Mercer International Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Mercer International (MERC)

Mercer International (NASDAQ:MERC)

Q4 2013 Earnings Conference Call

February 14, 2014 10:00 AM ET

Executives

David Gandossi - EVP, CFO and Secretary

Jimmy Lee - Chairman, President and CEO

Analysts

Bill Hoffman - RBC Capital Markets

Richard Kus - Jefferies

Andrew Shapiro - Lawndale Capital Management

Paul Quinn - RBC Capital Markets

Sean Steuart - TD Securities

Mark Kennedy - CIBC

Operator

Good morning and welcome to Mercer International's Fourth Quarter 2013 Earnings Conference Call. On the call today is Jimmy Lee, President and Chief Executive Officer of Mercer International; and David Gandossi, Executive Vice President, Chief Financial Officer and Secretary.

I will now hand the call over to David Gandossi.

David Gandossi

Thank you, Tracy. As usual, we will begin with our formal remarks, after which we'll take your questions. Please note that in this morning's conference call, we will make forward-looking statements according to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and with the company's filings with the Securities and Exchange Commission.

First, I'd like to begin by reminding everyone that effective October 1st, 2013, we have changed our reporting currency from the Euro to the U.S. dollar. Our historical financial information and our annual report on Form 10-K and our earnings press release has been translated to reflect this change, as if it had been previously reported in U.S. dollars. As a result, all monetary references in today's call will be in U.S. dollars, unless otherwise noted.

I should also point out, that for those who may have missed it, Mercer furnished Form 8-K on February 6, 2014, which provides quarterly historical balance sheets and statements of operations in U.S. dollars.

I will now cover some of the key financial aspects of the quarter, and then I will pass the call over to Jimmy.

In Q4, we achieved EBITDA of $27.2 million, down approximately $5.6 million relative to Q3. In Q4, pricing was up significantly in all our markets. However, these higher prices were offset by higher scheduled maintenance costs at Stendal, as Stendal had their major annual shut in Q4. This maintenance shut had an impact of over $10 million in the quarter. We also had slightly higher SG&A costs, primarily due to higher stock compensation costs, which are tied to movements in our share price.

Overall, the German had solid production in Q4, while Celgar struggled a little, Rosenthal set a new quarterly production record and Stendal produced 60,000 tons for the first time in the month of December.

Our finished goods inventory were up approximately 6,000 tons, as strong production laid in the quarter, outpaced sales in December, primarily due to holiday related logistics challenges. Overall, pulp list prices were up strongly in the quarter. List prices ended the quarter at $905 per ton in Europe, $750 per ton in China. On average, prices were up about $35 per ton in Europe, and over $50 per ton in China.

We reported a net loss of $9.8 million for the quarter, or a loss of $0.18 per basic share, compared to a net loss of $3 million or about a loss of $0.05 per basic share in Q3. Our Q4 2013 net loss includes a deferred income tax charge of approximately $5.6 million, primarily due to a non-cash adjustment to our deferred tax asset account. The loss also includes a non-cash unrealized gain of approximately $4.1 million on the mark-to-market valuation of our fixed interest rate swap, virtually offset by a realized loss on our pulp swaps. Also included in the loss this quarter, is a charge of about $2.6 million related to our restructuring projects at both Celgar and Stendal.

The U.S. GAAP IFRS differences relating to major maintenance had an impact this quarter, when comparing our EBITDA to those at many of our competitors. In Q3, we expensed approximately $10 million for major maintenance, and almost $25 million for the year-to-date, the majority which would have been eligible for capital treatment under IFRS.

Switching to cash flow, overall, our cash position was down approximately $34 million compared to Q3, sitting at approximately $148 million. Quarterly working capital movements decreased cash by approximately $34 million on a net basis, primarily due to a large decrease in accounts payable and an increase in finished goods.

Capital expenditures drew about $7 million during the quarter. Of this total, roughly $2.6 million were spent on Stendal's Blue Mill Project, while the remainder was spent on other high return capital projects at Rosenthal and Celgar.

On the financing side, Celgar repaid approximately $6.6 million on its revolver, and Stendal received about $3.9 million of government grants. At the end of the quarter, Stendal had received approximately $9.3 million in government grants for the Blue Mill project. As a result of this project coming in under project, it is now eligible for approximately €11 million of government grants. The outstanding balance going to Stendal is expected to be received by the end of Q2.

Our working capital movements in the 12 month period ended December 31, excluding cash and short term debt, increased by approximately $21 million to $220 million. The increase was primarily due to higher inventories and lower payables, partially offset by lower receivables.

In terms of our liquidity, at December 31, we had approximately €28.3 million of undrawn revolvers available at Rosenthal and approximately C$33.3 million available at Celgar. Our $148 million of cash at the end of Q4 is comprised of approximately $83 million for the restricted group, and about $65 million for Stendal.

Net debt-to-equity on a consolidated basis at December 31 is up slightly from Q3, at approximately 2.4 times equity, while the restricted group's net debt-to-equity remains flat at approximately 0.6 times equity.

In July, we announced a workforce reduction at the Celgar mill, that would reduce the workforce by approximately 85 employees. At December 31, this process was nearly complete. In the fourth quarter, Celgar incurred about $1.2 million of restructuring expense, or approximately $5 million for the year. We estimate that this workforce reduction will realize pre-tax savings of between $8 million to $10 million annually, with about 80% of those savings being realized in 2014.

