Mercer International Inc.
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

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

[David M. Gandossi:]

Thanks, Laura. As usual, we will begin with formal remarks, after which we'll take your questions. Please note that in this morning's conference call, we will make forward-looking statements similar to those that were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are fully described in the press release and with the company's filings with the Securities and Exchange Commission. Relative to the fourth quarter, average NBSK pricing was up marginally in all markets, however the stronger euro more than offset these price gains. Demand was seasonally strong in China during the quarter as buyers returned to the market following the Chinese New Year holiday, while in Europe demand was steady. Relative to Quarter 4, sales were up approximately 21,000 tonnes. The mills ran reasonably well in the quarter and sales essentially matched production. As a result, our finished goods inventory was up only 5,000 tonnes relative to Q4. Pulp prices remained low when current market metrics are considered but demand and low customer inventories did create some pricing momentum in the first quarter with average prices up about USD 30 per tonne. List prices ended the quarter at USD 840 and USD 700 per tonne in Europe and China, respectively. As you will see in our press release, we reported a net loss of EUR 0.4 million for the quarter or a loss of EUR 0.01 per basic share compared to net loss of EUR 5.2 million or loss of EUR 0.09 for basic share in Q4. Our Q1 2013 net loss includes a net unrealized gain of approximately EUR 4.7 million related to our noncash gains on the mark-to-market valuation of our fixed interest rates swap, offset by a small noncash loss on our pulp swaps. Before these noncash items, basic earnings per share was a loss of EUR 0.09 per share. We recorded quarterly EBITDA of EUR 24.3 million or approximately USD 32.1 million. This compares to EUR 21.3 million or about USD 27.6 million in the fourth quarter of 2012. The most significant impacts on our EBITDA this quarter was not having any major maintenance in Q1 and higher pulp and energy sales volumes. However, our results were negatively impacted by higher fiber and energy costs as cold weather limited the availability of wood in Europe, as well as increased our natural gas usage. Switching to cash flow. Overall, our cash position is EUR 6.4 million higher than at the end of Q4, sitting at approximately EUR 111 million or USD 143 million. Quarterly working capital movements increased cash by approximately EUR 6 million on a net basis, primarily due to an increase in payables and a decrease in raw material inventories which was partially offset by an increase in receivables. Capital expenditures drew approximately EUR 11 million during the quarter. Off this, about EUR 9 million was spent o Stendal's Blue Mill Project, while the remaining EUR 2 million was spent on higher return capital projects at Rosenthal and Celgar. In addition, Stendal made a scheduled principal repayment of EUR 20 million on its debt facility. During the quarter, Stendal submitted documentation for EUR 4.4 million of government grants for the Blue Mill Project, of which EUR 0.7 million has been received before the end of the quarter. In total, we expect to receive EUR 12 million of government grants on this project. Our working capital movements in the 12-month period ended March 31, excluding cash and short-term debt, decreased cash by approximately EUR 9 million with working capital up from EUR 138 million at the end of Q1 2012. The increase is primarily due to higher receivables and finished goods. In terms of our liquidity, at March 31, we had approximately EUR 26.2 million of undrawn revolvers available at Rosenthal and approximately CAD 22.3 million available at Celgar. Celgar's credit facility is set to expire in May and we have negotiated a multiyear extension. Our EUR 111 million of cash at March 31 is comprised of approximately EUR 52 million for the restricted group and EUR 59 million at Stendal. Net debt-to-equity on a consolidated basis at March 31 is up slightly from Q4 but remains a little over 2x equity while the restricted group's net debt-to-equity is essentially unchanged at approximately 0.5x equity. I want to again remind everyone that many of our competitors report using IFRS and as such, account for major maintenance using a different method than we do. In accordance with U.S. GAAP, we expense all nonmajor maintenance costs in the period they are incurred. While those -- for those reporting under IFRS, noncapital major maintenance costs are capitalized as property, time and equipment and then amortized over the period ending with the next major maintenance through the depreciation line. As a result, financial performance comparisons to many of our competitors using certain metrics such as EBITDA are no longer on an apples-to-apples basis. Although, we did not incur any major maintenance in Q1, we expensed almost EUR 14 million in 2012, the majority of which would have been eligible for capital treatment under IFRS. That ends my overview of the financial results, and I'll now turn the call over to Jimmy.

