood but there is a big chunk of capacity coming over the next two or three years so I think there's going to be rationalization. I am expecting lower hardwood prices. I am expecting some of the high-cost guys to shut down. And there is a lot of that, including a lot of the agricultural-based stuff that still runs in places like Vietnam, other spots in Southeast Asia.

What we have been seeing in China, I think some of that fiber is going to go away and probably some of the North American higher cost, short fiber mills as well.

That is interesting. When you say the high cost -- those guys in the higher cost curve, is a lack of good fiber procurement capabilities part of that, you think?

Well, you're competing -- and on the hardwood side you are competing with plantation-grown wood in mega-mills. Their fixed costs per ton are so low. It is just a new dynamic that typical small North American or European hardwood mill is just going to have a really tough time competing with. My view.

Not to mention the foreign exchange element in some of those locations as well, right?

That is a good point too, Dave.

Right. And lastly, sorry, not to beat a dead horse, but on the NAFTA I have been seeing out there and in some publications, maybe by April 1. So you guys said near future. Would that April 1 near future be in the same ballpark?

It's just a guess, Dan. As I mentioned earlier in my comments, I just -- I do not know. We do not -- we won't know until it happens.

They will just make their decision, it will be a big, huge written conclusion and they will release it when they're finished and they don't tell you when that is going to be.

Right. I cannot wait to read it

Yes. Same here.

All right. All right, guys. Have a good one.

Thank you

Paul Quinn, RBC Capital Markets.

Thanks so much. Good morning, Dave. Good morning, Dave. Just a questions on -- a follow-up on this wood cost.

You mentioned a three-year trend in downward cost, maybe you could -- and you did a great job detailing all the work you have done around it. Can you quantify what that cost reduction has been over that three-year period?

Well, I got to be careful I don't talk about much more that's in our MD&A, Paul.

Well, maybe you can point me to where it is found in the MD&A so I can add it up or --

Why don't we do that.

Maybe while you work on that or maybe while you get David Ure to work on that maybe --

Well, he's just -- well, Paul, maybe this will help you. So he's just pointing to a recent investor presentation where we showed our US dollars-per-ton average fiber cost at Q1 2013 at around $350. And it is down now in the -- it's just a little above $250, call it maybe $260, in Q1 of -- Q2 -- Q3 --

Okay. So it's quite immaterial. And maybe you can help me out with the $13.6 million wastewater reversal. I just basically backed it out of EBITDA but I think that is probably pretty crude. Do I just take that over the 12 quarters? Spread that over the 12 quarters going back would be the way to see that?

It's three years going back, Paul. So these are three-year windows.

Right. 3 years, 12 quarters.

That we accrue into costs the wastewater fees and during that timeframe, we develop a concept, review that with the authorities, and the concept is, hey, we can spend some capital to reduce the effluent emissions of a certain -- particular parameters and get them to buy in. Then we design -- we engineer and we build and then we have to test.

And if you can prove that you reduced the effluent emissions in accordance with the plan that was outlined initially, then you get a waiver of the -- of needing to pay the wastewater fee. So if you do not do the capital spend, you have to pay the wastewater fee in cash at the end of the three-year period.

If the capital spend achieves the objectives, then you have that reversed or waived and it is when we receive that final clearance from the authorities, the fourth year after the beginning of the period, then we -- it's just a one-time reversal that goes through earnings because it was recorded as a cost in the previous three years.

Okay. So thanks for that. So just trying to understand the benefit to you. If I back that out of Q4, 2016, because I think it is a one-timer, how I give you the -- do I take that $13.6 million over the three-year period as a credit for you in your EBITDA on those, during that period?

That's right. You got it back evenly over the whole period.

Okay, and then just on the refi, and you had mentioned the $12.9 million interest in the quarter, what's the effect of the refi on your rate going forward?

Well, it is 0.5% on $225 million.

Okay. Okay and just lastly, mentioned strong shipment volumes on the softwood side up 3%, globally up 13%. In China and I think you're probably referencing PPPC data.

Yes. That's right.

