Feb 16, 2012
Operator
Good morning, and welcome to Mercer International's Fourth Quarter and Fiscal Year-End 2011 Earnings Conference Call. On the call today is Jimmy Lee, President and Chief Executive Officer of Mercer International; and David Gandossi, Executive Vice President, Chief Financial Officer and Secretary.
I will now hand the call over to David Gandossi.
David Gandossi
Thank you, Stephanie, and good morning, everyone. As usual, we will begin with formal remarks, after which we will 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 more fully described in the press release and with the company’s filings with the Securities and Exchange Commission.
David Gandossi
I will begin with some prepared comments on the key financial aspects of the quarter, and then I'll pass the call on to Jimmy, who will speak about the particulars of the markets, our operating performance, our recently filed NAFTA notice of intent and our recently announced strategic initiatives.
David Gandossi
As you've seen from our press release, our fourth quarter results were somewhat disappointing. NBSK pricing fell quite dramatically this quarter, and we had a number of items that negatively impacted EBITDA in the quarter totaling EUR 14.5 million.
Due to a British Columbia Utilities Commission decision regarding energy rates, Celgar was required to make a onetime payment of approximately CAD $2.1 million, resulting in incremental energy costs in Q4. We had just over EUR 3 million of costs at Stendal as a result of reaching an agreement with a local municipality regarding the mill’s share of certain infrastructure costs associated with the construction of the industrial park that the mill resides in.
And compounding the poor results was the fact that Stendal's shut was longer than usual due to extra work required on the recovery boiler, and we also had 11 days of unplanned turbine maintenance on Celgar's GG2 [ph].
David Gandossi
Overall, these factors resulted in our lowest EBITDA quarter in 2011. However, we believe our maintenance issues are behind us, and more importantly, we're beginning to see signs that pulp markets are starting to tighten up.
David Gandossi
I'll be going over our financial results in more detail in a few moments. But first, I wanted to highlight that in the past 12 months, we've made significant strides in improving our liquidity.
Year-over-year, we have reduced our debt by EUR 94.5 million. The reduction in debt has come about through almost EUR 63 million of debt repayments and repurchases and almost EUR 32 million as a result of converting our convertible notes to equity.
David Gandossi
During the quarter, we purchased USD $9.3 million of senior notes, and our total repurchases for the year was USD $13.6 million. And for the year, we also repurchased USD $10.6 million of our common shares.
Over the year, our cash and short-term investments and marketable securities grew by approximately EUR 18 million.
David Gandossi
Operationally, our mills ran well in the quarter with production up 21,000 tonnes compared to Q3 after adjusting for shuts. Pulp sales volumes were also up, however, pulp prices dropped significantly in the quarter, most notably in China where list prices ended the year at USD $670, compared to USD $830 at the end of Q3.
And in Europe, they fell USD $125 to USD $825. We estimate that these price reductions reduced our EBITDA by about EUR 33 million relative to Q3.
David Gandossi
As you will have seen in our press release reported a net loss of EUR 1.8 million for the quarter, or a loss of EUR 0.03 per share, compared to net income of EUR 8.4 million or EUR 0.15 per basic share in Q3. Our Q4 2011 net loss includes approximately EUR 0.8 million of a noncash loss related to the mark-to-market valuation of our fixed interest rate swap.
Before this noncash item, basic EPS was a loss of EUR 0.02 per basic share.
David Gandossi
We recorded quarterly EBITDA of EUR 17 million or approximately USD $22.9 million. This compares to EUR 49.2 million or about USD $69.5 million in the third quarter this year.
As I highlighted previously, the negative influences in EBITDA when compared to Q3 was significant pulp price reductions, scheduled and unscheduled downtime, infrastructure-related costs incurred at Stendal, as well as incremental energy costs related to a BCUC-imposed settlement of an energy rate dispute with Celgar's utility provider. These negative impacts were only partially offset by the positive movement of foreign exchange, higher pulp sales volumes and higher energy sales revenues.
As I noted, production was up compared to Q3, and Jimmy will talk more about that in his remarks.
David Gandossi
Increased pulp sales volume compared to Q3 requires a little more explanation. Our Q3 sales volumes were low relative to our historical quarterly average due to low demand.
However, in Q4, we saw significant activity in the Chinese market as buyers and traders took advantage of low prices to refill inventories. Jimmy will discuss the short-term outlook for pulp in more detail, but we feel that this buying activity is a strong indicator that NBSK prices have bottomed out in Q4.
David Gandossi
Switching to cash flow. Overall, our cash position is about EUR 14 million lower than at the end of Q3, sitting at EUR 117 million or approximately USD $152 million.
Overall, the quarterly working capital movements decreased cash by about EUR 2 million on a net basis, primarily due to the increase in accounts receivable and the decrease in payables being partially offset by a net decrease in our inventories.
David Gandossi
Capital expenditures grew EUR 11.7 million, which was comparable to Q3. During the quarter, we received approximately CAD $1.1 million of Green Transformation fund grants from the Canadian government with respect to the payment for Celgar's oxygen delignification project.
And we have approximately CAD $3.2 million of remaining grants that we expect to receive in the first half of 2012, CAD $0.8 million of which relates to a standard rollback requirement for the O2 delign project.