[Jimmy S. H. Lee:]

Thanks, David. Good morning, everyone. We are generally satisfied with our first quarter results given the current state of the market. And we're encouraged by the modest pricing momentum experienced in the first quarter. On the production side, overall, our mills ran reasonably well with production up slightly relative to Q4, after allowing for Stendal's Q4 annual maintenance shut. In addition, our electricity and chemicals sales were also up compared to Q4. Our energy and chemical revenue in Q1 exceeded our interest expenses by approximately EUR 5 million, which is noteworthy given the slow recovery of pulp prices. Put another way, out of our byproduct sales, suppressed our debt-carrying charges by almost 40% this quarter. Equally important, our debt-carrying charges continue to trend down as we paid down the Stendal debt. While our byproduct revenues are expected to continue to grow with the completion of Stendal's Blue Mill Project. In the first quarter, average NBSK list prices rose in all markets with the European quarterly average list price rising USD 29 to USD 832 per tonne, and the Chinese quarterly average list price rising USD 16 to USD 678 per tonne. I will talk a little more about recent pricing developments in a moment. But first, let me comment on the mills production. Celgar and Stendal both experienced some unplanned downtime this quarter. However, Rosenthal continue to benefit from its Q2 recovery boiler upgrade, achieving near record production. In total, we approved -- we produced approximately 361,000 tonnes of pulp this quarter compared to approximately 350,000 tonnes in the fourth quarter and approximately 380,000 tonnes in the first quarter of 2012. Our first quarter production was broken out as follows

[Operator:]

[Operator Instructions] Your first question comes from the line of Richard Kus from Jefferies.

[Richard E. Kus:]

Firstly, a procedural question. Would you guys mind giving us what the sales were by mill?

[David M. Gandossi:]

Yes. I can do that, Richard. So the sales volumes for Rosenthal were 91,500; Stendal was 157,300 and Celgar was 107,900 for a total of 356,700.

[Richard E. Kus:]

Great. I appreciate it. And then question on the fiber situation in Germany. Can you talk a little bit about how much you guys think that contributed on a per tonne basis maybe versus the fourth quarter? And then I'd be curious to hear how you feel about the fiber cost situation there over the medium term, given the different factors that you're experiencing.

[Jimmy S. H. Lee:]

I think in terms of the actual numbers, David's just finding them now. The impact of the fourth quarter in the first quarter, of course, would not be as significant overall because of course, it was only in the first quarter that we've started to experience the wood situation arriving from very severe winter conditions. In terms of an EBITDA difference between the fourth and the first, for all of the operations, because of course, the Canadian costs were slightly higher, too. They equate it to roughly about a 4 -- just over EUR 4 million impact.

[Richard E. Kus:]

Okay, okay. And then how do you see this situation developing over the course in the next couple of years?

[Jimmy S. H. Lee:]

Well, I think, like in prior years, whether we've had higher wood costs as a result of adverse winter type of conditions, we tend to peak out over the year and then we go back to more kind of normal conditions as this kind of interruption or this kind of unusual event filters through the system. So we're expecting that we'll have higher wood prices but then gradually coming down to more of the prices that we've seen in the past.

[Richard E. Kus:]

Okay. And then just with regards to China, you guys spent a little bit of time talking about the inventory situation there, at least how you see it. It doesn't seem like shipments have been very robust there and I would say maybe that's reflecting economic growth on the ground. What are your customers saying about that?

[Jimmy S. H. Lee:]

Well, I think, it isn't really reflecting directly all of the economic conditions. I think it's also to do with the degree of the anticipation of additional capacity coming in, especially from Russia. I think many of the traditional trading entities in China, which of course provide a significant outlet for market pulp, had been reducing their inventories over the last few months in anticipation of Russian capacity coming online and realizing on values that of course, they have locked in by buying pulp in the earlier periods at a much lower price. So you're seeing that type of movement which clearly is impacting the, I guess, the demand side right now and lower shipments. We know that the Russian capacity was longer or later in startup than people had expected and therefore, I think the inventory levels certainly and our customers probably reflect that reality that maybe they're probably sitting on far lower rent inventory than they would have probably expected if the Russian production had been on schedule.

[Operator:]

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

[Bill Hoffman:]

I wonder if, David, you can just talk a little bit about the outages you got in Celgar and Rosenthal, whether they're normal this year or anything different?

