Mercer International Inc (MERC) 2017 Q3 法說會逐字稿

Good morning and welcome to Mercer International's Third Quarter 2017 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. Sir, please go ahead.

Thank you. Good morning, everyone. 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, strategic activities and our outlook in Q4.

Please note that as -- in this morning's conference call we will be making 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 of are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.

Our Q3 financial results reflect record level operational performance, strong markets for our products, and faster than expected ramp up of our Wood Products business. In Q3, we achieved consolidated EBITDA of $64.0 million compared to $39.1 million in Q2. When compared to Q2, our Q3 results are highlighted by lower major maintenance costs and higher pulp and lumber prices, which were partially offset by a weaker U.S. dollar.

Our sawmill operations also contributed solid earnings totaling $4.4 million of EBITDA. In Q3, we had 10 days of scheduled major maintenance at our Rosenthal mill compared to 22 days combined between Celgar and Stendal in Q2. The impact of our Q3 shut was $5.2 million of direct costs compared to $21.0 million in Q2. The majority of these costs could be capitalized by our IFRS reporting competitors.

As I noted last quarter, with the acquisition of the Friesau sawmill we are now reporting 2 business segments. In Q3, our pulp segment contributed $61.8 million of EBITDA. Our new Wood Products segment contributed EBITDA of $4.4 million, and our corporate offices incurred costs excluding depreciation of $2.2 million. Additional segment disclosures can be found in our 10-Q.

Compared to Q2, higher pulp and lumber prices positively impacted EBITDA by $7.5 million. David will have more to say about the markets in a moment. Our results also reflected the impact of a U.S. dollar that continued to weaken during the quarter and negatively impacted EBITDA by $10.8 million compared to Q2. Our pulp sales totaled about 384,000 tonnes, which is essentially flat compared to Q2, and electricity sales were up almost 32 gigawatt hours, relative to Q2 due to record pulp production.

In addition, with the ramp up of our Friesau sawmill, we sold the equivalent of about 74.2 million board feet of lumber in the quarter, with about 10% of this volume being sold in the U.S. market. During the quarter, we also completed the build up of lumber inventory for the purpose of growing our U.S. market sales in Q4. We reported net income of $21.1 million for the quarter or $0.33 per basic share compared to a net loss of $2.1 million or $0.03 per basic share in Q2.

Our Q3 interest expense was $13.5 million, which reflects our senior note interest, as well as interest on the Friesau mill revolving credit facility. Income tax expense in the quarter was $6.6 million of which approximately $2.4 million was current. Current taxes reflect our continued use of tax assets to shield cash taxes. Turning to cash flow, our cash balance increased by about $15 million in Q3 compared to a reduction in cash during Q2 of $43 million. The increase in cash in the quarter was a result of our strong operating results though this was partially offset by a net increase in working capital primarily due to an increase in lumber inventory needed for our U.S. sales program.

Capital expenditures drew approximately $15 million during the quarter and this spending was spread between the mills and was focused on high return and reliability improving projects. Our cash outflows in the quarter also included our quarterly $7.5 million dividend payment.

Our strong Q3 results have improved our liquidity as at the end of Q3 to $323 million, which is made up of our consolidated cash balance of approximately $159 million and about $164 million of undrawn mill revolvers. On a trailing 12-month basis, our net debt is about 2.3x EBITDA, which has decreased relative to Q2 primarily due to our stronger EBITDA.

And as a closing comment on cash flow, the final scheduled payment -- settlement payment on our floating interest rate swap was completed just after the quarter end. And you will have seen from our press release yesterday that our board has approved a 9% increase in our quarterly dividend increasing it to $0.125 for shareholders of record on December 27 for which payment will be made on January 4, 2018.

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. Good morning, everyone. Our Q3 operating results reflect our strong operational performance in the quarter. All our mills ran well and have set a number of production records in the process. We also sold a record volume of energy in Q3. These results show we are already seeing the benefit of our recent investments in Celgar's reliability and how quickly our team has been able to ramp up the Friesau mill. Part of the ramp up includes achieving the synergies we were expecting. We now expect the 2017 synergies to be near the upper end of the $47 million range we originally forecasted. As of the end of the September, we have captured $4.8 million worth of synergies.

Our strong Q3 operating results included 10 days of annual maintenance downtime at our Rosenthal mill. I'm happy to report that the shut was completed safely, ahead of schedule, and started up without a hitch. In terms of the pulp markets, demand has been strong and steady throughout October. In Q3, prices averaged about $670 per tonne in China and were flat relative to Q2.