In addition, in Q4, as part of our fixed cost reduction initiatives, and to improve our management efficiency, we restructured Stendal's management team. As a result, we accrued approximately $1.4 million of related severance expenses. These costs are recorded in the restructuring expense line in our statement of operations.

I would also like to highlight that in January, we commenced a project to implement new enterprise resource planning solution or ERP to replace certain of our existing business software applications. This is an important project for us, as it will be the foundation for our business for the foreseeable future. The solution we have selected is SAP, as it best meets our current needs, and is flexible enough to meet our needs, as our business evolves in the future. We estimate this project will cost approximately $12 million and is designed to be completed in stages over the next two years.

That ends my overview of the financial results. So I will now turn the call over to Jimmy.

Jimmy Lee

Thanks David. Good morning everyone. Overall, our fourth quarter results were satisfactory. Compared to Q3, pulp prices were up. But higher major maintenance costs offset the price gains.

In addition, we incurred an additional $2.6 million of restructuring costs at Celgar and Stendal. I am pleased with the success of our Blue Mill project, and we are already benefiting from it, in the form of incremental energy revenues, and increased pulp production.

In the fourth quarter, steady demand pushed average NBSK list prices up across all markets. In Europe, the quarterly average list price rose to $902 per ton, while the Chinese quarterly average list price were up to $737 per ton.

In December, NBSK produced inventories were at 27 days, up approximately two days from November. At these inventory levels, the NBSK market is still considered to be below balance. December hardwood pulp inventories are down one day from November at 39 days. As a result of this market tightness, producers have recently announced, at an additional $10 increase in all markets beginning February, which brings list prices to $1,010 in North America, $920 in Europe, and $760 in China.

We are currently optimistic that this pricing momentum will be maintained through the first half of 2014, due to the increased demand, primarily from China, and low inventories at both the producer and consumer levels.

We estimate that there are approximately 3 million tons of incremental tissue capacity coming on globally in 2014, with approximately 1.8 million tons coming online in China. In addition, there are approximately 1.3 million more tons of tissue capacity scheduled to come online in 2015. This growth in tissue capacity is unprecedented, and is expected to further tighten the NBSK market. As a result, we continue to be optimistic about the demand for NBSK going forward.

On the supply side, we see certain, previously integrated European pulp becoming market pulp, with the closure of certain paper mills. However, we believe that this incremental demand will more than offset the market pulp supplies. In addition, certain analysts believe that approximately 2.1 million tons of new hardwood capacity coming online in 2014, will create a drag on the NBSK market.

We do not share this view, we believe that the papermakers ability to substitute hardwood for softwood is limited due to the fact that modern paper machines require certain strength characteristics from their raw materials, in order for their machines to run at high -- at optimum speeds that they were designed for. Consequently, we don't believe that a large price gap between hardwood and softwood will be a significant negative impact on NBSK pricing in the near future.

Turning to our pulp production for the moment, after several years of steady improvement, we were disappointed with our overall production in 2013. However, we are encouraged by the positive results late in the year, Rosenthal shattered a quarterly production record in Q4, en route to achieving a new annual production record. Stendal was down for 12 days for its planned major maintenance shut, but otherwise the production was strong, and benefited from the Blue Mill project, and reaching the milestone production level of 60,000 tons in December. Unfortunately, Celgar had some unplanned maintenance issues that reduced their Q4 production.

In total, we produced approximately 365,000 tons of pulp this quarter, compared to approximately 669,000 tons in the third quarter, and approximately 350,000 tons in the fourth quarter of 2012.

Our fourth quarter production was broken down as follows; Stendal produced 151,000 tons; Celgar produced 117,000 tons, and Rosenthal produced 97,000 tons. In addition, the mills produced approximately 436 gigawatt hours of electricity in the quarter, compared to 444 in Q3, and 406 gigawatt hours in Q4 of 2012. Our pulp sales volume totaled approximately 359,000 tons in Q4, compared to 357,000 tons in the third quarter, and 335,000 tons in Q4 of 2012.

Sales breakdown by mill in the quarter were as follows; Rosenthal sold 90,000 tons, Stendal sold 148,000 tons and Celgar sold 121,000 tons. While our Q4 sales by region in Europe were 209,000 tons; China, 112,000 tons, and all others combined were about 38,000 tons.

Let me now take a moment to discuss developments in the wood markets; in the fourth quarter, German wood prices remained potentially unchanged from the elevated levels in Q3. However, we are seeing chip demand come off slightly, which is creating downward pricing pressure. While roundwood costs are up slightly, due to the steady demand and less than optimal harvesting rates.

In 2013, a number of factors conspired to create some of the highest fiber costs we have ever seen in Europe. Going back to last winter, unusually cold weather, coupled with heavy snow, all severely limited harvesting and sawmill residual supply. The limited supply, combined with the heavy demand for fiber from pellet producers, pushed prices up early in 2015. Subsequently, the warm spring weather brought catastrophic flooding throughout most of Germany, which also hampered both harvesting as well as logistics. As a result, supply was unable to catch-up with demand throughout 2015, resulting in high fiber prices all year.

