Mercer International Inc. Q1 2010 Earnings Call Transcript

May. 4.10 | About: Mercer International (MERC)

Mercer International Inc. (NASDAQ:MERC)

Q1 2010 Earnings Conference Call

May 4, 2010 10:00 AM ET

Executives

Eric Boyriven – IR

David Gandossi – EVP and CFO

Jimmy Lee – Chairman, President and CEO

Analysts

Amil Safino [ph] – Cantor Fitzgerald

Bruce Klein – Credit Suisse

Bill Hoffman – RBC Capital Markets

Joe Stivaletti – Goldman Sachs

Andrew Shapiro – Lawndale Capital

Rick Sherman – Oppenheimer

DeForest Hinman – Walthausen & Company

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time I would like to welcome everyone to the Mercer International First Quarter 2010 Earnings Conference call (Operators Instructions). Thank you, I will now turn today’s conference over to Mr. Eric Boyriven of FD.

Eric Boyriven

Thank you. Good morning and welcome to the Mercer International 2010 first quarter earnings conference call. Management will begin with formal remarks, after which we will take your questions. Please note that in this morning’s conference call, management will make forward looking statements that were made in the press release. According to the safe harbor provisions of the private securities litigation reform act of 1995, I would like to call your attention to the risks related to these statements, which are more fully described in the press release and with the Company’s filings with the Securities and Exchange Commission.

Joining U.S. from management on today’s call are Jimmy Lee, President and Chairman, and David Gandossi, Executive Vice President and Chief Financial Officer and Secretary. I will now turn the call over to David Gandossi. David please go ahead.

David Gandossi

Thanks Eric and welcome everyone to Mercer’s first quarter earnings conference call. I’ll begin with some prepared comments on the key financial aspects of the quarter and then I’ll pass the call to Jimmy, who’ll speak about the particulars of the markets, our operating performance and some of our strategic initiatives. As always we’ll be pleased to answer any questions you may have following our remarks.

Let me begin with a few comments about our financial performance. As expected we experienced a significant improvement in our results, driven primarily by a remarkably tight pulp market. We completed a major maintenance shut in the quarter and after removing the impact of this shut Q1, 2010 was also strong one from our productivity perspective.

In addition to steady price improvements in the quarter, the Euro has been under a great deal of pressure giving us an additional boost. As you all have seen in the press release, we reported a net loss of EUR7.5 million for the quarter or EUR0.21 per share compared to a net loss of EUR39 million or EUR1.08 per share in the same quarter of 2009. The loss arises due to the mark-to-market valuations of our fixed interest rate swap and the US dollar-denominated debt, were not for these non-cash items EPS would have been a positive EUR0.12.

We recorded EBITDA of EUR31.8 million in the quarter compared to EUR23.5 million in the fourth quarter of 2009 and US dollar equivalents this is about EUR44 million of EBITDA in the current quarter, compared to about $33 million in Q4. The most significant contributor to the increase in EBITDA was the improvement in pulp pricing and the weaker Euro and was partially offset by the impact of higher fiber prices in Europe.

We also completed a plant maintenance shut at Stendal during the quarter. The shut itself lasted 10 days and positions the mill well to run full for two months before its next maintenance shut. If I can switch to cash flow for a moment, overall our cash position is marginally lower that at yearend. Outflows included EUR16 million to the seasonal increases in working capital, EUR6 million of high return capital spending and EUR23 million of interest and debt payments.

These outflows were offset by EUR32 million from EBITDA and about EUR9 million of cash and flow from the Canadian government’s Green Transformation program to fund Celgar’s Green Energy Project. We have EUR29 million of un-drawn revolvers available at Rosenthal and EUR10 million at Celgar. We currently have cash of about EUR49 million which is comprises of partially EUR26 million for the restricted group and EUR23 million at Stendal.

As you know in January we completed a second exchange of almost all of the remaining 2010 convertible notes for the new notes with identical terms of those issued in the December exchange. After this second transaction we now have only $2.3 million of the old 2010 notes remaining. This latest exchange gave rise to a EUR9,000 loss which will be reversed through interest expense in 2010 and 11 as the debt is accreted down to a face value.

The refinancing of our old convertible notes was an important step in improving evaluation of all of our securities. Considering a lag effect of pulp price increases achieved throughout the first quarter and for April and May, we’re expecting improved financial performance in the quarters to come. So with that quick overview of the financials let me turn the call over to Jimmy to talk about our operational market and strategic developments.

Jimmy Lee

Thanks David. Good morning everyone. As David mentioned, after pretty difficult year 2009, 2010 has started well for us. We were generally pleased with the progress in the quarter particularly in light of tightening fiber markets and our scheduled maintenance shut at Stendal and I remain satisfied with the rate of construction at our Celgar Green Energy Project.

