Good morning and welcome to Mercer International's Second Quarter 2017 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. I will begin by taking a few minutes to speak about the financial highlights of the quarter and then I will pass the call to David to discuss the markets, our operational performance, strategic activities and our outlook into Q3. 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. Our Q2 financial results reflect strong operational performance, robust sales, heavy pulp mill maintenance spending and the acquisition of the Friesau sawmill. In Q2, we achieved consolidated EBITDA of $39.1 million compared to $60.2 million in Q1 2017. When compared to Q1, our Q2 results reflect higher pulp production and sales volume, along with higher pulp prices which were offset by the negative impacts of 22 days of scheduled annual maintenance and a weaker U.S. dollar. Our new sawmill operations also contributed small positive earnings. Our 22 days of scheduled major maintenance negatively impacted EBITDA by about $27.5 million, included in these costs were about $21 million of direct costs, the majority of which are IFRS reporting competitors can capitalize. David will have more to say on this topic, but the shut in Celgar was ambitious and successful. And Stendal's mini-shut was completed a day early, lasting only two days. We took the opportunity to lengthen Celgar's shut by two days to add several projects to the schedule, some of which were scheduled to be completed later in the year, a decision that increase the cost beyond what we would normally realize. Our Q2 results…

Thanks, Dave, and good morning, everyone. I want to start by saying there were several positive developments for Mercer in the quarter. First of all, our pulp mills had strong steady production with Rosenthal mill setting a quarterly production record. We completed 22 days of maintenance with excellent execution, cooperation from labor and strong costs control And we acquire the Friesau sawmill complex, which is just down the road from Rosenthal mill. And finally demand for both pulp and lumber continues to be strong and steady. Now, although Dave has already mentioned this, I want to emphasize differing impacts of maintenance shuts on pulp company results, and in particular, the impacts of different accounting treatments. Mercer being a U.S. public company is required to expense all direct annual maintenance costs in the quarter, they are incurred, which means maintenance costs are straight deduction from EBITDA. Conversely, most of our peers followed international financial reporting standards, which allow them to capitalize our annual direct maintenance costs, and later expense them to the depreciation and amortization line of the income statement. This has the effect of excluding maintenance costs from our peers' EBITDA. In this quarter, our direct maintenance costs majority of which would be eligible for capital treatment under IFRS were approximately $21 million. So we have a practice to reporting our maintenance schedule and costs each quarter to assist investors and analysts understand the timing and quantums of those outages. So although we've missed the Street's earnings target this quarter, I don't want this to overshadow what in my view was a strong quarter. And in the results, I see clear evidence of the quality of our assets, and our very capable and dedicated employees at all our locations. Now getting back to some of the activities for the quarter…

Thank you. [Operator Instructions] Our first question comes from Sean Steuart, TD Securities. Your line is open.

Thanks. Good morning, everyone. A couple of questions, your overall downtime of 22 days was just one day longer than what you guys guided to last quarter. And, I guess, I'm just wondering David about the nature of the maintenance you took, specifically, the incremental, I guess, pull forward of activity you had at Celgar. What was the incremental expense associated with pulling that forward?

Yeah, good morning, Sean. Hard to say exactly, I mean, it's not a huge number. It's just is really - we highlighted it more as a reflection of how well the mill executed on their maintenance shut that they got - they were getting things done on schedule. All of the quality work was evidenced that things are - we're going to startup well and we had some capacity to do a bit more work, because, as you know, we got all the contractors on the mill at that time. And so it's just a big improvement over last year's performance and that's why we highlighted it. So in terms of dollars it might be a few million. Clearly, not all that material compared to what the normal cost of the maintenance shut is, but again, highlighting the good performance of the crews up there.

Further your comments on the currency moving really quickly at quarter end and the revaluation of working cap items, can you put a dollar figure on how much that would fit into earnings as well quarter-over-quarter?

Yeah, yeah, quarter-over-quarter, for a bridging number you can say FX impacted us almost $7 million.