David Gandossi
Looking at the components of working capital in the corner -- quarter, finished goods are down approximately EUR 14 million from Q3. Our Q4 finished goods inventories were 89,000 tonnes while Q3 finished goods inventories were 124,000 tonnes.
Offsetting this inventory decrease is a EUR 7 million increase in our chip and log inventories. Our receivables were up approximately EUR 10 million, and our payables were down roughly EUR 10 million.
David Gandossi
Summarizing our working capital movements relative to our cash build in the 12-month period ended December 31, our working capital, excluding cash and short-term debt, declined by about EUR 4 million, down from EUR 172 million at the end of 2010 to EUR 168 million at the end of the year. At December 31, 2011, we had approximately EUR 26 million of undrawn revolvers available at Rosenthal and approximately $38 million available at Celgar.
Our EUR 117 million of cash at December 31 is comprised of approximately EUR 57 million for the Restricted Group and EUR 60 million at Stendal.
David Gandossi
Net debt-to-equity on a consolidated basis at December 31 is a little over 2x compared to the end of 2010 when it was over 3x. The Restricted Group net debt is about 0.5x equity at December 31, compared to 0.8x at the end of 2010.
David Gandossi
As a reminder, many of our competitors now report using International Financial Reporting Standards, also known as IFRS. IFRS replaced Canadian GAAP on January 1, 2011.
And one of implications of this change is that many of our competitors that we benchmark ourselves against now account for major maintenance using a different method than Mercer. Currently in accordance with U.S.
GAAP, we expense all nonmajor maintenance costs in the period they are incurred, while for those reporting under IFRS, noncapital major maintenance costs are capitalized as property, plant and equipment and then amortized through depreciation to the next major maintenance and -- which in our industry, is usually about one year.
David Gandossi
As a result, financial performance measure comparisons to many of our competitors are no longer on an apples-to-apples basis. As a result, I wanted to highlight that we expensed EUR 7.6 million of major maintenance costs in this quarter and EUR 17.4 million year-to-date, the majority of which would've been eligible for capital treatment under IFRS.
David Gandossi
That ends my overview of the financial position and developments. So let me turn the call over to Jimmy now to talk about operational market and strategic developments.
Jimmy Lee
Thank you, David. Good morning, everyone.
As David mentioned, we are somewhat disappointed with our fourth quarter results. However, we are pleased with our overall yearly performance.
We significantly increased our liquidity this year, which was an important objective for us. I'm also pleased to report that our focus on reliability is beginning to pay dividends in the form of record production in 2011.
We still have work to do in this area, but we're moving in the right direction. We also achieved our highest electricity revenue this year, though that is primarily due to Celgar's new turbine running for a full year.
However, it is a good indicator of what our energy assets are capable of. Our total energy revenue of EUR 58 million almost completely covered our 2011 interest expense, and provided our mills continue to run well, we expect our energy revenues to exceed our interest expenses in 2012.
Jimmy Lee
In the fourth quarter, we watched NBSK list prices decreased significantly with average list prices in Europe falling USD $112 to USD $868 per tonne. In North America, they fell USD $73 to USD $920.
While in China, the quarterly average list price fell USD $127 to USD $713 per tonne. I will talk more about recent price developments in a moment, but first, let me comment on the mills.
Jimmy Lee
All 3 mills ran at near-record levels in the quarter with Celgar achieving its highest quarterly pulp production since the start-up of the mill. After allowing for Stendal's shut in Q4, production was up 21,000 tonnes compared to Q3.
It also worth noting that on top of the record-setting energy production this year, we also achieved record energy revenues in the fourth quarter, and that is despite 15 days of planned maintenance at Stendal and 11 days of unplanned turbine maintenance at Celgar.
Jimmy Lee
Overall, we're pleased with our record pulp and energy production this year, but we continue to believe that there's even more potential in our assets, and we'll continue to focus our efforts on realizing on that potential.
Jimmy Lee
In total, we produced 365,000 tonnes of pulp this quarter compared to 362,000 tonnes in the third quarter and 356,000 tonnes in the fourth quarter of 2010. Our annual production of 1.45 million tonnes exceeded our previous production record by over 27,000 tonnes.
Jimmy Lee
Turning back to the pulp market for a moment, we believe the NBSK pulp market bottomed out in the fourth quarter. We're encouraged that we're beginning to see signs that the market is tightening.
Though produced inventories were at 36 days at the end of December, we believe that the number will come down slightly when January numbers are released next week. In addition, hardwood pulp, which tends to be a bellwether for NBSK, is also showing encouraging signs of strength including a drop of 8 days in December to 33 days.
The price spread between hardwood and softwood is also beginning to narrow, which believe in another positive sign for NBSK prices.
Jimmy Lee
European sovereign debt issues continue to be a drag on economic growth in Europe, and low European paper demand are combining to create a weak European pulp market at the moment. We continue to believe that part of the European pulp market recovery is going to come in the form of supply reduction given that some of the mills are high cost and the high proportion of previously integrated pulp that is currently being sold as market pulp.
While in North America, we're already seeing the impact of the lower NBSK prices in the form of one large NBSK producer declaring bankruptcy and halting operations.
Jimmy Lee
In China, we're encouraged by the indications of improved demand and the resulting potential for price increases in the near term. In fact, we have recently announced a USD $20 price increase effective March 1.