[David M. Gandossi:]

To which, Bill?

[Bill Hoffman:]

For both Celgar...

[Jimmy S. H. Lee:]

Production problems were -- it's actually unexpected. Normal equipment type of issues, nothing that we thought were substantive. But of course, in a large production facility like Stendal and Celgar, we will, of course, have these unusual, unexpected equipment failures.

[Bill Hoffman:]

No. That's -- I was actually asking about the planned outages whether they're normal...

[David M. Gandossi:]

Oh, yes. The maintenance shutdown schedule is actually as pretty much more as normal compared to the normal maintenance schedule. Celgar may be a little bit shorter because we are implementing a little bit more efficiencies and then prior shutdowns, but nothing substantive.

[Bill Hoffman:]

Okay. And then with regards to Ilim and their -- the capacity. I'm assuming these guys are preselling that into the market. So I'm a little bit surprised that you're still seeing customers uncertain about that capacity.

[David M. Gandossi:]

Well, I think if you look at the actual startup date, which was from their announcement, April 24 or so, I think the original anticipation of this volume was much earlier than that. And there's been several delays in terms of the actual announced anticipated startup dates. And therefore, I think they may have contracted but contracts are 1 thing. You have to actually have the physical volume to deliver. So clearly, the commitments may have been there, but the volume certainly was not being produced. That's one. I think, there is also several closures which have occurred, as you know, in Canada and that of course, has to filter through the system because of course, there's still inventory working the way through. And also there's the uncertainty of the CAFTA production. Our expectation is that sometime in June, as they announced, certainly the CAFTA mill could go down, which of course, would rebalance the capacity to actually less. In fact, there will be no incremental supply growth. In fact, there'll be an incremental supply reduction if CAFTA actually does close.

[Bill Hoffman:]

Okay. And then just -- I wonder if you could just comment a little bit -- obviously, Paper Excellence is in process of buying the Skookumchuck mill. And then NBSK [indiscernible] obviously, these guys have been buying mills up in Canada historically. Any thoughts on how that might change the dynamics of the market up there?

[Jimmy S. H. Lee:]

Well, I think, clearly, Paper Excellence is part of, I guess, the APP group. Certainly, a very big growth ambition in terms of the tissue market in China. As you know, based on announced projects, in terms of expansion on their tissue side, it will require a significant amount of softwood supplies and therefore, I guess, it fits into their strategy of assuring availability of those supplies for the future.

[Bill Hoffman:]

Finally, any strategic thoughts at this point, Jimmy, just with regards to -- last year, you look to Fibrek but there's obviously other mills out there?

[Jimmy S. H. Lee:]

Well, I think at this point, we're focusing in terms of, of course, reducing our debt if possible and also of course, strengthening our balance sheet and honing on the efficiencies of our operations and looking for additional income. I think at this point, we're really focused on, of course, our own issues right now.

[Operator:]

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

[Andrew Evan Shapiro:]

Questions here. Regarding the maintenance and downtime. Regarding your unplanned downtime that you mentioned you had in both Celgar and in Germany. Can you take a shot at quantifying the estimated impact that unplanned downtime created in Q1?

[Jimmy S. H. Lee:]

Yes. In terms of the -- in comparison to the fourth quarter comparison, the impact of this unexpected shuts was positive because of course, you have the Stendal maintenance downtime. So it's difficult to kind of factor in how much of the -- the lost tonnages we have. I think another number in there. I'll have to look that up for you.

[Andrew Evan Shapiro:]

Right. Because you mentioned that the reduced -- you mentioned specifically that the reduced production at Celgar also contributed to reduced energy. And so...

[Jimmy S. H. Lee:]

Yes.

[Andrew Evan Shapiro:]

In that respect, there's lost tonnage and there maybe some of estimate of lost energy. It'd be useful to kind of quantify that. With respect to the Q2 maintenance for Celgar, I think I've seen some press reports that discussed it, so that made me think that perhaps it's already started and maybe perhaps it's been completed. What's the timing for it and if it's been done, di every -- is it back up and running at a full capacity?

[David M. Gandossi:]

It's in process right now.

[Unknown Executive:]

It just went down, so it's not started up yet.

[Andrew Evan Shapiro:]

All right. So it's expected to be back up at around when?

[David M. Gandossi:]

Second week of May.

