Oct 30, 2015
Executives
David Gandossi - President, Chief Executive Officer David Ure - Senior Vice President, Finance, Chief Financial Officer
Analysts
Bill Hoffman - RBC Capital Markets Dan Jacome - Sidoti & Co. Anthony Young - Macquarie Andrew Kuske - Credit Suisse DeForest Hinman - Walthausen & Co.
Emily Davies - RBC Capital Markets Andrew Shapiro - Lawndale Capital Management David Erb - Merrion
Operator
Good morning and welcome to Mercer International’s Third Quarter 2015 Earnings conference call. On the call today, is David Gandossi, President and Chief Executive Officer of Mercer International; and David Ure, Senior Vice President - Finance, Chief Financial Officer and Secretary.
I will now hand the call over to David Ure.
David Ure
Thanks Sally, and good morning everyone. Please note that in this morning’s conference call, we will make forward-looking statements, and according to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I’d like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company’s filings with the Securities and Exchange Commission.
In Q3, we achieved EBITDA of $61.1 million compared to $50 million in Q2. Pulp demand was stable in the quarter with sales volumes up almost 19,000 tons; however, currency movements and some negative market sentiment put pressure on NBSK pricing.
The quarterly average RISI list price in Europe fell to $843 per ton from $855 per ton in Q2. In addition, the quarterly average list price in China went down to $638 per ton from $670 per ton in Q2.
Both the European and China list prices have come under some pressure early in Q4. Our mills were stable with good energy efficiency in the quarter, and as a result EBITDA was positively impacted by approximately $1.6 million of additional energy revenue relative to Q2.
Our Q3 results also benefited from lower planned major maintenance costs of about $5 million when comparing the annual Stendal shut in Q2 to a smaller scale shut at Rosenthal. After considering those annual maintenance shuts in Q2 and Q3, our pulp production was down slightly this quarter; however, our Stendal mill achieved record production during the quarter.
We reported net income of $23.8 million for the quarter, or $0.37 per basic share compared to net income of $16.4 million or $0.25 per basic share in Q2. Our current taxes totaled approximately $2.8 million this quarter, which is a consequence of our growing profitability.
We continue to have significant tax assets but certain tax jurisdictions limit their use, which will continue to create a modest current tax expense. The U.S.
GAAP-IFRS differences relating to annual maintenance had an impact this quarter when comparing our EBITDA to those of many of our competitors. In Q3, we expensed direct costs of approximately $4.1 million on annual maintenance, the majority of which would have been eligible for capital treatment under IFRS.
With regards to our cash flow, our consolidated cash position was up significantly in Q3 compared to Q2 as our total cash increased by about $46.4 million. Our cash build this quarter was despite repaying almost $13 million of our outstanding revolvers.
Capital expenditures drew approximately $10.4 million during the quarter and generally comprised high return projects split roughly equally among star mills, along with approximately $1 million toward our new ERP project. The ERP project is progressing well and remains on target to be completed in 2016.
Included in the high return projects are evaporator plant upgrades at our Rosenthal and Stendal mills. These projects are aimed at de-bottlenecking both mills and ultimately adding incremental production capacity.
The projects also have environmental benefits and as such, we are eligible for a program of the German government that provides a waiver of certain wastewater fees, provided the planned environmental benefits are realized. Both projects are expected to be completed in Q4.
In addition, during the quarter we completed our woodchip in-feed automation project at Rosenthal, a project that provides a number of cost savings benefits in addition to the expected fiber yield improvements. Our cash flow also reflects a temporary reduction in working capital totaling $25.4 million primarily due to lower receivables resulting from the timing of sales and higher payables due to increased accruals for debt service.
In terms of our liquidity, our consolidated cash balance was sitting at approximately $146.8 million at September 30, 2015, and we had approximately €28 million of undrawn revolvers available at Rosenthal, €57 million of revolver availability at Stendal, and approximately CA $38 million available at Celgar. Combined with our $147 million of cash, our total liquidity is about $271 million.
Our $147 million of cash at the end of Q3 includes approximately $9.5 million of restricted cash. These are funds that have been set aside to act as collateral for our Stendal interest rate swap.
The collateral amount is contractually based and as interest rate swap balance declines, so will the collateral amount, subject to certain minimum requirements. Looking forward to Q4, a reminder that we paid our first dividend to shareholders in early October, and as you will have seen from our release yesterday, our board has approved that same $0.115 dividend for early January.
On a trailing 12-month basis, our net debt is about 2.2 times EBITDA, and this level combined with our debt profile gives us considerable flexibility when considering capital allocation decisions in the future. That ends my overview of the financial results, and I’ll now turn the call over to David Gandossi to discuss market conditions, our operational performance and strategic activities.