Late in Q3, we have seen significant upward pricing pressure in China. Our October list price in China was increased to $800 per tonne and we've announced a further increase in November. New business in China is transacting today between $830 and $850 per tonne. In our view, the strength in China stems from a combination of factors and circumstances, some of which we highlighted during our Q2 conference call. First, during the first half of the year traders were selling, taking profits on pulp they purchased at lower prices in 2016. The local RMB market price was lower than contract U.S. dollar prices for most of that period. Second, demand for pulp in China and in fact most markets has remained strong. Third, China has, in the preceding years, closed a significant volume of highly polluting agricultural based pulp and paper capacity. And finally, the introduction of a wastepaper import ban combined with many pulp consumers sitting on low inventories and traders being empty has fed the demand-induced price increases.

Moving to Europe, NBSK demand has also remained steady with Q3 list prices averaging $903 per tonne compared to $880 in Q2. We've also seen upward pricing pressure in Europe in October. The third quarter is traditionally a slower sales period. So the upward pricing pressure we experienced in Q3 is a reflection of the underlying strength of the NBSK market in Europe, further supported by higher margin opportunities in China. All of these factors seem to have mitigated the predicted negative impacts of new capacity entering the markets.

In addition, current price discussions have been at higher levels and considering a gap with China, it seems there may be success in this regard. NBSK producer inventories are relatively flat ending September at 29 days, we believe inventories at this level are well balanced. Further supporting the demand picture, global pulp shipments were up over 3.6% through the first 9 months of 2017 and softwood pulp shipments to China were up 3.3%. This demand is coming from paper producers and supported by strong consumer demand and while new capacity may bring some downward pricing pressure in 2018, we don't expect it to be as significant as many market analysts might be predicting.

Lumber markets are also very strong and including prices in the U.S. that are at near record levels, the random lengths U.S. benchmark for Western SPF #2 and better averaged $405 per 1,000 board feet in Q3, which is above its historical average and up $19 from Q2. We're also seeing steady demand for lumber in European markets. In Q3, we successfully entered the U.S. market with our lumber products. We sold about 10% of our lumber sales volumes in the U.S. this quarter and we expect to grow that in Q4.

Turning to operations in Q4, we successfully completed a short 3 day maintenance shut at Stendal this week and we do not have any further major maintenance plan this year. Looking ahead to 2018, we expect to have both our Celgar and Stendal major maintenance shuts in the second quarter of 2018 and Rosenthal's will be in Q3.

Stendal's shut will also include an 80-day maintenance outage on one of its turbines. This is the normal maintenance required for turbines, which happens about every 7 years. In total, we produced a record 388,000 tonnes of pulp this quarter compared to approximately 363,000 tonnes in Q2 and approximately 362,000 tonnes in our third quarter of 2016.

We also produced 109.6 million board feet of lumber in the quarter, while running the mill on a 2 shift basis. Pulp sales volumes in Q3 totaled approximately 384,000 tonnes compared to 389,000 tonnes in Q2 and 360,000 tonnes in Q3, 2016. We also sold 74.2 million board feet of lumber in Q3.

Our strong pulp and lumber production led to a record energy sales. We sold approximately 249 gigawatt hours of electricity in the quarter compared to 217 in Q2 and 208 in Q3 2016. Relative to Q2, our fiber costs were down slightly this quarter, overall our wood markets are currently balanced.

Looking forward, we expect German pulp wood costs -- prices rather, to increase marginally in Q4 as we continue to build our winter stocks. We are seeing some increase to competition from the board industry for this industrial fiber. We also expect Celgar's Canadian dollar fiber costs will increase marginally in Q4 as we begin to build winter inventories there after what has been a slow summer harvesting season due to extremely dry conditions in BC.

We are continuing to watch the development of the Canadian U.S. softwood lumber agreement negotiations but currently we do not expect them to materially impact our fiber prices. We expect the sawmills' fiber costs to be flat through Q4 as we continue to rationalize the mills' fiber logistics. We're also so very comfortable with our sawmill fiber inventories and supply.

Regarding our CapEx plans our teams are executing well on a roughly $65 million program in 2017. The focus of our CapEx program continues to be a balance of maintaining our mills, while improving reliability and reducing costs.

With respect our NAFTA claim, the time it has taken to arbitrate this is now at the outside of how long these claims historically take. So we continue to expect a decision in the near future. In addition, the ongoing NAFTA negotiations between Canada, the U.S. and Mexico will not, in our view, impact our claim.

