Mercer International (MERC)

Q2 2010 Earnings Call

August 4, 2010 10:00 a.m. ET

Executives

Alexandra Tramont – Financial Dynamics (FD)

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

Jimmy Lee – President and Chairman

Analysts

Bill Hoffman – RBC Capital Markets

Amil Schiaffino – Cantor Fitzgerald

Richard Kus - Jefferies

Andrew Shapiro – Lawndale Capital

Peter Ehret - Invesco

DeForest Hinman – Walthausen & Company

Jonathan [unintelligible] - CIVC

Christopher S. Dechiario - ISI Capital

Rick Sherman – Oppenheimer

Phillip Wirtz – Odeon Capital Group

[unintelligible] Goldman - Catalyst

David Shapiro – Aegis Financial

Paul Quinn - RBC Capital Markets

Sven Karlen - Wells Fargo Advisors

Scott [unintelligible] - Lawndale Capital

Presentation

Operator

At this time I would like to welcome everyone to the Mercer International second quarter 2010 earnings conference call. [Operator instructions.] I would now like to turn the call over to Ms. Alexandra Tramont of FD. Ma’am, you may begin your conference.

Alexandra Tramont – Financial Dynamics (FD)

Good morning and welcome to the Mercer International 2010 second quarter earnings conference call. Management will begin with formal remarks after which we will take your questions.

Please note that in this morning’s conference call, management will make forward looking statements that were made in the press release. According to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks related to these statements, which are more fully described in the press release and with the company’s filings with the Securities and Exchange Commission.

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

David Gandossi

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

Let me begin with a few comments about our financial performance. As expected, our second quarter was very strong, both financially and operationally. The pulp market tightened nicely and operationally all our mills ran at or near record production levels, after giving consideration for the scheduled maintenance shut at Celgar in the quarter. We also benefitted from both significant price increases, driven by the tightness of the market, and the euro’s considerable weakness relative to the U.S. dollar.

As you will have seen in our press release, we reported a net income of EUR12.4 million for the quarter, or EUR.34 per share, compared to a net loss of EUR11.5 million or EUR.32 per share in the same quarter in 2009. The net income includes EUR13.8 million of expenses related to our mark-to-market valuations on our fixed interest rate swap and U.S. dollar-denominated debt. Were it not for these non-cash items, EPS would have been EUR.72 per share.

We recorded our highest quarterly EBDA in the company’s history, at EUR62.1 million. This compares to EUR31.8 million in the first quarter of 2010. In U.S. dollar equivalents, this is about $79 million of EBDA in the current quarter, compared to about $44 million in Q1. The most significant contributors to the increase in EBDA were the improvement in pulp pricing and a weaker euro, which were partially offset by the impact of higher fiber prices in Germany.

We also completed a planned maintenance shut at Celgar during the quarter. The shut itself lasted 12 days and positions the mill to run full for about 12 months before its next major maintenance shut.

Switching to cash flow, overall our cash position is EUR13 million higher than that at the end of Q1. Inflows were dominated by EUR62 million from EBDA, EUR6 million of additional borrowing at Celgar to manage timing differences between payments for the green energy project and receipt of the Canadian government’s Green Transformation Fund grants.

The strong EBDA, however, does not immediately translate into cash flow, since some of our higher sales funds higher levels of accounts receivable and wood inventories. Working capital increases drew on cash by about EUR30 million, and capital expenditures drew about EUR15 million.

It’s important to note that about EUR13 million of the EUR15 million in capital expenditures is in respect to the green energy project. We have pre-funded a portion of this amount and funding from the Canadian government will come in accordance with the Green Transformation program in Q4. We have EUR26 million of undrawn revolvers available at Rosenthal and EUR6 million available at Celgar. We currently have cash of about EUR62 million, which is comprised of approximately EUR39 million for the restricted group, and EUR23 million at Stendal.

So with that quick overview of the financials, let me turn the call over to Jimmy to talk about our operational market and strategic developments.

Jimmy Lee

Thanks David. Good morning everyone. As David mentioned, we are very pleased with our second quarter results. We are especially satisfied with the mills’ productivities this quarter, after considering our annual maintenance program at Celgar. The expected impact of the tightening European fiber markets was really the only negative in the otherwise positive quarter.

In addition the green energy project is progressing as planned, and we continue to expect to be producing electricity early in the fourth quarter. We’re happy with the pulp market’s ability to support price increases in light of the low inventory levels in the first half of this year. And the NBSK market remains tight, with a historic low 21 days of inventory available.

We are also pleased with the progress of our high-return strategic projects, most notably Celgar’s green energy project. I’ll talk more about this in a moment, but let me first comment about the mills.

Our two mills in Germany ran extremely well in the quarter, with Stendal posting its highest production quarter ever and Rosenthal with near-record production. These results were particularly satisfying after we were forced to slow these mills down in the first quarter to manage our fiber inventories.

I continue to be pleased to see our vision and investments resulting in our people raising the bar in terms of what we are capable of producing, though we are continuing to believe that there is more untapped potential.

Although it is not immediately obvious in the numbers, due to its recent maintenance shut, Celgar performed particularly well. Productivity there continues to improve, and we achieve daily, weekly, and monthly production records during the quarter.

Although our return to full production was slower than we would have hoped coming out of the April shut, the mill followed up with a record month in June. In total, we produced 360,000 tons of pulp, compared to 330,000 tons in the first quarter of this year, and 349,000 tons in the second quarter of 2009. In addition the German mills’ strong productivity allowed us to sell 144 gigawatt hours of electricity in the quarter, compared to 107 gigawatt hours in Q1 and 129 in the same quarter last year.

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