David Gandossi
Thanks, Dave. I’d like to start by saying we’re pleased with our third quarter operating results.
Our mills performed well during the quarter and our sales exceeded production. The increase in EBITDA in Q3 compared to Q2 was primarily driven by lower maintenance costs and higher pulp and energy sales volumes.
Pulp prices continue to adjust, partially as an offset to currency movements but also due to some weakening market sentiment, particularly in China. I’ll speak more about our fiber markets in a moment, but compared to Q2 our overall Q3 per-unit fiber costs were down slightly.
September NBSK producer inventories were at 30 days, up one day from the previous quarter end. We were not surprised to see this increase in producer inventories in Q3 as the summer months are a period where we traditionally see lower demand.
At these inventory levels, the NBSK market is considered to be generally in balance. NBSK list prices in October are $830 in Europe and $620 in China.
Prices are off slightly in October but volumes continue to be good. At these current prices, we believe we are very near the floor level pricing in China.
Despite a general negative market sentiment in China, we feel that the price of hardwood, being higher than softwood today, will increase softwood demand, and we also see the potential for Chinese traders to reenter the market, which could also positively impact prices. We recently learned that certain tissue providers in China’s Hebei province are facing up to two months of pollution-related downtime late in Q4.
We’ll watch the market impact of that development closely. In Europe, the strong U.S.
dollar has put downward pressure on prices in the quarter, but overall pricing and demand have been fairly steady. Looking forward, we expect new tissue machines to continue to start up, especially in China which will further strengthen demand for NBSK.
We also expect the supply-demand fundamentals to keep Chinese and European pricing fairly steady through Q4, although the recently announced temporary pollution-related curtailments of these Chinese tissue mills I mentioned could create some pricing pressure. We remain optimistic about the future supply-demand fundamentals for NBSK.
We see demand growing in developing economies, particularly China, in a variety of grades, including tissue, specialties and board. Specifically, we estimate there are approximately 3.7 million tons of incremental tissue capacity coming online globally in 2015 and ’16, with approximately 1.3 million of those coming online in China.
Today, we are in the unusual situation where hardwood prices are higher than softwood. This is not unprecedented, but in the past the price gap has turned around fairly quickly.
As I noted earlier, at this price levels we believe we will see incremental NBSK demand as paper producers will use additional softwood in their furnish recipes to get the benefit of higher productivity. As Dave Ure mentioned, Q3 was a strong production quarter for us.
All of our mills ran well. In total, we produced approximately 369,000 tons of pulp this quarter compared to approximately 359,000 tons in the second quarter and approximately 376,000 tons in the third quarter of 2014.
Q3 included a planned 11-day maintenance outage at Rosenthal. Our pulp sales volumes were up in Q3 and totaled approximately 390,000 tons compared to 371,000 tons in Q2 2015 and 387,000 in Q3 2014.
Turning to our power sales, the mills sold approximately 215 gigawatt hours of electricity in the quarter compared to 197 in Q2 and 207 gigawatt hours in Q3 2014. Relative to the second quarter, our euro per-unit German fiber costs were down slightly.
Overall, the German fiber market is in balance. We continue to see sluggish demand for fiber from the board and pellet industries, so we expect German fiber prices in euro terms to remain steady through Q4.
In British Columbia, our Q3 per-unit fiber costs were up marginally this quarter in Canadian dollar terms relative to Q2, primarily due to the impact of currency movements on our U.S.-based wood purchases. We anticipate that Celgar’s Canadian dollar per-unit fiber costs will decrease modestly in Q4 due to reduced levels of pulp logs in Celgar’s fiber mix.
We’re currently comfortable with each mill’s fiber inventory level. Our remaining 2015 annual maintenance shut was at Stendal, and it was a short shut primarily for the purposes of finalizing the tie-ins for the evaporator plant expansion project.
Chips were back on the digester yesterday. With respect to our NAFTA claim, we now expect a decision in the second half of 2016.
In late October, we finalized a settlement with Celgar’s electrical utility provider whereby Celgar will receive a refund related to a fee structure issue that we’d been disputing. We expect this refund to be about U.S.
$6.5 million. This settlement is subject to the approval of the BC Utilities Commission, which we expect should come as a matter of course.
Also, subject to and upon approval, this settlement will provide Celgar with about CA $2 million of annual electricity cost savings per year. Now just wrapping up, I’m happy to confirm that our strengthened capital structure and our positive business outlook has allowed our board of directors to again approve a quarterly cash dividend.
This will be Mercer’s second of what we plan to be regular quarterly dividend distributions. Our board has approved an $0.115 per common share dividend that will be paid January 5, 2016 for shareholders on record at December 28.