As Dave mentioned, we're pleased to be announcing a 9% increase to our quarterly dividend. While we continue to evaluate acquisition opportunities to leverage our core competencies, our cash generation and balance sheet strength also support a measured dividend increase.

As I noted earlier, we are pleased with how quickly our new sawmill has ramped up. We have developed a strong management leadership and sales team for our solid wood business and I'm excited about the potential for further growth in this area. Looking further ahead to 2018, you can expect us to continue to execute our strategic plan to maintain and improve our world class assets and to seize growth opportunities in areas where we can leverage our core competencies such as in wood products, in wood procurement and logistics, in green electricity, in wood based chemicals and derivatives, and of course in wood pulp and specialty paper products.

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

[Operator Instruction]. And your first question comes from the line of Charan Sanghera with RBC Capital Markets.

Good results, but just one thing just kind of on the fiber costs in Germany. They're up 9% in the quarter or as I think year-over-year and just maybe some added color on that and are you guys not seeing any savings or benefits of your added reach with the new rail cars?

Well, the -- yes, of course we're -- the new rail cars provide benefits in a whole bunch of ways. Reduced costs per unit gives us further reach and so on. Really I think the increase we're seeing in Europe is really more to do with -- we had a storm in the early part of October, it was actually a hurricane called Xavier which shut down (inaudible) for about a week, maybe 10 days. There is a pretty -- there's an FX component in that as well. So I mean it's -- like our local fiber costs are not increasing as much as it might otherwise imply. We are a little behind on our winter build up of inventory because of the storm and also because of some of the weather conditions earlier in the summer. So we'll have -- it's not that unusual at this time of the year to have some modest price increases, but maybe not as significant as it appears primarily because of the FX.

Your next question comes from the line of Hamir Patel with CIBC Capital Markets.

David, it looks like Friesau is running better than I think you might have originally expected. What level of lumber production are you targeting there in 2018?

Well, it's -- if you normalize the recent quarter, you get -- you can totally see the 465 million that we've talked about as it's capacity. So that's a good number to use for modeling purposes.

Okay. Fair enough. And do you expect a sort of mix shift in the products you're producing there as '18 unfolds?

Yes, it's -- I mean it's a very flexible mill. So with the way conditions are right now, we're obviously going to focus on a really healthy offering to the U.S. markets, European markets for a variety grades that are strong. We've sent our first 6 containers to Japan to start to introduce our J-grade prime products into that market. So I think we will be balanced in our approach, optimizing high margins where we can but we're new in the business, so we are building out a full suite of offerings so that if there's changes in markets that we'll be well diversified.

That's helpful. And, David, can you speak to how robust that pipeline of potential acquisitions for sawmills in Europe might be right now and have valuation multiple shifted much since you acquired Friesau? I know there's been I think at least one transaction in recent months.

Yes, that's -- I mean that's a good question. We've been busy for -- we've had a number of targets before we bought Friesau and we still got other things we're working on. But as you point out, valuations are challenging. So we're disciplined, we're not going to overpay for anything. We also have -- we have high return capital opportunities at the Friesau mill and we might even have some built scenarios that might make more sense than buying given where valuations are at today. So we're analyzing all of those different options.

And if you were to go down a greenfield route would that -- I am assuming that would be in proximity to maybe one of the other sawmills -- I'm sorry, one of the other pulp mills?

Yes, it'd be in the northern regions closer to Stendal. That would make the most sense.

And then just see question on the pulp side, [Fibria] earlier this week they were speculating that perhaps the annual discounts on their hardwood contracts might actually go down next year. Curious, what we're seeing on the softwood side as you sort of finalize those contract negotiations for 2018.

Yes. Well, it's -- I mean it's certainly the topic I think that's going to be discussed at length in London a week from now. That's the traditional London pulp week where there's a lot of discussions on contract renewals. With the tension in the market and prices going up, I don't know why there would be a need for any discount widening. In fact, there may be producers like ourselves pushing to reduce discounts, but those -- this is all happening very quickly, Hamir, and also those discussions haven't really started.

Your next question come from the line of Sean Steuart with TD Securities.

Couple of questions. David, you went through the various factors that you've indicated have added this sort of incremental tension to the pulp market toward the end of the year. And I wanted to focus on the Chinese restriction of recycled fiber imports. And how much of it do you think is that variable specifically is added to the sort of last leg of positive momentum or most recent leg of positive momentum, and do your guys on the ground have any view on when those import licenses might be relaxed, I guess, and we might be looking at more recycled fiber coming back over to China again?

