Good morning. And welcome to Mercer International’s Second Quarter 2014 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. You may begin.

Thanks, Lisa. As usual, I will begin with formal remarks, after which I will take your questions. Please note that in this morning’s conference call, we will make forward-looking statements 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 with the company’s filings with the Securities and Exchange Commission. I’ll now cover some of the key financial aspects of the quarter and then pass the call over to Jimmy. In Q2, we achieved EBITDA of $41.9 million, compared to $59 million in Q1. In Q2 pulp pricing was essentially flat in Europe and North America, while at the end of the quarter list prices in China were down slightly to $720 per ton. Also at the end of Q2, pulp list prices were $925 per ton in Europe and $$1,030 per ton in North America. However relative to Q1, our lower Q2 results were primarily due to the impact of 12 days of major maintenance in Q2, compared to no major maintenance in the first quarter. The total EBITDA impact of our Q2 major maintenance was approximately $18.4 million. In addition, a strengthening Canadian dollar negatively impacted Celgar’s cost. These negative impacts are partially offset by lower German fiber costs. Our German mills achieved new record production this quarter, while Celgar struggled with some mechanical issues. Our finished goods inventory volumes were down slightly relative to Q1, despite logistical challenges late in Q2 at Celgar as strong demand outpaced production. We reported net income of $0.6 million for the quarter or $0.01 per basic share, compared to net income of $21 million or $0.38 per basic share in Q1. Our Q2…

Thanks, David. Good morning, everyone. Let me start by saying that overall we are satisfied with our second quarter results. As David noted, compared to Q1 our EBITDA was down approximately $17 million, which was primarily due to our 12 days of scheduled maintenance downtime in Q2 compared to no scheduled maintenance downtime in Q1. On the positive side, we are pleased to see our German fiber cost continued to trend down and I will also speak more about that in a moment. In the second quarter, reduced Chinese demand pushed the quarterly average NBSK price down approximately $30 in that market to $730 per ton. In Europe, the quarterly average list price was essentially flat at $925 per ton. June NBSK producer inventories were at 25 days, down three days from March. At these inventory levels, the NBSK market is considered to be below balance. Last quarter, I spoke about the logistical issues that certain Canadian producers were facing, including a truck driver strike at the port Metro Vancouver and unreliable railcar service that were keeping producer inventories artificially high. The backlog at the port has for the most part being cleared, but pulp producers continued to be underserved by the rail companies. In addition, June hardwood producer inventories are down six days from March at 42 days. NBSK list prices in July were $1,030 in North America, $925 in Europe and $730 in China. Despite the slightly lower Q2 prices in China, we continue to believe that low customer inventories will force buyers back into the market, which should create global upward pricing pressure in Q3. Adding to expected pricing pressure is the fact that NBSK production will be negatively impacted at certain mills take their annual maintenance shuts during the summer months. Overall, we expect these factors…

(Operator Instruction) Your first question comes from the line of Bill Hoffman from RBC Capital Markets. Your line is open.

Hey, good morning. Jimmy, can you talk a little bit about Rosenthal shut in the third quarter? Will it be as extensive as Celgar’s just from a standpoint? And then second question, I just wonder if you could just talk a little bit about your tall oil project, that’s where you're on, from sales standpoint and what you expect to be getting out of that?

May be David can address those questions correctly for you, Bill.

Hi William. Yeah, for Rosenthal, it's significantly smaller maintenance shut compared to a Canadian shut, so to put apples against apples, if Celgar was $16.4 million of the $18.4 million in Q2, the comparable amount for Rosenthal in Q3 will be $4.6 million.

Okay.

And then Stendal in the fourth quarter same comparison will be 3.2. So much lighter maintenance in the back half of the year.

Okay. And then the tall oil business

Well, the tall oil project is coming along. If the guidance you’ve given is two-year pay back, little bit of an energy hit. But we -- obviously more than make that back on the tall oil sales. So it's just a stepwise addition, that’s going as planned, completed at the back half of the year.

