Good morning and welcome to Mercer International’s First Quarter 2016 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.

Good morning, everyone. As we typically do, I will begin by taking a few minutes to speak about the financial highlights of the quarter, and then I’ll pass the call to David to discuss the markets, our operational performance, and our outlook into 2016. 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 Q1, we achieved EBITDA of $45.3 million, compared to $61.5 million in Q4 2015. Pulp demand was solid in the quarter, as we achieved a near record level of pulp sales, up almost 42,000 tons compared to Q4 2015. The relatively high level of the U.S. dollar continued to keep downward pressure on NBSK pricing, as did the psychological influence of sliding hardwood prices. Although, NBSK pricing was on average, lower in Q1 when compared to Q4, pricing in all markets has been stable for the past two months. The quarterly average RISI list price in Europe fell to $792 per ton from $817 in Q4 2015. In addition, the quarterly average list price in China went down to $590 per ton from $600 per ton in Q4. NBSK pricing has now stabilized and we believe we are seeing some upward pricing momentum in Q2. Overall, our mills ran in near record production levels, and as a result, EBITDA was positively impacted by lower per ton costs and higher sales of energy in chemicals. In addition, we remain pleased at the rate of fiber costs reductions, which continue to trend down in all…

Thanks, Dave. During the quarter, our mills performed well and pulp demand was solid. EBITDA was lower than we were expecting, primarily due to the rapid weakening of the U.S. at the end of the quarter, which created foreign currency losses, as David just discussed. In addition, slightly lower pulp pricing also contributed to the EBITDA reduction. However, partially offsetting that reduction with our higher sales volume in the quarter, which highlights the strong demand for NBSK. I’ll speak more about our fiber markets in a moment, but compared to Q4, our overall Q1 per unit fiber costs were down slightly. Once again, this quarter currency movements had a significant impact on our results. Our operating costs are primarily incurred in euros and Canadian dollars, while NBSK pulp is quoted in U.S. dollars. So as a result, our business and operating margins benefit from the current strength of the U.S. dollar. However, our mills also maintain U.S. dollar denominator receivables and cash balances, as Dave discussed. So these currency translation losses show up and U.S. dollar weakened at the end of the quarter. The other side of this though is that, as we move forward with the weaker U.S. dollar, this should help us support NBSK price increases, as it will reduce the cost of pulp for our European and Asian customers. March NBSK producer inventories were 30 days, up one day from the previous quarter end, but still considered to be generally imbalanced, as we continue to see steady NBSK demand in all markets. The April NBSK list price in Europe is $790 per ton, and then net price in China is $590, and we continue to see steady demand for pulp in all markets. Pulp imports into China and European sales continue to be strong through 2015 and…

[Operator Instructions] Your first question comes from the line of Bill Hoffman from RBC Capital Markets. Your line is open.

Yes. Good morning, guys.

Hi, Bill.

David, can you just talk a little bit about just as the hardwood versus softwood markets. I mean, obviously, in the hardwood, market prices continue to drag and are likely just continue to be weak. Are you seeing any of the Chinese customers trying to push more of the mix into hardwoods versus the softwoods, I know, you got to still have softwoods in the tissue business? But I just wonder, if there’s more and more pressure to do that?

Yes, Bill, we talk about this all the time. There’s always back and forth a bit on the margin, maybe 5% or something like that. When you’re talking about the advanced paper products like high-end tissue, modern – all the modern machines. I mean, they’ve got a recipe, they’re trying to follow. They’ve got a branded product, they’re trying to sell. So you get some movement around the edges. But it’s – these price differentials we don’t really see it in the market. It’s hard to quantify. The prices of hardwood have been under a lot of pressure, as you know with spreads approaching 120 and increasing between the two grades. But demand for NBSK is strong. And the industry is pushing the 610 in China and in Europe it’s pushing 810, and I’m more optimistic today than I’ve been for a while. We’ve been trying – Mercer first announced 810 in Europe in January, and it’s been hard to get – it’s hard – the industry has an all sort of rallied around that, even though we have this currency move. But it feels to me like, it’s a good chance we’re going to get. So we kind of confirms, but substitution happens around the edges, but it’s not something you can just fundamentally take the long fiber out and replace it with short fiber on these high-end paper grades, which is a space we plan.

So and just that your comment on the currency, obviously a big move. It seems like prices are definitely lagging in the currency move. What do you guys see it in the current?

Well, it hurts the margins obviously, so that’s why we’re pushing so hard to get the price up.

Either way you quantify the EBITDA impact to that in the second quarter at this point?