[Andrew Evan Shapiro:]

Okay. You mentioned how Blue Mill is on track, scheduled to be up and running by September 30. Can you speak or explain a little bit about the power contract pricing and its similarities or differences to the enhanced energy prices we enjoyed at Celgar? We got some subsidized or enhanced pricing on the prior German power generation. Do we get to enjoy that or is that program over and where do the power rates we're going to get in Germany on the new incremental capacity stand?

[Jimmy S. H. Lee:]

Well, we believe that the new generation will qualify under the existing EEG, renewable electricity generation program. So of course, we will get the higher feeding rates that are available to the biomass to energy cogent with producers. It will be slightly lower than the overall kind of number that we have on the first because there is certain additional benefit that we derived. The first, a very small incremental amount of generation but it will be similar in the overall magnitude because it is qualified, we believe under the EEG program that it exists today.

[Andrew Evan Shapiro:]

And then on the NAFTA claim, are there interim milestones that trigger the sides potentially having a mutually agreeable settlement talks?

[Jimmy S. H. Lee:]

I guess our feeling, Andy, is the closer or the further along we get, the more tension there is. Things like discovery, hundreds of thousands of documents where it's being required to produce these things and be examined on them and stuff. So it's becoming very real for both the Canadian and provincial haircuts [ph] that are managing this process. We've also got an election in British Columbia that could produce a new way of thinking within the government. At least we hope that will happen. If it's the same government, there might be different leadership principles applied and if there's a change in government, then, that's an opportunity for a fresh discussion.

[Andrew Evan Shapiro:]

When is that election?

[Jimmy S. H. Lee:]

It's this month, May 14.

[Andrew Evan Shapiro:]

Okay. With the current prices that are going on and the limited profitability that we see from plants that are modern and low-cost, are there plants other than CAFTA and out there where the mills are running red ink that you see at potential risk or, for Mercer, opportunities for supply reductions?

[Jimmy S. H. Lee:]

Well, I mean there is a few mills that we know that are even at today's type of prices, probably are still experiencing some kind of red figures but we cannot comment on those. What we do know is that, of course, there is 2 production facilities which have announced and have taken closures. As example, one of the lines at [indiscernible] as an example, which again is produced from more sawdust so it's not really strictly the same type of quality. But it is a softwood and we know that coupled with those 2 in Canada and the CAFTA announcement, as I earlier mentioned, this incremental increase of 0.5 million tonnes is a result -- actually will not really occur. In fact, you have a small capacity decrease of, say, something in the order of about 200,000 tonnes or so, roughly.

[Andrew Evan Shapiro:]

Great. Just 2 more here. Based on the substantially narrowed spread between softwood and hardwood, and also in light of the new tissue capacity and other paper modernization capacity that's going on, is substitution between hardwood and softwood finally or possibly to Mercer's benefit now going on at these levels?

[Jimmy S. H. Lee:]

Well, I mean, if prices certainly in China, are such that hardwood prices are at or close. In fact, in some instances above that of softwood, then of course it makes sense for many of the producers to use more softwood because of course, the production efficiencies would improve their run rates, et cetera. And therefore, there is likelihood that probably the recipe will be adjusted to use more softwood because of the efficiency gains that they would experience as a result.

[Andrew Evan Shapiro:]

Right. And can you provide some insight to your views from this heavily deintegrated point already as to the risk or opportunity from deintegration or reintegration of softwood pulp from these integrated paper players? Are you seeing more paper capacity coming out in the risk of increased deintegration? Or is it the headwinds are gone and there's a prospect of any tailwinds and when that might occur?

[Jimmy S. H. Lee:]

Well, I think the European side, especially in terms of the printing and writing grade. It's very clear that there's a significant weakness. There is further anticipation of consolidation and possibly additional paper capacity closures. So we think that clearly the European situation has not returned to normal, but we don't think at the same time, the closures are going to be as deep or as significant as what has already occurred. So what additional new capacity that may be shut will not be as material clearly, and therefore, the impact in terms of nonintegrated or deintegrated pulp going into China won't be as significant in terms of the growth year-over-year as we've seen. Certainly, we've seen a big amount of that really coming out of more of the Scandinavian area in terms of actual growth based on the reported numbers. And we don't think that, that type of growth rate in terms of the incremental increases year after year is going to be comparable. So we think that the real big impact of the nonintegrated pulp into China is probably already being felt. There'd be probably potential for additional, but that could reverse if CAFTA clearly shut down because, of course, there was some in incremental tonnages coming from Norway into China. And therefore, if that mill shuts then, of course, that will benefit us in terms of this nonintegrated pulp coming into China.