Yes, well, maybe just to review for a minute. So it's -- I mean this is a regulatory shift, if you like, in China. I mean their real focus is on reducing poverty and improving the environmental conditions. The 13th 5-year plan that was done for, I think, it was 2016 to 2020 was pretty clear saying it's all about enhancing green development, promoting supply side structural reform and reducing outdated overcapacity, and improving energy efficiency, reducing pollution, all that kind of stuff. So our feeling is they are very serious about this. There's like -- and this isn't just about waste paper, this is all sorts of products going into China. The initial draft regulatory standard that came out, I think it's the Environmental Protection Control Standard for imported solid waste, they put a really tough maximum contamination rate on paper. I mean I think it's something like 0.3%. So that's the discussion is whether it's going to continue to be 0.3% or something else. And if it's mixed office waste we are talking about coming out of North America or coming out of Japan, I mean there's no way that stuff is going to meet this standard, not even close. But it seems to me that's what China's trying to prevent. They don't want to import big percentages of garbage along with the fiber that's coming in. So the mixed office waste going to China is something like 5.5 million tonnes. The fiber yield on that is maybe 60%, so you're talking a little over 2.5 million tonnes to 3 million tonnes of fiber that's missing in the system. Plus I think any other grades like SOP and OCC and stuff, I mean those guys all have to get license import permits as well and we don't really have a feel for how much tougher that is right now compared to what it used to be. And my feeling on China is that if there is a wriggle room, guys will kind of cheat the system. So I think there's some slow down in the pipeline of getting permits because they are auditing people and companies and making sure that the guys aren't going, but putting the -- calling something it isn't. So things may evolve, Sean, I really don't know. I don't think this is going away. I think this is here and I think it's kind of like the agricultural based pulp and paper stuff. I think as they get their arms around it, they're going to continue to tighten up and their real focus is to now sort of try to get the domestic recycling stuff going and so that will be an evolving story over time. This 0.3% I think is the number that has to be addressed and announced in November some time. We'll see what happens.

Thanks for that context. Second question I had, on the dividend policy, can you remind us again as you think about the sustainability of your dividend, what is your target with respect to payout ratio whether it's relative to EPS or for cash flow per share? How do you guys think about that payout as a long-term objective?

Yes, well, it's not we're not driving it off a metric per se as a percentage of free cash flow or EPS or anything like that. It's really just part of a balanced capital allocation strategy. We want to return cash to shareholders, we want to invest in high return projects and we want to grow the company and we want to maintain an appropriate level of leverage and safety so that equity investors are always comfortable throughout the cycle. And our -- increasing our dividend modestly as we have is just a reflection of our comfort and our approach to enhancing shareholder value.

But just to clarify that, David, we shouldn't think about it as a variable dividend policy? When you increase it like this, it's with a view that this is a sustainable level based on your forecast horizon over the mid-term. So that's the right way to think about it.

Yes, that's right. It's not -- I mean, I said many times, we're not ever -- we are hoping we never have to reduce the dividend and we would hope to continually increase it although maybe modestly at times, but just steadily increase it over time as the performance of the company improves and our scale and scope improves. But no, it's not -- this isn't a one-time thing. This is a signal of a direction.

Your next question comes from the line from Dan Jacome with Sidoti & Company.

Just 2 quick questions here, first on the lumber side. I know you only have 2 quarters or so on the books, but I was impressed by you improved the utilization level, was I think from like 61 to about 68 this quarter. You gave us a target for the production you expect to get from that asset, but what's a reasonable kind of utilization rate to think about just near term, I mean, with this progress is it safe to assume you'd be kind of north of 70 possibly on the current quarter, the fourth quarter? And then a second question, kind of the NAFTA, I know we have been waiting a long time for it, but this seems to be even beyond your initial expectations on when we would have a resolution. What do you think is taking so long. Is it just the courts have so much on their desk or is there something else that I am missing? That is it from me.

Yes, okay, well, 2 questions here. So the first one on lumber, I think the best guidance is to look at the third quarter run volumes and normalize it and I mean that's a good bogey for next year. This is Mercer, we're always fixing things and optimizing and expecting to rollout some high return capital in that mill for next year. We haven't finalized all those plans yet, but we've got some great high return ideas for that mill and so we'll talk about those on future calls. For NAFTA, I've said on previous calls that we did learn that the tribunal had -- it's 3 guys, basically 3 judges and one of the -- I think, the lead judge had another really big file that backlogged him and our understanding is that prolonged the time here. But it's really late. So we are just -- our view in the company is that it must be getting pretty close. I'll just but -- we'll see what it is.