We have grown very confident in the pulp market’s ability to return to normal and support price increases, so marketing has returned to the full front of our focus. And like our marketing efforts, we remain committed to bringing our high return strategic projects to conclusion. I’ll talk more about this in a moment, but let me first comment about the mills.

Our two mills in Germany ran well in the quarter, although Stendal’s production was hindered somewhat early in the quarter by a number of operational upsets, including the loss of a key transformer late in December. We also slowed the mills down for a period to manage short fiber inventories. In total this impacted production by about 17,000 tons but we are particularly pleased with Celgar, productivity there continues to generally improve and both daily and weekly production records were broken during the quarter.

In total we produced 330,000 tons of pulp compared to 357,.000 tons in the fourth quarter of 2009 and 346,000 tons in the first quarter of 2008. And while Stendal’s general maintenance shut limited our ability to export power for a couple of weeks, we nevertheless sold 107 Gigawatts in the quarter compared to 112 in the same quarter last year.

As I could turn to the pulp markets for a moment, I would generalize it as remaining extremely tight as you know current pulp inventory statistics remain positive with producers global soft with inventories falling to about 23 days, which is amongst the lowest levels in nine years.

The February earthquake in Chile and recent labor disruptions in Scandinavia have compounded the shortage of pulp to the point where the spot market is currently well in excess of the publish list pricing. While most of the Chilean producers are planning to return to full production in the next few months, we believe that the markets will remain significantly strong for the balance of the year due to the significant loss in production.

So on the strength of the low inventories in remaining improving shipments, the industry implemented $90 to $100 US per ton of price increases in all markets in the first quarter alone. In addition price increases totaled again another $70 to $90 US per ton have been announced for April and May. The price increases by us and certain competitors will take the price to $960 US per ton in Northern Europe, $1000 US per ton in North America and $870 US in Asia.

As you know our sensitivity to the list price is significant. Each $20 per ton increase in the price of NBSK is about EUR20 million increase in revenue on an annual basis. It is however worthy to note that the implementation of price increases is not always immediate as we are committed to pricing debt wasn’t effect when we took the order. There is approximately 30 to 60 day lag effect depending on the markets.

Our sales volume was at normal levels for the quarter for maintenance shut. Sales volume totaled 333,000 tons compared to 352,000 tons in the fourth quarter and 337,000 in Q1 2009. We believe that the upward pressure on prices will remain and that the momentum will increase particularly since the value of the US dollar remains at historically low levels, the US dollar equivalent for Euro today is about $.32 compared to $1.30 just one year ago and the Canadian dollars have reached almost parity against the US dollar.

Let me now take a moment to discuss developments in the wood markets as we discussed last quarter after falling for most of 2009, wood pricing in Europe has been rising. On average our wood cost were about EUR5 million higher than in Q4.

We expect on average that our wood cost will increase a further 10 to 20% in the second quarter due to the supply demand dynamics and should flatten out for the second half of 2010. In Germany wood pricing is up for both full logs and residual wood chips to put this in perspective, I should remind listeners that the deterioration of the global housing construction through 2009 had a dramatic impact on wood producers which reduced our competition for fiber when compared to prior periods.

After reaching the lowest in December of 2009, our fiber cost in Germany increased 6% in Q4 and 17% in Q1. We’re expecting a similar increase in the second quarter, but following this the cost should flatten out for the remainder of the year. But while the market is tightening, our ability to consume wood in either whole log form or residual chips has meant that we had been to ship the way from less abundant residual chips and focus more heavily on the whole log supplies that were previously the target of wood manufacturers.

In January and February much of Europe was impacted by severe winter including large volumes of snow, as I mentioned due to tight inventories we took the precautionary measure of easing back in our production for a few weeks in January. With slow production by the equivalent of about 17,000 tons, current fiber inventory has indicated no further curtailments is necessary. Residual chips continued to be in short supply as saw mills productivity in light of the par new housing market remains low, but we see the situation improving slightly as we move into the summer.

And British Columbia, our fiber cost trend is very encouraging, the new supply chain for whole log pulp wood that we have developed and significantly addressed our delivery cost issues and while some of the residuals have been harder to come by, our new woodroom continues to improve its productivity and so we believe that the downward wood cost trend at Celgar will continue for at least another quarter before settling.

If I can spend a moment to talk about energy, our Green Energy Project at Celgar is progressing nicely. The most of the key machinery is now onsite and we don’t anticipate any significant problems achieving our full startup for this important project that we expect will about 20 to CAN25 million to our bottomline. As you know the project will consume 40 million of our 58 million Green Transformation fund grant. So we’re working hard to narrow down additional qualifying projects which we’ll talk more about in due course.