Currently, German saw mills are running at high levels in the market, where log supply is still relatively low, which has resulted in sawmills using high quality pulp logs. Thereby, increasing the supply of chips, but also keeping pressure on roundwood prices. We are monitoring this market closely, and are looking at opportunities to reduce our private [ph] costs going forward. However, we are optimistic that the mild German winter will allow supply and demand to come back into balance, as we move through the first half of 2014. We are currently seeing some positive signs in this market, but overall, we anticipate that our German wood costs will remain essentially flat in Q1 for 2014.

In British Columbia, our fiber cost is trending downward most of the year, on the resurgence of the lumber industry, and we are down slightly in the fourth quarter, relative to Q3. We expect that Celgar's fiber costs will also remain flat for Q1 of 2014. We are currently satisfied with each mill fiber inventories and expect the mills to work through their winter fiber inventories in Q1. We also expect that we will be able to continue to source the fiber as we need, but we will continue to monitor of course the fiber markets and our inventory levels, closely.

I am very pleased to note, that our Blue Mill project was completed on time and below budget in Q4. The new [indiscernible] began its ramp up phase in September, and is currently running at planned capacity, and we have also seen improvements in our pulp production capacity. Our investment in this project totaled approximately €38 million, with approximately €11 million of that coming in the form of non-refundable government grants.

We regularly get questions about the timing of our annual major maintenance shuts, so I'd like to highlight that our 2014 shuts are scheduled as follows; Celgar will be down in Q2 for 10 days or approximately 14,000 tons. Rosenthal will be down for 12 days in Q3, or approximately 12,000 tons; and Stendal is not scheduled to have a major maintenance shut in 2014. But instead, will have two small two-day shuts in Q2 and Q4, for a total of approximately 3,900 tons each.

With respect to our naphtha claim, we are working with our advisors to move this process forward, and we continue to expect our case to be heard in the mid to late 2014, with decisions several months after that. We will provide of course regular updates, as we move through this process.

David mentioned the workforce reduction at our Celgar mill; this restructuring is designed not only to reduce the mill's fixed costs, but also making it more efficient and productive. Celgar management has nearly completed this process. We remain confident that this restructuring will be successful in meeting its productivity and cost saving goals. In addition, as part of our fixed cost reduction initiatives, we made the decision to restructure Stendal's management group, and we expect these changes will result in more addition to the management team.

In closing, we believe the NBSK markets are continuing to build momentum, with steady price increases in all markets. So technically speaking, the market is slightly below balance, based on producer inventory levels and customer inventory levels are also reasonably low. Consequently, we currently feel pricing momentum will continue to build in the first half of 2014, and we currently do not believe new hardwood capacity will have a significant negative impact on NBSK pricing. We are also watching our costs closely, with European fiber costs at near historic highs. We have dedicated significant resources, in the attempt to mitigate this issue. We continue to be optimistic about the medium to long term NBSK supply demand fundamentals, which we foresee as being driven by increased economic standards globally.

That is the conclusion of my prepared remarks, and I will turn the call back to the operator, so we can open the call for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Bill Hoffman with RBC Capital Markets.

Bill Hoffman - RBC Capital Markets

Thanks and good morning. Jimmy, I just wonder -- looks like, with the Stendal project done, [indiscernible] have done with Celgar. Just looking forward, where do you expect next -- with the business. Where do you want to take it?

Jimmy Lee

Well, I think the most critical things that we are working on, really is in terms of the input costs, and therefore, our focus really is, in regards to of course, continuing to reduce our fiber costs back to those levels, which we had around the mid-2000s. And we believe that there is various ideas that we are working on, which we believe will have significant benefits. Unfortunately of course, its not going to occur right away, but we believe that in the medium to long term, that we will have much better control in terms of our fiber costs. This of course involves significant logistics issues and others, but we feel very confident that we have the various projects or initiatives, that we believe will make material difference, if they are successful. So that's really our focus in the meantime.

Bill Hoffman - RBC Capital Markets

With the target to get the cash generation up to where you were, sort of couple of years ago?

Jimmy Lee

Well I mean, if you look at the renewable energy issue. Of course, it had a very negative impact, in terms of fiber costs in Germany, as well as in other areas. And of course, if you look at 2005-2006 prices, you can see that there was a significant change, in regards to what was the steady state price. And of course, we do not believe, we could get to those much low levels, but we think we can make a significant impact in regards to fiber costs, that we are presently experiencing.

Bill Hoffman - RBC Capital Markets

Okay. Thanks. And just a thought on use of free cash in 2014, especially if you continue to have these higher prices?

Jimmy Lee

Yeah. I mean, we are going to have some fairly good buildup in terms of cash, and of course, our focus as always is to look at deleveraging as the primary objective. Certainly, in terms of Celgar operation, we believe that it is performing quite well now. The restructuring efforts, etcetera, and the changes in the management team I think, are showing the benefits, and of course, it has got the tailwind of the weak Canadian currency, and the continued, of course, demand in China, where of course, Celgar's major market is.

Europe, as you know, is still fairly flat. But it is starting to build momentum, and we believe that the worst of the market condition is over there too, and so, we hope that we will continue to build momentum in Europe, which will further improve our overall cash generation, and of course, with a continued focus on fiber costs, that, in the medium to long term, of course, we will reestablish the significant cash generation of those facilities too.

Bill Hoffman - RBC Capital Markets

Thanks. And maybe just last question. David, you mentioned that bank availability at the Rosenthal and Celgar facilities. Can you go through that again?