[Andrew Evan Shapiro:]

Okay. And lastly, David, what's the roadshow/Investor Conference agendas for the coming quarter or month?

[David M. Gandossi:]

We've got Barclays coming up shortly. And then there's a CIBC mini-conference in London to meet some potential European equity investors. We're presenting at Sidoti, June 9, I think, it is, Andy? And then Jefferies later in August.

[Operator:]

Next question comes from the line of Mark Kennedy with CIBC World Markets.

[Mark Kennedy:]

First of all, just with regard to the maintenance shuts coming up this year. Can you just give us a guide as to the expected tonnage outage for each of those?

[David M. Gandossi:]

Sure, Mark. Rosenthal will tonnes be about 11,800. Stendal would be 22,400 tonnes. Obviously, it's the bigger mill. And Celgar is expecting 16,000 tonnes.

[Mark Kennedy:]

Okay. Great. And Jimmy, I guess, I'd like to get your perspective on an issue. If we can look through NBSK markets, say, after the next 12 months once the Brask [ph] mill has started and that tonnage has been absorbed into the marketplace? I don't think there's another new NBSK greenfield mill being built anywhere in the world right now. And if we get 1 or 2 more mills that convert into dissolving such as -- Terrace Bay is going to do that at some point and there's even some speculation that Paper Excellence might be thinking of converting Skookumchuck to dissolving at some point. What factor is really going to lay out the path for NBSK when we look out 1 to 2 to 3 years?

[David M. Gandossi:]

Well, that's why we've very optimistic in terms certainly the medium- to long-term supply and demand type of situation because even if you take the CAFTA potential closure, there won't be an increase. At the same time, we know that based on -- even the continued decline in paper consumption in North America and Europe, we know that on a global basis, the softwood demand has continued to grow and albeit at a very low rate. But because of the growth in tissue and other paper products in the emerging markets, the demand for softwood is increasing year after year. So -- and we don't see anything that will change that view. And in fact, in terms of the tissue market, we know that the incremental capacity increases in China are just mind boggling. And therefore, a lot of that requires softwood. Even if you take a 30% type of proportion of soft and hard, it means many hundreds of thousands of tonnes that is going to be in new demand. And there is new no capacity and yes, every mill will have a little bit of incremental production capacity growth because of efficiency, et cetera. But the scale of the demand growth is such that we do believe we'll have good supply-demand balance so that we will enjoy very good capacity realization once we get through this transitioning of the even capacity. And so we are optimistic. The only thing that analysts clearly point to is the significant capacities of the hardwood side coming towards the end of this year in South America. Now, in prior type of correlations indicated -- actually, there is no direct correlation between price movements and capacity increases today. So yes, you can point to the capacity increases but certainly, studies by other analysts seems to indicate that there is no direct correlation as to the capacity coming on and actually the price movements. So I think it's indicative that really yes, you can point to that and be negative, but I don't see certainly, from an NBSK softwood perspective, why that will have an adverse impact in terms of the demand for us. Yes, pricings have been much higher for softwood versus hardwood for an extended period of time. We've had periods where we had many, many months of price gap of about USD 200.

[David M. Gandossi:]

And that was in a time frame where there is 2 brand new hardwood mills.

[Jimmy S. H. Lee:]

Right. Coming on. So I think you can point to the capacity growth on hardwood but I don't necessarily agree that this is going to have an immediate impact in terms of price because prior studies don't seem to indicate that. And at the same time, you cannot directly correlate hardwood and softwood because we've seen the extended period of times where there has been a disconnect and good premium on softwood for a long period of time. And we've also seen periods where for whatever reason, softwood prices actually being cheaper than hardwood for a reasonable period but actually, not for too long. Technically, those situations tend to correct much faster than the other where you have a continued high premium of softwood against hardwood.

[Operator:]

Next question comes from the line of David Quezada with Raymond James.

[David Quezada:]

Just a quick question. You mentioned the -- I think it was 2.3 million tonnes of additional tissue capacity coming on in China. Do you have any idea of how much NBSK pulp demand that would translate into? Or even pulp demand in general?