All of our options carry cash and cash paybacks of three years or less. So to make a few closing observations we continue to believe that the tightening market that was interrupted by the global economic crisis has returned. We’re bullied [ph] with the market strength and recent months and expect its market tightening to continue well into the year. There is much speculation about softening as capacity restarts but our view is this will be more evident on the hardwood side.

The fundamentals for NBSK supply and demand remains favorable and we’re very optimistic for this year and with continued global economic growth, the supply demand balance results which should remain favorable for the next several years. We believe that there has been a significant and continuing adjustment in global production capacity for softwood pulp. We also believe that because of the preexisting inventory levels, the impact of this loss falling is only now becoming apparent.

We remain focused on increasing our margins by reducing costs as well as increasing the mill availability at all operations and improving the returns in our byproducts such as excess power. So with the conclusion of my prepared remarks, perhaps I can now turn the call back to the operator where we can open the call up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Amil Safino [ph] of Cantor Fitzgerald.

Amil Safino – Cantor Fitzgerald

Good morning. Could you talk a little bit more about the capital spending, I believe you said it was $16 million for the quarter, is that right, and that’s all maintenance. Could you give me an idea of the nature of the projects please?

David Gandossi

Well most of the capital is related to Celgar, which is funded by the Pulp and Paper Green Transformation Program.

Amil Safino – Cantor Fitzgerald

Okay. So you do show that as a capital spending volume, for those items?

David Gandossi

Yes, it is. Yes.

Amil Safino – Cantor Fitzgerald

Now the – your net levels didn’t really changed much but debt at the restricted group in the quarter went up to – from 279 to $297 million, but what facility was that under?

David Gandossi

Well what you’re seeing really is the mark-to-market impact of the US dollar.

Amil Safino – Cantor Fitzgerald

Okay.

David Gandossi

We really just have the senior notes and the converts and so it’s all mark-to-market, as all it is.

Amil Safino – Cantor Fitzgerald

Right. And can you give me an idea of how much was invested in operating working capital for the quarter?

David Gandossi

I don’t have that number at the top of my head.

Amil Safino – Cantor Fitzgerald

Okay and I guess my last question is with the improving markets for pulp and then the what have been an attractive capital market are you considering anything to address your 2013 maturity?

David Gandossi

Yes, there is nothing that’s been announced that we can discuss at this point in time.

Amil Safino – Cantor Fitzgerald

Okay, I’ll get back in the queue. Thank you.

Operator

Your next question comes from the line of Bruce Klein of Credit Suisse.

Bruce Klein – Credit Suisse

Hi Good morning guys. Well the Green Energy project, you said I think 40 or 50 was going to spent on the project and then we heard the last part you said you might be working on (inaudible).

David Gandossi

40 of a total of 58, it was being spend on the turbo generator at Celgar so the remaining funds will be spend on something else which we’re analyzing. Jimmy mentioned that all of our options is very accretive, better than three year paybacks and we’ll be making those decisions quite certainly I think and maybe on the next call we can talk a bit more about it.

Bruce Klein – Credit Suisse

And could you just remind us of the estimate or the sort of the bottomline benefit of 20 or 25, how much variability is that? Do you have contract coming on the other side, or how does that work and that sort of drives the contract or what drives the variability of the 20 or 25, if you can help with us that?

David Gandossi

Well, it’s a fixed price contract with an escalator for inflation for 10 years and it’s really just it’s all about fuel. So when the mill is running well and there isn’t a maintenance shut in that quarter than you know is more power if you are in a maintenance shut period, there is slightly less. The estimate is, we are just hedging our bets a little bit, but –

Jimmy Lee

It will be probably closer to the 25 based on normal operating run rate. So unless there is some significant production issues which we don’t really expect, it will be probably closer to be through the higher number. So we are giving a range, because, of course, it is very dependent on pulp production.

Bruce Klein – Credit Suisse

And did you disclose or are you disclosing who the contract is with?

Jimmy Lee

It’s BC Hydro, the government utility.

Bruce Klein – Credit Suisse

And that contract is a – it’s signed (inaudible) deal.

David Gandossi

Yes, it’s all done.

Jimmy Lee

It’s all approved, everything.

David Gandossi

It’s an 10-year contract, they are looking forward to receiving the power, so it’s going to happen Bruce.

Bruce Klein – Credit Suisse

Great. And then, remind us do you have a Euro sensitivity – you mentioned Euro a couple of times (inaudible). Can you remind us the Euro sensitivity –?

David Gandossi

Yes, we have put a number in our Ks. I think 0.01 euro cent is about 8 million euros annually.

Bruce Klein – Credit Suisse

Okay, great. And lastly, just the – any color on what’s going on with the Chinese market these days and if you can help us with that.