David Gandossi

Yes about €28 million at Rosenthal and $33 million at Celgar. There is nothing drawn on either of our revolvers, its just guarantees around what purchase is, using up a bit of a availability, but they are both fully available to us.

Bill Hoffman - RBC Capital Markets

Great. Thank you.

David Gandossi

Yeah.

Operator

Your next question is from Richard Kus with Jefferies.

Richard Kus - Jefferies

Good morning. I know that your mill is really more in Western Canada, but is there any disruption you guys have seen from the poor weather we have had here over the course of early 2014?

Jimmy Lee

There has been a little bit of trickle on impact in terms of the availability of railcars really. And I think, all the Canadian producers have suffered somewhat. We are fortunate, we are not too far away from the ports that we are able to cobble together, solutions like trucking and so on. So no real negative impact on our customers I'd say. A little bit of increase on Celgar's transportation and logistics costs, but nothing significant and nothing major -- no real negative trend developing, I think, is more likely to start improving.

Richard Kus - Jefferies

Okay. And Celgar has operated effectively throughout the first quarter so far, right?

Jimmy Lee

It sure has. And they had a very damp [Indiscernible].

Richard Kus - Jefferies

Okay. Fantastic. And just curious, on the discounts. Given that the markets are so tight, why haven't we seen those discounts tighten up?

Jimmy Lee

Well, this has been a trend that has been ongoing, and I think there was a push a couple of years ago, to really tighten up those discounts. But I think, the customers like the mid-price being fairly high, and of course, the discount is not always so clear. I guess, it improves their kind of market and pricing strategy, and therefore there seems to be a resistance to really reduce the discounts, but at the same time of course, it just means that list prices are up, but its kind of meaningless at the same time. But, you know, we are trying to focus on net pricing, but there seems to be clearly not a consensus to try in that direction.

Richard Kus - Jefferies

Okay. And then lastly on CapEx, what's the outlook for 2014?

David Gandossi

Yeah, I guess in round numbers, we are expecting about $40 million. $3.5 million of that will be covered by government trails, that's the deduction at the tail end of the Blue Mill project. Some interesting components in there; Rosenthal's building its own tall oil plant. East -- transferred [indiscernible] over to Stendal, because Stendal had our first tall oil plant, but it's -- the Stendal mills become so effective, recovering its own soap, that its fully utilizing its plant on its own. So Rosenthal will get it soon, be completed by the end of the year.

We are doing a chip screening upgrade at Celgar, it's a very high return project. We have seen in our other mills, has a big impact on reliability and product quality. So that's happening this year, and then, the remainder is just a whole variety of mostly high return projects. So it’s a little bit of maintenance in there. But it’s a business project, but primarily good high return projects at each mill.

Richard Kus - Jefferies

Okay. And how does that break up on mill?

David Gandossi

It will be; $18 million for Rosenthal; about $12 for Stendal and $10 million for Celgar.

Richard Kus - Jefferies

Great. Thanks a lot guys.

David Gandossi

Thank you.

Operator

Your next question is from Andrew Shapiro with Lawndale.

Andrew Shapiro - Lawndale Capital Management

Yeah hi. I don't recall any prior mention on the Stendal restructuring, just its maintenance downtime for this quarter. So, is this a new development, and you've mentioned, I think, its about $1.4 million charge, maybe primarily severance. What's the assumed savings that should be coming from this?

David Gandossi

The savings are on matter of about the same as the restructuring charge. Really what we did is, we took a layer out, five positions. But it was really, we grooved in a new managing director, got a guy over from Rosenthal. Very strong, great manager. Stendal just looked like it needed to pick up its game a little bit, so we put him in there and taken a layer out below, and restructured, and its just really -- its one of those, just invigorating the mill. Its hard to describe. But we are very optimistic and excited about those changes, and we can see it in its operations already. You could just feel, the energy in the mill has stepped up a notch. So its not really about the fixed cost savings as much as about the morale and the attitude and the engagement in the mill.

Andrew Shapiro - Lawndale Capital Management

So the other positional changes are -- you don't expect them to come back and be replaced?

David Gandossi

No.

Andrew Shapiro - Lawndale Capital Management

Managerial shift and a new spots out. And I am assuming, this is partially related? It appeared that the Stendal operations from your broken out financial statements, that Stendal was operating at a loss last quarter, and was that on an operating basis, or with one time items?

David Gandossi

That's with one time items, I guess. I mean -- I can't answer that question directly, I don't have it --

Andrew Shapiro - Lawndale Capital Management

I mean, it looked like the non-restricted income statement for the quarter had negative EBITDA in there.

David Gandossi

I mean, because of the major maintenance, it could have been slightly negative or reasonably flat. I don't have that numbers on me. But its really influenced by the --

Andrew Shapiro - Lawndale Capital Management

And then, your release says the Blue Mill, and you talked about how Blue Mill is completed? While on the November call, you mentioned how you are ramping up Blue Mill as of September. So about -- what amount of a benefit, both on the pulp and energy side do you feel we saw in the currently -- recently completed Q4, and what are the full quarterly expected benefits the company should get close to, in the current Q1 that we are in?

Jimmy Lee

Well, you know of course the fourth quarter, because of the major maintenance shut, you are not seeing really the full impact of the Blue Mill implementation.

Andrew Shapiro - Lawndale Capital Management

Right. And we also didn't complete it until December anyway?