Overall, we're predicting that the prices will improve in 2012 and that the increases will come in the form of a slow upward trend. However, we're not as comfortable forecasting how foreign exchange rates will move this year.
And I don't think we are alone in this regard, given the wide range of predictions currently on the marketplace.
Jimmy Lee
In the medium to long-term, we continue to believe that the growth in the emerging economies will increase market tightness. For example, a recently released Chinese government report is focused -- is forecasting that almost 7 million additional tonnes of wood pulp will be used in 2015 when compared to 2010, which equates to a 36% increase over a 5-year period.
Clearly not all of that will be NBSK, but we know that there's a significant amount of new tissue capacity being constructed in the short term that will require NBSK. Based on this forecast, more capacity is coming.
Although this growth forecast is significant, it is consistent with what we have seen with respect to the ongoing urbanization of the Chinese population.
Jimmy Lee
Our sales volume totaled 400,000 tonnes in Q4 compared to 321,000 tonnes in Q3 of 2011 and 386,000 tonnes in Q4 in 2010. And our 2011 sales volumes totaled 1.43 million tonnes, which was comparable to our 2010 total.
Jimmy Lee
Let me now take a moment to discuss developments in the wood markets. European fiber prices remain at elevated levels, but we're experiencing small price decreases in Q4 due to unseasonably mild fall and winter weather and reduced demand from board and pallet industries.
Looking forward, we anticipate that strong sawmilling activity and minimal competition for fiber from board producers will maintain downward pricing pressure in 2012.
Jimmy Lee
We continue to be able to source the fiber we need. And as a result, we are satisfied with our current fiber inventories in Germany.
But we will continue to monitor them closely. We also feel that we will benefit from lower European fiber prices should Russia be granted World Trade Organization membership as they have publicly stated that they will reduce the tariffs under wood exports if they're granted WTO membership.
Jimmy Lee
In British Columbia, our fiber costs rose slightly in Q4 due to both increased demand from coastal pulp and paper producers in our traditional fiber basket, as well as reduced sawmilling activity. However, we were able to build our roundwood inventory to the point where we could begin to run a second shift in our wood room late in the quarter, which allowed us to drop certain high-cost suppliers and will continue to positively impact Celgar's fiber pricing in Q1 of 2012.
We're currently satisfied with Celgar's fiber inventories, but we'll continue to monitor them closely.
Jimmy Lee
In January, we announced our Blue Mill Project expansion at Stendal. We're very excited about this project because it will create an additional 30,000 tonnes of pulp production capacity, and we will install a new 40-megawatt turbine.
We expect to invest approximately EUR 40 million in this project with EUR 12 million of that coming in the form of nonrefundable government grants.
Jimmy Lee
Overall, we're anticipating this project will pay for itself in about 2 years. We also expect to benefit from excess generating capacity going forward as each incremental investment in pulp production will also increase our energy output.
We will provide regular updates on the status of the Blue Mill Project over the course of its construction.
Jimmy Lee
As David mentioned, we have spent the majority of our grants allocated to us by the Canadian government under the Green Transformation Program. At December 31, 2011, we have about CAD $2.4 million left that we expect to receive in the first half of 2012, as a result of small investments in qualifying but yet highly accretive projects.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
Rosenthal will have their annual shut in Q2, Celgar in Q3 and Stendal in Q4.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
I would like to take a moment to briefly comment on our recent announcement of our notice of intent to submit a claim to arbitration, which we filed against the Canadian government under NAFTA. After many years of working within the regulatory structure in British Columbia, our window of opportunity to file a claim under NAFTA was set to close.
And consequently, we are forced to take this step. Ultimately, we feel we have been discriminated against relative to our competitors in British Columbia with regards to our ability to sell our self-generated power.
The amounts involved are significant. However, we're optimistic an equitable resolution will be achievable.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
As you may have seen, we also recently announced our agreement to acquire Fibrek Inc. by way of a takeover bid.
We believe Fibrek's assets are very complementary to ours and that the acquisition will be very beneficial for both Mercer and Fibrek shareholders.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
I would also like to briefly comment on our financial position at the end of 2011. As David mentioned, we have made great strides in improving our balance sheet this year.
I also believe that the markets have been rewarding our efforts in terms of our share and debt values.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
Indeed, Moody's recently upgraded our outlook from stable to positive, citing our deleveraging strategy and increased renewable energy production. We are pleased with what we have accomplished this year and commit that any growth we undertake in the future will be done such that we don't undo these recent accomplishments.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
If I can close with a few observations, we continue to watch the NBSK markets very closely. We believe NBSK prices have bottomed out and 2012 will see a steady climb in pricing.
We remain strong believers in the medium to long-term NBSK supply-demand fundamentals, which we foresee as being driven by increasing economic standards of the emerging markets.
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight that our 2012 shuts will line up as follows
That is the conclusion of my prepared remarks. And I will turn the call back to the operator so we can open the call up for questions.
Thank you.
Operator
[Operator Instructions] Your first question comes from Andrew Shapiro with Lawndale Capital Management.
Andrew Shapiro
You mentioned CAD $2.4 million of Canadian governmental grants were left. Once those are used up, what does that bring the total Canadian government grants up to?
David Gandossi
It's CAD $58 million, Andy.