Now you just can look at what the – take the net price of pulp a few times the exchange rate and apply that difference to the number of tons, and it’s a direct drive unless you get the price to compensate.

Thanks. And then I guess, the other part of that question is just with the Celgar outage any dollar pricing that’s going to add? Anything just makes differential?

.:

Thanks. And then just last question, big picture strategically see you at this point. You’re looking more at capital projects and/or what do you think about acquisitions?

Well, I think I’ve been pretty open about how we see acquisitions in the NBSK’s basis. There aren’t really many notes of this factory that would attract our attention for the Mercer group that are likely to come available. And if they did keep come available, I’m expecting that it would be a pretty high price. So we’re really a disciplined company. We’re not going to get bigger just for the sake of getting bigger with solid pulp making money and creating value for shareholders. So I don’t see at NBSK pulp acquisition in our future. But we’re very focused on strategy and we’re continuing to work on that.

All right. Thanks.

Your next questioner comes from the line of Hamir Patel from CIBC Capital Markets. Your line is open.

Hi, good morning. David, can you give us an update as to, what you’re seeing on the demand side in China? I guess, maybe primarily from tissue customers on the end markets?

Yes. Well, our tissue customers are ordering pulp as usual. Their business is still coming along, they’re doing well. They’ve had a slight erosion on margins over the course of last year. So – but still pretty healthy businesses. There’s – there has been some rumblings about challenges in the space. The guys up near Beijing with some of the energy issues they had up there for a short period of time earlier in the year. But I think that’s more of a result itself. And everybody is kind of – it feels like business is normal. And for us, we had very little tons to sell in May. We basically sold already. And a lot of our competitors are getting into spring maintenance shuts. And the attention in the market is really more – the buyers from our tissue customers are looking for the pulp that we can’t deliver. And that’s what gives me the optimism that we’re going to get some traction on this $20 price increase that’s been pushed into the market right now.

Okay, thanks. That’s helpful. And then, I guess, just talking about what pulp assets are worth, it seems like we’re probably going to get a large fluff transaction at some point in the next few months. And there has been an announcement of a fluff Greenfield in the U.S. itself. There’s not a lot of comps for new NBSK mills. But how would you kind of compare maybe what you think the value of NBSK assets are relative to fluff assets, because the prices aren’t that different?

That’s right. And fluff historically stated at the slight premium than NBSK. But we’re going to have an addition moves in fluff. So I’m expecting fluff will be a little bit oversupplied for a while. Although demand for fluff continues to grow at a reasonable pace beside. Yes, it’s hard one to say. We didn’t participate in that process for the reasons I articulated earlier. We built the pulp mill, so we know what it costs – we know what replacement costs is to build Greenfields. Also, we bought a mill in our minds, we were prepared to moving about Celgar. I think we paid five times a trend EBITDA number. So that might be some benchmark for you. But I don’t know what the expectations are in this process you’re referring to, because we didn’t participate in.

Great, okay. That’s I’ll had. I’ll turn it over. Thanks.

Your next questioner comes from the line of Dan Jacome from Sidoti & Company. Your line is open.

Hey, good morning. How are you.

Hey, good, Dan.

Excellent. Just two quick questions. Is there any update on NAFTA? And then my second question was, I was impressed by the free cash flow generation this quarter and the working capital leverage. Can you provide any color on how we should think about that going forward? Would you need to see the same level of shipment increase that you saw this quarter to be able to possibly enhance the working capital leverage going forward?

Okay. Well, NAFTA, there’s really no update. It’s in the hands of the tribunal. And so there’s no news – no new news there. But as I’ve said, I think, we were expecting a decision in the second-half of the year. In terms of free cash flow, the first quarter was very strong cash coming out of working capital, which is what we’d expected. I think, I talked about that on the last call. You shouldn’t expect that same thing in the second quarter. The second quarter is really more balanced from a capital investment point of view and you do have a maintenance shut in there. So that free cash flow generation would not be the same equation as in the first quarter. Having said that, we – it’s a recently good business, and also liquidity and it’s just really just reflecting the seasonality of our business and the timing of maintenance shuts us with key factors.

Okay, totally understood. Thanks a lot.

You’re welcome.

Your next questioner comes from the line of Andrew Kuske from Credit Suisse. Your line is open.

Thank you. Good morning. Maybe a nitpicky question first, and it’s just on the mechanics of the FX commentary that you gave earlier on. And are you working with effectively renew the rollup of the subs? Is it at the end of quarter FX rate, or is it an average through the quarter? And I asked the question just in part, because we saw some pretty big FX moves through the quarter itself?