We’re excited to be return cash to our shareholders while continuing to grow shareholder value by investing in our business and pursuing accretive opportunities. Operator, that’s the conclusion of our prepared remarks, and I’ll turn the call back over now so that we can open the call for questions.
Operator
[Operator instructions] Your first question comes from the line of Bill Hoffman with RBC Capital Markets. Your line is open.
Bill Hoffman
Thanks, and good morning guys. David, can you just talk a little bit more about what’s going on in China with this curtailment?
It sounds like it’s in one province, but I just wonder, is the issue broader than that and if you guys have any indication of how many of these tissue mills are, quote-unquote, environmentally unfriendly?
David Gandossi
Yes, sure Bill. I think it’s a fairly localized issue.
Hebei Province, there’s a tissue production area called--so colloquially called, Tissue Town. The name there is Baoding.
There’s just a big slug of tissue capacity, a whole number of producers all together in a region. I’ve visited there with Eric Heine not even a year ago, I guess, and everybody was talking about these big centralized power stations that were being built - basically if you can imagine, 40 or so different individual producers all having coal-fired boilers for their energy source and then having these big installations built so that they could one by one shut down their own power and take a more modern source of steam for their operations.
I guess they’ve been cutting over and cutting over, and we just recently read that in an effort to get everybody onside, they’ve just forced them all as of November 1, anybody who is not hooked up yet has to curtail for a couple of months and presumably do the tie-ins and come back up again. So it’s a fairly localized situation.
I think it’s a good example of how serious China is about fixing some of their pollution problems, but in my mind, the amount of capacity, it’s not really all that serious in the context of--you know, you can lose 200,000 tons a month in the maintenance schedules in the spring and the fall - I’m talking global softwood here, so a two-month curtailment of some of the guys in that region is not that big a deal. The reason we highlighted it, though, is it’s predominantly Russian pulp that goes through Baoding, so there will be--we’ll see some softness possibly in their pricing strategies, and that may ripple over or have some impact on the psychology of the market, but certainly not from a volume perspective, not anything that really changes the fundamentals.
Bill Hoffman
Thanks, that’s helpful. Then just my other question, with regards to pulp pricing trends, obviously things are sliding a little bit anyway.
Can you just talk a little bit more about your thoughts with the hardwood prices going up and Latin America basically pushing prices up on the hardwood side, how much more of that do you think they can achieve and whether you expect at some point in time you’ll be in a position to start pushing prices up on your side. Thanks.
David Gandossi
Yes Bill, the way we’re thinking about the fourth quarter, as we indicated in our disclosure materials, is we’re sort of generally flattish and hoping that some of the accelerated consumption of softwood due to the price gap will give us some strength towards the end of the year. So it feels to me like we’re bottom-ish right now, and more likely to get some positive traction before the end of the year rather than the reverse.
We’re still arguing over nickels in Europe - you know, $8.30 versus $8.25. We’ll stick the line at $8.30, we hope.
China, we think we can see the pricing pattern for--well, we know what October was, and we see November being pretty similar, we think, no big changes there. A little bit of deterioration possibly as a result of some of these issues I just mentioned, but generally flattish.
You know, producers really will switch and use as much softwood as they can get their hands on with the pricing dynamics they way they’re being, and it’s also maintenance season so there is some curtailment of capacity, both hardwood and softwood. So things should stay relatively stable and possibly improve a bit by the end of the year.
Bill Hoffman
Thank you.
Operator
Your next question comes from the line of Dan Jacome with Sidoti & Company. Your line is open.
Dan Jacome
Hey, good morning. How are you?
David Ure
Morning, Dan.
Dan Jacome
Maybe I missed it - the full production by mill, do you have that handy?
David Gandossi
Yes, I do. Do you have it there, Dave?
David Ure
Yes, yes.
David Gandossi
Why don’t you do that?
David Ure
Okay. So for the third quarter, production for Rosenthal was 78,000 tons, production at Stendal 174,000 tons, and production at Celgar 118,000 tons.
Dan Jacome
Great, appreciate it. Then on the energy side, you had a nice modest rebound there.
Just wondering if you have any thoughts here - it looks like you were able to monetize a little bit better the surplus base you generate. Is this kind of a function of the capital investments you’ve been making in that area?
David Gandossi
Yes Dan, we run very modern facilities. Both Stendal and Celgar have incremental generation capacity.
We built larger generators there than the capacity at the time that we put it in. We did that for a bunch of good reasons.
As we continue to produce incremental tons, and when the mills run well like they did, the generation curve improves sort of exponentially - it’s not linear. Incremental tons from these levels are all quite valuable to us.