Maybe I'll have a follow-up here, just on the import ban in China, you provided a lot of details and I think in the press release you said this would be -- it sounds like a medium-term benefit for you guys. I'm just curious, I don't know how much visibility you have, and you did provide a lot of details, but what would you need to see for you guys to feel confident that the restrictions they are putting in place there are in fact longer term? Is there anything that we can be looking out for that maybe you are internally or is it just going to -- still wait and see?

Well, I think the thing I'd be watching is this draft regulation that's going to be finalized in November and I mean that will tell us a lot about the determination of the Chinese regulatory officials on how they're going to approach this and there'll be lots of sort of new stuff coming out about the impact on the price of waste papers in different jurisdictions. So I think we will get a pretty clear read on it fairly quickly.

The next question comes from the line of Andrew Kuske with Credit Suisse.

I appreciate the detail in the release on Friesau on all aspects of this. So the question really relates to that and it's bit of the interplay just on the fiber in particular. Obviously, you've got ships going from Friesau, out of Rosenthal and then you've got waste going back. Could you quantify a little bit of the impact, the economic impact this helps overall Mercer on those operations. And then maybe the follow-up question to that is, are you also getting better pricing from just local suppliers for the other aspects of your wood fiber?

So on the synergies, again so it's white wood, white ships going from Friesau to the pulp mill and then we're able to take bark from the pulp mill up to the Friesau sawmill and that's -- it's a cheaper fuel than what Friesau used to burn in the past. We were able to pull out of Friesau's waste stream, the pines and sawdust and so on and sell that as a byproduct as well instead of burning it. So the run rate or the EBITDA to the end of September synergy is about $4.8 million and we guided that for the year we will be on the high end of our originally announced expectations, which were 4 to 7. In terms of impact on the fiber basket around us, it -- Friesau hasn't really moved the pulp wood market per se, which is I think a signal of the strength of our procurement activities. We did push sawlog prices up initially in the region because we pushed our elbows out and muscled our way into the market and we've really ramped that mill up very quickly. And -- but today we've got a full level of inventory in front of the mill both in terms of debarked wood as well as storage and prices have been modestly coming down, normalizing again as we got through the hump of the buildup. And we're just another sawmill in the region now. I think we've got -- as I mentioned in my remarks, we are very comfortable with our fiber supply and our inventory levels for that mill.

I think that's very helpful. And then just one other question, a little bit different tangent. Just on the FX and you were explicit in the results on the $13.7 million impact prepared a year ago in the same quarter just because of FX moves. So obviously, there's a lot of FX volatility, but how do you think about "normal FX" in your modeling assumptions for when you're looking into '18?

I'll let our CFO answer that question.

I could ask you that maybe, Andrew. Well I guess we don't take -- and we use FX to test obviously, to stretch the model and just make sure that we're comfortable with our capital planning and our long-term planning, but -- and we -- we haven't in the past talked a lot about our views of FX and that is still volatile. I'm not sure we'd really gain by giving you our thoughts there. It's just, it's very volatile and then the other thing to remember, there is an element, it's not immediate, but there is a relationship over time because the majority of NBSK is produced in the euro zone or the Canadian dollar zone that over time you tend to see in periods of weakening U.S. dollar, like we've experienced in the last quarter or 2, you tend to see a little bit of upward support on the commodity price as well. So over time, like I said, it's not immediate and it's not instantaneous, but over time you tend to see a kind of an offsetting effect from FX on the price.

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

Just a few follow-up questions if I could. You have certain things you're expecting to do on the integration and getting certain synergies out of Friesau obviously other than the main thing of ramping up its business again, which seems to be on pace. With respect to how the integration is going in what you expected to do, what is left that needs to be done or is it all done?

We're -- well, when you speak of integration, Andy, I guess a lot of the -- well, for synergies, okay well, there's -- since we bought the mill, we've improved the rate we get for power by applying for an additional regulatory, something that's regulatorily available. So it's like a bonus if you do things in a certain way, you can achieve a certain higher rates. So we've done that. There's another one on top of that called the [NAWRO] bonus and we are -- the guys are working on that. We hadn't applied for that yet because we just want to make sure that that's the right thing to do. We continue to optimize with Rosenthal on the backhauls of thinning chips one direction and bark the other. There's also synergies in logistics and transportation in a sense that we bring sawlogs in from the north by rail then we stick lumber on those same rail cars and turn them around and ship them up to Berlin, where they get loaded on to a vessel to go to the U.S. and then the train cuts across, picks up more logs and comes back down. So as time goes on, we just continue to optimize our logistics and produce more value as we do. On the integration side it's -- what I think of it is, it's like getting the support services, integrating SAP, both were in SAP shop and they were but it's earlier version, so we've been upgrading and optimizing the systems that they use to give us better capabilities to optimize our product offerings on that side type of things. So there would be steady improvement as time goes on and then as I mentioned earlier, we do -- we're working very hard on high return capital projects for the mill. I mean it's -- if we can get 3-year or even 2-year paybacks on capital, it's just a -- it's something we are really -- it's good stuff to do. It's falling off a log type of investment. We know the risks and we know we can execute well. So we'll talk more about that I'm sure on the February call.

