Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Mercer International Inc. (NASDAQ:MERC)

Q3 2010 Earnings Call

November 02, 2010; 10:00 am ET

Executives

Jimmy Lee – President and Chairman

David Gandossi – Executive Vice President and Chief Financial Officer and Secretary

Alexandra Tramont – Financial Dynamics (FD)

Analyst

Bruce Klein – Credit Suisse

Bill Hoffman – RBC Capital

Gary Madia - Gleacher & Company

Phillip Wirtz - Odeon Capita

Claire Huxtable – RBC Capital Markets

Andrew Shapiro - Lawndale Capital

George Berman - J.P. Turner

Christopher Dechiario - ISI Capital

Sven Karlen - Wells Fargo Advisors

Richard Kus - Jefferies

Operator

Good morning, my name is Brandie and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International third quarter 2010 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) Ms. Alex Tramont of FD, you may begin your conference.

Alexandra Tramont

Thank you. Good morning and welcome to the Mercer International 2010 third 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 us 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 Alex and welcome everyone to Mercer’s third 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 will speak about the particulars of the market, 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, our third quarter was very strong and we are pleased to report another record EBITDA quarter. The pulp market sustained its relative strengths and we achieved new production records at two of our three mills. And the mill that not firmly achieve a record Rosenthal, completed a very expensive and complicated maintenance shut down that was completed on time and as planned.

We experienced some strengthening of the Euro during the past two months and our German fiber costs while still higher than in recent years, have leveled off as we had expected. As you have seen in our press release, we’ve reported net income of €46.1 million for the quarter or EUR1.17 per share, compared to a net loss of EUR14.1 million or EUR0.39 per share in the same quarter in 2009.

The net income includes EUR10.4 million of non-cash gains related to market-to-market valuations over US dollar denominated debt and fixed interest rate swap. Before these non-cash items, EPS was EUR0.91 per share. We recorded our highest quarterly EBITDA on the company’s history of EUR65.5 million or above $85 million. This compares to the previous record of EUR62.1 million or $79 million in the second quarter.

The most significant contributors to the increase in EBITDA compared to Q2 where the improvement in average pulp pricing along with lower energy and chemical costs. These improvements were partially offset by the impact of the weaker US dollar, the maintenance shut at Rosenthal, and lower sales volume as the market sorted out the uncertainty of pricing.

Switching to cash flow, overall our cash position is EUR23 million higher than it was at the end of Q2. Inflows were dominated by EUR65 million from EBITDA and receipt of above EUR7 million from the Canadian Government’s Green Transformation Fund grants.

I know there is interest in working capital movements related to our cash builds, so I’ll summarize these for you. In the nine month period ended September 30, our working capital, excluding cash and short-term debt grew by about EUR54 million, up from EUR54 million to EUR118 million.

Looking at the components of the working capital in the quarter, finished goods are up approximately EUR14 million from Q2 and raw materials were up about EUR9 million. Receivables were down about EUR23 million to EUR102 million, primarily due to lower sales volumes.

Accounts payable and accruals are relatively flat quarter-over- quarter. Quarter end finished goods inventories were high at 93,000 tons due to the heavy shipment volume scheduled in October. In the quarter, non-cash Working capital increases drew on cash by about EUR10 million on a net basis, capital expenditures drew about EUR9 million and we paid about EUR30 million towards debt service.

When thinking about our cash fills, it’s also worth noting that we have a holdback receivable of about C$4 million of Green Transformation Fund works that we expect to receive from the Green Transformation Fund during the next several months.

We have EUR26 million of undrawn revolvers available at Rosenthal and about EUR7 million available at Celgar. We currently have cash of about EUR85 million, which is comprised of approximately EUR48 million for the restricted groups and EUR37 million at Stendal.

Finally as you’re probably aware, we announced today a tender offer to purchase our senior notes due 2013 and an offer to sell a new issue of senior notes. The purpose of the transaction is simply to extend the maturity of our restricted group senior debt. More information regarding the offer will be available shortly when we file our preliminary offering memorandum; offers to purchase the 2013 notes will also be mailed shortly.

So that is my quick overview of the financial position and developments. So let me turn the call over to Jimmy now to talk about our operational market and strategic developments.

