Good morning and welcome to Mercer International's Fourth 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. Please go ahead.

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 Q1. 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 Q4, we achieved EBITDA of $57.8 million compared to $47.9 million in Q3 2016. Our Q4 result reflects steady pulp demand, favorable foreign exchange movements, and the reversal of a wastewater fee accrual at our Stendal Mill, all partially offset by an increase in the level of scheduled annual maintenance. Our pulp sales were down about 15,000 tons and electricity sales were down 29,000 megawatt hours relative to Q3 primarily due to Stendal's 12 days scheduled maintenance downtime. Pulp sales realizations were essentially flat compared to Q3 with strong demand mostly offsetting the downward price pressure from the rapid appreciation of the U.S. dollar. However, the stronger U.S. dollar did help reduce our euro and Canadian dollar costs when translated to U.S. dollars. In terms of significant items impacting our results when comparing to Q3, the scheduled maintenance shut at Stendal is notable. Including direct costs, lost production and reduced energy and chemical sales, we estimate that our Q4 EBITDA was negatively impacted by approximately $7.2 million relative to Q3. After taking consideration, the major maintenance downtimes, our mills ran well in Q4 with total production similar to that of Q3. In addition…

Thanks Dave, and good morning everyone. Overall we had a solid operating quarter including an ambitious 12 day plan maintenance shut at our largest mill. Compared to Q3, the strengthening dollar had a large positive impact as well on our results as at the reversal of the wastewater fee accrual at Stendal. In terms of the pulp markets, demand has been very steady to the point that we're having to say no in fact to certain spot pulp sales request we've been getting. We expect these balanced conditions to continue well into 2017. Demand has been strong enough to offset new capacity that entered the market in 2016. NBSK producer inventories finished the year at 32 days and have been near this level all year. 32 days is up two days from the previous quarter but we believe inventories at this level remain balanced. Growth in global softwood deliveries continues to be strong at over 3% year-to-date, that's roughly 700,000 tons and China in particular was very strong at about 13% growth when compared to the same 12 month period in 2015. We believe China's strong demand is consumer driven but it's also the result of the closure of highly political Chinese agricultural based pulp, along with the diminishing supply of quality recycle fiber. In addition, the Chinese paper industry continues to advance its capacity with new highly efficient paper machines to require a certain amount of premium NBSK to run efficiently. The quarterly average resi list price in Europe was unchanged at 8.10 per year compared to Britain compared to Q3 in 2016. Similarly the quarterly average list price in China remained at $595 per ton compared to Q3. This is remarkable as it occurred during the period of conservable U.S. dollar appreciation. Looking forward in China we implemented…

[Operator Instructions] Your first question comes from Sam McGovern with Credit Suisse. Your line is open.

Hi guys, thanks for taking my questions. Just regarding the maintenance downtime schedule that you guys laid out, can you give us a reminder in terms of the year-over-year cost impact that you guys had, I know you guys had a slower start-up on Celgar last year I'm just trying to figure out what we should expect in terms of what won't be in the numbers this year.

Well I guess the - from a competitive point of view, thing to think about in 2017 is there won't be a large shut for Stendal which there was in 2016. We'll have two mini shuts, Stendal is an 18 months rotation so that's one of the differences. The other is Celgar will have a 15 to 18 day shut this year in 2017 which is a fairly large one and it has the extension - has to do with some of the larger capital times that we need to do. In 2016, in the second quarter Celgar had a normal shut expected to be 12 days but then we had three unrelated interruptions immediately following the shut which essentially took Celgar out of production for the full month of April and we don't expect that to happen again.

Okay, got it. That's perfect. And I know we just talked two weeks ago with the bond offering but also can you just update us in terms of how you guys are seeing the price hikes go. Are those being well received or any sort of push back?

So maybe just, for Europe it's up 20 and this is the month of everybody trying to settle accounts at 840 and I think it's a steady market, it's still under discussion but it's a steady tight market so I'll - maybe leave it at that. In China it's really strong market. Our team are over there right now, I was just talking to them earlier this morning. Lots of interest, lots of demand, paper guys are busy so I think the 630 for February is happening and 650 for March is looking pretty good.