Jimmy Lee

Well, what we are seeing from what we hear is some of the – let’s say mothballed mills are starting to start up again. These would be primarily none wood base. But I – we don’t think that there will be a significant number of these mills. We started because of the environmental issues. But whatever facility that they can restart because of the pulp price being at these levels, they certainly are trying. This really impacts more the hard wood pulps demand side rather than soft wood, because it’s more of a hard wood substitute.

In fact, it – probably we will improve the soft wood consumption, because, of course, they require more reinforcement qualities, because of the lower quality of their pulp. So all-in-all, the Chinese market seems to be holding up. There has been no significant change in terms of what we are seeing in terms of the demand side, even though prices have reached historic high levels.

Bruce Klein – Credit Suisse

Thanks guys.

Operator

Your next question comes from the line of Bill Hoffman of RBC Capital Markets.

Bill Hoffman – RBC Capital Markets

Yes, good morning. I wonder if you guys could talk a little bit about downtime in the second quarter as well as in the third quarter, because I assume you are transitioning Celgar, you are going to have some downtime. Just want to get a sense on where you expect your production levels to be available both in second and third quarters.

Jimmy Lee

So Celgar’s maintenance shut is – just happened, they were down for 12 days, so that’s Q2. And Rosenthal will be down for 12 days in Q3. But as we mentioned on the call last time, we are signaling that in addition to the 12 days of maintenance at Celgar it’s time for its turbine revision, which means that the turbine will be offline for 50 days. So the mill will run, but we will purchasing power. So it will be a tough quarter for Rosenthal in the third quarter.

Bill Hoffman – RBC Capital Markets

Does that affect the pulp capacity or just the power sales?

Jimmy Lee

No, just the power sales. Basically, we will be running the mill on imported power at Rosenthal while the turbine refurbishment is completed. At Celgar, because of the maintenance shut that we have taken, all of the tie-ins that were needed have been completed, so there will be no further shutdown requirements to – is actually start the turbine once it’s all completed.

Bill Hoffman – RBC Capital Markets

Okay, thanks. And then, Jimmy, just could you talk a little bit about fiber sourcing in – for Celgar. I am just curious whether with the lumber demand up again, what’s happening with residual fiber supplies and what you are balancing? You said that you were – you are just still using more whole logs up there.

Jimmy Lee

Yes, I mean, at this point, we are still consuming mainly pulp logs. The residuals still are not as plentiful and that’s because, of course, there has been certain restarts as you know of additional lines on the coast, which, of course, increases the chip demand. So chips are kind of move – moving from the interior to the coast, which is offsetting save some of the increase in production.

But we think with the restart of again saw milling capacity in the summer, as you know, Interfor has announced that their plans to potentially restart the Castlegar mill this summer that will certainly aide in terms of availability of residuals. So moving ahead, of course, for us things are starting to improve even better than what we had originally forecast, because, of course, we were not expecting any real significant increase in some lumber production in our area.

Bill Hoffman – RBC Capital Markets

So just conclusion wise from a fiber cost for that site, you expect to sort of yield contain with the –

Jimmy Lee

Yes, we think that we are going to trend further down in terms of costs at least for the first half of this year, and then stabilize for the balance of the year.

Bill Hoffman – RBC Capital Markets

And then, just with regards to Rosenthal, similar issue on the fiber side, is fiber sourcing stabilized over there?

Jimmy Lee

Well, we think we will continue to increase into Q2 and then stabilize in the summer and then stay stable at those more higher elevated levels through the year.

Bill Hoffman – RBC Capital Markets

Okay, thanks. And then, David, can you give us the production at Celgar and Rosenthal?

David Gandossi

Sure. The production for Rosenthal was 79.6 and for Celgar it was a 130.7 for the quarter.

Bill Hoffman – RBC Capital Markets

Perfect, thank you.

Jimmy Lee

Okay.

Operator

Your next question comes from the line of Joe Stivaletti of Goldman Sachs.

Joe Stivaletti – Goldman Sachs

Hi. I heard your outlook on the pulp market and it sounded not only positive for this year, but into the next couple of years. But I just wondered if you could talk a little bit more about that in terms of, you think that the current pricing levels you were seeing are sustainable or I mean when you talk about a positive outlook out beyond this year, you are thinking we will see some sort of dip by the end of the year or into next year and then a recovery. Just trying to understand sort of what exactly your outlook is and what the assumptions are behind that.

Jimmy Lee

Yes, I mean, clearly, we can’t expect that this – let’s say high price levels are sustainable for an extended period of time because, of course, the paper markers are having difficulty implementing price increases. So I think on the paper side, there is likelihood as we have pulp prices at a 1000 and potentially higher (inaudible) going to get production curtailments as well as you are getting restarts of marginal mills, we are already hearing several and already some have restarted. So our expectation is that certainly towards the end of this year and possibly maybe Q1 of next year, probably there could be a short period of extreme weakness.