Jimmy Lee

Thanks David. Good morning everyone. As David mentioned, we are very pleased with our third quarter results. We are particularly satisfied with the mills’ productivity this quarter, after consideration of our extensive annual maintenance program at Rosenthal. The weakening U.S. dollar and a fiber market that had remained quite tight were the only negative factors in an otherwise very positive quarter.

In addition, our energy project was commissioned as expected in the final few days of the quarter and we are now selling Green Energy to the B.C. Hydro on this renewable electricity rate. The upper trend of NBSK pricing stall during the quarter as the market digested new hardwood and to some extent softwood capacity, but the NBSK market remains relatively balanced. I’ll talk more about this in a moment, but let me first comment about the mills.

Our Stendal and Celgar mills ran extremely well in the quarter with both mills posting their highest production quarters ever. Even more impressive is the fact that the records that were broken were themselves only one quarter old for Stendal and two quarters old for Celgar. I was continued to be pleased to see our vision and investments resulting in our people raising the bar in terms of what we are capable of producing, but we continue to believe they are more untapped potential.

Although, it is not immediately obvious in the numbers due to its recent maintenance shut, Rosenthal also performed well. We not only completed the aimed annual maintenance shut on our pulp facilities at Rosenthal, we also performed a full rebuild of our electric turbine and generator. While the Rosenthal shut took our pulp production down for nine days, our power production was down for almost two months. There is no scheduled maintenance downtime in the fourth quarter.

In total, we produced 381,000 tons of pulp, compared to 360,000 tons in second quarter of this year and 346,000 tons in the third quarter of 2009. In addition, the mill’s strong productivity allowed us to sell 119 gigawatt hours of electricity in the quarter, compared to 144 gigawatt hours in Q2.

If I could turn back to the pulp markets for a moment, I would characterize it as balanced, but a little uncertain. As you know current NBSK pulp inventory statistics are relatively positive with producer’s global softwood inventories sitting at around 27 days today, which remains historically low. But as you know the momentum we have experienced in the past year has stalled at the moment with market resisting further price increases and suppliers lowering prices to accommodate.

They remains no shortage of conflicting market variables to consider. While the inventory levels for NBSK are positive, the market is also considering to impact of return to production of a small number of previously shut NBSK mills. In addition to the restarts, there is some uncertainty as to the impact in the market of certain recently sold mills, mills that previous supplied the markets and which may in the future be dedicated to their new owners integrated paper production in China.

And of course in the background there is the hardwood market, which is addressing large amounts in new capacity. There does not seem to be a consensus and what degree this will weaken the hardwood prices and what if any impact it may have on the softwood price. As you know the NBSK market appears to have settled on a $20 reduction for North America in October, so that will leave list prices in October at around $270 per ton in North America, $960 in Northern Europe and $820 in China.

So while we’re optimistic that the market will continue to display the resiliency that it has in the past two months, we’re also prepared for the possibility of a slower period as the market absorbs production from recent restarted NBSK capacity.

Our sales volume was slightly lower than normal levels as the markets were through the pricing uncertainty. Sales volume total about 345,000 tons, compared to 365,000 tons in the second quarter, and 362,000 tons in Q3, 2009. Most of this stock will be picked up in the next quarter shipments.

Let me now take a moment to discuss developments in the wood markets as we discussed last quarter, after rising for most of the first two quarters, wood prices in Europe seem to have leveled off, albeit at relatively higher levels. We expect on average that our wood cost should remain at these levels for the remainder of this year.

In Germany, we have seen modest improvements in operating rates of the saw mills. However, we do not expect the impact of this to be significant in regards to our cost. You will also recall that in Q1, we eased production in Germany due to our tight fiber inventories, but as David noted, we have invested a significant amount of working capital to limit the risk of having to slow production again. We’re currently satisfied with our fiber inventories in Germany, after building our inventories in anticipation of the seasonally slow harvesting winter months.

In British Columbia, our fiber cost trend remains encouraging. The new supply chain for whole log pulp wood that we have developed has significantly addressed our delivery cost issues. As well, we have begun to see a modest increase in saw mill activity in our area. This combined with continued productivity improvements from our wood room, has us confident that Celgar’s wood cost will stay flat in the fourth quarter. However, even if weak lumber markets reduce the saw milling in our area again, we believe the impact on our cost will only be slightly negative.