Do you have any thoughts on like what kind of sales you’ll get out of that?

Yeah, I think it’s between $2.5 million and $3 million per year of chemical sales. And there is some discount for energy which brings it in at around $2 million net on a $4 million investment.

Okay. Thank you.

Next question comes from Andrew Kuske from Credit Suisse. Your line is open.

Good morning. I guess, the question is for Jimmy and it just relates onto the view on NBSK markets in your commentary on essentially the spreads. So if you look at just pricing dynamics, we’ve really seen flattish pricing last few months on the U.S. list and the spread between NBSK and hardwood has widened, I think we’re at 14 or 15 year all-time highs. So is your view really one of -- it’s the psychology of that spread which is really depressing. The prices are moving up, given how we look at just the fundamental tightness in the market at this stage in time?

Absolutely. I mean, if you look back in terms of the pulp cycles, when you had inventory levels at the producers at 25, we would be looking at like monthly price increases like $50. Right now, we’re so gun-shy that we’re barely even trying to push for $20, $30 increases and even that we’re kind of like prepared to give back. And this is completely irrational behavior when they consider that at these type of levels and continued reduction in producing inventories, considering all of the logistical issues that many of the Canadian producers are faced with. It’s surprising that clearly market psychology plays a significant role in terms of the pricing momentum. But the reality is through this cycle, we've seen clearly the inventory levels continue to drop, the price gap continue to widen and therefore if this equation was relevant then how come this is occurring.

And then, if I may just to clarify something, I believe you said in July you got a small price increase from your Chinese buyer's. But I don’t think you quantified it?

Yeah, I mean we were targeting as you know, like $30 type increase because clearly we didn't get a full support from many of our peers. So we were getting somewhere around the kind of 10-ish type of increase. Unfortunately we were not able to achieve what we believe was justifiable but will continue to focus as we move into the third -- tail end of the third and beginning of the fourth because, of course, as you know the second half of the year tends to be much better for pulp sales. We are going now into much stronger period with very low inventory levels. So I think you know that set itself up for pretty good foundation for further price increase push.

Are you really looking for an inflection point in say the fall for NBSK pricing to move upwards?

While I mean, typically as you know in the summer month, you’ve always had prices, which tend to give back prior increases. You are not seeing that this year. So that alone tells you something.

That's helpful. And then if I may, just a question to David. I guess, two things to follow-up on, if you could just once again go throughout your FX exposure into Europe, the Euro-USD relationship as we’ve seen a little bit of a pullback in the euro relative to where it was?

So it is our case, every penny that the euro weakens is worth about $8 million of EBITDA to us. So we’ve seen a couple of penny moves down to 134 range. I think, it’s just a little above 134 today. But it feels like things are finally starting to move in that direction in Europe based on the consensus of analyst estimates that I’ve seen. So that should be positive in the back half of the year as well.

And then just one final thing, you made a comment on your SAP implementation that you view this is suiting your needs today but also for how your business is going to evolve in the future or words to that effect. Could you just give us some insight as to just the evolution of how you think the business in SAP system taps into that?

Well, the system we’re putting in is very robust and it's very flexible. So whatever strategic directions we may go, this system will be there for us. And so we see it as a strategic investment in a lot of ways, provides us with some advantages in data availability and so on. So I can’t really go any deeper in terms of strategic direction when we’re focusing on a system but it’s flexible and expandable.

Okay, that’s helpful. Thank you.

Your next question comes from Andrew Shapiro from Lawndale Capital. Your line is open.

Last quarter, you spoke of the intended injection of €10 million down into Stendal. And this quarter the plan now according to the loan documents that you’re working on is to downstream $20 million. All in all, it’s a greater amount than discussed. Can you comment as to when you expect the finalization of the loan amendments and the downstreaming of this money, the potential larger size of the money and will the Stendal joint venture partner be contributing capital pro rata. And if not, what is Mercer's current and soon-to-be increased ownership percentage in Stendal?