Okay. And with respect to the Friesau facility, good progress out of the gate there. You noted that the volume you held back for shipments to North America. Is that Delta representative of how much volume from that facility you expect to ship to North America going forward?

Yeah, not really. It's just - that's just logistics. That's sending the mill to a port in Germany and then you got to ship it on the water and then it sits in a warehouse and it gets sold out of the warehouse in eastern seaboard. So as guided on our acquisition announcement, we're thinking around 25% of that mill's production will find its way into the U.S. markets. It's the way currently thinking about it. Roughly 50% will stay in Central Europe, around the chimneys [ph]. We are planning to have a J-grade program up to 8%, possibly 10% of Friesau's product is a very high quality J grade and then the remainder would be Middle East, North Africa.

Okay. Thanks for that, David. That's all I have for right now.

Great, Sean.

Thank you. Our next question comes from Hamir Patel, CIBC. Your line is open.

David, you mentioned the diminishing supply of recycled fiber. So curious if you got a sense as to maybe how much recycled capacity may come out this year and then similarly in 2018?

Yeah, we're pretty curious about that and we're still digging into it. But on the surface if you look at the PPPC data, it could be around 5 million to 6 million tonnes of mixed office waste that's going to be blocked from the China market. And so, what's going on there is we've been hearing these rumors. There's recently been like a public announcement come out of China, sort of a press release type of thing that says, mixed office waste has been finding its way into China to be processed into pulp and paper is going to be restricted, because China doesn't want to import everybody else's garbage essentially is what they're saying. So that's going to impact some deliveries from the U.S., some from Japan and some from the UK in that order, 5 million to 6 million tonnes a year. A lot of the guys that use that kind of product, I mean, there is some tensile properties in that mixed office waste. So it's a positive development for virgin softwood pulp producers in the sense that there will be a substitution or an increased demand for virgin fiber to fill the hole that's going to be left by this.

Okay. And, I mean, I was kind of under the impression a lot of that mixed paper is getting - used to make containerboard. But could you give a sense of where it goes?

Well, yeah, I mean, there is - yeah, well, a little bit of it goes - it goes all over the place. They're not restricting like corrugated box, recycling and that kind of stuff. This is the dirty mixed recycling office waste. It comes in with a bunch of other garbage. And it depends on who you are in China, but it's going into all sorts of different paper products.

Okay. And then in terms of the - I know you've spoken over the years about some of the higher cost pollutive capacity situated in China itself. Any updated thoughts on how much of that's going to come out?

Yes, I mean, I think, it's possible at the - they've done a lot of the heavy lifting now. And we don't - we are not seeing the regular announcements that we've had over the last three or four years, which as you know have been very sizable. So our sense is they work through the list. Our feeling is that the bigger mills were the ones that were done the latest. And I think also the Chinese government is very serious about keeping these things down once they make the announcement, which is in sort of previous years that was not the case. And I think, it's becoming a very serious issue over there for them with both water and air pollution. So what's down, I'm sure will stay down. There may be small incremental amounts still to come, but they are not as vocal about it.

Thanks, David. And then just a final question I have for Dave Ure. Could you give us the shipments and production by mill in Q2?

Yes, okay. In thousands of tonnes, the shipments, Rosenthal was 90.3, Stendal 169.6, Celgar 128.9. And as far as production, again in thousands, Rosenthal 97.3, Stendal 168.1 and Celgar 97.3.

Great. Thanks, Dave. That's all I have.

Thanks, Hamir.

Thank you. Our next question comes from David Jacome from Sidoti & Company. Your line is open.

Hey, good morning, everybody. Can you hear me?

Yes. Good morning, David.

Great. Dan, I don't know what happened. I guess they changed my name.

Oh.

No. So, look, pulp seems to be in really good shape. You seem to kind of focus on the new lumber assets, which I'm excited about, so four quick ones. If annualized the production you did in this quarter, you'd be about a half, if I am not mistaken of your total capacity. So can you just remind us again what your target is for 2018, do you expect it to be maybe at 75% or producing 100% of that 550 million capacity, I think you guys have?