If I can spend a moment talking about energy, we’re pleased with the early production of green energy from our new facility at Celgar. We received confirmation of our commercial operating status from the BC Power Utility and we are now turning our focus to fine tuning the equipment to realize the EBITDA’s improvement impact on this important project.

We are in the final stages of preparing our submission for the use of the balance of the funds, like the green energy project, these final few projects will be highly accretive with quick paybacks of three years or less. We’ll report more on these initiatives as our next quarter’s conference calls.

So to make a few closing observations, we continue to believe that the tight market that was interrupted by some restarts of old NBSK capacity will return shortly, while there remains some uncertainty about pricing in the next few months, we believe that the upward pricing pressure will return into near future, due to the continued expansion of tissue and other higher consuming softwood products in China next year and beyond, while there is much speculation about prices softening as capacity restarts and new capacity enters the market. Our view is that this will be more evident on the hardwood side.

The fundamental for NBSK supply and demand remain very favorable and we are optimistic with the continued global economic growth. The supply-demand relationship for softwood pulp should remain favorable for the next several years. We remain focused on increasing 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 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) And your first question comes from Bruce Klein with Credit Suisse.

Bruce Klein - Credit Suisse

Just on the Celgar Energy program, do you expect the fourth quarter to get the full benefit or most of the benefit and when so does the run rate kick in where you get the full amount of power sales, I guess?

Jimmy Lee

Well, we are optimistic by the end of this year that we should be able to get all of the optimizations completed, so that we will have what, we projected to be the normalized run rates. Of course, there is a seasonality to this, because unfortunately we are entering into the colder period of the year and of course steam consumption tends to be much higher during this period.

So, don’t regard let’s say the smaller type of power generation in the winter month as indicative of anything other than the seasonality. So, I think the mill certainly in terms of the power generation is starting to show the optimization, as we are expecting. There is of course continued focus in terms of reducing the steam as well as optimization of the controls. So that we are able to maximize the power production.

Bruce Klein - Credit Suisse

Thanks. And just a second question was just, we’ve talked during the past just about some of the hardwood capacity I think is longer-term, but when it does come on in terms of the ability for printing and writing producers or tissue producers to switch to use more hardwood vis-à-vis soft where do you think we are on that curve? Is that a big concern or if not why not?

Jimmy Lee

Well, we recently had a trip to China and clearly our customers in the Heichin area almost all of them are looking to double their capacity in the next couple of years. We discussed substitution issues. We feel very comfortable that this is not something that’s easily substitutable, because they really do rely on quality issues. They are trying to differentiate their product versus their competitors.

They are very quality conscious. They also reinforced our belief that the recycle-based tissue is not really a competitor. They are focusing on virgin fiber, because they believe the market has a very negative opinion of recycled-based type of hygiene products. At the same time, we also discussed with the basic printing and writing grades, the proportion of hard and softwood and the substitution ability, there seems to be really not that level of flexibility.

There is a minimum and they all acknowledge that, in terms of the quality that minimum is pretty much the four. So I don’t think the substitution issue is the big question. It’s really; if softwood prices are significantly higher than hardwood, then of course there is a psychological influence rather than strictly a supply demand type of relationship.

So, we are very optimistic that the expansions going on in China especially in the area of more premium grades, which they admit are going to take more and more softwood in the coming years, certainly bides well in terms of the supply and demand balance. In fact, if you look at even the recent restarts, if you just look at the hygiene area, there is really a lack of production if you actually project out the paper expansion that has already been announced for next year and beyond.

Bruce Klein – Credit Suisse

Alright, great. Thank you guys.

Operator

Your next question comes from Bill Hoffman with RBC Capital.

Bill Hoffman – RBC Capital

Hi, good morning. Dave, I am wonder if you could just give us a couple of details. One, the sales volumes from the different mills and then two, just want to get the restricted group CapEx and then finally if you could just talk about the SG&A restricted group in this quarter versus the prior quarters?

David Gandossi

Yes, sure. So let’s do the sales volumes first. So, third quarter Rosenthal, 76.4, Stendal 152.9, and Celgar 115.5; okay, restricted group CapEx. So, yeah we’re going to let the club out a little bit for the restricted group, for Rosenthal, I don’t want to get too complicated here, but we have this thing in Germany called wastewater fees and the opportunity to offset those.