Yes, Andrew, you’ve got it right exactly. So that that adjustment that mark-to-market adjustment of that gain or loss is actually calculated on the last day of the quarter, and that’s compared to the last day of the previous quarter. So you’re right. You can have a situation where the foreign exchange rate is pretty flat through the quarter. And then if it does something odd on the last day, that’s the rate that we used to translate. So you can get some – you can get a little bit of volatility there, for sure.

Okay. That’s quite helpful. And then if I may, maybe just a broader question, and you alluded to this earlier on in the commentary with prices where they are in NBSK and maybe putting some of the higher cost producers under pressure. Could you just maybe elaborate a little bit on how you think of the slope of the cost curve at the stage and maybe the economic returns that people are earnings just on massive, what the $20 means to you? I think, we’ve got a good idea on that, but maybe broadly from an industry perspective in terms of the costs curve?

Yes. Well, for NBSK, our view is that, the fourth quartile has got some pretty steep slope on it. And it’s almost – like it’s a big chunk of the fourth quartile, look, it’s 2 million to 3 million tons of pre high cost stuff out there. These are mills that our energy – not energy, there’s some clearly not even balanced. So they’re buying electricity there. Utilizations are poor there. They’re are older mills. So they could be – when you’re factoring energy and the maintenance of business requirements, you see these guys could be $150 on the cost curve away from us. And so that’s one factor. The other piece is the older the mill – the order these mills get, the higher the maintenance, and their inability to invest in any high return capital, because their maintenance of business in there, and they’re safety related, environmental related, and CapEx are overwhelming. And then further point is, the U.S. boiler emissions regulations are tightening up. And I’m not just thinking a market pulp mills here, I’m thinking about the integrated smaller chemical pulp mills as well. We’re going to face some pretty serious CapEx challenges in the United States to comply with the new boiler regulation. So as things get – things go itself at all. I don’t think it has to go very far before some of these guys just give up those and say, okay, I’m done. And I’m going to buy my pulp from the market producers that are committed to the business long-term. And so you won’t see that happen till it happens. But our view is that, there’s a lot of at risk competitors that tell us we should keep our – and just chunk through whatever happens, if we get some volatility in our pricing.

Okay. That’s very helpful. Thank you.

Your next questioner comes from the line of Wes Swanson from RBC Capital Markets. Your line is open.

Hey, guys. I just had a couple of quick ones here. Just on pulp realizations, it looks like they were down a little bit more than NBSK benchmark prices in the quarter. Is that sort of mix related, and how should we think about that go forward?

Yes, I think, it would be next, for sure. And don’t forget the European list discount widened January 1 this year as well. So I don’t know what your reference period is. But first quarter, there was a widening of the discount in Europe, and for the reason for us to be pushing really hard for that price increase obviously.

Okay, great. That’s helpful. And then it seems like from your remarks, you’re quite comfortable with your leverage position now. But on our numbers, and I think on consensor’s numbers, you’re generating some pretty strong free cash yields over the next couple years. So what are your thoughts maybe just on deployment of distributable cash flow? If noticed that you’re chipping away, of course, that your 2019 maturities. I think, there’s a little over $220 million left in principal value there. Any thoughts on accelerating the sort of debt repurchases, or share buybacks or anything along those lines?

Yes. See, clearly noting has changed in our capital allocation strategies, which I’ve spent quite a bit of time on in the past. And generally we’re – is to summarize, we look for opportunities to buyback the bonds without having to pay premium for them. And we’re committed to maintaining our dividend and we’re not interested in share buy backs at this time.

Great. And so when you mentioned, you don’t want to pay premium for repurchasing bonds, I think, it’s what 3.5% if you repurchase over the next year, and then down to, I think, 175 bps for the year after. Does that imply that’s something you might not be interested in with regards to your 2019 notes?

We’re – it just going to depend on what’s happening in the market and how we’re assuming at both things. But I’d signal that that we wouldn’t possibly entertain calling bonds, that’s what it takes to continue to buyback debt. But we’re also can opportunistically watch the market and if we chances to pick some up, we will continue to do that.

Very helpful, thanks, guys.

Your next questioner comes from the line of Andrew Shapiro from Lawndale Capital Management. Your line is open.

Hi, thank you. David, the follow-up to this previous questioner, I understand the idea and the goal, and the concept of either the buyback of the bonds in the open market if you can get them below the call premium. And also the idea of the call premium is going to decline over time. One of the things that I think in tax, you guys decisions with your capital allocation and when and how to take out those bonds would be what the cost of alternative financing, refinancing would be in the market. And last quarter, I asked the question you may have an update, which is the long way of getting to my question here. Have any of the credit agent – the rating agencies who had you on positive credit watch for possible upgrade? Have you gotten any feedback or any indication on that credit rating upgrade, especially now that you’ve taken out a bunch of those bonds already and reduced the company’s overall debt with the buildup of additional cash and the reduction here in bonds?