The pricing is all fixed, as you know, so it’s really just a function of what we generate, and to some extent what we consume; and when the mills run well, their energy efficiency is quite as a result.
Dan Jacome
Okay, that makes sense. Lastly, it sounds like the 2x leverage here maybe a little bit still too low for you guys.
How reasonable an assumption or realistic would it be to maybe have a higher dividend, a modest hike next year even if things are just status quo, or would you need to see a much larger improvement in pricing?
David Gandossi
Yes Dan, so that’s a bit awkward for me in the capital markets context. I think what we’ve tried to signal is that we feel comfortable with our leverage levels.
We feel business conditions are great, free cash flow generation is healthy, and we are very pleased to be returning cash to shareholders. We have signaled that we are starting at level which we expect that we will never have to roll back on.
That’s not for sure, but that’s our intention, so that shareholders can expect us to manage our balance sheet and manage our business so that we can maintain the current levels. As time goes by and we continue to build our balance sheet, and we do discuss the objective of continuing to de-lever within that strategy, that balancing our capital allocation decisions to temper our interest to continue to de-lever, continue to provide cash to shareholders, and as and when we feel comfortable, our intention would be to step up the dividend sort of consistent with that view.
So I can’t say when that’s going to happen, but that’s--what we’ve got today is what we expect to continue with, and as events unfold we would hope to improve upon it.
Dan Jacome
Okay, appreciate all the color. Thanks a lot.
Operator
Your next question comes from the line of Anthony Young with Macquarie. Your line is open.
Anthony Young
Morning guys. Thanks for taking the question.
Just with respect to the issue in British Columbia, the payment that you guys are receiving, $6.5 million, is this is a completely separate issue from the NAFTA issue, or are they somehow linked and this is some sort of capitulation possibly from the British Columbia utilities?
David Gandossi
They're separate, Anthony. The NAFTA complaint stems from the treatment we received as we were entering into our power purchase agreement with BC Hydro.
This particular dispute had to do with the behavior of our utility, a separate utility as it relates to a rate matter. It gets complicated, but this really stems to what they charge us as a standby rate for what little bit of power we do purchase, and again we just felt like--we’re a very unique mill in the province in the sense that we’re the only pulp mill in Fortis’ region and we’ve got this unique treatment from BC Hydro, and BC Hydro and Fortis--I mean, they behave in concert vis-à-vis us because of some contractual power supply arrangements they have between themselves.
So long story short, this was one of those things that we were complaining about. We fought it in the BCUC and we’ve been fighting this for years, and we finally won.
So it’s great to get our money back, it’s going to mean a $2 million cost saving to the mill going forward, and I think it’s an indication of the stuff that we’ve been complaining about is real, and hopefully the province takes notice of that.
Anthony Young
Okay. Then just on the hardwood-softwood mix, how long does it take for a tissue producer--I mean, tissue producers specifically to make that decision?
Do they want to see that differential be in place for three months, six months, or is it really more real-time?
David Gandossi
Yes well, I’m not a tissue producer. I think--how can I answer that?
When you have the big price gap where softwood is more expensive than hardwood, then it’s a cost objective, so the guys will tighten up on the amount of softwood they use, to the point where they feel like they don’t want to go any further because of the risk either to the quality of the sheet or the run-ability of the machine, that kind of thing. But when the prices of softwood and hardwood start to equate, it’s an easy thing just to say, well, let’s put some more softwood in.
We can run the machine harder, we get a better quality sheet, and as long as we can supply, they’ll do that fairly quickly, I would expect.
Anthony Young
Okay, that’s helpful. Thanks guys.
Operator
Your next question comes from the line of Andrew Kuske with Credit Suisse. Your line is open.
Andrew Kuske
Thank you, good morning. I guess the question relates just on the pricing side.
We’ve seen realizations really slide with list prices that you realized, but it looks like you’re really trending on mid-cycle EBITDA generation, and you’ve had decent margins given the fact you’ve benefited from currencies. So how should we think about your realized pricing dynamics out into the future and maybe margin expansion, because the currencies continue to look favorable for you and your commentary on pricing generally sounds somewhat positive.
David Gandossi
You know, it’s almost like you summed it up well, Andrew.
Andrew Kuske
I answered my own question.
David Gandossi
I think so. Things are stable and, like you say, mid-cycle type of margins.
It looks like we’re giving up on price, but we’re getting the same benefit on our costs, obviously. A lot of the softwood producers globally all have the same currency devaluation issues - you know, there’s the Chilean peso, the Russian ruble, Canadian dollar, the euro, they all kind of moved the same way.