Jimmy Lee

Well that's when we -- we have the official handover, in the sense, all the tests etcetera are finished. So that's the official time length. But of course, through September, when the turbine was on, and everything was being tested. Of course, you are generating electricity and improvement in pulp production. But because of the major shut in Q4, really, you are not seeing, really the potential of that. As we earlier said, we believe that pulp production easily will increase by roughly about 30,000 tons, and of course, coupled with that, of course, would be the power generation. And so at this point, what we are seeing is, really, higher power generations than what we originally anticipated. I think that's probably not just because of really the pulp production increase, but overall rebalancing of the turbine. So you are running the turbines much more efficiently; because clearly, we were overloading the first one, and of course with the additional cooling capacity etcetera, it improves the overall energy efficiency and power generation.

So we are very-very happy with the performance to-date, and we believe it will exceed the numbers that we originally have put out there in terms of power generation and pulp generation.

Andrew Shapiro - Lawndale Capital Management

So remind me again then, on an annual basis, you thought your enhanced cash flow return would be around what?

David Gandossi

So, maybe I will answer that, even if we dispose 109,000 megawatt hours and that will produce €7 million to €7.5 million and 30,000 tons of incremental pulp and what's your normalized EBITDA per ton, maybe 150, 160 or something like that. So there is another 5-ish, so it could be in the 12 plus range from Blue Mill.

Andrew Shapiro - Lawndale Capital Management

A year?

David Gandossi

Yeah.

Andrew Shapiro - Lawndale Capital Management

Euro?

David Gandossi

Yes. Okay. And so arguably, a quarter of that, each quarter. Okay. And the tall oil project on Rosenthal, you expect to complete it by the end of the year you mentioned. Is there any feel for the cash flow, incremental cash flows that could come from that, since you already were doing tall oil out of Rosenthal, but via Stendal already?

Jimmy Lee

Yeah we are expecting to -- the current pricing generated may be a couple million euros a year of crude tall oil out of that facility.

Andrew Shapiro - Lawndale Capital Management

Okay. Starting at the end of the year. And then, on the naphtha claim; can you remind us the size of the claim that is being asserted, and is that amount that -- you had said in the past, does that take into account the long time process of that -- the wheels of justice take, or what has the claim amount accreted up to?

Jimmy Lee

Well, when we filed our claim, we were looking back to, when we feel this discriminatory action occurred, which was in the 2008-2009 timeframe, when we were attempting to sell the power from our turbine that was under construction, and also the current power that we were producing, and that's when BC Hydro stepped in and, that really blocked our efforts, in a way -- quite different from the way they are treating other pulp mills in the province. So that was the beginning. By the time we filed their claim, we were looking back three or four years, and looking forward through the term and every year that goes back, you are looking back one more year and forward one year less.

It’s a big number. You know, its in the $20 million a year range since 2008, that we feel we have been harmed. Celgar still sells a reasonable chunk of power as you know, but its only the surplus power we had -- we were required to completely consume all of our own green electricity generation in our own plant. We have no access to power in the province the way other mills have, and that's what we are fighting for.

Andrew Shapiro - Lawndale Capital Management

The basis of your claim, yeah.

Jimmy Lee

So its well advanced. We have been through the discovery stage and all the document trading stage, and a lot of the information has now been processed by our legal team and we feel as confident as ever. So we have made the decision to continue to the end, we have not given up. And that's going to cost us a couple of million more in legal fees, but we are very resolved in our view that we have been harmed and see what happens.

Andrew Shapiro - Lawndale Capital Management

When we are dealing with a few hundred million, is that dollars or euros or Canadian dollars?

David Gandossi

That was Canadian dollars.

Andrew Shapiro - Lawndale Capital Management

Okay. And when you run the costs of the litigation through, is that going through the Celgar financials when you break it out, or its all up in corporate?

David Gandossi

It goes through Celgar's.

Andrew Shapiro - Lawndale Capital Management

Okay. I have a few more questions, but I will back out into the queue. But come back to me, would you?

David Gandossi

Okay sure. We will do that. Thanks Andrew.

Operator

Your next question is from [indiscernible].

Unidentified Analyst

Hi. Could you give us kind of an overview of your thoughts on the tall oil producers in the German fiber basket, and how that demand of consumption has changed over time, and how do you see them from a competitive standpoint going forward into that fiber basket?

Jimmy Lee

The pellet industry as such has been very disruptive, clearly, in regards to the fiber costs, as well as fiber demand, especially for the sawmill residuals. And unlike industrial pellets, which of course are dependent on the various state subsidies or initiatives, and of course in Germany, its more based on the carbon credits. In U.K. there is direct subsidization based on substitution. So each of these states have different kind of programs available, and the industrial pellet pricing as you see, really reflects the various component of those subsidies, equated to of course, the substitution of coal; because, primarily its more of a coal fire. You are substituting coal and using wood pellets, and of course, you have to make sure the modifications to your facility, to handle the pellets, because of dust and other things, and as a result, pricing tends to be in the range about €120, €140 per ton type of range, it's being pretty steady. Most of these end-users have long term supply commitments from the producers, and therefore pricing has been pretty flat.

And the residential side is completely different, its really driven by domestic, of course, heating, and its again different in Italy, it tends to be more based on bags, rather than these bulk type of supply. Germany and Austria tends to be more automated, and you have bulk inventories at home, and of course, the distribution is different.