Right. So that does not take into account other countries that are not covered by that and I am just wondering what your feel is on what the total China increase was in 2016 and the sustainability of that, i.e., do you have any color into tissue capacity adds going forward or on the capacity shut side for pulp within the country?

Yes. I do not have any better data but that 13% in softwood for China. That's about 800,000 tons in that market. That's huge. And on the ground, what you see is even the printing and writing guys are much happier now than I have seen then for -- as long as I've been going over there. They are 80% or more utilized.

I think they are -- there's a lot more domestic business for them. Some of that is coming from the closure of the highly polluting -- in regional China the agricultural waste products that get pulped and turned into paper in an integrated way and that stuff has been closing down to the tune of three to four or five million tons a year, in some cases, over the last five or six years. Pretty big numbers.

And so what was over built earlier in the decade is now getting busier. They are also -- they have also, interesting, most of the guys are saying they have had some reasonable success with export business. They're starting to make some money shipping paper out of China so they are not all sitting on these big overhangs of paper anymore. On the tissue side, it has been really significant growth.

A few years ago, there was some huge announcements and after a year of those announcements, the companies that made them pulled back their expectations and said, we are not canceling our plans, we're just delaying them. And that's -- so that what would have been a, call it, a three-year build has become a five-year build. So it is still -- China is still chugging along adding capacity on the tissue and the specialty side fairly significantly.

Big demand draw for hardwood, slightly less for softwood. On average 30% to 40% softwood more to the hardwood depending on the grades. But it is, when you add it all up, 800,000 tons is incremental softwood demand in China in one year is -- it give you an indication of how quickly things are changing over there.

Great. That's all I had. Thanks a lot, guys.

Thanks, Paul.

Andrew Kuske, Credit Suisse.

Thank you. Good morning. I really appreciate the commentary on the pulp markets but maybe just a little bit more granular on just the last month of data that we saw and there is a pretty meaningful fall off in European shipments on softwood but then, as you stated, pretty big increase on China, just in that month of data.

To what degree was that a little bit of trying to get ahead of the Chinese New Year and could you just give us a bit more color on the commentary as to why?

My guess is it's weather-equipment related. For us, for example, we struggled at the end of the year to get everything out and some of the container availability in Europe has been relatively low, those kinds of things. So I do not think the data is reflecting anything in the market. It is probably really more around the shipment side of things

Okay. So then on the shipment data, maybe that just foreshadows a blip in the data the end of the year for Europe and then Europe bounces back. And then do you anticipate any pullback in the data on the Chinese numbers, just given the Chinese New Year, when it fell?

Yes. Well, Chinese New Year -- nothing can be received in a port there. Everything gets scheduled so that it does not show up when there is nobody there to receive it. And then stuff will start rolling in pretty quickly and everybody gets back to work.

Eric Heine is over there right now, as I mentioned. I was speaking to him this morning, he said things are happening. Is a tight market right now. So we are expecting shipments to continue and consumption to continue and that should carry on as long as we do not have too much pulp brought on all of the same time from a capacity point of view.

Which is the risk that we are all thinking about for the back half of this year and into next year to see how that plays out.

So on the near term, are you thinking as your fiber costs have been -- you keep wrestling them downward for the most part. There's a good trend there, as you've talked about. And you have got a price increase in front of people right now.

It seems like the market is reasonably balanced. Do you see a good opportunity for margin expansion just on a near-term basis before there'd maybe be a capacity concern later on in the year?

Yes. I think so. Yes. All the metrics are moving in a good direction for sure. Yes.

Okay. And maybe just one final one, just on balance sheet management. Obviously, there is the maturity extension on the debt and the coupon. So how do you think about just the balance sheet management and how that positions you -- really early here for an extended period of time now and just the benefits that gives?

Yes. And so we want to be, we have been de-levering for an extended period of time. We took on a lot of leverage to build our mills. But we felt it was manageable leverage. We had guarantees from the German government, for example, it is hard to explain that to a North American capital markets, but we felt comfortable with the leverage.