[Jimmy S. H. Lee:]

We typically say, look, a typical recipe would give up 30% softwood in tissue and the rest would be hardwood. So -- and that would be kind of a -- probably, generally a reliable figure I mean some guys use less, some guys use more. And it also depends on the type of tissue product clearly, but 30% is a pretty decent kind of ballpark figure to use.

[David Quezada:]

And is it about 1

[Jimmy S. H. Lee:]

Yes, roughly.

[David M. Gandossi:]

And David, just remember, that's just 2 customers, that's Hanging an EPP [ph] . But if you add up all of the announced tissue capacity today, that's between 2012 and 2016, that's 5.6 million tonnes.

[Operator:]

Next question comes from the line of Paul Quinn with RBC Capital Markets.

[Paul C. Quinn:]

Just wanted to try to further break down or solidify my model on the addition of Blue Mill. So you stated that it's coming up the end of September. What should we look for in terms of additional tonnage at all in '13 and will the extra 30,000 tonnes start to come in into Q1 '14? And then actually...

[David M. Gandossi:]

So I'll try to help and maybe Jimmy can add. So big part of the -- of what is going to produce the incremental tonnes was completed at the end of probably December timeframe. So you're starting to see the impact of that in the first quarter. We're saying Stendal is going to do about 645,000 tonnes this year. It will do about 650,000 tonnes to 660,000 tonnes the next year all depending on shuts. In a year when Stendal doesn't have a shut, we think its capacity is up at 670,000 tonnes right now. So if that's a difficult thing to quantify for you on this call. On the energy side, in our disclosure previously, we've indicated it's about 100,000 kilowatt hours of power per year incremental based on today's growing rates. So it's going to depend on what we ultimately negotiate with the EEG for that power but if it was EUR 60 a megawatt hour, you'd be 60x 100,000 kilowatt hours roughly. To give you a feel, you're in the $7-ish million, $8-ish million range, annual and incremental.

[Mark Friedman:]

Okay. That's very helpful. And then just a higher-level question on geographic shift. If we look back 5 years, given that you're running the exact same mills that you were at that point, how have you switched into your customer base over that period of time? Obviously, you're trying to grow over that. But can you sort of give us some rough outlines of where your selling your pulp into the major end market?

[Jimmy S. H. Lee:]

Yes, I mean, if you look at the what has been occurring on the European side, what is clearly noticeable is paper demand, certainly in Europe, has been weaker in the Western European market but stronger in the Eastern European market. So the emerging Europe, as such, paper consumption, tissue consumption, et cetera is strong. In terms of the Western Europe, Germany, France, et cetera, et cetera, you're having weakness. Tissue, not as bad, but certainly the printing and writing grade. And therefore, if you look at our percentages, we've had a slight decline in terms of the volumes to the developed Europe and a slight increase to the emerging Europe. Nothing of real significance but that's a trend. In terms -- and again a little bit more into China, depending on the U.S. dollar exchange rates because it is sometimes more favorable to ship into China than it is to ship to the peripheral European markets. In terms of the Celgar operation, we all know that there is overcapacity of premium quality NBSK in North America and therefore, we have been essentially been more focused on the China, as well as the Asian markets. So you're shifting from probably more tonnage out of Celgar than ever before into the Asian and China markets. And we see that trend continue unless we are able to have a fiber quality strategy which will be as good, if not better, than the premium qualities clearly on the market in the U.S.

[Paul C. Quinn:]

Great. And then just now that -- well, I guess Blue Mill will soon be done, what's your -- what's the next project after Blue Mill?

[Jimmy S. H. Lee:]

Well, we look at the byproduct of 3 mill's [ph] very significant for us and therefore as you know, Rosenthal also produced tallow oil. It has traditionally shipped whole pulp to the Stendal facility for processing. We don't essentially have capacity now because of the Blue Mill expansion, et cetera, et cetera. And therefore, Rosenthal will be investing in its own tallow oil processing facility. And of course, we will generate additional income as a result of that. We will also pursue additional wood-based chemical strategies. So I think that it's really the incremental stuff will not be on the, strictly, on the pulp side but really more in terms of this byproduct stream. So enhancing more of the chemical recovery processes and upgrading of the chemicals and pursue that line which, of course, will have good margin benefits without significant capital type of outlays.