Yes, thanks for the question Andrew. Yes, we certainly – yes, we are on positive watch by both agencies. We talk to them regularly. We push them. They know that from the credit metric point of view, they owe it’s two notches, most likely we’ll get one and it could happen at any time would be our expectation that we can’t control them obviously, but we know that that’s what they’re intending to do.

Right now in light of getting one or two notches, let’s just say one. Is that sufficient in the current market environment if you were to get the one notch, preferably two notches and in light of where rates maybe going over the next few years. Do you have a feel or timing for which you maybe looking to go to the market and do reify?

Yes, I think the quick answer is, right now we’re still a little too far out. The tender premium would be too expensive, which would make an NPV-positive reify hard to do. So we just have to be patient for a while.

Right.

Need a little more time, yes.

Yes, that makes sense. Your dividend based on current pricing on the last quarter and even now with the decline sell of today. You have a pretty sizable dividend yield and you had it now for the last several months since you’ve instituted it. Have you seen yet new parties interested in the company and its equities that are we’ll call it, dividend focused types of investors that have began engaging with the company?

Yes, it’s hard to tell exactly what the – what’s behind the new interest. But there certainly we do have some new shareholders in our roster that have bonds in some reasonably good-sized positions in the last quarter too. So you our view is that as management and our Board that having a nice steady dividend is something that investors care about and make us more attractive and improve the demand on the stock, so certainly part of our – fundamental part of our strategy going forward.

Okay, and then my last two real quick questions here is in Celgar. You guys were engaging in new steps to enhance the a power and byproduct profitability coming out of Celgar, given what your power specials in from Stendal to doing that increasing power generation with this longer maintenance shut that you just had and over the course of the last several quarters. Have those projects all been implemented or there’s still some to come that are on the table here for a improvement in the operating efficiency and margins coming out of Celgar?

Yes, I think there’s lots of room for improvement there. You’re right, we brought our – an Energy Manager over from Germany into the Canadian operation. He has been doing a great job. And he finds value in all sorts of different areas and programs within the company. So that’s a real positive. It’s also the case that the Stendal generator, we put a big one in there. And so every additional ton of pulp that we make produces an additional ton of fuel. And so a lot of the focus has been – as Celgar has been to enhance the production trying to move it from what’s been in the last couple years sort of in the 460, 470 range, getting and up to the 500 and 500 and above. And it’s – we don’t have any bottlenecks per se below the 520. It’s just the way the mill is balanced it. We just have to – we have to take some of the risk out of some of the operating areas of the mill and that’s we’ve been working on. So I was really disappointed that the shut got extended. We’ve lost those tons. The guys executed really well on the shut. They did a ton of good work towards as we’re bottlenecking and describing. And then what we’ve got there was something you don’t expect. It was, I think one of these big fiberglass elbows on a big stock pipe that comes out of a bleach tower and it ruptured. And these things are all tested and inspected and you just don’t expect that, and it created a big mess for them to cleanup. And so it’s not a big technical thing, it’s like basic plumbing so it’s really disappointing for everybody that happened. But we’re getting a mill backup and running. And I’m hoping with all this work we did on the shut that we can try to catch up some of those tons and show this mill – get this mill up to that 480,000, 490,000 ton operating rate, and that will produce. So that that was a really valuable incremental tons, because the more you push it, that generated the higher efficiency. So it’s – the really valuable incremental tons to be making and so there’s quite a bit of upside there.

So we can drop a lot more to the bottom line form current levels?

That’s right, yes.

Have you already seen and is it built into the Q1 numbers, reduced transport costs by the increased railcar capacity coming open because of the energy price and oil sands economic troubles?

Yes, the general logistics costs have abated quite nicely in the last couple of quarters, just trickling down. We get some – there are some unique things in the market right now like the – for example, the container rates from Hamburg to China, or they’re really cheap. So we’re certainly seeing some of that benefit certainly in some of the areas.

Nothing, are you just selling just anything particularly noticeable in Canada with the – where transport had been an issue before and getting railcar capacity, et cetera?

