Good morning, and welcome to Mercer international Second Quarter 2018 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 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 would 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. As we discussed last quarter, our Q2 results were heavily influenced by the scheduled maintenance program that are Celgar and Stendal mills. This was partially offset by solid pulp and lumber markets, which supported sequential price improvement. Q2 consolidated EBITDA was $60.5 million compared to $99.4 million in Q1. When compared to Q1, our Q2 results were negatively affected by the loss of pulp and energy production along with the direct costs associated with our schedules shuts, the total impact of which we estimate to be about $59 million. These costs were partially offset by higher pulp and lumber prices along with favorable foreign exchange movements. We also experienced some sequential escalation in fiber cost, resulting from the reveneance of weather reduced shortages from Q1. In terms of business segments, our pulp segment contributed $58.1 million of EBITDA, and our wood products segment contributed EBITDA of $6.1 million. As usual, you can find additional segment disclosures in our 10-Q. And Q2, the average European pulp list price was up over $100 of tonnes relative to Q1 while the average price in China was unchanged quarter-over-quarter. Compared to Q1, higher pulp prices positively impacted EBITDA by…

Thanks, Dave, and good morning, everyone. I'll start my comments by noting that we're pleased with our Q2 performance. As Dav noted, our Q2 results were heavily impacted by our major maintenance programs. Celgar stand over down for total of 37 days [Technical Difficulty] and there's completed a number of significant hydrogen projects as well as the regular maintenance activities. I'm proud to say that both shuts were completed safely and all primary objectives were achieved. Celgar shut when 11 days longer than planned primarily due to damage identified inside the recovery boiler to require specialty replacement parts. As I mentioned on our previous call, we also undertook a significant capital upgrade to our digestor with the installation of new screens and nozzles for improved pulp washing along with the new chip in feed system. The nozzle and screen work was challenging, but the extra time turn for the recovery boiler allowed us to get the work done efficiently and on budget. Celgar startup was lower than usual due to challenges of commissioning the upgraded digester, but early indications are that the digester update was successful. Our friseau soil mill performed very well as quarter, producing 112 million board feet of lumber on a 2-shift basis, which was up 9 million board feet for Q1. The solid performance allowed us to achieve about $6.9 million of synergies so far in 2018, primarily between fragile and a Rosenthal mill. For compassion purposes, we achieved $700 million of synergies in all of 2017. Turning to our markets. The pulp markets remain tight through Q2. In Europe, Q2 list prices averaged $1,200 per tonne compared to $1,097 in Q1. European market is particularly strong with limited spot tonnes available and as result, we continue to see upward pricing pressure. July's price is $1,230…

[Operator Instructions]. Your first question comes from Sean Steuart with TD Securities.

Couple of questions to start. One of you can speak to markets in China, specifically. And it sounds like there is pressure on the resale prices. And, David, I'm wondering if you can give some context to, I guess, paper downtime in China. And how much near-term demand destruction there's been and that market potentially as a function of prices for pulp pricing and faster than prices were paper in that market?

Well it feels like a normal summer in China to us. New traders kind of take a holiday. A lot of paper guys are taking downtime. So it's almost just not a good time to really try to push any transactions. We don't have really much pulp to sell this summer to be honest. We had a 30,000 tonnes unbleached craft run going into the shut at Celgar. And then we completed the shut we're making the pulp now, but that will take a month to get to China. So it's -- if we were going to be selling -- if we want to sell a full month's production in China today, we'd probably be down $40 or $50 from where we were a month ago. We will be, by the end of the summer, I don't think it would likely be any lower than that. As you get into September, the market tight enough and the inventory is low enough that, all the guys come back, they need to fill the warehouses again to get back to business. Pulp prices should remain at that level or improved. So I kind of see it is a soft summer Deb. I'm not really, really concerned about. It's -- may be another factor that's important to understand is that over the last 18 months, I think Chinese papers producers have been quite successful raising prices for -- of the paper products, probably more so then European producers. And especially, the challenges typically feel most on the tissue side, where -- it's typically twice a year that the tissue producers negotiate prices with their customers. But in China, I think, the moves have been so quick that they've just are feelings that these guys very successful keeping up with the pulp price movements.