Great. Thanks so much, I’ll pass it on.

Your next question comes from Sean Steuart with TD Securities. Your line is open.

Thanks. Good morning, everyone. Couple of questions. Dave just wondering if you can go into a bit more detail on the pulp market and I'm interested in your views on customer inventories as you mentioned 32 days at the mills isn't really tied by a historical standards but we've clearly got really strong momentum in early 2017. What are you seeing in terms of buyer inventories right now?

Yes, my feeling is inventories at the buyer level are low and I think that's both softwood and hardwood. You know some of the real strength - as an example some of the real strength you saw on hardwood at the back end of the year was everybody's then going just in time for a couple of years and then expecting all this pulp to come on and then it's delayed and I mean there was panic in Asia, guys were behind the eight ball and I think that's why you saw that price escalation. Going back to November in China we had customers repeatedly asking us for spot tons and we kept telling them listen we're done, we can put something on the vessel for you in January but we just - we don’t have any more, it's uncommitted and you can see the concern on the customer side and that was when we went up 20 effective immediately and if the market is, the market I think buyers have been used to adjust in time and like I've always said as soon as they know the price is going to go up, then everybody wants more before it does and so you get this flurry. So we're just in the middle of that kind of frenzy just at the moment.

Okay, thanks for that. And on the NAFTA claim, you mentioned you expect something soon, can you put some goalpost around timing there and does the administration change affect anything with respect to that claim?

Okay. First of all, like normally these like so we finished our in-person hearings in Washington last July of 2015. Okay, and so we would have expected within a year normally to get the answer but then we learned that the President of the Tribunal had two other very large files, he has been working on in front of ours. So, our view or lawyers view is that the delay is a work load delay like this guy has to rate these decisions and so he is got the other two out of the way now and our assumption is that, they are working on ours, it hasn't been a procedural problem or necessarily lack of - I think it's just a workload thing and we're 18 months now, so my feeling is it's getting embarrassingly late. So we're expecting it reasonably soon. In terms of rhetoric or changes to NAFTA the announcement that it would be renegotiation with Canada and Mexico, I don't think that has any impact looking backwards. Those protocols are all in place so I think that's more forward-looking trade, trade concern.

Okay. Thanks very much. That's all I had.

Your next question comes from Dan Jacome with Sidoti & Company. Your line is open.

Can you just give us a little bit more color on all the initiatives you have been doing on the wood procurement side. I know you discussed a little bit, I'm just – it's something I get asked about a lot. I’m just looking for couple more like on the numbers, like how much you say you reached to saw log and fiber is expanding and then your unit cost are coming down probably, because I think you're putting 50% more wood volume on every trade. What is exactly that doing for your cost and then how much did you reach change by - I'm just looking for like a Delta percentage change.

Yes, so I guess the main - when you look at it from the top down, our strategy in Germany is to relieve the pressure on the domestic wood market and this strategy started back in the days when bio-energy, home heating with pellets was and community heating was sort of a new craze, it came in very quickly and pellet demand was greater than pellet supply and that drove wood cost up. So, our strategy was, we got to bring more wood in to take pressure off the markets so we put a lot of effort into things like rail infrastructure, sightings, we entered into long-term arrangements for port facilities. We have a port in Rostock for example Northern Germany where we can bring one million meters of wood year end from the Baltics and from Russia. And when you organize solid logistics with rail and ports all of a sudden what there was too far away before for the German market becomes competitive with the German market and then more you bring into the German market, the more you push the wood down. And then also the other - we've had some benefit from the market as well because what was the shortage of pellet supply back in those early days is now completely the reverse that there is low barriers entry to the pellet business, anybody who wants - any sawmill that wants to utilize this pins and shavings has got a pellet plant beside it, there is pellets coming in from North America that are getting EN certified and so there is - it's not as bigger force in the market. So we've just been able to - combination of these factors just steadily drive down the market price of wood in Europe and if you can move the roundwood down then sawmill residuals follow. We also invested in our mills and receiving capabilities, automating, unloading activities those kinds of things to help bring unit cost down and the trains themselves carry 50% more wood relative to what the old trains did. And we Mercer leases all these cars as we control them and that gives us opportunities to do other - we're ready to expand our activities into merchandising complete harvest, moving saw logs around for customers who traditionally were limited to local truck access, those kinds of things. In Canada we are really - we’ve been very successful expanding the roundwood availability which is a similar sort of a concept. We are not limited to taking saw mill residuals anymore, we can take roundwood residuals from harvesting and process those ourselves at a very efficient cost. So this is a logistics equipment related endeavor that improves the supply volumes to the mill which helps to keep a lid on prices.