Pricing for domestic pellets, surprisingly is not correlated to really pulp prices, which would have been kind of the normal assumption. It actually seems to be correlated to oil price, or natural gas price, and of course natural gas price in Central Europe, tends to be set based on fuel/oil equivalents, and therefore its not like North America, because the major supplier is primarily Russia.

And as a result of that, there has been of course continued price inflation to reflect the continued elevated levels of oil prices, and of course a lot of that also is taxes from the state. So in Italy of course, you have the highest fuel costs, versus even Germany, Austria. But if you consider oil prices in Europe as a whole, its significantly higher than of course North America. A big component of that is really taxes. And therefore, there is a motivation on the part of the average consumer to look at savings, by maybe shifting to pellets. And this has been a trend that has been pretty steady. Let's say that growth rates have been more significant in Italy, but of course starting coming from a lower base, and I think it also reflects the much higher oil prices, as well as the press [ph] conditions of the economy. And so this has been steadily increasing demand.

Now if you look at the price difference between pellet, which could be available from industrial sources, versus the domestic. The gap actually is quite ridiculous, because the gap between what the domestic consumer is paying, which is higher than €300, but [indiscernible] in some cases, and of course, industrial pellets at around €120, €140. So you can see that there is a huge premium, if you may, and really there is only one difference, really domestic one tends to be almost certified, because the manufacturers of these domestic heating, of course, will not warranty the equipment, unless you use these certified pellets, primarily. And their certification process is not really complicated, as long as this is softwood, southern softwood certainly qualifies. So of course, you are seeing a huge capacity coming on in Southern United States, reflecting really, the increase in demand industrially, that's kind of tapered though, because other areas rely on carbon credits, and of course, that market has been pretty weak. But still continued demand in U.K., because of their subsidization, domestic demand continuing to grow fairly steady.

And I believe that with the new capacity in imports, potential in South U.S., and the spread between industrial and domestic, I think you are going to see essentially pellet prices for residential moderate very quickly. I don't see that this type of premium can really stay for long.

There is costs in terms of the price of domestic pellets, meaning of course, they are very competitive for fiber in our markets. So, the faster this correction occurs, certainly, it will have beneficial impact in terms of our pricing, and we don't believe that these type of prices are sustainable, especially with this gap in price and the increase of potential export quantities from Southern U.S.

Unidentified Analyst

Okay. And then, can you tell me what the cost for the Stendal shut was in the prior year fourth quarter?

David Gandossi

Well I think two to four, I don't -- I am guessing a little bit, but I am going to say, this shut was a couple of million higher than the previous year. We had --

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from Paul Quinn with RBC Capital Markets.

Paul Quinn - RBC Capital Markets

Yeah thanks and good morning guys. Just a question on your level of confidence with pulp pricing going forward. We have heard a lot of commentary from other management teams about the impending hardwood capacity coming to the market, and what they feel is going to be a softer market through 2014 and in 2015; and just wondering, what gives you the confidence to against the grant?

Jimmy Lee

Well, you know, one of the things clearly is of course, the continued growth in tissue. I know that the basic printing and writing grade, of course is under pressure, just clearly oversupply and capacity in China as example. Of course, Europe has been continuing to be very weak. There is a lot of paper machine capacity taken out. But you know, there is -- also the positive side clearly is, there is growth in specialty grades in China. I am not just talking tissue now, but a lot of very specialized, whether its very light weight type of wrapping tissue or whether its liquid board or any of these other products, as well as wallpaper base and all this, which typically use a lot more strength required, fibers than basic printing and writing. And therefore, we do believe that this underlying strength in demand coming from those growth areas, underpins our market.

In terms of the printing and writing grade, yes some of the integrated guys certainly have been taking machines down and shifting to market pulp. We have seen that throughout the last year, couple of years, but you are seeing that this has plateaued too. So if you look at country-by-country, you can see the impact of the exports out of Finland, etcetera, and that has grown, and clearly integrated pulp now essentially being market pulp. But you will also see that momentum has now pretty much flattened, so you are not seeing further major increase in supply coming out of Finland, etcetera.

So clearly, that means that most of the stuff that is going to be deintegrated, has been done already, because of course, they have already figured out which paper machines to shut and which ones essentially are going to run, and therefore, we believe that the bulk of this restructuring is pretty much done, but the integrated stuff coming on market is pretty much done.

Yes, there is some fluff that makes its way into China, but as you know, the fluff grade really is so primarily in rolls, which is different than the traditional market, pulp, which is sold in sheets. There is a cost of handling rules, and its very cumbersome, if you are going to feed it in [ph]. So the pricing and the demand certainly for fluff, is not going to be attractive, and therefore there is going to be certain end users which may, because of the price difference, look towards that; but again, its not something that is so optimal and so readily available to a lot of the end users.

In terms of the hardwood, really, the Chinese capacity has grown, as you know, over the last few years. Chinese cost of production is very high, because they rely primarily on imported chips, all from pretty much the same supply area, whether its Vietnam or Philippines etcetera, and therefore, what you are seeing is very elevated chip costs, and it makes the Chinese hardwood production, probably some of the most expensive in the world. So you are going to essentially have a war between the Brazilians and the Chinese domestic producers. And of course, the Chinese producers are wanting to maintain a price, otherwise they will lose a lot of money. So ultimately, the battle is in that front. Its not going to be waged between softwood and hardwood, it’s a fight between domestic hardwood and the Brazilian hardwood.