But we have been chomping away at it, steadily improving the balance sheet and I think where we are positioned today, we are very comfortable with our leverage. We have a very healthy liquidity, we can withstand anything the world may throw at us touching wood. And we have always committed to maintaining our dividend and we'll continue to pay down debt where we can and when the conditions are right. And we continue to maintain some optionality.

We do, as I think the market is aware and reading our materials, we do see now it's time for Mercer to continue to expand its activities and continue to seek more of these lower capital, higher return type of initiatives that you have seen us doing. And we'll continue to do that and more. And having some strength and healthy cash positions will help us do that.

Okay. Thank you.

Andrew Shapiro, Lawndale Capital Mark management.

Following up in the prior question and your prior answer, with all of your debt now refinanced to lower rates, extended out another five years, debts at lower overall levels with your cash and your cash continues to build up in excess of your CapEx needs. When does a common stock buyback and/or an increased dividend policy gain importance in your Board discussions?

Well, we do. We talk about that every quarter, Andrew, and at the moment, we are staying the course on the dividend and we do not have a share buyback announced, as you know. So we're --

Right. Well, I am asking when does this gain greater importance since all of the other items that were on the checklist have now been actually, successfully been taken care of by you?

Well, capital allocation is done in consideration of lots of variables, lots of activities, not everything of which is announced in the market. And so I cannot say when it takes greater importance.

It does take great importance always. That is why we are here. But at the moment, we have nothing announced.

Okay. That part was obvious. I just did not know if like that's the next thing you will turn to as an item. There's other things on the checklist now that are out of the way.

What are the plans for your investment presentations, non-deal road shows, et cetera, in the coming months?

Yes. We have -- nothing as far as formal conferences for the next couple of months, Andrew. But we are working on a couple of -- it's a little bit fluid, but we're working on a couple of road shows. We are hoping to line up something on the West Coast and something on the East Coast in the next couple of months.

And then as the season -- as the conference season comes a little bit closer, I think we will be in a better position in -- at our April call to talk a little bit about what our plans are for formal conferences. It will all start to pick up in the late spring.

Okay. And I have been an investor, as you know, for a very long time, in varying sizes but for a very long time. So I've have seen the Company in its days of extreme leverage based on the German government guaranteed loans. The build out of Stendal paid for with hundreds of millions of dollars of government grants, the build out or refurbishment of your other facilities with government grants, and under GAAP, those grant values are a reduction of -- and don't -- a reduction of your PP&E and thus your book value.

Your stated book value does not really reflect the replacement cost of these plants and facilities. Periodically I think -- I do not know if it was annually or at some point you have maybe disclosed the unamortized value of those grants. In other words the un-depreciated amounts of those grants.

Will your 10-K, that's going to come out in the next few weeks, provide such an update so one could understand the estimated or adjusted book value of your plants or is that something you could either provide now or plan to provide us in the future?

Yes, Andrew, my understanding is it is in the K and will be in this K, as it has been historically as well.

Good. Okay So we will be able to see that because we are just trying to understand, and I wanted the rest of the Street to understand how deeply undervalued the stock market valuation might be, despite it approaching recent-year highs.

Yes, it is a great point. I would draw your attention to the capital expenditure section of our case. I do not know this year's amortized amount, but in gross terms it exceeds $0.5 billion of government grant value that's gone into our mills in the last 12 years.

Right. And that is not reflected by any means in your stated book value because --

It is --

A reduced depreciation over many years.

It gets recorded as a reduction against fixed assets and then gets amortized on the -- amortized against the depreciation line.

Exactly. Okay. The stated current market yield of your dividend is again something that is very attractive and when you guys do consider the aspect of doing a stock repurchase, does that play a role in your analysis that for every share you buy back, that is actually cash flow on dividends that you do not have to pay out?

Well, that is how it works.

Yes.

Good. All right. Thank you.

Thank you, Andrew.

[Kasha Copetek with TD Securities].

Good morning. It is Kasha. Would you be able to provide the mill-by-mill breakdown for shipments as well as production in Q4?

Yes. We can do that.

Yes. So in Q4, the production at our Rosenthal mill --

Just the shipments, I think.

Just the shipments?

No. Both if you could.