Yeah. Okay, I’ll take that one, Andrew, yes, in the previous quarter we talked about €10 million because that's a commitment that the company has -- Stendal has under its amended loan facility that if we didn't equity offering in Mercer, €10 million would be contributed to Stendal. And that was part of the amendment that that came out -- created in the amendment process in 2009. So we did an equity issue at the -- in the previous quarter, closed it in April. So we were talking about €10 million going in. We were negotiating also the syndicate to achieve the amendments that we spoke -- that Jimmy spoke of earlier and the number that we agreed to was US$20 million so that's the linkage there. So it's just the $20 million is slightly more than €10 million. And it's a function of a negotiation. Now that goes in as registered capital, which is our attention that would dilute our minority partner down to -- from 17%, down to about 10%. And the discussions with that minority partner is still ongoing. Nothing has been resolved or settled at this stage. There is some indications that they may be ready to step out but that hasn’t been finalized or approved at the higher levels within their organization.

With the press release quoted Jimmy as saying after strong sales in the last two months of the current quarter; I am assuming that was Q2. Celgar sales volumes decreased year-over-year. Can you clarify this -- is this July post Q2 decline? Or what time period you were referring to and then reconcile your reference to this weaker demand from China with your ability to impact even a 10% price increase? Did the price increase cause the decline in Mercer's demand, I mean in Chinese demand of our product?

No, I think you had a combination of factors playing into that. One, of course, typically we’re going into the weaker summer months, so you do see reduced volumes, that's one. And second, of course, we also had logistical issues right at the very -- towards pretty much from the middle of the second quarter on, where we weren’t getting a railcar supply. We continue to have that problem even now. And therefore from a shipment perspective, it’s presenting a lot of logistical challenges, which has created a backlog in inventory. And so it wasn't because of the price increase announcement that we were losing sales by any means that was not -- that was not a -- it's just a combination of the weaker seasonal impact together with the logistical issues, which had again the problem in terms of the actual sales numbers in the quarter. But we believe as we go through the balance of the year like we did from the Q1 to Q2, that will start to catch up on these lost orders or at least shipments anyway.

I will back out in the queue. I do have some more questions so please come back to me.

The next question comes from the line of Sean Steuart from TD Securities. Your line is open.

Thanks. Good morning. Jimmy with respect to China for a second, can you give us your impression of where buyer inventories or I guess trader inventories are in China right now and how tight the supply looks on their end?

We think that basically the inventory levels are still quite low. It was really triggered by the fact that there has been clearly some credit tightening as you know, and therefore there has been a resistance to build any inventory. Only those which have access to good liquidity like the tissue guys have been buying and taking advantage of low prices, which they continue to do, but the others certainly in the printing and writing and coated type grades, they are being very restricted in terms of access. And therefore, their inventory levels because of probably a combination, the demand competition because there is a lot of capacity in certain segments, so that coupled with financial constraints had meant they all operate was fairly low. Now with the gradual loosening of conditions, what we're seeing is I think a much better type of kind of view in terms of buying. So I think that what we will likely see as China further loosens its credit that you'll get that pent-up demand now kind of being filled. And therefore, our expectation is, yes, right now, it’s low, but as we move through the year, they will start to order necessary volumes. And therefore, we build inventory over time.

Okay. And then wondering if you can also talk a little bit about the specialty paper side of this or specialty packaging papers driving NBSK demand, I think everyone has decent visibility on the tissue side, but can you talk about what you’re seeing in the specialty packaging side?