The pulp markets, as you know, historically don’t go in straight line, it tends to go up very quickly and also come down very quickly in terms of price. But we think the duration of the weakness when it comes will be quite short, because it will have a big impact on the marginal producers very much like what we saw last year, because of the global economic crisis, you are going to get a short drop in price, a shake up, and then prices will move back up again.

We don’t think that the price floor though this time around is going to be that low, because of the Canadian dollar being quite strong against the US. So I think we will probably reach a floor which is higher than what we saw in the prior periods. And then after that shakeup, I think prices will start to move back up again. And because I think the supply and demand balance globally is very good for soft wood, it’s just an issue of this kind of marginal capacity coming on and off, which has of course influencing the cyclicality.

I think the prices will trend higher, but we may not get much beyond what we are seeing right now. And the next cycle, will we then see good prices? I don’t know what the next kind of peak will be. But certainly 1000 plus seems to be historically the peak levels in the past.

Joe Stivaletti – Goldman Sachs

Right. No, that’s a very helpful perspective. And specifically following up on the China question, what do you think is – when their PPPC numbers showing 23.5% volume decline in China for the first quarter, I just wondered what your perspective is on what’s going on there in terms of, are they just bought a lot for inventory a year-ago or they – what exactly you think is going on there?

Jimmy Lee

Well, I mean, we were expecting certainly a reduction in terms of the shipments, because of the significant, let’s say, increase in the shipments in the prior quarter. So we didn’t think that those type of shipment levels were sustainable, so I don’t think it came to as a surprise to anyone that the first quarter shipment numbers were down.

I think the Chinese were caught offsite, because they thought that with this prices may moderate. But then the Chilean earthquake happened of course and this created a crisis in China, because you know, Chile is a significant supplier for soft wood into China. And so I think we are going to see probably shipments stabilize, because, one, you are not getting the capacity. The Chilean shipments are no longer there, so we don’t think it’s more of a demand driven thing, but really the reality that there isn’t production available to be shipped.

So I wouldn’t look at the shipment volume as indicative of the demand situation. I think you have to put that in perspective with the inventory levels at producer as well as the consumers

Joe Stivaletti – Goldman Sachs

Sure, okay. And my final question was more specifically – you mentioned in your press release on page two about the Celgar mill and some of the progress in the initiatives, the incremental EBITDA coming from the new turbine. And I wondered if – have you quantified when you make the comment about a significant boost in your cash earnings at the mill. I mean have you talked or can you quantify the – on an apples-to-apples basis, the benefit you expect from the initiatives of that facility?

Jimmy Lee

Well, I think what you have to look at is the historic wood price trend. I mean, it’s – before we were able to bring on the efficiencies at or new whole hog shipping facility, wood prices or wood costs were significantly higher. So if you look at prior-year numbers and the trend, we were heavily impacted negatively by this wood price. Now that trend has gone the other way.

So because of the significant cost reduction in our wood cost, which will probably stabilize a little bit lower than what you saw in the first quarter, that really is the big benefits that we are seeing in terms of the efficiency as well as the fact that the mill itself is running way better. There were some issues with the mill that were unexpected. It took us a lot longer to stabilize it, but now it’s running much more stable. And so the reliability certainly will also improve the margins. And the $20 million to $25 million incremental benefit will get after well into Q3 and beyond, certainly will drop right to the bottom line. So those are really the significant gains that we have been able to see.

So I think it will be easier to see the improvements as we move forward into this year. And I can’t give you an exact number, because you have to calculate it on terms of the wood benefit from average prior year and make that as kind of like the improvement and then add on to $20 million to $25 million extra EBITDA.

Joe Stivaletti – Goldman Sachs

Okay, thank you.

Operator

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

Andrew Shapiro – Lawndale Capital

Hi. I guess the Rosenthal and Celgar production numbers and I didn’t get enough, sorry, I missed your Stendal production number.

David Gandossi

Okay, Stendal’s production was 119.1.

Andrew Shapiro – Lawndale Capital

Great, now more subset of questions. On Celgar, you have issued one or more 8-K. You had provided the agreement with BC Hydro and the 10-year deal and all that. And if I recall and please educate us or correct this if I am wrong, it’s a variable rate but the variable rate is – was a premium spread because this bioenergy?