And further to that, David, I guess over the midterm, given any thoughts on speculations about China imposing duties on U.S., imports from the U.S. on pulp and paper. And how that could in fact, pricing in that market over the mid- to long-term?

Yes. It's interesting time for sure. And I guess we don't really -- it's possible to know what will happen. But one of the things we should reflect on I guess is that it is a trade -- tariffs are imposed on products coming from the country of origin, right? So Mercery doesn't have any pulp production in the U.S. per se. China doesn't have any NBSK production. It gets most of its products from Canada or from Europe. So they're not going to put a tariff on Canadian pulp, I wouldn't think. That actually sells in a foot. U.S. pulp on the other hand, which is predominantly fluff, southern soft wood. If there is a tariff place on that in China, that would limit the ability of southern fluff producers to run their mills without really insisting on higher prices I guess or taking huge margins head. So challenging for them, but net for us, probably, a positive.

Yes, that's what I was trying to get out, trying to understand the potential magnitude there. Last question for me, you mentioned interest in potential growth in biochemicals. And Russia was associated with a potential Sandalwood plantation and refining acquisition opportunity few weeks ago in local press. Can you give some context on the scale of your potential growth ambitions in that product line.

Yes, well that particular -- I mean there's a lot of things that we're looking at. As everybody knows, and it's have to be careful before the disclosable. But there is that press in the market so it's true. We've been chasing a Sandalwood plantation situation. And in northern Australia, there is couple of them out there. We've been working on both of them. The one that we're currently active on -- I would categorize, is not really material from a -- an invested dollar perspective. But something that's super exciting for longer-term value creation. Sandalwood is an exotic tree that is traditionally Sandalwood products have come to marketive -- traditionally, from illegal harvesting activities. That growing stock is down to less than 10% of the what it was just a short 10 years ago per se. And plantation Sandalwood will become the new supply as the legally harvested wood is pretty well eliminated. And so having a fairly significant growing stock that will previous value down the road, is kind of option value at the stage for shareholders. It's not -- just as I say, it's not a big capital outlay, but it's getting our foot into -- our toes into a business that we think we can grow as it's a platform for growth. And really, when you think about our core competencies, how this relates to that, it's taking a growing stock, adding value through a downstream processing and marketing. And a Sandalwood plantation today that is coming onstream is, it's difficult to value the growing stock but there's a lot of it, and it's a lot of value. It just comes of years down the road. So that's what we're trying to do on that particular one. It's not a done deal yet, but it's something that has been linked to the press or something we are working on.

Can you give us some perspective on potential scale of that opportunity? I guess in terms of dollars committed for you guys, potentially?

Yes, let's as I said, Sean, it's not material from an investment -- invested dollar perspective. But it is very material from a value creation. And I don't want to -- it's too early to be throwing those kind of numbers out. But it's something that's quite exciting to us.

Your next question comes from Hamir Patel with CIBC Capital Markets.

David, on the maintenance front, Q2 is obviously, very heavy. Given the timing of the shut, is 2019 still looking like it should have significantly less maintenance then 2018?

Yes, yes, that's right, Hamir. So Standels on 18-month rotation as you know. So that will eliminate a number days for 2019. There's to be 2 small shuts but not a large one.

And for the two other mills?

That will be normal 12-day shuts as far as we know at this stage.

Sure enough. But, David, just given the investment that presale, is that change how you think about potentially, building a greenfield lumber mill at Stendal?

No. I see us building a platform in Northern Europe, 2 to 3 mills, possibly 4. And stendal is an option. We're getting fairly far along on our feasibility studies and preliminary engineering. And there is tremendous synergies to build these general Stendal sawmill. But there is also -- we think opportunities to get existing capacity that you don't have to wait 2 years till you build it. So we're focused on both. And I'm hopeful that we do both in the performance of time.

And, Dav, any thoughts on how multiples in Europe Friesau recommended sinsuated freesales.