Yes. We’ve done a lot of work to sort of remove that risk if you like. So we built a reload center, where we’ve got access to the BN [ph] mill. So we have both CP and CN that are available to us to bring pulp from the Canadian mill to the coast. And we also have a long history of dedicated ocean freight, break bulk freight to China, unlike many of our competitors. We have a steady 100% committed to vessels booked that brings our break bulk breakdown quite nicely. And so it’s a very efficient logistic change. We just keep pushing everything to the coast, pushing it and then we fill up a vessel enough goods to China. So we’ve enjoyed. We’ve had that strategy for several years. The freight rates to China have come down nicely on break bulk. This last renewal has been another pleasant surprise. So it’s everything seem a little bit here and there, all adding up they’re going in the right direction cost wise.

So but it’s not one noticeable callout on that. And regarding a separate potential noticeable callout, you had obviously a big one-time rebate award, but part of the settlement and the B.C. Utilities Commission was that your annual operating cost savings, I think, we’re supposed to be enhanced, because it was going to be adjusted payment levels going forward? Is that understanding correct and has that taken place?

Yes, it is. Yes, we – in addition to the recovery of the past amounts, we’ve reduced our demand charge going forward to the tune of – they tune to the number…?

It’s just a 2 a quarter – $2 million a quarter.

$2 million a quarter…

$2 million a quarter, yes.

And that was a full $2 million in the current quarter completed?

Yes.

It started and that kicked in. And my last question, because I don’t think you put it in your script was what are the plans for your investment presentations non-deal roadshows et cetera in the coming several months or few quarters?

Yes so we’ve got a couple of things coming up in the next quarter. We will be attending the Barclays Institutional Conference in the second week in June. And then we’ve got a couple of non-deal roadshows with Macquaries and RBC in June. And then looking weigh out we’ve got, we’ll be attending the Japanese Industrial Conference in August and the Credit Suisse Fixed Income Conference to weighs out, but September, so fairly full schedule for the next few months.

Great, well if you come out rest of the Bay Area, please let us know.

We’ll do.

[Operator Instructions] Your next question comes from the line of John Pace, from Stone Harbor Investment Partners. Your line is open.

Hi, thanks. I appreciate it. I just had a couple questions. First of all, this FX loss that you expressed this quarter on the beginning of quarter – end of the quarter shifts in FX rates, it would seem that you probably had a gain in the fourth quarter as both the dollar strengthened against both currencies by your level is at least half as much as what happened in the first quarter. Do you have a number around that gain that you might assuming the fourth quarters net affect?

Yes, between four and five.

Okay, four and five.

You got a rate John.

Yes, four to five.

Great, all right. And then also I just want to draw a little more of a box around the potential cost Celgar from this outage. The past few years your cost per day for the Celgar outages of average and between 1 and 1.5 a day, would you say this one there maintenance shut for 18 days, do you think that’s toward the low or the higher end of that range? Thanks.

Yes, you can’t really do that when you have an extension. So like for the maintenance shut, you got all the intense work, you got contractors on site, you’re doing a lot of different jobs and that’s what you are doing in 12 days. And then imagine that early on in that process we looked into one of our flash tanks and saw corrosion and required some overlay work. And the time to do the overlaid work is going to extend beyond the time of the shut. So the first thing you do, if you say okay we’re going to limit overtime, nobody is working on Sundays that kind of stuff you try to bring the cost down, because you got that extra time, but then you get things done and you’ve got one job, that kind of carries on that’s your bottleneck job. And so you look to accelerate other jobs that you might have been thinking of doing a year later or you keep – you take advantage of the time, the best you can. So the cost comes down quite a bit on those days. And then, then we the startup issues where we started making some pulp and we produce some pulp and then you put some on the floor and you have to shut it down for a while clean it up and then started it up again. So you can’t – it’s not a linear cost equation unfortunately.

Right.

As I can’t give it…

So I know last year – okay I know the last year, the first quarter because it was like whole day outage cost $18 million was more intense and expected, I mean would you say this shouldn’t be as intense of that as that outage was in terms of cost?

No, John it was a big shut. We got a lot of work done in it. So it’s – I don’t have a number here. We haven’t disclosed it, but it’s it was a really complete good maintenance shut.

Great, all right, okay. So I mean then looking forward to 2Q just kind of whole prices hold steady, it looks like it’s going to be pretty heavy maintenance cost quarter, I mean I assume we should see some pretty significant dollar both on EBITDA for 2Q relative to 1Q, would that be correct?

Yes, you’re pushing me into guidance and I – we has policy, don’t give guidance.

I know.

But I think all our analyst would expect to see us by deterioration over the Q2?

Okay, great. Thanks Dave, I appreciate.

You bet.

There are no further questions in the queue. I pass the call over to David Gandossi.

Okay. Well, thanks Chris, and thanks everyone for joining us on the call today. We look forward to speaking to you all again next quarter.

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