Of course many of the Chinese paper mills have focused not just on the commodity end, but a lot of them are also focused on the specialty grades, including these wrapping tissues as you know. Those are doing very well. They consume a lot of NBSK. Of course on a ton basis, it’s not a large quantity. But on a percentage of raw material, it’s significant. So to that area liquid board as you know there's a lot of expansion in that area, specialty luxury boards, because retail and luxury products again globally is increasing. And so these are the areas and of course the core grades etcetera which require a lot of NBSK. So we're not talking about big tons here, but each of them require significant larger or higher component of NBSK than the traditional commodity product. So we see that this is a good trend for us moving forward.

Okay. Thanks for that. And then just finally, David, I don’t know if you've settled on 2015 CapEx guidance, I know European, the tall oil project you’ve something from the deck, but we've been in around 40 million. Is that a good number to go with?

Yeah. For now I think that’s a good proxy, Sean.

Okay. That’s all I had. Thanks, guys,

Your next question comes from Mark Kennedy from CIBC. Your line is open.

Good morning. Dave, just a clarification again on this $20 million of capital in Stendal, did you have a time, is that going to go in, in Q3, do you know?

Yeah. That’s our expectation.

But at this point you are not sure if Mercer is doing a 100% of it or just your pro rata share?

Well, I am pretty sure our minority partner will be contributing.

Okay.

So it's just finalizing the form of the injection, our position is that all goes in as registered capital. I am sure they would prefer to avoid the dilution. So it's an ongoing discussion with minority that we need to resolve in the next few weeks, but timing will definitely be the third quarter. We will have this all resolved one way or another.

But for modeling purposes we can assume you paid a full 20 and then you have 90% of Stendal coming at the other end?

Yeah. I think so Mark. We will put the 20 in one way or another and it will either 90% or something slightly less and it could be some of it goes in as something other than registered capital, although that’s our intention. But we’ve got a negotiation, we have to go through.

And then just to add onto Sean’s questionnaire. So CapEx for this year is also going to be sort of in that $40 million neighborhood?

That's correct, yeah.

Okay. So $40 million this year and again another 40 next year?

Yeah. All this mostly discretionary as you know, high return projects, the mills, we had a long-term planning horizon and we put strategically those investments at each mill that we think provide the highest return and strategic good -- lead us in the right strategic direction.

Correct. Okay, that’s great. That’s it for me. Thanks.

Your next question comes from Andrew Shapiro from Lawndale Capital. Your line is open.

Two follow-ups if we won’t mind. You talked about the CapEx in terms of dollars and modeling purposes. Last quarter you gave us some color on those projects you’ve identified, I guess would provide the highest return in and around the desk. One of them was a -- I guess it was wood treating, or you call it just the treating business and another was chip screen and Celgar and then now you have obviously this CF business. Can you kind of talk about the -- I guess the relative amounts that would be going into these various projects and give a little color on -- still big picture, but a little color on if this is reducing cost, this is opening up a new revenue stream, what are you -- what’s the strategies behind some of these projects?

Well, I will start if you like. So there is a bunch of different things in place. So, one for example is in Rosenthal. We’ve had an opportunity to improve the yield, which mean you use less wood to make ton of pulp. So over the years they strategically have been moving down. They did chip thickness screening a few years ago. They’ve been working on the way. They manage their piles on the reclaim systems, get the track loader off the piles and have it all automated mechanic thing, which improves the yield. So they come a long way to the point now where they're using less than 5 cubic meters of wood to produce a ton of pulp and some of this is also in process enhancements. So that’s been our real core strategy for Rosenthal, makes a lot of sense considering the cost of wood over there and very successful group of projects. At Celgar, our focus is enhancing the reliability of the equipment and one of the really important steps in that we feel is chip thickness screening, although it's a very modern mill. One of the older pieces of equipment in it, it was the screen room and was combination of the performance of the screeners themselves and some safety issues that we move forward with the chip thickness screening. That was commissioned not even a month ago. It’s up and running the successful project on time on budget. And I think we’re going to see much more reliable cooking processes. When you get uniformity in the fiber going in it, it really helps the production stability further down the line. So we’re already seeing the early benefits of that project. And for Stendal, we’ve just completed Blue Mill and it's our youngest mill obviously, so the projects there are just a multitude of smaller issues that have been identified over the years that either reduce cost or improve the efficiency in operation. So, all of them are quite accretive.