So, these are fees for effluent that are accrued through wastewater usage. And if we can come up with a capital project that allows us to reduce our permit levels permissions, then we can avoid paying the wastewater fee in lieu of the capital spending that we’re going to do. So we’ve got a project at Rosenthal, that’s about EUR15.8 million project, that will happen over a couple of years.

We’ll avoid paying wastewater fees about of EUR6.6 million. We get a grant of about EUR1.5 million. So our investment’s somewhere around EUR7.5 million and the payback through the cost reduction of this exercise is less than two years. So it’s a real winner for us. So our Board has approved that.

At Celgar, we’ve got about EUR9 million call it left to spend of Green Transformation program money. So a big chunk of that’s going to go into a two-stage oxygen delignification tower, which is something that will help us lower our chemical costs on an aggregate basis. So it’s a very high return project it also creates some features in our pulp that make it highly sought after by the hygiene guys particularly on the east coast of North America. So, that’s something we’re quite excited about and that’s all covered by federal funding.

In addition to that, we’re going to spend about 12 million Canadian on a variety of high return projects at Celgar. The mill as you seen it’s last two production records, has got room to grow and we’ve highlighted some of those areas and this is the year for us to put that stuff into place. So, all highly accretive creating shareholder value through that activity.

Bill Hoffman – RBC Capital

Just on the CapEx. What was the spend in the third quarter?

David Gandossi

Yes, the spend in the third quarter was EUR1.5 million on Rosenthal and very less than EUR1 million on Celgar and less than EUR0.5 million at Stendal so, very small. And Celgar I give you on a net basis, because it’s too complicated. Everything we’re spending this year at Celgar is coming back to us in grants.

Bill Hoffman – RBC Capital

Right and you said you had, there is another EUR4 million holdback on that grant?

David Gandossi

Yeah, that’s right.

Bill Hoffman – RBC Capital

Okay. And then the other question was just in the SG&A line?

David Gandossi

Yes, so in SG&A – it’s just a little bit complicated, because we have three functional currencies in our company. One functional for recording and then we have Celgar in Canadian dollars. We have Mercer Inc in U.S. dollars and we have Euros at German operations.

So, our cash spending on SG&A has gone down a little bit and it continues to go down a little bit quarter-over-quarter, but we always get this foreign exchange pump that rolls through there. So, the changes are all related just to timing and we use the mark-to-market type of valuation adjustments that go through there on the SG&A side.

Bill Hoffman – RBC Capital

What would you expect going forward for the restricted group part of it?

David Gandossi

Well, over the course of the year, it’s just a consistent flat line compared to last year and I just don’t have the number off the top of my head Bill, but it’s just declining slightly overtime other than the foreign exchange funds have take it up and do.

Bill Hoffman – RBC Capital

Okay, I will circle back with you on that. And just one final question, the power sales in the quarter 119 megawatts, you just sort of, curious if you talk a little bit about that since you had Rosenthal offer effectively two months?

David Gandossi

Yes, it’s the record productions that you have record quarter electricity production ex Stendal and of course also at Celgar was not buying outside power. So it’s really those combination which allowed to have higher electricity revenue than we would have expected.

Bill Hoffman – RBC Capital

Okay, thank you.

Operator

Your next question comes from Gary Madia with Gleacher & Company

Gary Madia - Gleacher & Company

Couple of my questions has been answered, but David, can you help us quantify potentially or at least remind us in Celgar kind of what you guys are thinking in terms of the normal run rate impact once that Green Energy Project is fully up and running?

David Gandossi

Yes Gary, it’s between 20 million and 25 million Canadian here on the hindsight and then there is growth potential on that going forward in the future years and in the first, okay.

Gary Madia - Gleacher & Company

Any sense, can you give us any color as to, I mean, those language in the press release which speaks to the impact 3Q versus 4Q now with that project is selling as of the end of September. Could you help us quantify what the potential impact might look like in 4Q?

David Gandossi

Well we don’t really forecast. So I’m reluctant to do that on the call here. But it’s ramping up. So it will be in the first month perhaps 50% of expectations and then second month it’ll be closer to optimal and by the end of the quarter we should have it fully optimized subject to further growth and further, when there is always things you can do improve and the team at the mill will learn to continue to learn to optimize. So there is always upside. But it will take them a quarter to get it to a level where we are projecting.

