Good morning, and welcome to Mercer International's Fourth 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'll begin by reviewing the fourth quarter's financial results. We're pleased with this quarter's results, particularly the ways our financial and operating performance reflect both the benefits of our long-term strategy and the operational priorities we review each quarter on these calls. Following my remarks, I'll pass the call to David to expand on our strategic progress, cover our key markets, operational performance, the integration of our new assets 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. We achieved strong operational and financial performance in Q4 with the highest level of EBITDA in our history. The results were driven by a record pulp and energy production, combined with solid pulp prices and a relatively strong U.S. dollar. Q4 consolidated EBITDA was $118.1 million compared to $86.7 million in Q3. When compared to Q3, our Q4 results were also positively impacted by lower annual maintenance spending, strong energy sales volumes and a moderating fiber cost. When compared to Q3, our planned maintenance program was lighter consisting of only a 3-day shut at Stendal. The shut resulted in lost production and direct costs impacting EBITDA by about $2.9 million compared to $10.8 million of planned maintenance costs and lost production in Q3. Our pulp segment contributed $118.7 million of EBITDA, and our wood products segment contributed EBITDA of $3.3 million. As usual, you can find additional segment disclosures in our 10-K. In Q4, the average European pulp list price was…

Thanks, Dave. And good morning, everyone. As Dave mentioned at the opening, we are very pleased with our record Q4 performance. It is gratifying to see the benefits of our long-term value-adding strategy taking shape, and as a reminder, the key pillars of our strategy are maintenance of modern world-class assets, acquisitions and organic growth in adjacent businesses and spaces where we have core competencies, prudent management of the balance sheet, all while maintaining the highest standard of safety and sustainability. Our focus on our assets has allowed us to achieve record quarterly pulp production and record quarterly EBITDA. Our Celgar mill, where we completed major upgrades earlier in the year, had its best-production quarter in seven years. The upgrades were part of the capital expenditure program that included other debottlenecking initiatives at Stendal and Rosenthal as well. The Friesau sawmill ramped up well in Q4, after the completion of the first of a two phased $50 million expansion program that will significantly improve its production and grade outturn. We also advanced our growth objectives considerably in Q4. We added 645,000 tonnes of pulp capacity and 2.8 million cubic meters of timber tenures with the acquisition of Peace River and Cariboo Pulp mills in Western Canada, and we added a new sandalwood extractive business to our suite of bio-extractives. The acquisitions and our ambitious capital program were financed through the modest use of cash from the balance sheet and new senior notes, leaving our balance sheet a firm foundation to support further growth along with a steady dividend. As I noted, our mills ran very well in Q4. Excluding the results of our recent acquisitions, we produced a record 393,000 tonnes of pulp, which allowed us to produce 539 gigawatts of power. In addition, I'm very proud to say that…

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

Few questions. The Peace River broiler project in August. Can you go through the math on how much business interruption insurance will cover again? I missed that, and I'm just trying to gauge how much of that will be offset -- the EBITDA hit will be offset by the insurance?

Yes, sure. The total length of the shut is 58 days. And the length of time that will be covered by business interruption for lost earnings is 34 days.

34 days. Okay.

Yes, and what that margin is, Sean, will depend on the market at that time. It's -- let me take again -- do now, it'll be -- whatever the market would have been, whatever earnings would have been earned in those 34 days will be covered by the insurance.

And that will flow through in real time? Or will there be a delay in the insurance recovery will show up, maybe a quarter later?

Yes, well, these things are not always done the same way. If the first layer of work that happened has any indication, there was fairly immediate -- there'll be like a deposit of half of what the expectation is and then you creep towards what the ultimate is. And the final amount is, it's always a look back calculation. So it will have to be several months after the time frame. But you don't have to wait for everything. There will be deposits as about it becomes clear.

Okay, understood. Can you give us an idea of the Q4 contribution from the MPR mills, like, maybe we get some from the volumes and price realizations, but it is my understanding, inventories were written up on the closing of the deal, and -- just trying to get a sense of how much, if anything, those mills contributed to Q4 earnings?

Yes, really nothing. Yes, the -- for your modeling, I guess, it might be helpful. So we bought around 62,000 tonnes of pulp, and you buy it fair value. We produced 42,000 in the period that we own the mill, and we sold 40,000. So we've got another, what is it, 25,000 to go roughly without margin on it and everything else will start kicking in.

Understood. Last question for now. Any updated thoughts on the marketing plan for the MPR mills in terms of repositioning where that tonnage will go in anticipation of changing the geographic mix going forward?