Yes, well, maybe I can do it just by annualizing how we ran in June. When we bought the mill there was no wood in front of it. There was no wood buying program in front of it. And as I've always said our wood procurement logistics strength is one of the reasons we are moving in that direction, so within - from April 12 to the end of the quarter. In June, we were processing above 5,000 cubic meters of logs a day. The yield of around 60%, and when you convert that into board feet produces about almost 37 million board feet a month annualize that to look at a run rate of around 440 to 445 million board feet a year, running two shifts.

Okay. Excellent. That's very helpful. And then, I think you said, I know you touched on that, but your sawlog costs in the quarter were a little bit higher than you expected, just because probably you are buying so much on a short-time basis. Is that we drove it, and then you expect it to improve in 2018? Can you just give a little bit more color on that?

Yeah, exactly. Yeah, yeah, yeah, so the - we just had to hit the market. And we knew we were going to have some inflationary impact on the market, when you buy that much wood really quickly. So I mean, the increase was not really a big number. It's like little bit less than 6%, say. But we did influence the sawlog prices in that region, but our strategy was just to hit it. We wanted to get that mill up and running. And now that we've got a big chunk of wood in front of the mill, now we are starting to optimize and rationalize, and turning back and pushing down prices wherever we can. So what we are signaling is we got over the hump, stabilized, and now we're going to start to do, what we do, which is start to push the prices down again.

Right, terrific. And then the U.S. market, you're obviously targeting, that should be exciting too. I mean, can you just give us very high-level view of how those conversations are going thus far. And then internally, what are you guys assuming for lumber prices, because the 390, I think the current - the spot market is. Is that what you are assuming going forward or some pullback? I think - I know they've gone as high as like 410 recently. So what are you guys assuming?

Yes, so well, first of all, like you're - I'm sorry to talk about benchmark pricing and our product mix. I mean, what we are going to bring to the U.S. market is a very high quality product, square edge lumber. It's going to be all other different source, including up to 16 foot premium pricing, because of the quality and some of the features of it. The demand in the U.S. market right now for that kind of product is very strong. From a margin perspective maybe this will help answer your second question, it's a slightly better margin than the European. It's further away, in terms of the freight cost is greater to the U.S. market compared to Europe. Europe is a strong market, good margin, very efficient freight costs for us, it's just slightly better today in the U.S. market.

You said, overall margins in the U.S. would be better for you than Europe?

Slightly better, yes.

Slightly better. Okay. Thank you very much. Appreciate it. Good luck with the rest of the quarter.

Thank you.

Thank you. And our next question comes from Charan Sanghera of RBC Capital Markets. Your line is open.

Hi, guys. Just quick question on Celgar with a lot of the annual maintenance shut down behind you guys. Any additional color on the - kind of the uptick in production performance?

Well, it's been - has been running really well, since the shut, which is great. I think for the year, considering the size of this shut, we're expecting to finish off somewhere in the 470, 475 range. And as I've mentioned several times, the work we are doing in Celgar is to get it up from sort of the 440,000 tonne average of the last three years, up more into the 480, 490 range and those incremental tonnes are actually quite valuable, when you consider the fixed costs coverage equation in pulp mill. So for 2018 that's our goal. And so far it's looks like things are really on track, doing well for that mill.

Okay, thanks. And just shifting gears back to the - just the GAAP recipher [ph] as EBITDA. You said that $21 million in maintenance, most of it potentially in IFRS could be eligible for expanding. So you could say on more apples-to-apples basis, your EBITDA was $55 million to $60 million or closer to $60 million. What's - would you give some additional color there?

Yes, that's how works. Like, if you read only analyst reports of guys that use IFRS for accounting. I mean, they had a shut, don't really talk much about the costs. And there is your EBITDA and it's just we look so different, because there is a big focus on variability of our EBITDA. But financially it's exactly the same thing going on every pulp mill in the world has an annual maintenance shut, and it's just unfortunate that are comes up and down in the EBITDA line. So what we try to do is make sure the Street can see that's why we disclose when the shuts are and we always if you go back for the last three years, you can track what our shut costs, direct maintenance costs typically are. And we do that help everybody kind of dial into make the apples-to-apples comparison.