So that explains price and improves our cost position at the same time, and the margins are holding on and supply-demand fundamentals are good enough that we should expect mid-cycle returns.
Andrew Kuske
So what market are you most concerned about, just from price realizations or margin realizations?
David Gandossi
Well, I guess the biggest battleground has probably been the U.S. market.
We don’t really play there anymore. As you know, we’ve moved most of our stuff to Asia because of that, and it’s a combination of where the--you know, it’s a bunch of factors, like where are the mills that are producing the pulp and where they try to sell, compared to where the options to them are.
There’s a big freight disadvantage for some of those eastern producers to try to get to Asia, so we benefit being a western producer. Some of these guys have to fight harder for market share in the U.S.
market, where they’re more or less locked in. Europe is pretty stable, nice and steady, good demand.
China, there’s this negative sentiment. There’s so many things that have happened in China with their currency devaluation and the stock market issues, some bank tightness and so on.
But having said all that, all these policies are pushing for improved consumer conditions, like they are trying to increase the standard of living generally within China. So I think there’s some negative sentiment there for the reasons we can see, but I’m hopeful and expecting it’s not going to be as negative as maybe some might think it would be.
Andrew Kuske
And then just maybe on China, you clearly mentioned the curtailment issue in Hebei Province, so that might cause some near-term pressure. Do you things restoring to more normal conditions maybe just ahead of Chinese New Year in the new year, or shortly after Chinese New Year?
David Gandossi
Yes, well you won’t see anything just before the new year, I guess. It’s always following new year when we really start to see the lay of the land.
But no, I’m optimistic - you know, this Tissue Town area I mentioned, when we were there not even a year ago, we went to a number of the producers there so we know the history of the region and how quickly it’s built up, and all those guys are planning to double their capacity. It’s not a doom and gloom thing; it’s just they’ve got to get off their small old coal-fired boilers and get plugged into the main utility, and then they all have foundations poured for increased capacity.
So I think things are going--the premise of increased tissue capacity in China is real and it continues, so I’m not worried about that because of this short-term thing.
Andrew Kuske
And then maybe finally, just how are you thinking about currency relationships on euro-USD and CAD-USD, just as you look ahead? Are you thinking major deviations from where we are now, or pretty much status quo?
David Gandossi
You’re asking a pulp producer to forecast currencies? I don’t know.
I think I’ve got a 1.31 and a 1.13 for next year, just high-level forecasting. But when you read the Bloomberg screens, the difference between the bulls and the bears is pretty wide.
I’m not really qualified to call it. We don’t hedge right now.
We’re watching it carefully. We don’t want to make a mistake and we don’t want to take a bet.
We want our investors to be able to see clearly what the line of sight is on our margins. So it is what it is, and there’s volatility for sure.
My guess is probably continuing strong U.S. dollar is how I think about it.
Andrew Kuske
Okay, perfect. Thanks so much.
Operator
Your next question comes from the line of DeForest Hinman with Walthausen & Company. Your line is open.
DeForest Hinman
Hi. Some of my questions have been answered.
I got on the call a little bit late, though. Did we give any indication at this point of what we’re thinking about for capex heading into 2016, and then maybe can we touch more broadly on our thoughts on capital deployment as it relates to some projects we’re looking at?
Any interest in calling the bonds? And then also, you’re almost in a position where you could maybe do an acquisition.
So there’s a lot of questions there, but--go ahead.
David Gandossi
Hi DeForest, happy to take those. So we didn’t give any guidance yet on 2016, but we just completed a set of board meetings here in Berlin, so I can give you some numbers.
So for 2016 in U.S. dollars, both the Stendal and Rosenthal mills, round numbers, will do about $13 million capital, and the Canadian mill will do about 17, U.S.
$17.5 million I capital. A number of really interesting projects in there - you know, all part of our continuous improvement culture, looking for chemical efficiencies, energy efficiencies, increased production levels, that kind of thing.
In [indiscernible], some of it is MOB, but the MOB, collectively if it gives you more tons can have a pretty attractive return, so I’m generally describing this bundle of initiatives as strategic - you know, good returns on the packages in general. So that’s capex.
In terms of calling the bonds, I think we’ve always--to my earlier comments, we’ll have a balanced approach to everything, maintaining a strong balance sheet, maintaining strong liquidity, really honoring that cash dividend to shareholders. At some point in time if the pricing is right and it makes sense in the context of the day, we’ll chip away at those, I would guess.
We may refinance them if we can get an NPV positive scenario at some point. There’s lots of possibilities.
It’s a nice option to have. In terms of bigger capital projects, we’re always--we’re good industrialists.
Our guys can deliver, they can put iron in the ground on time, on budget. If they say they’re going to get a 2.7 year payback, they get a 2.7 year payback typically, so we’re always looking for that kind of stuff.