Now, this could mean that ultimately the Brazilians force capacity in China down, by driving prices to ridiculous levels, and that could be the strategy, which means that of course, you have a sharp correction in the short term rebalancing, because essentially, that capacity in China is offline. Now this again, presents interesting situations, because clearly, the Chinese government and the industry are not going to want their facilities shut. Does it mean, then may be [indiscernible]? If that's the case, then of course, hardwood has to shift from China to other areas. So these are a lot of the variables, but certainly in terms of immediate correction of hardwood prices, I am doubtful. I see that there is going to be entrenched war between the forces, and at the end of the day, whoever has the most amount of money and access to money is likely to win, and you know -- and its different for all of these producers. At the end of the day, if you have excess supply, the only way to correct it, is actually take the capacity out. And you know, it’s a war between the low cost producers and the high cost producers.

In terms of softwood, we think that we have seen gaps in price, of over 150, which just lasted for an extended period of time. Any easy substitution would have been done at that time. It doesn't explain how you account for the fact that we had close to $200 gaps for a fairly long period. Until the economic conditions change, we actually had a wide gap for a long time, and therefore, I see and point to note, is really indicating where substitution and other things are at today. And there is nothing clearly that, other than hardwood prices dropping should influence softwood prices. That's the only kind of correlation that people point to, but it has not been reality, as you have seen in the past. So I don't quite understand how -- just because hardwood prices are under pressure, that automatically, we are going to be forced down the same way.

Paul Quinn - RBC Capital Markets

Interesting. Okay. Let me just ask one last question, just on [indiscernible] expansion. I understand that was a very difficult start. Just wondering if you are seeing more of that tonnage available in the marketplace, especially in China, and whether that has had any influence on the market?

Jimmy Lee

No I mean, because they had such difficulty in startup, clearly you are seeing that their ramp-up has been extremely slow, which means that month-over-month, whatever increase they are actually able to do, is to be easily absorbed. As long as their ramp-up seems to be constrained, and they are predicting now, design capacity kind of run rates around the summer of this year. Well, I don't think that kind of increased month-after-month, will not be taken up very quickly; because, you are seeing also tissue capacity coming on, month after month. And so, it’s a natural kind of growth and demand, natural supply growth. So it is not going to be disruptive.

Paul Quinn - RBC Capital Markets

Great. That's all I had. Best luck.

Operator

Your next question is from Sean Steuart with TD Securities.

Sean Steuart - TD Securities

Thanks. Good morning guys. Dave, just one question for you, and I think you have mentioned these conversely, I missed this in your upfront comments. The Celgar savings are related to restructuring there, how much of that showed up in Q4 and then, if you could just reiterate, how you expect that to roll out in the results in 2014?

David Gandossi

How much in the current quarter is difficult, because we had to sum up the severance costs in the quarter, and the movement of people out of the mill, sort of like a steady progression, if you like. I think what we said in our disclosure is, by 2014, you could expect about 80% of the benefits from that restructuring and we describe that as between $8 million and $10 million pre-tax dollars annually. So most of the stuff is done. We have got a little bit of high return capital to spend, to get the final guys out. So 80% of the $8 million to $10 million fixed cost savings will be realized in 2014.

Sean Steuart - TD Securities

Great. Rest of my questions have been answered. Thanks guys.

Jimmy Lee

Okay Sean.

Operator

Your next question is from Mark Kennedy with CIBC.

Mark Kennedy - CIBC

Good morning. My question is more of a general one. So we saw NBSK pulp pricing here in the fourth quarter average about $980 U.S. list, so I would say that's sort of at or above, what I would, call mid-cycle. So when you look across your pulp asset base right now, I am just curious, do you have an EBITDA per ton, that you target or want to achieve, sort of based on mid-cycle type of pricing?

David Gandossi

Mark, we can't really answer that on this call, getting into uncomfortable areas of forecasting. I think the first quarter is going to show you a different result from the fourth quarter. I think you will see -- in the fourth quarter we went -- we had like a $50 to $60 increase in pulp pricing. We had some current [ph] major maintenance, we had winter conditions. I think you should think of the fourth quarter as a reflection of what these pulp prices could really mean to the company. So that's how I will handle that.

Mark Kennedy - CIBC

Okay. Thanks.

Operator

Your next question is from Andrew Shapiro with Lawndale.

Andrew Shapiro - Lawndale Capital Management

Some follow-ups; looking at your SG&A for this quarter versus the prior quarter, even the prior year. It seems like it was up in both the restricted and unrestricted, but it was up pretty sizably. What would account for the increase in the restricted group's increase so sizably?

David Gandossi

Yeah, well there is a bit of non-cash stuff in there Andy, like stock comp that moves with the stock price. So we had a bit of a move in the fourth quarter, and that's -- we have got some little bit of professional fees and other things going on, but noting too significant. Mostly it would be the stock comp, would be my guess.

Andrew Shapiro - Lawndale Capital Management

And in unrestricted, that's from the maintenance shut or anything else?

David Gandossi

Well we do have some continuing consulting and legal costs around settlement agreements, but wrapping up all the EPC contracts and subsidy issues and those kind of things over there.

Andrew Shapiro - Lawndale Capital Management

So some of these items are, in a sense, one timers?