David Gandossi

Yes, the way it works is we have a seasonal commitment, so four seasons, quarterly; they call it seasonal. So it’s a little different from daily therm, it’s seasonal therm. So we have a fixed volume of power, we have to deliver each quarter and depending on the quarter, there is a slight premium or discount to our negotiated power rate. For shut season, it’s a little bit lower, and the peak of the winter it’s a little bit higher. But all in all, it harbors around the rate we negotiated, which we redacted in the agreement, BC Hydro still has negotiating power agreements with others. So we can’t discuss the number. But it’s a number that’s intended to reflect the combined heat power efficiencies of the facility, it’s green energy, and it’s online with other power deals that are being done in the province for green energy.

Andrew Shapiro – Lawndale Capital

So, because the government wants to incentivize green energy, etcetera, can you at least generalize that the rate that you are getting paid is some premium rate to – for regular power.

David Gandossi

It’s a premium to the heritage rates in British Colombia, Andy, like there are some very low power cost assets in British Colombia. The rate we are charging is what it cost to make power actually, we are getting credit for the cost of the fuel and running the facility. But it is a premium to industrial power rates in a province for sure and it is because governments are prepared to pay for green power but this is what it cost to make green power.

Andrew Shapiro – Lawndale Capital

Okay, and now – so you get the power, you got your rate. And so I think someone asked a question that you are running the CapEx for the Celgar facility through the finance of this CapEx and I guess then you are offsetting it with the government grant money that’s been provided to offset it, right?

David Gandossi

Yes.

Andrew Shapiro – Lawndale Capital

Okay, and so, but on the last call when we discussed this with you, I just want to confirm, if a $55 million or so plant of which, Mercer has or will have put in about $10 million to $15 million that you will have on the books as your cost and the $40 million or so the government’s paying will not be in your gross PP&E or it will be with an offset?

David Gandossi

It is with an offset. So the total PP&E will be there and then you deduct from it the government grants, and the government grant is amortized at the same rate as property fund equipment, they net zero on the P&L and overtime on a gross basis, the numbers accrete away. But when you look at our financials, you won’t see them.

Andrew Shapiro – Lawndale Capital

Okay. When the plant is running for the 10 years, 20 years, etcetera, the amount that you are going to depreciate against them, then the depreciation expense would be what, just your $15 million?

David Gandossi

That’s right.

Andrew Shapiro – Lawndale Capital

Okay. So absent the depreciation expenses, we’ll just call it EBITDA and your are summing the energy?

David Gandossi

Yes.

Andrew Shapiro – Lawndale Capital

Are there any other costs associated with this or is this pretty much a 100% margin cash flow?

David Gandossi

It’s pretty well 100% margin cash flow. There is a little bit of labor effort and maintenance on the turbine and stuff. But all those people are there anyway, it’s almost like a fixed cost. It’s primarily driven by black liquor, which is a byproduct of making pulp. So there are no new incremental costs to speak of.

Andrew Shapiro – Lawndale Capital

All right, so it’s all dropped into the bottom line. And the Celgar maintenance shut is now behind you?

David Gandossi

Yes, it is.

Andrew Shapiro – Lawndale Capital

That’s been done, and that was – was that all during this current Q2?

David Gandossi

Yes, it was.

Andrew Shapiro – Lawndale Capital

So, can you break out how the margins have improved at Celgar at all? We can see the restricted group margin but we can’t break it up between Rosenthal and Celgar. I am just trying to get an understanding when I look at your overall margin for Mercer as a whole, it looks like the gross margin at 14.5% and the operating EBITDA margin was at 12%, some higher level. It looks like your margin levels are running at with these pulp prices in Q1, we assuming your highest margins since the end of 2007 and I am just trying to confirm that Celgar facility is up with those kind of margin levels as well.

David Gandossi

Yes, I can’t, I got to be careful, I don’t get too far into Reg FD here with granularity, but I think we can confirm that. It’s – Celgar is going to be a very impressive mill this year from a margin perspective.

Jimmy Lee

Yes, I think that Celgar is finally running at the margin levels that our German mills have historically run. So I think what has changed this year is the fact that Celgar was always underperforming. So like Mercer was essentially running with two pistons rather than three, this is really the first year that we are seeing all three mills run at the levels that we thought they should be running at. So certainly Celgar’s margin is improved and it is more in line with our German margins and we expect that to continue. And in fact, with the turbine coming in later part of this year, certainly it should be on par with our German assets.

Andrew Shapiro – Lawndale Capital

Okay. And am I correct that you are margin levels for the quarter just reported have hit levels that were – we haven’t seen since the end of ‘07?

Jimmy Lee

Yes, I mean you will see because of the price trend that our EBITDA margins will – without the maintenance shut certainly be upwards of the 20 and approaching the high 20 type of percent if price continues to go in the direction that we have already announced.