All right. Thank you. That's it for me. Thanks, guys.

Thank you. [Operator Instructions] Our next question comes from Andrew Shapiro of Lawndale Capital. Your line is open.

Hi. Follow-up on the prior question, you're answering then one or two more if I could. So you have - you gave guidance on 18 day maintenance shut, you quantified somewhat earlier question is cost enquiry about what the extra four days et cetera might have cost. But when these maintenance shuts are planned. Is there a visibility of the extensible costs? You will confidence and that could be spelled out for investors or is it unknown into you get the equipment opened up, et cetera.

Well, our budgeting is pretty accurate, Andy. And we haven't really turned our minds to whether we would give forward-looking guidance on maintenance costs for a quarter. The other way to go is for investors just a look at the last couple of years to get a quantum of what the different mills do. And then we would always try to signal, well, 12 days as an average. If it's an 18 days, we are expecting to do more, and if it's like - I think that's probably the better way to go.

I don't disagree. And it certainly what we did, so we did necessarily get surprised, but if unfortunately look like the analyst community on this one - missed about on that one. So I was just wondering, if there is another way. It's unfortunate that you got to spoon feed it, but I was just wondering if that was something you're comfortable with doing, but that's okay. I mean, we got it on that. So anyway that was a follow-up on that. The currency effects during the quarter, when you call the amount, for I think Mr. Steuart's question upfront early on. Was that answer with respect to just the fall off in the last week or the last few days of the quarter in terms of the spot price movement that you have the mark-to-market on, or was that - what - I think it was 7% or so that David mentioned was the quarterly move for the full currency effect? Can you just reconcile that?

It's the bridging calculation for the whole quarter, which would include the impact on pulp pricing and also on the revaluation of the monetary receivables and cash receivables at the end of the period.

Would you also impact your COGS at all?

Yes.

And is there a qualification about what that might have been in the COGS in terms of your EBITDA?

Not off the top of my head, Andy, sorry.

Okay. All right. And then, last questions here. I was late to the call, so I wasn't sure, if your pre-prepared comments provided any kind of update are inside on the status of the NAFTA claim. And I'm sorry to ask for a repeat on that, if you did, or I can go back to the transcript…

That's okay. Just briefly there is unfortunately no update. It's - yeah, we are approaching the two-year timeframe from the completion of the oral [ph]. So, I mean, it's - that's a long time. We do know that the president of our tribunal was involved in a very large case, before ours in the results came out, while, we've been waiting. So that's part of it. But maybe it's a reflection of the combination of that complexity of the issues. So we don't really have any more insight from - last time we've spoke although, we still expect the decision relatively soon.

I was just going to say, could it happen like at any time or do you guys get a little bit of an advance read on it, because of certain milestones or activities that the tribunal goes through with respect to the petitioners?

No, there are no steps for us in the process. No milestones to monitor. It will just come when it comes.

Okay. And lastly, what are your plans for investment presentations, non-deal road shows, et cetera in the coming month?

So we've got a couple of conferences will be attending in the next couple of months on August 8, will be attending the Jefferies Industrials Conference in New York, and then in the second week, pardon me, the third week of September will be at the TD Institutional Conference in Toronto.

Great, okay. Thank you.

Thank you. Our next question comes from DeForest Hinman, Walthausen & Co. Your line is open.

Hi, couple of questions. The Celgar production numbers look encouraging in the past, I think, you've identified that is a pretty meaningful opportunity. I think, you had mentioned previously 480,000 tonnes, now we're saying 475,000, which would still be a good outcome. And you talked about the strength coming out of the shut, and if we take 475 or 480, you divide that by 12, it's 40,000 tonnes a month. Are we hitting those types of numbers, right now or higher than that? Can you help us understand how that mills running?