Well it depends on the situation. There's not a lot of transactions to pit to. I think multiples in Europe would be similar to multiples of other transactions you've seen. I don't think Mercer certainly wouldn't be buying on the high end of the multiples we've seen in the U.S. recently. But we're looking for situations where we can create value. And so be careful I don't get too far infront of this as well.

Fair enough. Just final question for David. Could you run through the production and shipments by mill in the quarter?

Yeah , sure. So in thousands of tonnes, production by mill for Q2, Rosenthal was 91,000 tonnes, Stendal 140,000 tonnes and Celgar 79,000 tonnes. And in terms of sales, volumes, Rosendahl 91,000 tonnes, so matching production, Stendal 140,000 tonnes, and Celgar 107,000 tonnes.

Your next question comes from Samuel McGovern with Crédit Suisse.

Just to sort of think about the impact of the downtime during the quarter. Anything you guys have $61 million after that impact as you to $69 million before the impact of downtime. Is it as simple as just adding the together $220 million proforma figure backup the impact of the downtime?

Yes, that's right. That's right way to think about it.

Then as you sort of thin k about the normal maintenance downtime, I need your segments. How would that EBITDAs breakdown. what would the impact of the downtime be split out across two segments?

You mean by mills or?

Yes, that's right.

Yes, the EBITDA will impact on Stendal was actually a little larger than Celgar. So that would be about 32 for Stendal, 26 for Celgar.

Got it. just thinking about the capital allocation, you talked about potentially spending on lumber mills in Europe. How you think about, how you plan to allocate the cash flow that you guys will be generating. Obviously, you guys have already de levered pretty substantially. I know you guys have announced the dividend. What other things are you guys thinking in prioritizing?

Well, so there is -- I started the -- to develop this theme on the last call. There is a number of things we are focused on. One is our sawmill platform in Europe. And I spoke a little bit a few minutes ago about that. But just to clarify that, it's -- with the pulp capacity that we've got in that market. And if we buy bills sawmills, the synergies are tremendous. I mean the -- it's the location of where the chips are produced, it's the waste heat that's being used and the cilms. It's just the whole infrastructure. So there is fiber synergies, there is operational synergies and so on. But there is also really strong fiber market strategy in there. So as you all know about our railcars and our strategy of bringing an importing woods and flooding it into the domestic market to help to temper the price of industrial wood in the domestic market, where we buy our pulp mills. If we do the same thing with sawlogs, we just have so much -- such a strong relationship with all of the harvesters in our region. And we have the capacity to bring in imports that, to some extent, we're able to normalize prices in our market. Then if you imagine somebody we're competing within the sawmilling business in that region, or somebody who might think they want to move in or compete with us. Rather than paying -- as you -- when you buy wood for facilities beside of pulp mills, you've always got a marginal cost curve for wood, you got low cost wood, you've got some high cost wood, which is an average cost of the wood. So if our high-cost wood today is coming from Poland, Eastern Poland or Eastern…

Your next question comes from Daniel Jacome with Sidoti & Company.

I had a quick question on the lumber operations. May be I'm being [indiscernible], just wondering, it looks like 22%, you said, was shipped into the U.S. in your total capacity of production out there. I think 1Q was 27%, so maybe -- just let me -- some color on what drove that kind of quarter-to-quarter change if I look at kind of random length to the U.S. lumber prices were up alto higher in 2Q versus 1Q. I think like $540 2Q up from $484 average pricing in quarter immediately preceding that. Was it just something with transportation or at higher returns? And how should we think about that metric going forward? It kind of like the mid-20s, kind of a base line to use. That's all I had.