Andrew Shapiro – Lawndale Capital

Okay, and when you say that just so I am trying to – are you are dealing with as your trialing price catches up to the current price or does that require even further price increases in the market to get –

Jimmy Lee

No, what you are saying is really a lag in terms of the actual net realized prices at the mill level because there is at least a 30 to 60 day lag. So what you are going to see is certainly the price increases that we have announced in the first quarter really starting to show in the second quarter, and the second quarter number is really going into the third quarter. So we think that with the prices that already being pretty much announced and implemented, certainly the first part and into Q3 etcetera is still quite strong.

Andrew Shapiro – Lawndale Capital

So if prices, when you say catch up, if you don’t announce another price increase but we don’t have price reductions, and you catch up with your 60 day time lag or 90 day time lag, right?

Jimmy Lee

It’s more like 45 day on average.

Andrew Shapiro – Lawndale Capital

But what I am trying to say is the prices remain where they are today and whether it’s another price increase comes and then there is price decline but basically on average remain where they are today, and your catch-up situation works. Is that sufficient to get you to the 20% EBITDA margin you are talking about, or you still need more increases?

Jimmy Lee

No, I think you will see, if you look at the numbers without – and take out the maintenance shutdown we had at Stendal, that I think clearly based on the trend that with present prices already implemented, we are going to have EBITDA margins which are certainly in excess of the 20%.

Andrew Shapiro – Lawndale Capital

Right, but of course, you do have the big Rosenthal shut in Q3 and you had Celgar shut in the current quarter.

Jimmy Lee

Right, and that’s why you have to essentially look at those numbers and take out the impact of the major shut.

Andrew Shapiro – Lawndale Capital

After the Rosenthal shut, are we one, two, three quarters away from the next shut because you do a shut every year?

Jimmy Lee

Well, Stendal is on a rotating 18 month cycle.

Andrew Shapiro – Lawndale Capital

Okay, so it won’t be for a while for Stendal?

Jimmy Lee

Yes, also ultimately we are trying to get all of the mills into more of an extended period of running before the maintenance. So when moving less from an annual to more like an 18 type of schedule in the long term.

Andrew Shapiro – Lawndale Capital

Right. And lastly did you make – I know that it doesn’t like you made any draws but you didn’t make any pay-downs on the restricted group debt side. But did Stendal debt get paid down a little bit during the period?

David Gandossi

Yes, we make payments twice a year on Stendal.

Andrew Shapiro – Lawndale Capital

So, the principal payments that were due on that one got paid down?

David Gandossi

Yes, that’s right.

Andrew Shapiro – Lawndale Capital

Okay. And when were you able to call or force conversion of the new January 2012 notes? I can’t recall if it’s –

David Gandossi

Mid 2011.

Andrew Shapiro – Lawndale Capital

When you make that call and force conversion, what happens to the accrued interest after the conversion date? Does that go along with it or that gets lost?

David Gandossi

No, I think it goes along with it.

Operator

Your next question comes from the line of Rick Sherman – Oppenheimer.

Rick Sherman – Oppenheimer

Hi guys, most of my questions have been answered. Just curious, going back on based on the current pricing model, what are the cash costs of the mils at this time?

David Gandossi

We don’t disclose that on a quarterly basis, Rick. So it will be difficult for me to give you that over the phone here.

Rick Sherman – Oppenheimer

Okay. Is it fair to say that at the current level of pricing, if you could – based on the what the previous gentlemen mentioned, if you could just kind of like freeze everything where it is right now, everything from pricing, realizations, costs, where the dollar, euro is, etcetera, it is amazing what a difference a year or so has made and this is probably some of the best pricing levels in almost a decade. Would you be able to say yes or no to a simple thing that you would be making at least $100 a ton pretax as a general premise if you annualize that going forward?

David Gandossi

I think you have to look at the numbers and you know that we will be making than $100 U.S.

Rick Sherman – Oppenheimer

Well, I am just, I am talking about $100 where it drops to the bottom line where you actually –

David Gandossi

I mean based on existing quarter-over-quarter numbers, you can see that easily will – if things don’t radically change, we will be making upwards of $100 plus, yes.

Rick Sherman – Oppenheimer

I mean in the years passed, I mean I don’t know if you were disclosing it on the call, I think so – most of your cash cost were generally in the $300 range. And is it fair to say though that and you were always driving that cost lower as time went on, I think there are a lot of other things that were bouncing around all the time, but has anything really significantly changed because of the wood, fiber cost or anything that at least is in that range or is it at (lay off)?

David Gandossi

I think the days when we had EUR300 per ton of pulp costs, that’s several years ago and the difference today are the value of wood. Wood costs have gone up. Since those days our conversion costs, our efficiencies and our utilization has improved in every mill. There has been some cost creep in, chemicals and a few things like that, they go up and down as you say quite variable. Today our Celgar mill’s cost would be in the low 300s. The European mills will be slightly higher obviously because of wood but they are a lot closer to their customer. So a European mill is only EUR23, EUR24 of freight away from the customer whereas a Canadian mill is more like EUR70 or EUR75 away from a customer.