We may and will have things in the future, particularly in our Celgar mill. I think it’s got still quite a bit of potential, as we’ve discussed in previous calls.
The German mills are optimizing well, maybe further work to do there, but generally they are pretty efficient already. In terms of acquisitions, we’re always--we’re not just sit back and wait guys.
We’re always looking at things and thinking about how we can create shareholder value; but to be honest, today looking in the pulp space and the valuations that owners would expect for their assets, I don’t see anything just at the moment that we can talk about that I’m really excited about. But we continue to look, and we’re quite open-minded about the areas that we look in, so it’s obviously lots of potential with the platform we have here at Mercer but we’re not far enough along to really be talking about things.
DeForest Hinman
Okay, and then last question on the NAFTA claim, the date keeps getting pushed to the right. Do we have some dates that you can give out to us that we can kind of be benchmarking, or is that something that’s still up in the air?
David Gandossi
Yes DeForest, I wish I could be clearer on it. You’re right - we have pushed it out.
A few quarters ago before we went into the hearings in Washington, I think I was signalling, expecting from the closing of the hearings it should be within nine months, and that was my belief at the time, that the general practice of these tribunals was to report within nine months. I’ve subsequently been told that that’s a bit aggressive, and given the complexity of ours it might take longer.
So again, it’s soft - it should be within 12 months of the completion of the hearings, which would be mid-July 2016. That’s why we’ve crafted our words the way we have, but we really don’t have any line of sight on what that arbitration proceeding is going to be going forward.
There’s no input required from us, there’s no further discussion; it will be what it is, and they will announce when they announce. I just can’t give you anything more than that at this time.
DeForest Hinman
Okay. I had one last question.
I think as part of your argument that you’re making in this claim, it’s something along the lines of a five-year look back; but as this case keeps getting pushed to the right, does that look back get additive, or is it just a statute of limitations of when the case is finalized?
David Gandossi
There’s no statute of limitations, and you have to look backwards and forward because the opportunities that you might have had five years ago in the power market may be completely different today, so they have to--they can’t just say, okay, we fixed the last five years, now you’re on your own for the forward five years. They have to assess damages for the event that they caused, and that’s obviously a lot of different approaches to that type of thing.
Both sides had damage consultants that did their best to make those assessments.
DeForest Hinman
Okay, that’s helpful. Thank you, that was my last question.
David Gandossi
Great, thanks DeForest.
Operator
Your next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open
Emily Davies
Thanks, good morning. This is Emily Davies on for Paul.
My first question is on pricing, primarily the spread between hardwood and softwood. Just wondering if you have a way of looking at the gap that you believe should be more normal to justify the higher strength softwood.
David Gandossi
Yes Emily, I don’t know how much more I can give you. There’s a difference in the cost curve, is one of the factors, the softwood cost curve versus the hardwood cost curve.
There’s the supply-demand fundamentals of each grade at a point in time that impacts on that. It’s really an unusual condition right now to have hardwood trading slightly above softwood when both grades are in reasonably good balance, so it’s difficult to give you anything more specific on that generalization at this stage.
Again, our view is that this is going to create additional demand on softwood, and that will help tighten things up more rapidly than otherwise, and we should expect to see improving conditions as we move through the year.
Emily Davies
Okay, great. Thanks.
Then on China, regarding the increase in demand for pulp that you’re expecting, I’m wondering if this is mainly or solely driven by the tissue capacity that is expected to come online. Then on that, do you look at the demand for tissue in your expectations on that, or is it just the capacity coming online, because if the demand isn’t there, I guess operating rates will just go down on that capacity and then maybe the pulp prices won’t be benefiting.
David Gandossi
Right, yes. So a couple things there.
It’s not just tissue in China, in my mind. We do a lot of business with specialty paper producers as well, so thinking of the décor guys, thermal papers, cup stock, liquid boards, those kind of guys that need the strength, and they are all growing, they’re all profitable.
It’s really a consumer consumption pattern. There’s millions of people moving into the cities, they are starting to consume more goods that come from packaged products than they have in the past, so as the living conditions improve in the developing economies, they consume more paper.
I think you can see in one of our presentations, we do show a correlation between the income per capita and the consumption of paper per capita in these developing economies, and it’s a pretty tight correlation, so we see that continuing. China had just announced a two-child policy today, or yesterday I guess, coming out of their plenary sessions, so that’s generally a positive.
So we do look at the demand side, and there’s always--you know, when you see so much capacity building up so quickly, you always have to ask, is there a bubble, is it going to hit a ceiling? Lots of guys write about that and talk about that, but the tissue guys are still making tissue and it’s still going away, so.