But none of these are like big noticeable individual buckets?

No, that’s right. They are high return, low capital. It's just good discretionary CapEx.

And also you can't really kind of, let’s say, pull apart the actual numbers, because the focus moving forward really is to look at the various cost areas. And of course, wood is a big component of our cost. And therefore, the focus is being trying to strategically drive wood prices down through a combination of improved logistics, improved sourcing, make more wood availability of our sort, this type of things. So there is many activities going on, some of which are very, let’s say, innovative and others, which are just basically, just doing something a little bit better than what we’re presently doing. So, a lot of different things, nothing significant in terms of capital investment at this point. In terms of the CF development, we see this as the future. It’s not going to play an important role clearly at this point, but we see potential innovative products coming out and it’s a joint venture with Resolute, which also sees the future in a similar light. And therefore, the combination of the two, we believe, will allow us to create products outside of the traditional pulp and paper industries and get into much more interesting areas, whether it's in transport or aviation or any of these kind of more high-tech areas, where interesting allow cellulose in the nano and the micro-sizing actually has some very interesting characteristics and potential as a result.

Appreciate the color. I was just actually trying to get at on any of these projects to call out if there is a decent amount. On CF, it’s not a sizable investment requirement yet either?

No, it’s basically a very small immaterial investment from both sides, but there is a commitment on both sides to really focus on partnering and collaborating in regards to development of very innovative type of end use products. And there's many different areas that we are looking at. And therefore, we do believe over time there could be some pretty interesting business that can come out of this.

I appreciate again the extra color. And David, on the tax, it looks like the tax provision of this particular quarter, in light of even though lower pre-tax income last quarter was way up. Was last quarter enjoying some type of tax benefit and offset? Or is there some extra items can breakout some color here on the large tax provision this quarter?

No, it's really just timing differences Andy in particular coming out the Rosenthal system. We’re just growing a deferred tax liability, that’s flowing through the P&L, but from a cash tax point of view, as you know, we've got lots of loss carry forwards, just some level of current tax because there is minimum utilization rules. But generally, we’ve got good shield and there haven’t been any other unusual adjustments in this current quarter.

Okay. And lastly, what are your planned roadshows and conferences in the coming season here? And I don’t know if you’re coming out our way or not.

The company’s attending the Jefferies Conference a little later in August. We’ll attend the RBC Conference and the Credit Suisse conferences in September. And I think that's about as much as we’ve got in the schedule at this point in time. I don't see ourselves in your neck of the woods in the coming month or two.

If I actually say one last thing here in terms of debt, so you called out here now and highlighted how the restricted groups already down to a 0.4 debt to equity. And you have foresight here into, I would say decent cash flow. Is there any thoughts here on doing a restricted -- a lower cost restricted group financing, refinancing in the near-term? Or are your thoughts to be waiting for a larger omnibus refinancing that takes the consolidated entity into account?

Yeah. I think we've been pretty open about our strategic thinking. We stated that in our view our net debt on the long-term interest-bearing debt side is getting down into that target range where we could do a global refi, taking full advantage of the combination of the unutilized revolvers on our balance sheet, the cash on our balance sheet and the very liquid capital markets for debt financings that we’re seeing right now. So yes, that is strategically the direction we’re moving to do of global refi.

You still there Andrew? Andy. It sounds like we got cut off somewhere. Operator, could you let us know if you’re there.

(Operator Instructions)

Okay. I guess we’re not getting any further questions. So maybe if that is the case, I would like to thank everyone again for attending today's call and goodbye.

Thank you. Good bye.

This concludes today's conference call. You may now disconnect.