Yes, so good question. Our approaches to allocate roughly 25% of reach out to the U.S. market, we're right in the middle of central Europe, where we are. And Europe is a -- I guess if look at it over the longer term, it's been a much less volatile market in the U.S.. It's a strong market, good pricing. And our customers are very close to us. So the U.S. market is marginally better, but the European market is also very good for us. The part of the consideration is, there were grading issues in the U.S. generally for European lumber starting in the fourth quarter of last year. All European lumber producers faced that situation. And really, what it is, it is the traditional European split stock that, which is 2/8's been cut into 2/4s in the planers, which is very common procedure, produces the creature risk of the spike knots. These are the notes that you can't see from the very center of the tree growing out. And U.S. grading guys have -- that they really kind of focused on that, feels like for the first time in the fourth quarter. So as I say all European producers got caught up in that. So Mercer, because we're really focused on building a strong brand in the U.S., we just pulled out all split stock, and say, we're not even going to take the risk. And so we don't have any grading issues. There at the point, we did have some preliminary issues when we were first getting started with this splits, when the issue was being identified. But we are very proactive. Pull back really improved our quality control, eliminated the splits going into the U.S. and focused then the rest of the production on our strong European markets. Some of the capital work we're doing, which includes improved optical scanning and the ability to cut different saw patterns, which don't require producing split 2x4 from the center of the log will eliminate that issue and provide much more volume for the U.S, should we want to let the club outs and so more in that market.

Okay, that's helps. So with your average realized pricing, lumber was 433 assuming the U.S. was 540. And I'm starting back into the European only, lumber. Am I in the ballpark with kind of low 400s per thousand board price?

Yes, I think so.

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

A few questions here on the CapEx and some of these more strategic investments. I think you updated us in the status of the sawmill product to be considered near the Stendal. What's the status of the overhauls for one of the electrical turbine's. I think it was Stendal or Celgar. And the reduced revenues that were encountered during that process. And how many and when would there be more of these once in every 10-year turbine overhauls?

Yes. So that's TG 1 at Stendal, is down for its revision. And in the maintenance stallers that we were talking about earlier, the lost energy revenue from that upgrade in the quarter was somewhere around $10 million. And it's about $4 million left to go for Q3 on that turbine. Celgar's had a turbine revision going on as well. And that is coming back up, we think, in early August. So not that big of hit for this third quarter. It's a -- it would be sort of $1.5 million a month, I guess, but turbine would take us down.

So how turbines are at Stendal. I think it was open, I guess I've been here for that many years before Stendal was even open.

Yes. We put the second turbine in the Stendal in 2009, '10 timeframe. So that will, probably, I guess it was probably, 3 or 4 years from now. And Rosendahl got a turbine that will be going through it. So it's long-term revision in 2021 or 2022.

And since, I guess, I've been around for as long as -- the rumored investment in Australia sandalwood was discussed, of course, is a long-term opportunity. I wanted to know if you can update us on the nano's cellulose joint venture investment made a long time ago with a resolute, and what is coming of that?

Yes, that's performance by philmant send. That's again a long-term value creation initiative. So for shareholders who aren't familiar, that was a $3 million commitment that Mercer made, along with a $3 million commitment by Resolute. So it's 50-50 joint venture. It has its own team, and its business purpose is to develop commercial applications for cellulose filaments. And the -- it's a -- I'd say, from our perspective, it's going very well. There are quite a number of very interesting attractive initiatives where the value to the customers appears very clear. There is -- we have access to production facilities, and we're expecting in the fullness of time that will -- could be very significant value creation initiative for us. It takes time, so these things all need to be pattern protected as you develop the applications. So you can imagine there is always a long work step with the potential customers. This is a -- this will be a -- like a chemical product that's provided to a customer, that allows him to achieve superior performance at lower cost on whatever the products how he's making. And we need to make sure that we're the only guy that can do that with him, supply and with that material. So we will have sales in 2019, small amounts of sales as these customers ramp up the use of the equipment -- fiber. And we see that is kind of like a slow and steady ramp up business. Some of the applications seem very interesting, things like additives to fracking muds and additives to concrete, for example, could be potentially huge volumes down the road. But as I say, we have to take it a step at a time.

Okay, then two last ones here. Are you -- you did 20,000 to 30,000 tonnes -- thousand tonnes of batch of un black bleach pulp for China. Can you describe what the -- if it's quantifiable the favorable impact in any future plans or opportunities to produce them bleached again?