Gary Madia - Gleacher & Company

Couple of questions, kind of looking back at the historical numbers. Can you help us quantify both on the power side and on the pulp side, it appears to be probably more of an issue on the power side. What the economic impact was with the Rosenthal downtime during 3Q?

David Gandossi

Yes, so it was down for two out of the three months on the power side and it was buying power, well it was producing pulp for all but nine days. So, I think we calculated that to be somewhere between 7 million and 8 million on the power side. And a typical maintenance shut at a mill high power mills is somewhere around EUR3.5 million to EUR4 million of maintenance dollars that get spent in the quarter and then of course you lose the margin on the pulp that didn’t get produced. But there is an inventory change calculation in there. So we just leave it there for you.

Gary Madia - Gleacher & Company

Very good. Thank you, I appreciate the color.

David Gandossi

Yes

Operator

Your next question comes from the Phillip Wirtz with Odeon Capita.

Phillip Wirtz - Odeon Capita

Hi, good morning. I’m wondering about your chemical cost is, I think you mentioned that they were actually down and I’m wondering if that has more to do with, you’re able to use chemicals more efficiently with higher rates of production or you’re just not seeing per unit cost increase and you had anything to that?

Jimmy Lee

Yes, it’s the really thing is – mentioning here it’s really the efficiencies, when mills run really well, you don’t have that slippage on an up sadder or having to boost things when you’re restarting and that kind of things. So it’s when the mills run really well, you get good chemical usage out of it.

David Gandossi

Yes, I think it’s to do with efficiencies right now rather than the cost of the chemicals. The cost of the chemicals has been reasonably flat.

Phillip Wirtz - Odeon Capita

Okay and moving forward, I mean, I have seen a lot of chemical increase announcements just on various forest products, chemicals that you don’t expect that to be a major headwind moving forward?

David Gandossi

No, and also there is further improvements in terms of our production, efficiencies to address chemical consumption moving forward. So in fact, I think chemical issue certainly is an area that we are not really too concerned about.

Phillip Wirtz - Odeon Capita

Okay. And then secondly on Celgar production, it looks like after having several record months, you kind of getting to the point were we can expect that go forward run rate that maybe 10% higher than what we’ve seen in the past. So is that going to also, could that raise your expectations for Green Power revenues at those higher rates?

David Gandossi

Yeah, exactly we are seeing the capabilities of this mill, which far exceeds what we originally expected. We had record breaking days which on an annualized run rate would bring this mills’ production volume more in the seven or 600,000 tons. So clearly, the mill has the capability once we stabilize and optimize different areas then bottleneck certain other areas. So, clearly the Celgar mill has got lot of potential and that means that power generation also would increase as a result of that.

Phillip Wirtz - Odeon Capita

Okay. And then the last final question is, on the orders that didn’t slip into Q4, was that mostly due to the buyer strikes you had mentioned in Q2?

David Gandossi

Well, we had that period in August which of course was a little bit weak because of the uncertainty and then we saw the orders started to really pick up towards the end of August and into September. And then it’s a question of aligning the shipments. You can’t just put to the vessels quickly. So, the resulting flood of orders into September meant that there was a heavy volume of shipments in October and the balance of this year but significant shipments in October.

Phillip Wirtz - Odeon Capita

And so you would expect that catch up mostly in Q4 as container availability and Vancouver is still an issue?

David Gandossi

No, we basically are using a lot of boat carrier shipments; container issue is still some concern in Vancouver. But we basically are addressing the limitations on that side by having chartered vessels available to us. So, we are not constrained in that regard and also the costs are quite good. And so our expectation is the inventory issues will certainly be dealt with in this quarter.

Phillip Wirtz - Odeon Capita

Okay, it’s very good. Thank you so much.

Operator

Your next question comes from Claire Huxtable with RBC Capital Markets.

Claire Huxtable – RBC Capital Markets

Good morning. Could you just review with us your downtime expectations for next year?

David Gandossi

Yeah, so we’ll have a – we’ve got three main shuts next year. I think Celgar is in the second quarter; I believe it’s Rosenthal in the third quarter and Stendal in the fourth quarter.

Claire Huxtable – RBC Capital Markets

Okay, great.