Okay. Well, I'll start with production. Production in Q4 at our Rosenthal mill was 89.4 thousands of tons These are in thousands of tons.

Stendal, 142.5 thousands of tons Celgar, 118.4 thousands of tons. And sales volumes, Rosenthal, 85.9 thousands of tons.

Stendal, 140.4 thousands of tons. And Celgar, 118.9 thousands of tons.

That's great. Thanks very much. That's all for me.

Anthony Young, Macquarie.

Good morning, guys, and thanks for the question. Really just on capital deployment, you touched upon this and, David, you mentioned the investments that you have been making are happy to continue making. But just wondering on the M&A side, you have talked about in the past, things being expensive.

And given the firmness and increasing pricing environment we're seeing, are things starting to look cheaper or more attractive or are we going to just continue to chip away at the balance sheet?

Yes. It's -- we are always actively looking for ways to enhance value. I have said in the past, we are not -- I do not want any investors to think we're look at big mills or anything like that, nothing overly material, certainly not going to be issuing stock at these levels.

But we do continue to look at things that are attractive to us in our areas where we have core competencies and we just keep doing that. It has been difficult with valuations, as I have mentioned, but there are things that we see that we evaluate, we think are interesting and we do hope to get something done this year at some point.

And just reading between the lines and it seems like it would be more of a bolt-on acquisition than -- if you were to pursue anything, you are looking more bolt-on, and like you said, another mill or something else transformative?

Bolt-on, that would be a reasonable term, yes. It's -- our focus is lower capital intensity, higher return. More of an opportunity to create growth in an area that is -- in an area of our core abilities but would not necessarily be NBSK pulp. So I cannot say too much because we have not announced anything but it is just something that we're actively thinking about that we have got a strong balance sheet and we have got a strong team and continue to grow Mercer with and think would create value for shareholders. We're working hard at it.

Okay. Definitely good luck with that. And then maybe just last one on the --you have the bonds which you'll -- are callable in December, do you still envision calling those in a similar fashion to the ones you did a few months ago, a couple of weeks ago now I guess?

Yes. I do not know. I cannot answer that. The call in the 2019s was an opportunistic call.

We got strong, strong tailwinds from pulp market, we had a strong bond market and we are moving into a period where there is some capacity coming so we felt we should get it done. We will have to make our assessments on the 2022s as the time approaches, probably no rush on those would be my guess for now. But we will just evaluate it as we measure the conditions at the time.

Okay. Thanks for the question, guys.

(Operator Instructions)

Hamir Patel, CIBC Capital Markets.

Good morning. Dave, based on the various projects that you guys have underway, can you speak to what sort of level of shipments you are targeting for 2017?

Yes. How do I answer that? We would, we will expect to be at around 15 -- 1.5 million tons or greater, maybe 1.525 million tons, something like that. The main improvement area for us will be Celgar, which closed the year at 426,000 tons, which was disappointing.

It had a lot to do with some of the equipment issues we had back in the spring. Looking to get that mill up more in the north of 480,000 tons. Stendal was close to 650,000 tons in 2016, maybe an aggressive stretch target for that mill would be 675,000 tons And the Rosenthal mill, we would hope can hit it's maximum capacity, which is at around 365,000 tons.

Great. Thanks. That's helpful. And just the final question I had was, I saw a report in RISI, I think it was this week, that seemed to suggest that Sun Paper project in the south is going to be coming back as a fluff mill. Have you heard anything about that?

Not specifically. But you know, it was originally thinking -- they originally were thinking fluff and then they were thinking dissolving. So having said that, the fluff market has been reasonably strong, Good growth there, so they might be rethinking it, but I -- these things are not always exactly what the company is thinking. So I do not have any specific knowledge of it.

Thanks. That is all I had.

And there are no further questions queued up at this time. I will turn the call back over to Mr. Gandossi.

Okay. Thanks, Denise. Well, thanks, everyone, for taking the time to be on our call today. Appreciate all your support and if you have questions that you want to contact either Dave or I, that would be find and otherwise we look forward to speaking with you again on the next quarter.

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