Andrew Shapiro
So you've done about CAD $55 million, CAD $56 million now?
David Gandossi
That's correct.
Andrew Shapiro
And CAD $58 million will be it. And with respect to the German government grants, when they come in on the construction of this new project, will you be accounting for them similarly where there'll be an offset to your PP&E balances on the balance sheet?
David Gandossi
Yes, that's correct. All government grants are recorded as a credit against fixed assets themselves.
Andrew Shapiro
Okay. Two other quick ones here.
On your G&A, it had jumped up this quarter. Is the EUR 3.1 million Stendal infrastructure charge that was mentioned in the press release, is that included in the SG&A number?
Or is that somewhere else in the income statement?
David Gandossi
Yes. That goes through cost of sales.
Andrew Shapiro
So it's in cost of sales. So that's where it would arbitrarily have been higher rather than -- and that's a single period run-through?
David Gandossi
Yes.
Andrew Shapiro
Okay. And the inventories are up year-over-year.
Are they where you'd like them to be or you think they ought to be? Or what is your kind of focus on your inventory levels?
Jimmy Lee
Well, I would say they're slightly higher than where we would like to be but, certainly compared to Q3, it was a substantial improvement. We are, again, of course, focused on making sure that the inventory levels are at what we would call kind of normal.
And of course, it's dependent also to a degree on the shipment schedules. So they do vary, but I would say that overall, the inventories were certainly comfortable.
Andrew Shapiro
Right. Okay, now if there's -- the large Stendal infrastructure charge went through COGS, what were the items or what can you call out in particular that went through and caused this jump in G&A this quarter and if there -- any of those are kind of like onetime in nature?
David Gandossi
Yes, it is mostly onetime in nature. We had some accruals that bounced back and forth between the third and fourth quarter relating to the move of our office.
There's a little bit of foreign exchange in there. And then there's the year-end accruals for performance, comp and that kind of stuff.
So fourth quarter is just a -- it's a combination of onetime events, seen as the average of the prior quarter is just really what our run rate average would be. Nothing structurally has changed for us.
Andrew Shapiro
All right. And then with the Fibrek bid and such structured with your stock price at quite a bit higher level, are there provisions for which there's an adjustment to the ratio whereby additional shares of Mercer stock might end up getting issued here?
Jimmy Lee
No, I mean, at this point I think the number of shares and the dollar component of the offer that is to be sent is, of course, fixed. There's been no discussion or any adjustments.
Of course, there's still a lot of time between now and the mailing of the formal offer, as well as the close of the offer. So these type of movements in the meantime, even subsequent to the offer, of course, doesn't necessarily mean that there would be any adjustments.
Andrew Shapiro
Last question, I'll back out into the queue. Your -- I guess it's Resolute or Abitibi, I'm not sure what they go by now, they filed, I guess, the American equivalent of a preliminary injunction, a motion in the Canadian courts attempting to go after this warrant that Mercer has made an investment in.
Is there an indication of when that hearing is going to take place and when a ruling on that matter would take place?
Jimmy Lee
Well, the hearing, I believe, is scheduled for Friday and I think also Monday. Now as to when the decision will be rendered, of course, it's up to the commission, but the hearing schedule is scheduled for Friday and Monday, as I said.
Operator
Your next question comes from Bill Hoffman with RBC Capital Markets.
Bill Hoffman
Jimmy, I wonder if we could talk a little bit about the Celgar. You talked about this onetime energy payment, and I just wanted to understand exactly what that had to do with it.
And also maybe just give us a little more color on the power sales disputes and whether it's a pricing issue or some of that.
Jimmy Lee
No, basically in terms of that onetime charge, it relates to standby fees that we had agreed to with our utility supplier in the past. And then they made a unilateral adjustment to that cost, which we felt was completely unreasonable.
And this was also part and parcel of, I guess, the issues that surrounded the ability of our Celgar mill to sell the power that it produces. And so the original structure was that there was a contract with the utility which would've allowed us to resell pretty much all of the power being produced and allowed us to repurchase at what would be the normal heritage rates.
Unfortunately, there was an intervention. And as a result, of course, we have been in the process at BCUC in that regard as to the fact that as far as existing policies, et cetera, that existed, our ability to sell certainly was very clear.
They subsequently amended the policy, which clearly prejudiced us. And therefore, of course, we asked for hearings, and we went through the process and certain determinations have been rendered but still, of course, not completely.
And unfortunately, the timing of these actions were such that we were, of course, hitting the deadline in terms of the NAFTA claim. And to preserve the NAFTA claim, to ensure that we would not have -- be further prejudiced by the procedures and to have an impartial hearing, if needed, that we filed this notice, and our intention clearly is if this matter is not resolved, then of course, we will go through the full arbitration that, of course, is available to us under the procedure.
Bill Hoffman
So of the power produced out there today, are you able to sell all that you would like to?
Jimmy Lee
Well, the new turbine project which, of course, was power that was in excess of our present mill requirements, that is contracted to BC Hydro under a long-term contract. So that part of the contract is not impacted whatsoever.
Really what it involves is the power that we presently produce to operate the mill, which is greater than any other existing mill in British Columbia. No other mill in British Columbia has to generate all of its power needs before it's able to sell.