Emily Davies
Great, all right. Then on the capacity side, how do you see softwood supply and demand balance?
Do you see any new capacity, aside from what’s already announced in Finland and Brazil, into 2017?
David Gandossi
Yes, there’s definitely capacity coming. We can see it both on the hardwood side and the softwood side, certainly a lot more on the hardwood side.
The big mill that we all have our eyes on is late 2017 - that’s the Aanekoski mill in Finland. Everything other than that is well covered by growth and demand, in our view.
That’s more capacity in one year than the demand grows in a year, so we’re watching it. As I’ve mentioned on previous calls, when I think about a 700,000 ton add to softwood, I think about the shape of the cost curve and the impact that might have temporarily on the industry, and that the macroeconomics could come to bear with some of the high cost guys needing to step aside.
There’s also a fiber reality there - you know, that’s a big new fiber demand in that region, and that could change behaviors from some of the high cost producers in the region there competing for fiber as well. But for the rest of ’15 and ’16, and most of ’17, it’s pretty clear sailing from a capacity demand balance perspective.
Emily Davies
Okay, great. Thank you.
That’s all I had.
Operator
Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Your line is open.
Andrew Shapiro
Thank you. Dave, a few quick follow-ups from what you had said with others, and then one or two questions here.
In following up on the past projects you’ve talked about that were to lower costs, increase revenues, I just wanted to touch base whether these things have been optimized or there is still some runway and benefit to be had. You have a power specialist from Stendal move over into the Celgar area, and you guys were working on increasing the power and byproduct profitability at Celgar.
Has that happened, or that still has got most of its benefits ahead of us?
David Gandossi
That’s a great question, Andy. I wasn’t aware you knew we’d brought Fabian over.
Yes, he’s a strong guy, so we’re optimizing the power balances and generation at Celgar. You might have picked up in my comments around capex, we’ve let the club out a bit for Celgar this year.
We’re quite excited about a group of projects that the team has identified that--no single big de-bottlenecking project per se, but just going to that next level of operating efficiency and reliability of equipment. So I think as the year progresses, we’re going to see continuing improvement, I would expect, in the performance of Celgar.
That’s the commitment I made to the board on this capital project program. Everything that’s a project gets done in our world is pretty much a three-year payback, and it starts earning that the day we fire it up, so.
Andrew Shapiro
Okay, and Celgar is also going to get $2 million a year in power savings from this new award, the judgment from the utility commission too, right?
David Gandossi
Yes, that’s right.
Andrew Shapiro
Okay. And then Rosenthal, you had a tall oil project.
That’s already been up and running for a little while. Has it been optimized, or are there still benefits that we should be seeing in coming quarters?
David Gandossi
Yes, tall oil production for us is--you know, we get it up and running pretty quickly. It was a really dry summer, so the soap generation has been not the best.
There’s a big swing between spring and fall, so I think as we go into--you know, past Christmas into the new year, we’re cutting fresher wood, I would expect the performance of both tall oil plants to continue to improve.
Andrew Shapiro
[Indiscernible]
David Gandossi
Yes, you haven’t seen it in the run rate EBITDA yet, no. The plant is optimized, but you haven’t seen the numbers that we’ll ultimately get from it, that’s correct.
Andrew Shapiro
When does the rebate award come from the BC Utilities Commission settlement?
David Gandossi
Well, again I’m going to be vague, unfortunately. It’s a joint application by ourselves and the utility, so we’ve come to terms, we’ve signed an agreement, we’re jointly applying to the Commission.
Our expectation is the Commission will, under those conditions, just say fine, good to go, and we’ll just get notified in fairly short order that that’s the case. There is a risk, on the other hand, that they could decide they want to hear it and hear the reasons that the different sides had.
I can’t imagine why they’d want to do that, considering all the protracted presentations they’ve already seen from us over the last five years, but there’s always that risk. So really hoping we can get this thing done before the end of the year.
I would expect it to be done.
Andrew Shapiro
All right, but the money hasn’t yet been received and there’s some steps.
David Gandossi
No.
Andrew Shapiro
Okay. You had a JV, I think it was in what you call nano cellulose technologies.
Is that JV coming up with discoveries, developments, opportunities? Is there anything there to be excited about yet?
David Gandossi
Yes. I mean, we’re certainly excited about it.
A little humor on the call - David Ure is a director of that joint venture. It’s a 50/50 JV with Resolute, and it’s not nano cellulose, it’s cellulose filaments, which is a slightly different product.
Lots of really interesting applications. We’re getting fantastic traction with potential users of it.
They have to take the product and work with it for a while and determine a way forward. David would say we’ve got our first customer and it’s in the hundreds of euros a month category.