On the prior calls, you spoke of the progress to increase the power and byproduct profitability at Celgar, but you still said there was a lot of room for improvement after the latest maintenance and CapEx you've done in there. Where do you kind of stand on that? Is your description still that there's a lot of room for improvement? I mean there's always room for improvement, but is there still a lot of upside in cost cutting and revenue enhancement you can do?

The -- yes, I mean it's -- there's a big difference between making 430,000 tonnes and 460,000 tonnes in a mill like Celgar because of the fixed cost coverage and because every tonne of pulp you produce gives you an incremental amount of electricity generation. So in this year, we move Celgar from, I think it was 433,000 tonnes last year to -- the target for this year is about 465,000 tonnes. With the capital program for 2018, my expectations are that that mill will run at that 465,000 470,000 range for the first 6 months the next year and then following the tie-ins of its maintenance shut, it should move in to the 490,000 tonne range. And so that's level I've been talking about the last few years. That's a really good optimal run rate for that mill. We've really optimized its cost per tonne, its energy generation per tonne, et cetera. There is opportunity to go to the next level up to 520,000 that will high return capital opportunities for us down the road, 2019 perhaps, but for next year, we've got a clear line of sight on the level of tonnes that I just described.

Got it. And with respect to the NAFTA claim, when you made the claim and you assessed damages and there's high end, there's a low end, et cetera, was some of the calculation based on an expectation of the timing of the decision and in light of the decision which would involve, I guess, potentially mandating modification of behavior that the damage claims would change or that was all built in just because it's taken so long for the decision?

Yes. I understand what you're thinking, but it doesn't work that way. The damage claim will be the impact of the actions that the provincial government or the regime took to our mill and it will be an award of damages that that caused. There's no influence on Canada or the province of British Columbia to change anything. It's just Canada simply has to pay for the damages they caused to us. And the damages remember were we did not get the opportunity to sell the appropriate amount of power relative to all of the other pulp mills in British Columbia that are run by Canadian companies.

Has that policy changed or are you still not getting that opportunity?

Well, no, it's a long-term contract. We got what we got and if we've been treated the same, we would have got a lot more.

Okay. So that's why the damage is kind of a fixed number?

That's right.

All right. And lastly, what are your plans for the next, I don't know, 6 months or so of investment presentations, non deal roadshows, et cetera?

Yes, so we've got a non deal roadshow coming up, is it November or early December days?

The last week of November.

The last week of November, so the East Coast on that one and then it will be, January I guess, is the CIBC Whistler Conference, which we always look forward to, it's well attended. And nothing specific on the agenda other than that, but we will be doing more non deal roadshow activity in 2018 along with all the usual bank conferences and so on.

(Operator Instructions) Your next question comes from the line of Adam Zirkin with Knighthead.

Would you happen to have the production and sales by mill? Usually someone asks for it by now, but I don't think we did on this call.

Yes, I can ravel those off. We'll talk about pulp production first, so the Rosenthal mill and these are in the thousands of tonnes I'll run through. So Rosenthal 83,500, Stendal 177,300, Celgar 127,300. And sales, again in thousands, Rosenthal 87,600, Stendal 177,500, Celgar 118,700.

Dave, also it looks like just looking at the cash flow statement in the press release, the capital spending seemed a bit elevated in the quarter relative to run rate. What's driving that?

Nothing in particular. It's just timing of things. I think it's just where we are in the various projects. Not a signal of anything good or bad, Adam. It's just the way it is.

And then lastly, can you remind us, just given everything that is happening in pricing, can you remind us what the split of tonnages, I guess, between the major markets? Right, in a given quarter or year, what goes to China versus to Europe? I know the North American component is small.

Yes, that's right. For Celgar I think, 400-ish into the Asian market; for Stendal, we are committing about 10% to China. It is -- we think it's the right thing to do. Rather than to push more tonnes into Europe, we push it into China. The margins there over the cycle seemed to be as good or sometimes better. So that's another 60,000 to 70,000 tonnes out of Stendal into China. The rest is primarily around the chimneys Central Europe, a little bit of Middle East and those kind of markets when we get a really good return.