Yes, sure. So there was a number of factors going on there. So what the recycle permit challenges in China, we saw some pretty heavy demand for unbleached Kraft. In fact, We had some Chinese customers asking us if we could do a run. We have a -- at the same time going into the shut at Celgar, we're doing some retiling work in one of the bleach towers, the DO tower. If you have to retiling in a short -- shut window, it's more expensive than if you can spread out the time a little bit. So we thought if we took the bleach plant down for a next or couple of weeks, that will give us ability to do that capital work at a lower cost. And then when you're -- because you're not running the bleach plant, you save about $80 or $85 of chemicals. And also because you're not bleaching and putting the pulp through O2 dulcification, you got a better slightly yield. So all in all, we sold that unbleached that add net $80 a tonne. And our bleach pulp was going for somewhere between $880 and $910. So when you put it all together, it was a really successful run for us. Not sure when we'll do it again. It depends on market conditions, and we do really want to maintain a strong partnership with our existing customers in China. So we don't want to be doing this too often. We want to be a reliable supplier for them. But on occasion, it may make sense for us depending on market conditions and other things that might be going on at the time.

And then lastly, what's your plans for upcoming investment presentations non deal, et cetera in the coming months?

Yes, we got a quite a bit going on. I'm going to be at the Jefferies' conference in August. There is also a TD 1 there coming up. We've got -- we'll be at Sidoti. David?

And then, we're also planning a couple of non-deal roadshows in September and October in East Coast of U.S. and in Canada as well.

That's right. So we'll be going out with RJ in Canada and the CIBC in New York and Boston.

Your next question comes from DeForest Hinman with Walthausen & Co.

Just maybe asking kind of a question similar someone else. Big picture base is, the company is always being kind of hard to analyze because a lot of moving parts. But you have the interesting situation in second quarter. You guys are put the pencil and paper and break out the expense related to Celgar and Stendal. You had to add back all of those numbers just on that segment. [Indiscernible] going to get number. On the EBITDA side, it's like $110 million. So you divide up by 90 days in the quarter, it's like a $1 million a day. So if we have kind of pencil of the paper steady-state environment, if it's three mills of running, they make over 100. The make of $1 million a day, is that a good way to think about the business right now?

Exactly. Yes. And I said the first, I said just -- mention just to be really clear that the reason we break it out so carefully is that we're one of the few pulp guys that report under U.S. GAAP like you, the Canadians use IFRS. And so what they do with their maintenance shut dollars is they capitalize them, and then the amortized them to the next shut to depreciation, amortization line. So you never see it in EBITDA.

And so we'll talk about that $1 million more. May be pricing, at least right now, in July, up a little bit versus where it was in the second quarter. And it sounds like we have expectations for following fiber prices. so $100 a day paper, it could be a little higher end to the quarter?

Yes. We don't typically give guidance. But the way the market looks to me today, I think the back half is going to be a boomer.

Can you go a little bit in more detail on what happened with the boiler? What was the issue inside when we got inside and looked around?

Yes, there is always -- these sort of things are pretty common stuff. The technical thing is, inside a recovery boiler, our devices called siplers, these have -- there are nozzles that rotate if they got steam that come through. When they blow, they blow the salt cake off of all of the piping in the various areas of the boiler. And if they can get misaligned or have any kind of malfunction during the period, they -- salt cake can build up in the boiler. So we had a big build salt cake build up in one corner of the boiler up high. And as that salt cake fell down, it dented the floor. And so when you go through the maintenance shut, you cool your boilers down, you clean them out and inspect all damage to all your fitness tests and fair wipe. In this case, we looked at the impact of that event and decided to replace the floor pipes in question. And that requires ordering additional pipes, reverse engineering, the exact shape of the mall and shop in Edmonton. And they're lifting them to the mill for installation, which is really what took the after 11 days. It's not a hugely expensive thing from the scheme of things, but it's just -- it's very finicky work that has to be done precisely. And of the guys did a great job of expediting that all procedure. And it's important to do that as recovery boilers are sort of the heart of the mill. And we expect to have our boilers in great condition at all times.