Okay. That's a lot of color, definitely appreciate it. And then I’m sorry if I missed it, did you guys gave kind of an update on the hardwood capacity swings you're expecting in this year.

I haven't talked about it on this call Dan but there is - I mean I think that's the right question for the hardwood guys there is - our understanding is, [indiscernible] is coming on and I think they're going to try to run it hard and I think they’re going to try to knock out some of the high-cost operators, that seems to be what's coming there - there is lots of strong solid demand growth in hardwood but there is a big chunk of capacity coming over the next two or three years. So I think there is going to be a rationalization, I'm expecting lower hardwood prices, I'm expecting some of the high-cost guys to shut down and there is a lot of that including our agricultural based up it still runs in places like Vietnam, others spots in Southeast Asia but we've been seeing in China I think some of that fibers going to go away and probably some of the North American hire cost, I’m sure fiber mills as well.

That's interesting. When you say the high-cost - are those guys in the higher cost currently, is the lack of good fiber procurement capabilities part of that do you think?

Well you're competing on a hardwood side - if you're competing with plantation ground wood in mega mills, theorem fixed cost per ton are so low. It's just - it's a new dynamic that you know a typical small North American and European hardwood noses, it could have a really tough time competing with, my view.

The point to mention the foreign exchange elements and some of those locations as well right, that’s good point too Dave.

Okay. And then lastly, not a beat a dead horse but on the NAFTA I’m kind of seeing out there in some publication, maybe by April 1, so you guys said near future - was that kind of April 1 near future be kind of - in the same kind of ballpark?

It's just a guess Dan, as I mentioned earlier in my comment I just - I don't know - we won't know until it happens like they'll just make big decisions. It will be a big huge written conclusion and they'll release it when they're finished, I mean they don't tell you when that’s going to be.

I can't wait to read it.

Same here.

All right guys. Thanks a lot. Have a good one.

Your next question comes from Paul Quinn with RBC Capital Markets. Your line is open.

Hi, thanks very much. Good morning, Dave. Good morning, Dave. Just a question on follow-up on this wood cost, you mentioned that three year trend in downward cost, maybe you could - and you did a great job detailing all the work you done around it. Can you quantify what that cost reduction has been over that three-year period?

Well I got to be careful I don't talk about much more that's in our MD&A Paul.

Or maybe you can point me to where it's found in the MD&A so I can add it up or?

I don't believe...

Maybe why you work on that or maybe why you get, David Ure to work on that may be?

Well Paul maybe he will just help so he is just pointing to a recent investor presentation where we showed our U.S. dollars per ton average fiber costs Q1 of 2013 at around 350.

Yes.

And it's down now in the – it's just a little above 250 call it maybe 260 in Q1 of Q3.

Okay, so it’s quite material.

Yes.

Then maybe you could help me with the 13.6 million wastewater reversal I mean, I just basically back it out of EBITDA but I think that's probably pretty crude, do I just take that over the 12 quarters, spread that over the 12 quarters going back would be the way to treat that?

It's three years going back Paul – so these are three-year windows.

Like three-year 12 quarters?

Yes. We accrue in the costs, the wastewater fees and during that timeframe we developed a concept review that with the authorities and the concept is, we can spend some capital to reduce the effluent emissions of a – particular parameters and get them to buy in. Then we engineer and we build and then we have to test and if you can prove that you’ve reduced the effluent emissions in accordance with the plan that was outlined initially. Then you get a waiver of needing to pay the wastewater fees. So if you don't do the capital spend you have to pay the wastewater fees in cash at the end of the three-year period. If the capital spend achieves the objectives then you have that reversed or waived and it's when we receive that final clearance from the authorities – the fourth year after the beginning of period – it's just a one-time reversal that goes to earnings because it was recorded as a cost in the previous three years.