So clearly, we're in a very unique situation where we have to supply all of our power needs before we are able to sell any power. And all of the other mills, whether sawmills or pulp mills, it is our clear understanding that, that is not a requirement for them, and therefore, they have enjoyed much higher prices for power that they supply to BC Hydro from their existing production.
And they purchase whatever they need from BC Hydro at the heritage rates. And therefore, there is a pricing difference which is what -- of course, what we are looking for, the same.
Nothing that is different. So all we are asking for is a level playing field.
We just believe that we had been unfairly prejudiced because of the policies that have been adapted, clearly subsequently, not just existing policies, but policies that had been clearly imposed on us, subsequent to contracts that we had entered into.
Bill Hoffman
Great. That's helpful.
And then just shifting to the Chinese market at this point, now we're past the Chinese New Year, have you seen any change in order patterns? And I know the demand in December was actually quite strong.
Jimmy Lee
Yes, actually the demand in volume going into the traditional slow season just before Chinese New Year was extremely strong, which surprised me. Traditionally, just before the January holidays, order and volume pick-up is, of course, reduced.
But we did not see, in fact, any reduction, which clearly indicative of a much stronger type of market. I think a lot of that of course is positioning because they believe that the bottom has been reached, clearly demonstrated by the fact that there has been market-related shutdowns, mainly the Terrace Bay.
And so I think that, generally, the market was under the impression that the bottom had been reached, and therefore, they're presented an opportunity for them to purchase at the lowest price and prepare for the upward move in pricing to come. So there was a lot of volume.
And we haven't really seen any changes in terms of the market. There's no real weakness that we're seeing subsequent to the holidays.
And so of course, the early part of the year traditionally is a strong kind of demand point. So we are still very optimistic that the markets will trend upwards.
Bill Hoffman
Any sense of the inventory levels on the ground over there?
Jimmy Lee
Well, for many of the producers, the inventory levels are low because of the credit situation. Of course, credit availability has been very tight, so their ability to order raw materials is being very limited.
The other part, certain paper producers, of course, are sitting on a lot of finished goods inventory, and therefore, a lot of their liquidity is tied up. So their -- although their desires may be there to buy, their ability to buy has been impaired.
And we think that with now the easing of the general kind of credit, hopefully this will allow more credit flow, and of course, they will start to rebuild inventories that have been clearly depleted. The ones that have taken the opportunity are the ones which have financial resources, clearly, either government-owned entities or highly well-connected or mainly the tissue guys, of course, which have better markets and less overcapacity, and therefore, they took the opportunity.
So you really have a different kind of spectrum, some which are very much undersupplied and others which are probably in a good position.
Bill Hoffman
Okay. And then just a question for Dave.
As you look at 2012, the Restricted Group capital spending versus total?
David Gandossi
Yes. For 2012 in the Restricted Group, Rosenthal's doing that recovery boiler upgrade, which is a project that offsets wastewater fees.
And we'll spend about EUR 16 million, but we avoid the wastewater fee as part of that. So it's like a grant, and that's about 7.
And it's accretive as well, about a 3-year payback on the project. So that's Rosenthal.
For Celgar, it's about CAD $10 million in total, and about CAD $3 million of that will come back through government grant recoveries.
Operator
Your next question comes from Paul Quinn with RBC Capital Markets.
Paul Quinn
Could you, just on the NAFTA claim, speak to the timing of that? Is that something that you expect over in the next year?
Or is that something that's 2 to 3 years out?
Jimmy Lee
Well, Paul, I mean, it's very difficult to guesstimate because as you know, of course, there is the procedural schedules that are kind of in the agreement. But then there's, of course, attempts, hopefully, to resolve it before it goes through the full process because, of course, it is very expensive for both parties.
The conclusion or the results aren't certain for both parties. So there's always probably a focus on trying to get a negotiated settlement before the full.
But of course, if there's none, then we have to go through the full course, and this could take many years.
Paul Quinn
Okay. In terms of just mill net realizations, I noticed that yours, quarter-over-quarter, dropped more than, say, some of your competitors.
Is that a function of your higher percentage of sales into Asia where we saw prices drop more?
Jimmy Lee
Yes. Basically it's the impact of the China sales.
We have a larger percentage of market -- of our production being sold into China and Asia.
Paul Quinn
And you basically saw that market bottom in December and expected that to come up in Q1 here, right?
Jimmy Lee
Yes.
Paul Quinn
Okay. And just in terms of fiber costs, you've outlined that you expect prices to come down in '12 in Europe and mentioned Russia joining the WTO and what that could affect on wood cost.
Maybe if you could just sort of quantify what you expect that cost drop to be for Rosenthal and Stendal, sort of ballpark number in buck per metric tonne of pulp?
David Gandossi
Yes, we think it could be -- it's not just the Russian thing that which kind of relieves the pressure on Europe, generally in the Baltic regions and so on. But there's just more availability, and the board side, there's been quite a few closures, and the pellet guys are off the market because it's been -- up until recently it's been a warm winter.
So we're expecting about a EUR 30 drop in wood costs for Rosenthal and maybe just a little bit lighter, maybe 20 to 25, for Stendal.
Operator
Your next question comes from Michal Marczak with UBS.
Michal Marczak
Just a question on the demand side out of Europe. What kind of order patterns have you seen kind of beginning of the year?