So it's then -- as we look for example, then to understand the math at the fourth quarter, 80% of Celgar's production and 10% of Stendal's would be somewhere around 460,000, 470,000 tonnes a year, right, or a little over 115,000 tonnes a quarter, right, give or take.

Yes.

Pricing is up, I mean well over $100 a tonne, right, sequentially in the Asia market. Right, so I mean the math is pretty much just straight multiplication, is it not right, that ought to be sort of $10 million to $15 million, EBITDA tailwind on the Chinese prices alone going into the fourth quarter. My thinking about that right?

China business in October is at $830 to $850 per tonne range as I mentioned and then starting November 1, it's going to go up, (inaudible) $880 per tonne range, Canfor at the $900 per tonne range, we'll be in the middle of those 2 probably somewhere.

Right and that compares to the high $600s, right in the quarter, we just concluded, right?

Yes, that's right.

Got it. Okay. Perfect. That's very helpful and I guess -- sorry lastly, one other, on the fiber costs. David, you mentioned some of the issues, maybe hurricane in Germany that led to some pressure there. Do you expect -- on a sequential basis, do you expect that to perhaps decline a bit going into the fourth quarter, does it feel stable, is it increasing? What does it feel like?

I think we've got a little bit of fiber costs inflation in euro terms and local currency in Europe going into the winter and that kind of normal seasonal activity and it's just a little bit tighter right now because of the -- we missed a good solid 10 days of transport because of the hurricane. So not -- I mean it's hard to quantify. It's just that -- it's going to be a little bit up for the fourth quarter. And by the spring, it will start to come down again.

Your next question comes from the line of DeForest Hinman with Walthausen & Co.

Did you talk about the maintenance shuts scheduled for 2018 at this time or is that up and disclosed yet?

Yes, no I put it in my opening comments, but I was going through it pretty quick DeForest. So it's Celgar and Stendal, are both going to be in the second quarter in 2018. It's unfortunate that that happens that way because it really impact the quarter, but it's -- what drives it is Stendal is on 18 month maintenance as scheduled, which is because it's a modern mill we can get away with that and I mean it's great to do that, but every other year, it's going to bump up against 1 of the other 2 mills. Celgar is on a 12-month maintenance and we can't hold it back. It wouldn't be right to hold it back into the third quarter. It would be starting to get to the -- it would start to impact the mill's reliability and possible to create some risks and then you do have Rosenthal in the third quarter, so we had to make a choice, so it'll be a hit in the second quarter, obviously. Rosenthal's third quarter will be much later obviously than the second with the 2 big mills in it.

Okay, great. And I think --I mean the comments on Celgar are really interesting, I mean the performance you just disclosed in the third quarter was very, very strong, 127,000 tonnes we haven't seen that in a long time, most of October is done and I think to get to that number, you talked about the 465,000 we need another 127 million sort of tonnes a quarter. Is that kind of where we're running in October, at that sort of quarterly rate?

Yes, I put my neck out a little bit here, but I don't see any reason why the mill won't produce 465,000 tonnes for 2017. It's running well. Its equipments are all in good shape. We've got -- we're very pleased with the -- with our labor situation. We've got a great team there and everybody is rowing in the same direction, so barring any unforeseen disasters, I am very, very comfortable with the direction that mill is going.

Okay and that commentary on the bump up to 490,000 in the second half of 2018 is also very interesting, can you give us a little bit more color in terms of what is being done to get that incremental improvement?

Yes, sure. So the first days of work that we've been talking about for the last couple of years has been getting the reliability of the mill up to high standards, and so that's dealing with equipment that may be getting close to the end of life that could all of a sudden break and cause some downtime and if these mills get to certain age, you get a number of these sort of things and if you don't deal with it proactively, it's kind of like death by a thousand nicks, so the program that we've just finished is we virtually threw all of the sort of high risk areas of maintenance of business that impact the reliability, so now we have the mill running reliably and steadily and we have all other risks analyzed and contained. And now the next set of projects is to increase the rate. So reliability is up at a high standard then it is -- now we have to improve the rate. And the first rate de-bottlenecking work that we see is in our digester and it's really a -- the digester is not the bottleneck, it's the feeding mechanism that goes into the digester. We call it a low-pressure feeder and a chip meter and a chip in. And so it's a capital opportunity for us that we can de-bottleneck that aspect of the mill and enhance the production. So it will be running at a run rate of -- if we take that bottleneck out, it'll run at a run rate of 490,000 tonnes. We're going to do the work and tie-ins during its shut in April next year. So that's why I mentioned the 465,000 for the first half of the year and 490,000 for the second half.