Okay. So thanks for that. So just trying to understand the benefit to you if I back that out of Q4 2016 because I think it's the one-timer, how do I give you – do I take that 13.6 over the three-year period as a credit for you in your EBITDA on those – during that period.

Yes, that is right.

Okay.

You got it back evenly over the whole period.

Okay. Then just on the refi and you mentioned the 12.9 million interest in the quarter, what’s the effect of the refi on your rate going forward?

Well it’s a 0.5% on 225 million.

Okay. And just lastly, mentioned you know strong shipment volumes on the software side up 3% globally up 13% in China I think you're probably referencing at PPPC data?

Yes, that right in PPPC.

Right so that doesn’t take into account – other countries that aren’t covered by that. I’m just wondering what your feel is on what that total China increase was in 2016 and the sustainability of that – do you have any color into tissue capacity adds going forward or on the capacity shut side for pulp within the country?

Yes, I don't have a better data, but that 13% in softwood for China that's about 800,000 tons in that market that's huge and – on the ground what you see is even the printing and writing guys are much happier now than I’ve seen them for I mean as long as I've been going over there. They’re 80% or more utilized I think there is a lot more domestic business for them some of that’s coming from the closure of the highly polluting in regional China the agricultural waste products it get pulped and turned into paper in an integrated way. And that's been closing down to the tune of 3 million to 4 million or 5 million tons a year in some cases over the last five or six years pretty big numbers. What was overbuilt earlier in the decade is now getting busier. They have also interesting most of the guys are saying they’ve had some reasonable success with export business. They’re starting to make some money shipping paper out of China so – they’re not all sitting on these big overhangs of paper anymore. On the tissue side, it's been really significant growth a few years ago there were some huge announcements and after a year of those announcements the companies’ that made them pullback their expectations. And so we’re not canceling our plans we’re just delaying them and – so that – what would have been so call it a three-year build so it will become may be a five-year build. So it’s still, China is still chugging along adding capacity on the tissue and the specialty side fairly significantly big demand draw for hardwood slightly less for softwood on average 30% to 40% softwood more to the hardwood depending on the grades. But it's – when you add it all up 800,000 tons of incremental softwood demand in China in one year is – just gives you an indication of how quickly things are changing over there.

Great so thanks a lot of guys.

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

Thank you good morning I really appreciate the commentary on the pulp markets, but may be just a little bit more granular on just the last month the data that we saw and there is a pretty meaningful follow off in European shipments on softwood, but then as you stated pretty big increase on China just in that month of data. To what degree – was that a little bit of trying to get ahead of the Chinese New Year and could you just give us a bit more color on the commentary on why?

Yes, my guess – is whether equipment related.

Okay.

I think, for us for example we struggled at the end of year to get everything out – some of the container availability in Europe has been relatively low those kind of things. So I don't think the data is reflecting anything in the market it’s probably really more around the shipment side of things.

Okay. So then on the shipment data maybe that just foreshadows of what mid data at the end of the year for Europe and then Europe bounces back. And then do you anticipate any pullback in the data on the Chinese numbers just given the Chinese New Year when it fell?

Yes, look Chinese New Year you know nothing, can be received in a report there – everything gets scheduled so that it doesn't show up and there is nobody there to receive it and then stuff will start rolling in pretty quickly and everybody gets back to work. I mean Eric Heine is over there right now as I mentioned I was speaking to him this morning he said things are happening, it’s a tight market right now. So we’re expecting shipments to continue and consumption to continue and that should carry on as long as we don't have too much pulp brought on all at the same time from a capacity point of view which is the risk that we’re all thinking about for the back half of this year and into next year to see how that plays out.

So, on the near-term are you thinking has your fiber costs have been, you keep wrestling them downward for the most part there is a good trend there as you’ve talked about. And you’ve got a price increase in front of people right now it seems like the market is reasonably balanced. Do you see a good opportunity for margin expansion just on a near-term basis before – there may be a capacity concern later on in the year?