Operator

Your next question comes from Andrew Shapiro with Lawndale Capital.

Andrew Shapiro - Lawndale Capital

Hi. Good morning. Two questions. First off on the market overall, is the process of speaking out due to the end of the year, Chinese buyer strike, in other words, what’s the status of the closure of inefficient polluting plants in China and do you feel the markets now balanced sufficiently that the likelihood of an up or a down move is about the same?

Jimmy Lee

Like, we haven’t quite seen the impact of the closures of the polluting Chinese mills yet. I mean, and also it’s difficult to know the full impact that will have, but we do know that based on our discussions with our customers, we know that the inventory levels that they had certainly were lower than what would be normal, they weren’t desperate, but they were not running with high levels, that’s clear.

A lot of the paper makers in the sense with the hygiene grades et cetera were having very good orders. Only a few paper grades were having inventory issues. We also know that all of the various paper makers have been running both hard and softwood inventories towards the lower end, because clearly they have this buyer’s strike in August to try to force prices and at the same time, there is the stand up between the Brazilian hardwood producers and the end-users in China.

So, it is clear that we are not having inventory build up in any of the channels, if you look at the ports, the producers, the end-users, there hasn’t been this traditional kind of inventory build, which would indicate a peak market type of condition.

So, what we had in August certainly is unusual. We don’t have some impact clearly with the restarts. But they are starting up during the quarter, where there is a lot of maintenance. So we haven’t seen the impact as yet. And yet at the same time, the demand growth, in next year should take care of really any of the global restart.

So, we are optimistic in terms of the near future balance, because we know that capacity increases certainly will be significant demand increase. So, I think that overall turning onto NBSK case side, we think there is a very good balance in terms of hardwood, there is a lot in the capacity and that’s really where the pressure clearly is rising from.

Andrew Shapiro - Lawndale Capital

On the Rosenthal, prior your questioner asked about the estimate on the energy cost and I just wanted to know was that net of the energy the company actually had to purchase to run Rosenthal? Or was that just the lost energy revenue side?

Jimmy Lee

No, no that’s the net impact of in terms of loss sales and purchase of electricity.

Andrew Shapiro - Lawndale Capital

Okay, great. And year-over-year your operating costs were higher due to, I think your press release talks about 26 million of higher fiber and energy costs. Can you breakout between the two as to increased cost? Was it mostly the fiber side? Or I guess is it, you’ve just provided us the increased energy cost we could reverse in to that?

Jimmy Lee

It’s predominantly the wood fiber cost in Germany.

Andrew Shapiro - Lawndale Capital

Okay, and do you gave the prognosis for those fiber costs in the current quarter Q4, you feel that you are going to experience leveling or it’s thereafter starting in Q1?

Jimmy Lee

No, we believe that in the fourth quarter we should essentially leveling off the costs overall.

Andrew Shapiro - Lawndale Capital

Okay, and then you had about 16,000 in ADMT in orders slipping into Q4. I think you mentioned that as they moved out in October and that would certainly have contributed to your inventory build? But are these orders now supplemental to your ordinary Q4 rate, not we expect a decent size reduction in inventory and a build up of cash or is cash a Q1 event from Q4 receivables?

Jimmy Lee

No, what you’re going to have is clearly a very good sales in the fourth quarter, because a lot of, the third quarter have slipped into fourth with the normal type of sales in the fourth quarter. So, the fourth quarter sales will be higher. There should be an inventory reduction, in terms of whether there is cash is subject to, the receivable issues, because of course it’s the timing as to when the shipment is done and when we collect the money. So I can’t promise you that we’ll have a lot of cash, but you will see it in cash and receivables.

Andrew Shapiro - Lawndale Capital

On the debt side and have you had discussions with your current senior note holders? Just to have a handle on whether you think the tender offer will be pretty fairly received and thus the likelihood and then the covenants being changed would pretty much bring the rest of the senior notes with it?

David Gandossi

Andrew Dave here. I’m sorry we’ve been advised that we really can’t talk about this those as said all on this call.

Andrew Shapiro - Lawndale Capital

Okay, are you able to talk a little bit about the new plant, debt in terms of the, I guess we call it the term and duration here.