Yes, that's a good reference number. We think about Celgar, we - so it's been averaging in 440. And it's 475 - 470 to 475, what it means is, we've improved on the reliability of the mill. We've eliminated the variability that occurs when equipment fails for whatever reason. So first step for that mill has been to fix or replace some of the older things that have the potential to break, just because of their age. And get that reliability back that gets you that 470 range. And then as I mentioned in my comments there is - when you get - then there is debottlenecking exercise, where you kind of systematically go through and it's - these are high return low capital type of capital projects within the mill to improve the rate. So you are actually getting more products through the various departments to get the production up into that 490 - 480, 490, call it 500,000 tonne range. And then the mill has potential to debottleneck further, but do these things in stages. So over the next couple of years, the focus is going to be on just making sure that mill gets it's close to 500,000 tonnes as we can.

Okay. And you touched on this briefly, the wildfire is not impacting Celgar directly in the fiber basket, it sounds like, but in terms of getting product to the ports, and moving in by rails, has there been any disruption there?

Yeah, no - touching wood here, we've been very fortunate, that we haven't had any impact just speak up on our logistics.

Okay. And then, can you help me understand the working capital needs for Friesau, is the second quarter kind of reflective of steady state working capital for that type of million or where there be some seasonality with the winter like with some of the pulp mills?

Yes, it's good question. It is a little less seasonality actually, because where that comes into sawmill comes in fresh, where is in a pulp mill roll stock pretty significant volumes for the winter months. So the wood inventory flows, actually shapes scanned the wood. And you don't even - you don't pay for it until it's been shapes scanned and debarked in the mill. And so where we are on raw materials as where we're going to be. And maybe we're just a little bit high at the moment, because we've been staging for the U.S. market, once we get that thing flowing, then I think you'll see a little release coming out of working capital.

So just to I understand, if I see the 50.2 at the end of second quarter that's reflective of the pulp mills normal type of operations. And then we have wood at Friesau what is kind of on a consignment basis. Is that correct?

It's not consignment. It's woods delivered. You don't pay for it, until it's measured. And the way a sawmill in Germany does that is, it put it through your shape scanner. They get all in a single line. It goes through a shape scanner, and gets debarked. And then it gets put in the yard. And we do that to sort the log by its diameter, because this is a link mill, where wood is processed in batches by diameter. And just the way the commercial structure works is you don't pay for the log until you measured it, so you scanned it. So it's just a nice feature for working capital that you don't have to pay for wood in the forest or wood on its way. And you pay for it once you analyze it at the mill.

And then the shipment, I guess dock staging to sell to the U.S. is that some of reflected in finished goods or just working process line we have on the - our spare parts and other. Where is that wood…

That would be in finished good.

Okay. So the 33.5 they were disclosing in second quarter that's reflective of the way that's waiting on the docks right now.

That's correct. We're on a train or ship, yes.

And then if we continue to increase shipments of the U.S. would that line go up, because we owned the wood until it's deliver to the U.S. or is it, we remove…

Yes. I am not going to give you an up or down, because I don't know yet. Some of the variables are - what is the time - what point of time just the woods get sold. As you develop your programs, it's quite possible that customers can make orders, while the woods on its way to the market, and we sold well it's on - early on its way. So right now, what's going to happen is, it's got to get to them - it's got to get into a warehouse in the U.S. We'll be developing programs. Customers will come and look at it, that kind of thing and it will be - we'll be developing a sales channel initially. So it's a longer supply chain today than it will be six months from now, for example.

Okay. Thank you.

Thank you. Our next question comes from Adam Zirkin, Knighthead. Your line is open.

Hey, guys. Thanks for taking the time.

Hi, Adam.

Couple of questions for you, the production looked awfully good, considering the Celgar shut. Can you talk about what's happening at the German mills? Did Rosenthal or Stendal run particular well during the quarter?

They both did, yeah, excellent performance at both mills. Rosenthal, I mentioned in my comments, its best quarter ever from a production point of view. They also had - one month was the highest production month ever and another month was the highest rate of production ever, so both mills really hitting their stride. And it's just - it's really gratifying to see that. What it means in the pulp world is that all the hard work around preventive maintenance programs, standard operating procedures, the centering efforts and so on. They're all effective and we got a very, very solid workforce looking after those mills at the moment.