Rick Sherman – Oppenheimer

Okay.

David Gandossi

Did that help a little bit, Rick?

Rick Sherman – Oppenheimer

Yes, it did, thanks a lot. Okay, that’s all I have got, thanks very much.

Operator

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

DeForest Hinman – Walthausen & Company

Yes, I have a couple of questions and I apologize if missed this one. Did you go through the sales numbers for tons for each on the mills?

David Gandossi

I can do that for you. So sales for Rosenthal were 83.3; Stendal were 125.4; and Celgar was 124.1.

DeForest Hinman – Walthausen & Company

All right. My other question was on the balance sheet and you can correct me if I am wrong. I think the revised credit facility for the Stendal loans requires us to replenish the restricted cash pool? Basically your commentary sounds like over the course of 2010, Stendal will perform better, hopefully generate some cash flow. How much cash are we required to put into the restricted capital pool at this time?

David Gandossi

I mean the way that works is actually to the company’s benefit. The facility itself has a cash sweep that allows the bank to sweep what principal payments had been deferred under our mandate agreement. But before they can sweep anything to the bank, we have the ability to fill up debt service reserve account on our balance sheet. So we take – we have an excess cash calculation and that cash will stay on our balance sheet in a restricted account which will become available to pay principal and interests when the next downturn comes and the theory is we would have a year’s worth of principal and interest sitting in a reserve account on our balance sheet to help us weather the storm when the next downturn in the economy happens.

So it’s a protective measure for the bank’s and for the company and it’s – all I can say about it.

DeForest Hinman – Walthausen & Company

And then can you talk about the inventory levels from raw materials and finished good perspective?

David Gandossi

Well, I think the raw material inventories in Canada are at the level we would like to see them. The German inventory levels for raw materials are building a bit right now coming from very, very low levels. From a pulp point of view, I think the German inventories are rock bottom, couldn’t go any lower. It’s actually difficult to service all of our customers properly with inventories at low. Celgar, because of the timing of some shipments is a little bit above average volume of pulp on hand, but it’s all gone again in April. So nothing to spare to (inaudible), but certainly nothing for the spot markets.

DeForest Hinman – Walthausen & Company

And again, when you are thinking of the – speaking of the Celgar, are we having any issues getting that – those shipments out of the port? I think in the past week, talked about having some issues with the –

Jimmy Lee

No, we don’t have any labor issues at the port at this time, so we are not expecting any. I think what we are seeing though is the global container lines, of course, implementing costs increases, and of course we are working around that.

So generally freight, although the economic activity is still not robust, it is trending upwards, because of their control over their capacity. So I think that is something that you guys should factor in that, the extremely low freight costs that we had in last year is not indicative of the freight costs moving forward.

DeForest Hinman – Walthausen & Company

Alright, thank you.

Operator

Your final question comes from the line of Andrew Shapiro of Lawndale Capital.

Andrew Shapiro – Lawndale Capital

A follow-up question or two. I think it’s currency, but I want to confirm most of this. And the other one I would like to better understand the seasonality issue. PP&E went up from last quarter, long-term liabilities went up from last quarter, your total equity went up from last quarter, despite the announced loss. All currency or some other factors?

David Gandossi

Currency primarily.

Andrew Shapiro – Lawndale Capital

Okay. And the accounts payable and accrued expenses has jumped a bit. Is that all (inaudible) currency or there certain working capital or other –

David Gandossi

Yes, it’s mostly timing related and it is you see variability when you have got a capital project the size of the green energy project going on.

Andrew Shapiro – Lawndale Capital

Okay. And you guys were on the road, I think it was January with road shows and all, do you have a visit to investors or investor conferences planned in the near term or what’s kind of the strategic – we will call it price multiple focus that you have in the coming months?

David Gandossi

Yes, we are just sorting out our calendars Andy. But our plan is to come and see investors late May and early June.

Andrew Shapiro – Lawndale Capital

Okay. And both coasts or which way you are going?

David Gandossi

Yes, we will come and see you.

Andrew Shapiro – Lawndale Capital

Okay, great. Looking forward, thanks.

Operator

I would now like to turn the conference back over to management for any closing remark.

Jimmy Lee

Well, I think we covered lot of issues in the call and I would like to thank everyone for attending today’s conference call. And we are – as we said earlier, we are optimistic. I think we are finally out of the worst and certainly what a difference the year makes. So on that, I would like to thank everyone again and close the conference. Thank you.

Operator

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

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