Are you seeing any improvement in your order patterns from your customers?
Jimmy Lee
I would say that the European side continues to be weak. It's certainly not getting weaker, but there's -- it doesn't seem to be a marked improvement.
Michal Marczak
Got it. And I'm sorry I missed it, the $20 per tonne increase in prices, was it just for your Chinese customers?
Jimmy Lee
That's correct.
Michal Marczak
Great. And then just to get back on the -- just on the fiber cost again, I apologize, I’m just coming in and out, if I take out the onetime costs out of your cost of goods sold, your kind of costs per tonne went up year-over-year.
Was that mostly Q2 fiber costs? Were there other things that impacted it in the quarter?
Jimmy Lee
It's mainly fiber.
Operator
Your next question comes from DeForest Hinman with Walthausen & Co.
DeForest Hinman
Can you give us the tonnage numbers for the different mills on sales and then production?
David Gandossi
Okay. I’ll do production first.
For Rosenthal in the quarter, 86.6; for Stendal, it was 143.6; and for Celgar, 134.7, for a total of 364,900. And sales volumes for Rosenthal were 84.3; for Stendal were 167.3; Celgar was 148.4, for a total of 400,000 tonnes.
DeForest Hinman
Okay. And I don't know if you can comment on this or not, but looking at the assets that are contained within Fibrek, I think the NBSK assets clearly make sense, but then they also have the 2 recycled plants.
Can you kind of tell us your thought process regarding those assets and how they fit into Mercer as a whole?
Jimmy Lee
Well, I mean, from our perspective, clearly Fibrek's attractiveness to us is based on their SFK or the NBSK mill in Quebec. And there's a lot of complementary parts and also very similar -- a lot of similarities in terms of how they operate, nonintegrated, et cetera.
In terms of the recycled pulp markets, of course, we're not familiar really with that business. Traditionally of course, we as a company have avoided that mainly because of the uncertainty in regards to the raw material pricing and also the belief that these products don't get any real premium for the environmental touch.
And so -- but of course, these assets are well invested in the sense that a significant amount of money has been put in, in terms of the actual operating equipment, and clearly, the quality of the finished goods is very high as a result. We're going to have to further study, of course, the attributes of this business.
But let's say going in clearly is not a core asset and not a clear focus for us.
DeForest Hinman
Okay. And also on the Fibrek acquisition, I know you've made a tender offer or you've made this agreement with them, but is the structure of the purchase, is that actually being bought by the Restricted Group?
Or is it being bought by the unrestricted group? Or are you going to make a new holding subsidiary to actually buy that entity?
Jimmy Lee
Yes, I mean the structure, of course, is through the Restricted Group. And that was the design and intent.
Through the unrestricted group, it would be pretty much impossible.
Operator
Your next question comes from Gary Madia with Gleacher & Company.
Gary Madia
I just wanted to kind of dive in a little bit deeper on the sequential performance versus 3Q. If we look at the EBITDA number and we add back all of the one-times for maintenance downtime, the Stendal cost of 3.1 and the energy issue at Celgar.
Pro forma of approximately 35 million versus 49 million or so in the third quarter, is there something else in that cost number? Or is it -- am I to assume it's a fiber cost issue?
But there appears to be something else kind of weighing on operating results sequentially. Can you speak to that a little bit?
David Gandossi
Yes, I'll try to bridge it for you a little bit, Gary. So from going -- moving from 49 to 17, I think it's the bridge you're looking for.
So pulp pricing, as Jimmy said in his comments, and mix had an impact of around EUR 33 million. The impact of the shuts is a negative about 7.
I mentioned that in my comments. There was some insurance proceeds in the previous quarter of 2.6 that aren't in the fourth, so that's a negative.
There’s the Stendal infrastructure cost of 3, which are negative, I mentioned. And then a combination of just jumble bumble in chemical costs, freight costs and other.
And you can bridge down to the 17. But those are the main components.
On the positive side, we had 79,000 tonnes more pulp sales, so that was a positive 9. Foreign exchange was about a positive 5.
We had higher energy sales volume. We had an extra 20,000-megawatt hours, which was a positive EUR 2 million.
And just generally higher productivity. We mentioned we had 21,000 tonnes more production.
That was a positive 1.5, so…
Gary Madia
Okay. Great.
I appreciate that color. And also, David, can you speak a little bit to the drop in cash primarily at the Restricted Group?
Can you kind of help sketch out CapEx working capital there? Is that -- kind of driving that down pretty hard sequentially.
David Gandossi
I might ask you to go back to my comments. I think I spoke every component of working capital shift in the quarter.
So maybe if you could go back to the transcript and if you have more questions, give me a call later.
Gary Madia
Okay. Did you break it down Restricted Group versus unrestricted?
David Gandossi
No. And I can't do that for everybody on the call here today.
Gary Madia
Okay. But that's pretty much what you're telling me is the large drop at the Restricted Group from a cash level had to do with the working capital, pretty much.
David Gandossi
It's just a combination of all 3. We purchased some bonds, had [ph] some CapEx, had some working capital movements and [indiscernible]
Gary Madia
Okay. Final question.
I know you mentioned that you saw pulp prices bottom in 4Q. I'm assuming that's going to work its way through the operating results in the first quarter.