So we do have a customer that’s using it in a filtration application, a regular customer - he’s done all his trials and he’s happy with it, so for his product it works great, and he’s a regular customer. But it’s early days, and I’ve signalled before, this is a multi-year--this is one of those things you do that’s a multi-year expectation.
But it’s certainly very interesting and very exciting for the long term.
Andrew Shapiro
Okay, those were my follow-ups; now the new ones, here. The dividend you recently implemented gives you the opportunity to bring in new institutional investors that would only otherwise invest in dividend companies.
I’m just wondering, in your road shows and otherwise, have you seen this yet, or is this second dividend that’s about to be paid - because we just started being a dividend company - is this second dividend or even future consistency required first before dividend-only investors take notice? What are you seeing?
David Gandossi
What I’m seeing is the big banks have all been very keen to take us out on the road, so I take that as a really positive sign. When we’ve gone out, we’ve had great meetings, we’ve met lots of new investors.
The following write-ups from these gentlemen, the analysts, have been very positive, so I think we’re doing the right thing. We believe that--we want to be returning to shareholders in a prudent way, and we think it opens us up to a new group of shareholders.
Andrew Shapiro
Oh, it definitely does. I was just wondering if there’s been uptake yet, if you’ve seen it.
The price doesn’t reflect it yet.
David Gandossi
Well, the price isn’t reflecting it. I think on the price of the stock, it’s a little bit about they’ve thrown the baby out with the bath water with all the other commodities and the negative sentiment around China and those kind of things.
I’ve been trying to signal on this call, I think the fundamentals for our business are better and stronger than that. I’m disappointed with where we’re trading, but time will prove us out here.
Andrew Shapiro
What are your plans for the upcoming investment non-deal road shows, presentations, for the coming quarter or two?
David Gandossi
We’re going to be with Bank of America in Boston in December. We’re meeting some investors in London as part of the London Pulp Week again next week, or the following week.
And then, I think there’s the CIBC in January, and as we get into the spring we’ll do some more of these bank non-deal road shows.
Andrew Shapiro
The last thing was someone had asked about calling on the bonds and all that. I’ve been in here for so long, I’ve been accustomed to our bonds being fairly costly.
But the latest refi that was done, now I can’t recall - because those are, like, normal bonds and I look at distressed stuff. What’s the cash, the rates on these bonds, and do we consider those rates indicative of the risk levels, or is there a refi opportunity, and when on the time horizon does that refi opportunity kick in versus the call price--I mean, the premiums?
David Gandossi
Yes, well the cash coupons on the bonds, the five-year is 7% and the 2022s are 7.75%. I don’t--I mean, we were very happy to refi when we did.
You don’t get much credit from the credit rating agencies when--like, they don’t really ever move you more than a notch at a time, so our yield to maturity on those bonds has been better than that since the day we did it, which is an indication of the credit worthiness of the company, and the credit worthiness is improving every day also. So there will be a time, as I mentioned.
There may be a time to roll it up and do an NPV positive refi, some combination of tendering and reissuing, but for now we’ve got lots of runway ahead of us and we’re just focused on continuing to improve the business, paying the dividend, and improving the balance sheet. We’ll look for opportunities to continue to chip away at the debt, but for now we’re just stay the course.
Andrew Shapiro
So with your cash balances, your strong cash flow, and if that NAFTA claim comes in and it’s a windfall in terms of we get the full damage award, we’re talking about several dollars a share. Has the board discussed, and is it your thoughts that potentially some of that sizeable non-recurring award might be directly provided to shareholders in some way, whether it’s a tender, a buyback, a big special dividend, some other partial sharing of that award if it were to come in?
David Gandossi
No, we haven’t made any commitments in that regard, Andy. It’s still early days.
Andrew Shapiro
Okay, well we’ll ask about it, obviously, when we get closer.
David Gandossi
Yeah, well ask us after we get some money.
Andrew Shapiro
Fair enough. Thanks.
David Gandossi
Okay.
Operator
As a reminder, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of David Erb with Merrion.
Your line is open.
David Erb
Good morning, gentlemen. The previous caller covered my questions.
Thanks.
David Gandossi
Okay, David.
Operator
There are no further questions at this time. I’ll turn the call back over to David Gandossi for closing remarks.
David Gandossi
Great, thank you, Sally. Thanks everyone for joining us on this call.
It was a great quarter. It’s fun to be able to talk about such an exciting EBITDA level, so may it continue.
Look forward to speaking to you all again at the close of our fourth quarter call.
Operator
Thank you, ladies and gentlemen, for your participation. This concludes today’s conference call.
You may now disconnect.