So is that more or just the context, was that more had to do versus nice to do on this shot?

Well from a Mercer's perspective, it was a must do. I'm not sure every operator of put mills would've done it the way we did it. We tend to follow best practices always. But it's one of those things -- it doesn't change the performance per se, but it protects the assets over the long-term.

Okay, understood. And then on Celgar, you mentioned briefly some of the investments made there on the digester and the screen. It sound like we were rented up slowly. But can you help us understand how it's running in July, either weekly production level or how is it performing versus prior to that investments?

So the objective of the investment in the digester is to, one is the in feed. So we were running that digester. We are putting is chips as fast as the equipment allows us to put them in. So it was physically a bottleneck of the top of the digester. Couldn't squeeze anymore and faster. So we changed the infeed system including a new chip then the end of the top, which -- and a screw with -- screw feed system, which allows us to -- we can put all the fiber into the digester we want. So that bottleneck eliminated. Then the next bottleneck is that the digester had a limitation on how well it washes the pulp. And so we've done something we have this exact same procedure done at Rosenthal a number of years ago where you put -- we put about 14 nozzles into the base of the digester and 1/3 layer of screens, which creates a whole -- just really improves the washing at the bottom of the digester. So by improving the washing, you're taking out a large organics that aren't going to be pulped down at the end of the road. And you're removing that with your filtrate, which gives you what we call, a better dilution factor coming out of the digester, which enhances the performance of the bleaching and the O2 to leg. It's cleans the pulp better, reduces the bleaching cost, and it also enables you to cook your pulp, more pulp. So it's -- the challenge commissioning, it is really -- it's just that it's all new. Like when you're -- I digester hits like a heart, it's growth also things going on and the operators have to learn a new way to run basically all the DCS systems…

That seems like that's very technical explanation and in layman terms, were you think [indiscernible]

That puts us a target on 490 tonnes a year that I was describing as the objectives. And also sets up for the next phase of capital for Celgar that we feel will take that mill to 540 and that's in the works.

And then last question just one talking about capital allocation but you didn't mention the previous metrics in terms of returns, three-year payback. We still going to hold ourselves to that return rental as we look at these different opportunities between organic and inorganic investments?

So on the internal high return projects, yes. So pulp mill products and summer projects for discretionary capital and we got lost of our mention. For M&A year ago to let the club a little bit search three-year payback know a realistic target for MD&A. But when we think about asset from an M&A perspective we think about where you have to pay to get the asset. What would we do with the asset. What growth it become and how much would it cost to get it there and when we look at long-term holistic view in making our decisions.

May be. Shareholders are getting spoiled I mean Friesau it looks like going to be pretty fast. Led make yes, it was a great first step for us, for sure.

[Operator Instructions]. Our next question comes from Joe Pratt from Stifel.

Hi Dave, can you walk me through the uses of cash. I'm thinking it's interests around $50 million?

Yes, that's right, Joe.

Okay, and then cash taxes?

So I think you are looking for annual numbers there are, Joe. So interest is typically around $50 million, cash taxes would $12 million, $15 million.

About $15 million?

Yes.

Can you break the CapEx number down by and the pulp mills?

So on an annual basis -- so you'll recall the Friesau, we're in the midst of a pretty extensive high returning CapEx program that will probably total over the next 2 years, $40 million. And MNP care OpEx is quite small, but close to immaterial.

So does that means $20 million in 2018 for Friesau?

Closer to $30 million.

Yes, probably a little higher than that, Joe.

Okay, let's call it $30 million. So how about the pulp mills. What's the CapEx number there?

$20 million, round numbers.

$60 million. Okay. So those are any use of cash going out the door. So $15 million for interest, $15 million for cash interest, $60 million for the pulp mills, and $30 million for free Friesau?

We have our dividend, that totals about $32 million

There are no further questions. I turn the call back to presenters for any closing remarks.

Okay, well thanks everyone for taking the time to join us today. As usual, if anybody has -- after the questions, don't hesitate.

Either Dave or myself, we'll always happy to take your calls. Have a great day.

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