Can you help quantify for us how we should be thinking about average realized price realizations as we work through the first quarter? Is it going to be similar to what we saw 4Q, 3Q?
A little bit better? Can you speak to that a little?
Jimmy Lee
Well, I mean, Q3 average prices were significantly higher, the list price. But of course, if you look at the currency, of course today's exchange rates are more favorable, certainly from a euro perspective, not so much from a Canadian.
So that's going to have an impact. Our freight, because of certain logistical efforts that we made moving forward this year, we will have much better freight rates into China mainly because we, of course, will be shipping a lot of our volume via charter, bulk carriers.
This also will assist us in terms of the more credit-restricted customers because we, of course, will have available tonnes possibly depending on the actual volume of sales. But freight certainly will improve.
We improved a -- we also see a gradual improvement in terms of the wood costs. We know that the scheduled shuts because there's really no shuts in the first quarter.
As you know, Rosenthal had its scheduled shut in Q3. So another improvement.
Overall mill reliability, certainly based on what I've seen so far, I would say that the mills are running better than they ever have. Of course, weather conditions certainly helped us in Germany.
Unfortunately, in the last couple of weeks, the extremely cold weather has impacted a little. But still overall, I would say that the reliability and uptime is certainly very strong, which means that electricity generation is very strong.
So all in all, I mean, things are moving very much positively in our direction. As to whether -- how we compare Q3 and Q1, those numbers are heavily impacted by average price and average currency.
So it's very early for me to really speculate exactly how we're going to compare.
Gary Madia
Okay. But your overall commentary just then seems to speak to that -- like on a pro forma basis, if we adjust 4Q for all the onetime noise that right now that you're cautiously optimistic that you're going to obviously perform better in first Q?
Jimmy Lee
Yes.
Operator
[Operator Instructions] Your next question comes from Andrew Shapiro with Lawndale Capital Management.
Andrew Shapiro
Few follow-ups. In the Fibrek acquisition, part of the deal is going to get funded with some debt.
Is that debt going to be an obligation of the full restricted group on Celgar and Rosenthal? Or will it have its own project financing fence in?
David Gandossi
It will be all of the Restricted Group.
Andrew Shapiro
Okay. And the last time there was a drop in pulp prices, kind of in the heart of the recession, down to cash costs, you had many less efficient competitors temporarily shutter or some permanently shutter, but what also happened was there was an influx of Chinese buyers that picked up some assets on the cheap and then have now used that as their source of supply, somewhat competing with you into China so to speak.
Are you seeing that again? And does that have any broader-term implications to your market?
Jimmy Lee
Well, I mean, I don't see really a big impact because I know that they've been trying to integrate the production with their needs, but because of the logistic costs involved, clearly these mills are not the best located to serve their markets. And therefore, they have not been able to really send a lot of supply into China.
In fact, they are pretty much supplying what they traditionally supply because otherwise you'd be losing a lot more. So I don't think it's integrated in terms of their production.
They're acting pretty much like market pulp suppliers. I think what their focus is that with their view that fiber will become more and more tight and with the tissue capacity expansions, which calls for a lot of reinforcement grade type of pulp, they see that they may be vulnerable for a spike in prices.
And therefore, they would like to be in the position to offset the higher income on the pulp side with higher costs on the paper side. So this is, I think, more of a financial hedge rather than a supply integration.
Andrew Shapiro
Okay. So you don't find Mercer and other nonintegrated owned facilities being kind of shoved more to the side to be kind of the spot suppliers only then?
Jimmy Lee
Well, there's a logical supplier based on the logistics costs because freight and other costs to get the finished goods to the end market represents a very big component of the mill net realizations. And therefore, unless you're prepared to suffer clearly less margins, which is clearly not in the interest of anybody, these markets typically will find the natural end users based on quality and distances involved.
Andrew Shapiro
Now with this being a friendly negotiated deal between you and Fibrek, there's a few people who had been covering the industry and Mercer who’ve gone restricted. During this period of the transaction and all, are your Investor Relations activities, the various conferences you attend and go off to, are you restricted in doing that?
Or what is your current forward calendar of particular presentation events and dates?
David Gandossi
Yes, so the company will be at the Crédit Suisse Global Paper and Packaging Conference in New York next week. We'll be going to Barclays a couple of weeks following.
We're going to Goldman Sachs in Montréal. That's the next 3 coming up in the next 5 or 6 weeks.
Andrew Shapiro
Okay. So unlike those advisers whose -- they have to kind of pull coverage, you guys don't have to go into a quiet period?
Jimmy Lee
No. But there will be certain, let's say, restrictions because, of course, as you know, the offer that we're proposing is also part shares and so we do have to file a prospectus.
So as you know, there are certain requirements under the SEC policies so as to what we can and cannot say, et cetera. And so although we will be attending, we have to clearly be mindful of the policies in place, as well as the fact that we will be filing a prospectus pursuant to the offer.
And so there is no fundamental change in terms of what our schedule is, but of course, there is certain limitations imposed as a result of the requirements.
Andrew Shapiro
Okay. And lastly, I think in the Journal this morning, I got a note from someone that said there was like an article about U.S.
mills starting up again maybe and getting grants to shift to tissue production. Are you familiar with that and more of the details of the thesis of the author's report?