[Operator:]

[Operator Instructions] Your next question comes from the line of John Paces (sic) [Pace] with Stone Harbor Invert (sic) [Investments].

[John Pace:]

Just a quick couple of questions here. Number one, just sort of to get a feeling for the incremental cost on the maintenance outage in 2Q. Do you expect the cost of that Celgar outage to be similar to what it was in 3Q last year?

[Jimmy S. H. Lee:]

Hard to say. We're doing some things differently this year in Celgar to try to reduce the costs and improve the efficiency. We've designed some different approaches to the length of the ships, for example, to improve some efficiencies. It's doing things a little bit different from a BC labor perspective. We're optimistic it will bear some fruit for us and help us reduce our cost. And on the equipment side, we've been reasonably pleased, the early -- they've been down since, I guess, 4 or 5 days so far. The early reports are that we haven't really found anything, any big surprises yet, our fingers are crossed here. So without any big surprises then we really could possibly do better than we did last year.

[John Pace:]

And was last year -- was what? $6 million or $7 million roughly?

[Jimmy S. H. Lee:]

Yes. With Celgar, last year would have a little bit above that. This year, we're kind of targeting around the $6.5 million range.

[John Pace:]

Got it. And as far as the -- just looking in the 3Q, at the Rosenthal outage, would that be similar to sort of $4.5 million you had last year?

[Jimmy S. H. Lee:]

Rosenthal is actually budgeted to be quite a bit lower this year. Last year we had a..

[David M. Gandossi:]

We had an extensive shut.

[Jimmy S. H. Lee:]

An extensive shut with the turbine revision and so on. So we're -- our budgets are in the EUR 1.7 million to EUR 1.8 million range for Rosenthal in Q3.

[John Pace:]

Great. And then just talking about fiber cost. Did you say earlier that fiber costs had a negative $4 million sequential impact to the cost in 1Q versus 4Q?

[David M. Gandossi:]

That's correct. Yes.

[John Pace:]

Company-wide, okay. So based on where fiber cost is today, run rate. How would 2Q look versus 1Q? Should we get lower Celgar but still elevated Europe at this point?

[David M. Gandossi:]

Probably the continuation of these levels.

[John Pace:]

All right. So sort of flattish then basically?

[David M. Gandossi:]

Yes.

[John Pace:]

Okay. It's good. And then, also in terms of your labor contracts, when did annual raises kick in, sort of cylindrically speaking? When should we see a bump in your labor costs sequentially?

[David M. Gandossi:]

Well, I don't know quite how to answer because we do some fancy amortization and prefunding and things like that. So I don't -- you're not really sequentially going to see anything material one the announce.

[John Pace:]

Okay. It's a pretty smooth throughout the year then, basically is what you're saying.

[Jimmy S. H. Lee:]

Yes.

[John Pace:]

Okay. All right. And...

[Jimmy S. H. Lee:]

Other than the Stendal I guess it goes up. Stendal will have a 2% increase, I think, something like that. I'm just not sure, John.

[John Pace:]

Okay, great. And then, probably not that big anyway. And then finally, just want to circle back to the unplanned outages that you saw in the first quarter. Was there a cost number associated with that?

[David M. Gandossi:]

Not that we've calculated after this call. No.

[John Pace:]

Okay. Or -- and I think you said earlier, there was no -- you don't have a tonnage impact that you calculated, right?

[David M. Gandossi:]

Yes, we do.

[Jimmy S. H. Lee:]

We do. We just don't know the number at the top of our heads.

[John Pace:]

Okay. Can you give the total number of days you lost between the 2?

[Jimmy S. H. Lee:]

No, I don't know that, John. On the top of my head, it wasn't 1 single event. We had a number of different things so the mill would go down and come back up and then down and up. I should know it but I just don't have it with me and sitting in a room with a bunch of paper around me in Berlin.

[John Pace:]

Okay. We can circle back on that.

[Jimmy S. H. Lee:]

Yes.

[Operator:]

With no further questions in queue at this time, I'll turn the call back over to our presenters.

[Jimmy S. H. Lee:]

Well, okay. Thank you again for everyone attending today's conference call. And we look forward to making further progress certainly in terms of our productivity and efficiency and keeping our fingers crossed that the markets will continue to improve for the coming quarters. Thank you, and bye.

[David M. Gandossi:]

Thanks.

[Operator:]

You may now disconnect.