And did we put a price on that project?

Haven't disclosed that yet, but it's a high return EBIT, it's like we had some real home run. So we'll talk about bit more of that in February when we finished our engineering.

And did we put the detail on that shut for Celgar?

It's in April.

The number of days?

We're not finished yet DeForest to be, I mean, it will -- they are typically 12, it could go up 1 or 2 or it could go down 1 or 2 just depending on the scope of work, but we haven't finished our engineering and so -- I will give you an update on -- at the beginning of the year.

Your final question comes from line of (inaudible).

I'm not a paper guy these questions might be too basic, but what's your total tonnage of -- is it around 1.4 million?

No, it's more than that it's 1.5 million, 1.6 million this year if we finish it on plan.

So what's the total 1.6 million?

1,516,000 is our target.

1,500,000. And let's say an analyst wrote a report in the first quarter, what prices was he -- on average was he assuming in China, would you say in the first quarter?

Well I don't know what he would have been predicting carried forward, but we were in -- it was I think China was like low $600, $625 in January.

Okay $625. And I just wondering about this math here. Let's just say the $625 goes up by $200, which is sort of where it is now and that applies to the European deliveries going up $200 also, I mean, would $300 million in increment EBITDA drop from what is estimated it was in the first quarter? I mean let's say his estimate was $180 in the first quarter and instead of $625 in China and whatever it's going to be in Europe comparably it goes to $825 in China, how much of that $200 times the 1.5 million tonnes drops the incremental EBITDA?

There are couple things in there [Joyce] a couple of concepts, one is, don't forget foreign exchange. So we've had a pretty, pretty big shift in that in January we're close to parity maybe like 1.05 or something like that 1.06 and to the euro 1.19 today and the Canada was probably in the 1.30s, it was I think we saw 1.36 at some point in the year, we are at 1.23 today so or even 1.21 something in that range. So that has an impact on it. And then the second part to the whole thing is, you're right, we had a big lift in prices but we can't backward engineer ourselves into giving guidance because we don't do that so better to look at it…

My next question is you're going to be generating at these prices, assuming they continue, you're going to be generating a lot more free cash flow than you were (inaudible) expected to say 6, 9 months ago. At what point in time does that strengthen the balance sheet to the point where you can refinance or what's the current rate of -- average rate of the debt and what if you were upgraded, if your investment grade rating went, if your Moody's rate went up, what could you -- what rate could you refinance at?

I will let Dave go with that for a minute, if you want to.

So the average rate, our average rate is probably in the range of 7% and the markets are moving a little bit so I don't know for sure but you can look at where the bonds are trading and there are both tranches are trading at 105, 106, so that implies sort of a 6, a low 6s for a rate, which is kind of consistent with the re-file we did earlier this year and got the 6.5.

So 100 basis points save on $500 million in debt would only save you $5 million a year?

Yes, yes.

But don't forget that these are -- notes have a call premium too Joe in long-term. So that's the 20, 22s might be close to breakeven on an NPV basis, but --

Last question is on the sawmill, when you acquired the sawmill did you give an expectation, once you got it really cranked up after a year or 2 what the EBITDA could be?

No, we didn't. I think what I told, what I think what I said was that really a high quality sawmill could -- should punch out at something like a 15% EBITDA margin or better I mean if you are really on top of your game and that's my mind that's kind of the direction we're going.

Well at these prices what would the revenue run rate be on the sawmill revenues, do you break that out?

No, we don't but if you look at our quarter that we've just been through and we saw 10% in the U.S. market as we were going inventory we sold roughly 74 million board feet compared to a production of over 100, so the 4.4 of EBITDA you could give it a bigger number, so run rate well over 20 million, not including the synergies.

But the revenue is in our queue. So you could see the --

And just what is this document we're all waiting for to watch in November out of China, which will sort of codify the ban on dirty waste paper?

It's out of China's Ministry of Environmental Protection was a draft regulation that was called something like environmental protection control standards for import of solid waste. And in there it's set a maximum contamination rate and our understanding is that, that goes live and final some time in November probably. That is what we believe.

I would like to turn over to the presenters for any closing remarks.

Thank you everyone for attending our call and as always if there's any follow-up questions anybody has just reach out to either Dave or I, we are happy to speak any time, and we look forward to talking to you all again in February, next year. So bye for now.

And that does conclude today's conference call. You may now all disconnect.