Yes, I think so I mean, all the metrics are moving in a good direction for sure.

Okay. And just one final one just on balance sheet management – obviously there is - the maturity extension on the data and the coupon so how do you think about just the balance sheet management and how that positions you. Really for an extended period of time now and just the benefits that gives?

Yes, so we want to be - we’ve been delevering for an extended period of time. We took on a lot of leverage to build our mills, but we felt it was manageable leverage. We had guarantees from the German government for example it's hard to explain that to a North America capital markets but – we felt comfortable with the leverage but we’ve been jumping away at it steadily improving the balance sheet. And I think where we’re positioned today – we’re very comfortable with our leverage – it’s had a very healthy liquidity it can withstand anything the world may throw at us I’m touching wood. And we’ve always committed to maintaining our dividend and we’ll continue to pay down debt where we can and when the conditions are right and we continue to maintain some optionality. We do as I think the market is aware reading our materials. We do see now it's time for Mercer to continue to expand its activities and continue to seek more of these lower capital, higher return type of initiatives that you've seen us doing and we will continue to do that in more and having some strengthen and healthy cash positions will help us do that.

Okay. Thank you.

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

Hi, following up on the prior question and your prior answer. With all of your debt now refinanced to the lower rates extended out another five years, that's over lower overall levels with your cash and your cash continues to build up in excess of your ex needs. When does the common stock buyback and/or an increased dividend policy gain importance in your board discussions?

Well, we do - we talk about that every quarter Andrew and at the moment we’re staying the course on the dividend and we don't have a share buyback announced as you know.

No, I’m asking when does this gain greater importance since all of the other items that were on the checklist have now been actually successfully been taking care by now.

Capital allocation is done in consideration of lots of variables, lots of activities everything of which is announced in the market and so I can't say when it takes greater importance, it does take great partners always, that's why we're here but at the moment we have nothing announced.

Okay. That part of obvious I just didn’t know if it's like – that’s the next thing you guys will turn to us an item its, the other things on the checklist now that are out of the way. What are the plans for your investment presentations non-deal road shows et cetera in the coming months?

Nothing as far as formal conferences for the next couple of months Andrew but we are working on a couple of - to little bit fluid but we are working on a couple of road shows - we're hoping to line up something on the West Coast and something on the East Coast in the next couple of months. And then as the season - as a conference season comes a little bit closer I think will be in a better position in our April call to talk a little bit about what our plans are for formal conferences and they will start to pick up in the late spring.

Okay. And you know, I’ve been an investor as you know for a very long time in varying sizes but for a very long times so I've seen the company and its days of extreme leverage based on the German government guaranteed loans. The build out of Stendal, paid for with hundreds of millions of dollars of government grants, the buildout or refurbishment of your other facilities with government grants and under GAAP those grant values are a reduction of your PP&E and thus your book value – you've stated book value doesn't really reflect the replacement cost of these plants and facilities. Periodically, I don’t think it was annually or at some point you have maybe disclosed the unamortized value of those grants in other words the underappreciated amounts of those grants. Will your 10-K that's going to come out in the next few weeks provide such an update so one could understand the estimated or adjusted book value of your plants or is that something you could either provide now or plan to provide us in the future?

Yes Andrew, my understanding is it's in the K and will be in this K - has been historically as well.

Okay, good. So we’ll be able to see that because you know we are just trying to understand and want to the rest of the street to understand how deeply undervalued the stock market valuation might despite approaching recent year highs.

Yes, it's a great point, I would draw your attention to the capital expenditure section of our case and you know I don't know this year's amortized amount but in gross terms it exceeds US$0.5 billion of government grant value that's gone into our mills in the last 12 years.

And that's not reflected by any means in your stated book value because it's a reduced depreciation over remaining.

Yes, it gets recorded as a reduction against fixed assets and then gets amortized on the amortized against the depreciation line.

Exactly. Okay. The stated current market yield of your dividend is again something that's very attractive and when you guys do consider the aspect of doing a stock repurchase, does that play a role in your analysis that for every share you buy back that's actually cash flow on dividends that you don't have to pay out?

Well that's how it works.

Good, all right. Well thank you.