David Gandossi

Andrew, no, it’s any, if we discuss it at all, the free writing prospectus will bring this whole conference call into prospectus grade. So we can’t talk about this at all. There will be an opting memorandum coming out shortly. And that should answer most of your questions.

Andrew Shapiro - Lawndale Capital

Alright, then the last question here is that, how do you make the fact that the restricted group is non-recourse from the Stendal debt, more transparent? What is the structure that properly addresses the strength of both sides you had obtained to more appropriate equity valuation and lower cost of capital financing for Mercer and the restricted group then what the market continues to undervalue the company for?

Jimmy Lee

You are asking us with an alternative capital structure? Or what can we do just to communicate better what we are on that front?

Andrew Shapiro - Lawndale Capital

Well, I mean what is the structures, what are the alternatives you and the Board have been talking about as a means of obtaining an appropriate equity valuation and thus the lower cost of capital financing and what we have been and continue to experience on a consolidated basis is still spoken up on a consolidated basis that the company has a substantial amount of leverage and we’ve talked?

David Gandossi

What we’ve done to try to address it is, we have created a supplemental investor presentation that talks about Mercer’s capital structure. Jimmy and I’ve been on the road at least three times this year meeting with investors both existing investors and plus potential new ones to highlight our structure.

We point out the non-recourse nature of the Stendal debt. It’s a big chunk of leverage, but its non-recourse, its low interest rate, it’s guaranteed by the German government, it’s amortizing, but it has a safety net and a debt service reserve account all those features.

And then we on the restricted group side, we explained investors that the steps we took on our convertible debentures means they will move into equity without us making cash payments we believed. And so we’ll have our senior notes, which are the senior capital on the restricted group and that’s not bad leverage considering the quality of the assets and the electricity generating capabilities.

And even at the bottom of cycle if you got $40 million of electricity revenue coming in the restricted group, and you’ve got two low cost mills that, as we’ve demonstrated bottom of cycle before Rosenthal was a break-even mill and Celgar with its wood cost under control now, if it’s the same, that’s a pretty nice piece of paper. So we just keep communicating.

Andrew, I don’t – we are not going to blend it two together or we don’t have any ideas that we are discussing to radically change our capital structure. In fact, you’ve seen our announcement today that we are intending to issue the new set of senior notes for the restricted groups. So, I hope that helps to answer your question.

Andrew Shapiro - Lawndale Capital

Yes, we feel similarly, but it has been a frustration for everyone in terms of the markets’ understanding of that. And last question then is, what are your Mercer’s next events, presentations in terms of conferences and road shows, where you are going to communicate these things? Or are you kind of frozen down, because of the tender offer and offering?

Jimmy Lee

No, no, we’ll be going to the RBC Conference on November 30. We’re really looking-forward to that. They do a great job, they have both and equity and high yield and debt side there. We’re also been invited to the Sidoti Conference in January and Sidoti is picking up coverage on us, which I am hoping is in the market in December. So that should create quite a bit of interest. And then we’ll, we typically do a company sponsored general road show early in the spring, after the annual report is released. So, and there is CIBC, and CIBC at Whistler in the early part of the New Year as well. So we’ll be quite busy on our marketing side.

Andrew Shapiro - Lawndale Capital

Alright, great. Thanks guys.

Operator

Your next question comes from George Berman with J.P. Turner.

George Berman - J.P. Turner

Congratulations on a great quarter.

Jimmy Lee

Thank you George.

George Berman - J.P. Turner

I have just a couple of questions. Your convertible debt in the presentation was apparently very nice that you made at the Fifth Credit Suisse First Boston Show, you said that 80 million of the convert had already been converted. Can you give us some color on how much more if there any hasn’t converted to-date? And what that would do for your capital structure?

Jimmy Lee

Well, George, the 80 million that came in is really all of it. So there’s 48 million outstanding that’s US dollars of our convertible debentures and we just – we don’t have any color on whether any of those particular holders are interested to convert or not. So

George Berman - J.P. Turner

And if they were converted, it would reduce your interest cost by how much?

Jimmy Lee

Well, they’re 8.5% bonds and 8.5% times whatever it comes in, I guess.

George Berman - J.P. Turner

Yes, and you would add on 40 million shares to the share content.

Jimmy Lee

That’s right, yes.

George Berman - J.P. Turner

Okay, so that would alleviate any – a lot of the debt concerns as well and for you right?