And is this a trend that you're also seeing and pose an opportunity or a competitive threat?
Jimmy Lee
Well, I believe it's in reference to a very small pulp mill in the eastern part of the United States. And I think -- predominantly, I think it was hardwood production or was a hardwood mill.
And of course, it had not been able to compete with the very cheap supply from the southern players. So of course, every country and state will look towards shoring up [ph] employment.
So I cannot really comment on specifics or generally but...
Andrew Shapiro
No, I didn't know if it was a bigger deal. It sounds like it's a small deal that some local...
Jimmy Lee
Yes, it's a very small project.
Andrew Shapiro
Okay. Now in the past, you guys have avoided Eastern Canadian pulp, due to the -- I don't know if it was high-cost fiber basket or if it was in part due to energy costs or solely due to energy costs, but obviously the proposed deal is throwing you back into the eastern part of North America.
Can you comment a little bit about what your concerns were in the past and why this proposed deal does not have those concerns?
Jimmy Lee
Well, I mean, I don't think we ever said that we are, let's say, not going to look at an Eastern Canadian mill. I mean, clearly it's based on the specifics of the mills involved.
I mean, I think it's very clear that SFK historically from an operating perspective certainly was attractive type of candidate for us, and I don't think that was ever precluded. As I think it's really more mill-specific rather than a general negative aspect of operating in the eastern part.
Clearly, fiber cost is slightly higher because of a lot of the things entailed in regards to access to the wood, et cetera. But at the same time, the fiber situation is improving because, of course, a lot of the mechanical base type of end users are closing because news print and other mechanical grades, of course, demand is dropping.
So fiber situation certainly is much better and will probably likely continue to improve, so that's a positive. And the energy policies of certain provinces certainly are supportive of that, and it depends on whether the mill has the capability of partaking in those type of policies.
So it really depends, as I said, on the specifics.
Operator
Your next question comes from Joe Licursi with BMO Capital Markets.
Joe Licursi
I just had a question on Renewable Energy Resources Act, which Germany adopted early this year. Could you comment on the effect that's going to have on the wood supply or cost to Mercer?
Jimmy Lee
Well, in terms of the programs, whether it's in Germany or Europe as a whole, of course, the focus has been on trying to produce as much power as possible from easily accessible raw materials. Biomass was always considered in excess of the present demand, and so there was a lot of focus there.
But I think governments clearly have realized that there's other end users for that raw materials. So there's a lot of policies which had been amended, which essentially, improves what we thought could be the adverse impact.
So I don't think the changes that are occurring presently will have a negative impact. In fact, in Germany, there's, let's say, very little support in terms of particle -- or pellets with coal as an example, unlike U.K.
where of course, there's a lot of blending with coal and biomass. But Germany has been very resistant in terms of supporting that type of program because, clearly, they see the negative impacts to the wood-producing industries that presently exist.
So we think that the overall impact in a nutshell is not going to be negative. In fact, we think that renewable power rates will be increasing in demand because of the nuclear power issue.
Joe Licursi
Okay. So like your $30 reduction in Rosenthal and $25 in Stendal, that takes this into account, right?
Jimmy Lee
Well, it's really more influenced by the fact that, generally, you have less competition for the existing wood. Because of course, the overall housing market is depressed globally, and therefore, there's less competition from the board, as well as from the energy side, the pellets, because of course, the pricing for their pellets are not adequate.
Joe Licursi
Okay. I just had a clarification.
I'm sorry if I missed it. Dave, could you tell us what we should expect in capital expenditures for 2012 net of grants?
David Gandossi
Well, yes, Rosenthal's 16 with 7 of wastewater fees against it. Celgar's 10 with 3 of government grants against it.
And Stendal is the Blue Mill, which is 21. And over the course of that project, a total of 40 spend, there's 12 of government grants coming in.
And the timing of those grants is a little bit fuzzy for me at the moment. So an element of the 12 will be against the 21 in this year.
Joe Licursi
So these seem to be all projects, but like do you have a maintenance component as well?
David Gandossi
Well, our maintenance is expensed as incurred, and because our mills are modern, it really is all about discretionary capital. It's all very high return.
Our thresholds are a 3-year payback or better. And usually, it's better.
So that's -- and we let the club out or pull it in, depending on how we feel about our liquidity. So the mills have sort of a -- apart from the projects, it would just be average spending for the year.
Joe Licursi
Okay. Just one final question.
Don’t want to abuse your good nature. Could you guide us -- not guide us, but what you're seeing, like up to today, like you have almost half of the quarter gone, should we be expecting the same level of shipments as in Q4 with most of it going to China again?
Or do you see some shift in order patterns?
Jimmy Lee
No, I mean, clearly the order -- I mean, volume of sales is not going to be as robust as the fourth quarter because, of course, there was a lot of shipments into China. And of course, there was higher, let's say, inventory levels that we had in Q3, and so we had to make sure that we would, of course, bring them in more in line with what our objectives were.
So the volume is going to be lower, no question. And they will be more in line with the type of volumes that we've seen quarter-by-quarter.
Operator
There are no further questions at this time.
Jimmy Lee
Okay. Thank you very much.
And we thank you for today's call. Goodbye.
Operator
Thank you. This concludes today's conference call.
You may now disconnect.