Your next question comes from Kasha Copetek with TD Securities. Your line is open.

Hi, good morning, it's Kasia. Would you be able to provide the mill by mill breakdown for shipments as well as production in Q4?

Yes, we can do that, so in Q4 the production at our Rosenthal Mill - just the shipments?

No both if you could.

Both, okay, I will start with production. Production in Q4 to Rosenthal Mill was 89.4 these are in thousands of tons, Stendal 142.5, Celgar 118.4 and sales volumes Rosenthal 85.9, Stendal 140.4 and Celgar 118.9.

That's great, thanks very much. That's all for me.

Your next question comes from Anthony Young with Macquarie. Your line is open.

Good morning guys. Thanks for the question. Really just on capital deployment, I guess you guys touched upon this and David you mentioned the investments which you guys have been making and are happy to continue making. I was just wondering on M&A side, you guys have talked about in the past things being expensive and given the firmness and the increasing pricing environment we are seeing, I mean are things starting to look cheaper or more attractive or are we going to just continue to ship away the balance sheet?

Yes, I mean we're always actively looking for ways to enhance value, I said in the past we're not - I don’t want any investors to think we are looking at big pulp mills or anything like that, nothing overly material certainly not going to be issuing stock at these levels. But we do continue to look at things that are attractive to us in our areas where we have core competencies and we just keep doing that, it's been difficult with valuations as I mentioned but there are things that we see that we evaluate we think are interesting and we do hope to get something done this year at some point.

And I mean just reading between the lines and it seems like it would be more of a bolt-on acquisition and if you guys were to pursue anything, you're looking more bolt-on and like you said in other mill or something else transformative?

Well bolt-on, I guess that would be a reasonable term, yes. Our focus is lower in - lower capital intensity, higher return, more of a opportunity to create growth in an area that's in an area of our core abilities but wouldn't necessarily be NBSK pulp. So I mean I can't say too much because we didn’t announced anything but it's just something that we're actively thinking about that we've got a strong balance sheet and we've got a strong team and continue to grow Mercer where I think could create value for shareholders, we are working hard at that.

Okay. Definitely good luck with that. And then maybe just last month on the -- you guys have bonds which are callable in December, do you still envision calling those in similar fashion to that ones you get few months ago, couple weeks ago now I guess.

Yes, I don’t know I can't answer that, the call in the 2019 was an opportunistic call, we got strong tailwinds from the pulp market, have strong bond market and we’re moving into a period where there is some capacity coming. So, we felt we should get it done. We’ll have to make our assessments on 2022s as the time approaches, probably no rush on those would be my guess for now but will just evaluate it as we measure the conditions at the time.

Okay. Thanks for the question guys.

[Operator Instructions] Your next question comes from Hamir Patel with CIBC Capital Markets. Your line is open.

Hi, good morning. Dave based on the various projects that you guys have underway can you speak to what sort of level of shipments you’re targeting for 2017.

Yes, I hardly answer that, we would - we’ll expect to be at around 1.5 million tons or grater may be 1.5, 2.5 something like that. The main improvement area for us will be Celgar which closed the year at 426,000 tons which was disappointing, it had a lot to do with some of the equipment issues we had back in the spring, looking to get that mill up more in then north of 480. Stendal was close to 650 in 2016, maybe in a aggressive stretch target for that mill would be 675 and the Rosenthal Mill we would hope can hit its maximum capacity which is around 365,000 tons.

Great, thanks. That's helpful and just final question I had was, I saw reporting resi, this week that seem to suggest that some paper project in the South is going back to as a fluff mill. Have you heard anything about that?

Not specifically but it was originally thinking - they originally were thinking fluff and then they were thinking dissolving. So having said that the fluff market's been reasonably strong, good growth there so they might be rethinking it but - these things aren't always exactly what the company is thinking, so I don't have any specific knowledge of it.

Fair enough, thanks. That's all I had.

And there are no further questions at this time. I will turn the call back over to Mr. Gandossi.

Okay, thanks. Thanks everyone for taking the time to be on our call today. I appreciate all your support and if you have questions that you want to contact either Dave or I that would be fine and otherwise we look forward to speaking with you again on the next quarter.

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