David Gandossi

Yeah.

Jimmy Lee

Yeah, primarily one timers.

David Gandossi

Yeah.

Andrew Shapiro - Lawndale Capital Management

Oh! So when you say with that [indiscernible], is that a quantifiable number? Are we talking about a million X, what are we talking about that -- for one timers?

David Gandossi

Well consulting fees at Stendal, in the $1.5 million range this year.

Andrew Shapiro - Lawndale Capital Management

Oh, but I am talking about Q4? Its Q4 that was up, so somewhat stood up?

David Gandossi

So I'd say it'd be 700,000 or 800,000.

Andrew Shapiro - Lawndale Capital Management

Decent amount. Okay. And when you talk about a bunch of this being non-cash stock comp expense recognition, you were kind of enough to provide us the past historical quarters in U.S. dollars for the balance sheet and the income statement, but all we have for the cash flow statement, is the fiscal year ends. Is there any way you could provide, or we can be allowed to have offline, if that's not allowed. I guess what you would say is the, nine months ended September dollar number, which one can then reverse engineer with the Q4 of cash flow statements, right?

David Gandossi

To think about. I mean, I certainly can't provide full statements offline, that would be outside Reg FD.

Andrew Shapiro - Lawndale Capital Management

Do you want to be doing nine months and six months currently? But that's the only way to create the quarterlies for us to reverse engineer it, but you could even provide that on a quarterly basis in U.S. dollars, that would be great.

David Gandossi

Okay. We will take that under advisement.

Andrew Shapiro - Lawndale Capital Management

Thank you. Did you provide energy sales realizations at all?

Jimmy Lee

There should be in the press release, and will be in the K that's going to come out next week as well.

Andrew Shapiro - Lawndale Capital Management

Okay. So that's in the K [indiscernible]. And then, am I correct in observing both restricted group [indiscernible] non-restricted group's payables were down pretty substantially. It seems like almost more than any other time in previous years. So is that a correct observation, is there a particular reason or circumstance of that occurring?

David Gandossi

No its just completely random. There is no management activity, particular impact on that.

Andrew Shapiro - Lawndale Capital Management

All right.

David Gandossi

And also the working capital, we said the build will be quite similar to last year. Second quarter last year, we generated quite a sizeable inflow of cash from working capital moves, and I'd expect the same thing in Q2 as well for us here. We have to build up our winter with raw material inventory. And so, it’s a combination of that, and of course, typically December, because of the holiday, you always have a larger finished good inventory, which then starts to essentially be drawn down through the first quarter and second quarter. And of course, we are being [indiscernible] drag, drawn down right through first and second, and then there was a rebuild through the summer again.

Andrew Shapiro - Lawndale Capital Management

Okay. And when Mercer's ownership interest in Stendal joint venture rose to 83% with your recent equity investment. What percent did it rise from, and did this increase any trigger in your accounting treatment or presentation with the joint venture?

David Gandossi

It increased from 75, Andy, and no, it didn't result in any change in our accounting methodologies at all.

Andrew Shapiro - Lawndale Capital Management

Okay. So crossing 80 doesn't do anything?

David Gandossi

No.

Andrew Shapiro - Lawndale Capital Management

Okay. And the cause or the reason that the deferred tax assets were reduced, is this based on the projection of the current run rate over this past year in accounting principles, or any other reason?

David Gandossi

Yeah there is, in U.S. GAAP for deferred tax asset accounting out there. The SEC has created some hardline tests, a three year test and so on. So this is just a mechanical application of what is involved in U.S. GAAP. It doesn't make a lot of sense to us. So I'd just encourage you to not get too concerned about those numbers, that show up on that deferred tax line.

Andrew Shapiro - Lawndale Capital Management

Okay. Got it. Two other little ones here, very incremental [indiscernible] awarded this quarter, outside of course, of the release of the Blue Mill funds, or are there any future governmental grants opportunities that are out there, that the company is running for?

David Gandossi

So that program is really pretty much dried up unfortunately. We do still continue to benefit through the creativity of our teams in Germany on the waste water fee issue. So every three years, we have been able to identify a high return capital project that qualifies as the waste water fee offsets. So instead of having to pay typical waste water fees every month, if we have a project that's approved by the authorities, we can avoid making those payments. We do accrue the expenses of them, and then when we complete the project and it has been audited, then we get this reversal coming through the P&L of the -- what had previously been expensed. So we have been doing that quite successfully. So we now have a project that we think going to win for both Stendal and Rosenthal.

So that program continues for us. The other one is pretty much dried up.

Andrew Shapiro - Lawndale Capital Management

Okay. And then finally, Now that the fiscal yearend numbers and everything are out, what are your planned road shows and conferences in the coming season?

David Gandossi

Yeah, it will be very busy. So we have been invited to Credit Suisse, Barclays, we will do RBC again. We just did CIBC, and I expect we will be on the road a bit as well. We think it is going to be an interesting year for us, and quite excited about it. So we are going to get out there on some management road shows, and talk about it quite a bit.

Andrew Shapiro - Lawndale Capital Management

Great. Thanks a lot.

Operator

There are no further questions at this time. I turn the call back over to the presenters for any closing remarks.

Jimmy Lee

Okay. Well thanks everyone for attending today's conference call. And again, good bye.

David Gandossi

Thanks so much.

Operator

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

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