And say that - yeah, sorry.

Even if you carved out, if you took out the shut out of Celgar, if you took those days out, the productivity at Celgar was - for the quarter was among the best quarters we've had in the last two or three years, so…

I mean, is this the sort of thing that causes you to reassess of your annual target for production on the assets?

Well, yeah, I mean, both Rosenthal and Stendal are pumping right up at their disclosed capacities. For Celgar, it's a little different. Many years ago, we defined that mill to be a 520,000 tonne mill. For the last three years, as you know, it's averaged more in the 440,000 tonnes and that's just a combination of a number of factors that are kind of maybe too complicated to approach on this call. But getting the reliability up through the elimination of risk in equipment and also improvements in preventative maintenance processes, quality of work done and all those sorts of things contribute to the mill. Today, for 2017 including the shut being something in the 470, 475 range, moving towards 500 is we do some of the rate work that I've been describing. So it's not a - we're still not at 520. The mill can get to 520. It's going to take a little bit of work. As I say, we're doing it in stages. So - and so, I don't see a change in the capacity, disclosed capacity numbers at this stage. But it's important to understand how significant the move is in Celgar particularly.

That's helpful. One other - I guess, a few other questions. Can you speak to perhaps in real time what's happening in the fiber markets? With maybe one or two exceptions, the year-over-year comps have been sort of down now for fairly consistent period. That's difficult to tell when you're lapping easier quarters or tougher quarters. So as you look out sequentially, what's happening in those markets on both continents?

Yeah, well, I think, I see things pretty steady, Adam. I don't see any structural change that's going to materially increase our cost. We have seasonality impacts. As we all know, the - in particular the fourth quarter is when we push the market a bit to make sure we get a lot of wood close to the mill to cope with winter conditions, those times in the winter where guys can't get the woods to harvest or the logistics get challenging. So we have some upward inflation on costs as we push the market to deliver more wood. And then we have that big release of working capital in the first and into the beginning of the second quarter. But beyond that, our focus is to continue to really work on the strategies that we've developed which enable us to control the cost in the market if you like. So things like importing more wood. When we're starting to feel price pressure in the market, we just turn up the dial and bring in a lot more wood. We can bring it from further away. And in Germany, when you go east it's cheaper wood. You just have to compensate with logistics. And so, as we bring more of that and you might be a little bit more in an import market. But you take the pressure off the domestic market. And so we're getting quite effective at kind of keeping our foot on it and we expect to continue to do that more and more. The board has just approved another tranche of railcars for us. As we now got the sawmill business and we're finding more synergies by, for example, shipping lumber up to the Port of Bremen, using the same railcars do a triangle, over to Port of Rostock, bring brown wood back down to Rosenthal and Friesau and do that. So we're continuing to expand our - the size of our fleet in Germany as we grow the business and that will help both control and possibly even [indiscernible] help us reduce some of our cost.

Got it. And then lastly, David, can you just speak to your inventory position? I know - and I'm assuming the sales out of inventory had more to do with the Celgar shuts than anything else. But going into the third quarter, do you expect any inventory build or release on the pulp side. And then, I also noticed it's small than the wood products segment. You produced a fair amount more than you shipped. So what's happening there?

Yeah, I think we'll - that's a good thing you point that out. I think inventory will build a little bit in the third quarter. Celgar is just the timing of vessels and the strength of the market. We got right down to about 18,000 tonnes at the end of the quarter at that mill. And that's lower than normal, so more in the 35 to 40 range is more normal. So we'll build maybe 15,000 to 25,000 tonnes of finished goods inventory by the end of the third quarter.

Got you. That is super helpful. Thank you, guys.

Okay. Great.

And there are no further questions in the queue at this time. I'll turn the call back over to the presenters.

Okay. Well, thank you, everyone, for joining the call. And as usual, if anybody has any further follow-ups, don't hesitate to reach out to either Dave or I. We're going to be around for the next week or so, so happy to take your calls. Thanks again.

Thank you very much. Ladies and gentlemen, this concludes today's call. You may now disconnect.