Jimmy Lee

For sure, yes, it’s not a very really a big deal for us anymore. When you look at the cash flow over the last two quarters and you look at the liquidity reserves that the company has built, I mentioned in restricted group we had 48 million of cash, we’ve got over EUR30 million of revolvers available.

So we built up our receivables, finished goods and raw material inventories to a level where, if I compare where we are to-date George, to where we were at the bottom of the cycle, where we would take it to bottom of cycle there is another EUR35 million of liquidity in our working capital that’s available to the company. So we are quite flush and quite comfortable with our capital structure at the moment.

George Berman - J.P. Turner

Right. And the only other thing one could look at is that the float and the available shares in the marketplace might be increased to a decent amount.

Jimmy Lee

Well, to the conversion of the convert size is inside, yes that would be, we would see that additional liquidity or float as a positive.

George Berman - J.P. Turner

Your competitors in the pulp market, any of them have your setup where you actually produce excess electricity or all of them having to buy in electricity?

David Gandossi

Well the Canadians all are, none of them are in a position where they fully supply their own needs. But there are opportunities in British Columbia, for example where you can sell some power, while you are still buying. And it all depends on the history of your equipment and the relation and the deal you’re struck with the local utility.

George Berman - J.P. Turner

How about the rest of the world?

David Gandossi

Well, it’s different everywhere in the world. In Scandinavia, there is a number of different schemes. They tend to be very focused on it. The way we are here in Germany and there is programs that they benefit from. The few, the bit of the small amount of production of the market kraft production in the states has often feed in terrace. It’s different in every state, but there is opportunities for them as well.

The world is recognizing that wood kraft pulp mills do us a very good thing both in terms of environmental and in terms of its combined epower and cogen systems, where recyclers have waste from the saw millers, all these things are – jurisdictions are starting to realize how valuable these assets are and programs are being put in place globally to support. But having said that, we’ve got three other most modern mills in the world. So we are leaders in that area.

George Berman - J.P. Turner

Great, great. And then one last point, have you considered presenting your numbers in U.S. currency as well to sort of flush out your tremendous earnings power that you have?

David Gandossi

Yes, it’s clearly something we have to think about and we have been, we don’t have an answer yet George, but it’s an obvious question. So we’ve been thinking about it.

George Berman - J.P. Turner

Okay, great. Good luck to you in the future.

David Gandossi

Thank you.

Jimmy Lee

Thank you.

Operator

Your next question comes from Chris Dechiario with ISI Capital.

Christopher Dechiario - ISI Capital

Most of my questions have been asked, but I just have a couple of items. Could you give your sales per mill, can you give us production per mill?

Jimmy Lee

Yeah, sure Chris, so production at Rosenthal was 74.9, Stendal was 173.2, and Celgar was 132.8.

Christopher Dechiario - ISI Capital

Great, thanks. And then you spoke about, I think $20 reduction in list price on October 1st. I was wondering if there any pricing changes on November 1st.

David Gandossi

No, we have basically remained flat October, November.

Christopher Dechiario - ISI Capital

Right. Okay, thank you.

Jimmy Lee

Thank you.

Operator

Your next question comes from Sven Karlen with Wells Fargo Advisors.

Sven Karlen - Wells Fargo Advisors

My questions have been answered. Great quarter, guys.

Jimmy Lee

Thanks Sven.

Operator

Your next question comes from Richard Kus with Jefferies.

Richard Kus - Jefferies

Great quarter guys. My questions are also been answered. Thank you.

Jimmy Lee

Thank you.

Operator

And there are no further questions, management do you have any closing remarks?

Jimmy Lee

No, I mean, thank you again for attending today’s conference call. Actually, my trip to China was very lightening. That really gave me a good idea as to why some of our customers are actually buying junky pulp mills. So we are very optimistic in terms of the outlook moving forward and certainly discussions there made it very clear that their consumption of softwood in the coming years will grow and continue to grow as a result they are focused on particular paper grades.

So, I think, we may have a little bit of uncertainty in the short-term, but the long term looks very positive. So on that note, I would like to again thank you and finish the conference call. Thank you.

Operator

Thank you. This does conclude today’s conference call. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mercer International Management Discusses Q3 2010 Results – Earnings Call Transcript
This Transcript
All Transcripts