Yes, well, that's an ongoing process. So Mercer is going direct in North America. We're continuing with Marubeni in Japan and Southeast Asia, and we're running everything into China through the Mercer system. So we've got relationships that Marubeni -- that DMI didn't have, I guess, and there's also some really strong relationships that Marubeni have, particularly in Japan that we'll continue to work with them to deliver on. So I think there is synergies for us, for sure. We'll optimize the mix both geographically, and we'll have a slightly different way of approaching the market compared to the way that our predecessors did. So I'm feeling pretty good about the development so far. It's no problem selling the pulp out of that mill. It's good pulp and got to be following, and we'll just continue to optimize.

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

David, how much lower do you think the European log costs at presoak could be this year, given the -- all the beetle and storm wood that has to be processed?

Well, I think, we're kind of getting close to the floor right now. Not expecting a significant reduction from here. But I think we'll continue to have this kind of wood for quite some time. There is a lot of it. So our focus is to take advantage of some of the lower-cost wood and produce products where the -- for markets that that products are suitable for coming for wood like that, but also to continue and focus more on fresh wood as often as we can to produce the premium products that we get higher margins on.

And how much of maybe a negative mix impact is that if you're producing more low grade?

Well, it's hard to estimate that. I mean, the way we approach it, if we know the logs got beetle stain in it, we put -- we produced products for markets that allows stain. So that's put you into the dimension markets U.S., U.K., South Korea maybe. And if it's timber break wood that's coming from storm damage, again, that's probably a dimension product, and it slows us down because we got to be so careful with the grading. It's tough to optically scan all that stuff out. So you have to -- some of it's like training the AI integrator to identify the timber breaks, but you also have to slow the lines down, so human eyes can see it. But it's -- you're benefiting from a significantly lower log as well. And when you've got damaged wood like that, there's a lot more residual chip production, your yields are lower and that benefits us from a pulp mill. So convoluted answer, it's not all negative. There's quite a few positives in it as well. And as a percentage of our volume going forward, it might be 30% or 40% or something like that, of that kind of wood that we'll continue to buy.

That's helpful. And maybe any update you can give us on how the M&A pipeline is looking for sawmills in Europe?

Yes, well, I don't know, if I can say that much at the moment. The way we approach it is, we're very disciplined. We're -- we got time on our side. We are not in a rush. We don't want to pay more than trend values. We don't want to pay peak earnings type values, and we've got a really nice project at the Stendal pulp mill. It's -- if we build our own project there, it takes a little longer to realize the earnings from it. But if you take the long view, having sawmill capacity in around our pulp mills in Germany is a very profitable thing to do. So we're continuing to work hard on that, and like I say, we'll have things to announce when things are ready. But we'll do something there for sure.

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

Just wondering -- sorry, if I missed it. What are China softwood pulp prices doing month-to-date or quarter-to-date right now, if you have that handy?

Yes, well, China softwood prices are transacting at $700 net today, up $20 from the floor in January.

Great. And then -- I'm sorry.

The January's volumes were really big, like you could sell anything you had in January. I would say, there's a big shift of pulp from producers to the paper side.

Okay. Good. And then on the hardwood side, I think you gave us the inventory days for the softwood. Do you have that handy for hardwood by any chance?

Yes, at the producer end? Yes, I don't know about it top of my head. It's higher than average, and I would say, hardwood sawlogs in the ports are also higher than average.

Okay. Great. And then the last question was, so most of the hardwood pulp to China, I should know this, but where is it being directed to geographically speaking? Would it make sense to give us hardwood prices by region or not really?

No.

Yes, we're in the southern half basically is where we go and you have the resin, pulp and others going into north of Beijing in the plywood area and so on. But it's all -- it's common pricing in our market there.

Your next question comes from Joe Pratt with Stifel.

Could you just run through the '18 capital expenditures by your asset classes there, the sawmills, the legacy pulp mills and the 2 new mills in Canada? And what you anticipate those numbers being in '19?

Well, let's see, if I can do that. Well then I've find a piece of paper to help you with that. There's quite a bit going on there.

Well, we could it do it this way. I'm kind of interested in your capital allocation thinking, and that's why...

Yes, here I can -- Dave -- he sent me a piece of paper for you. So your interest -- so I've been saying for several years that as part of our capital allocation is to -- what we've got really great projects, high-return projects, which are like 3-year payback or better. I mean, we should be doing those things and for a whole bunch of reasons, it ties into, like, a solid asset maintenance strategy, I think, for long-term value creation is very important, projects that enhance the sustainability of our mills in changing times, things like reducing consumption of consumable things, reducing the energy consumption, extracting valuable byproducts, reducing fossil fuel usage, reducing water usage. All -- so we -- all these things are kind of blended into the Mercer value system and the types of things we focus on. You need to have some maintenance of business capital because that -- if you do that right, your mills will run reliably over time and then you want to have some combination of high return. So we try to keep -- slightly more than 50% of everything we spend will be in high return and sometimes, it's higher and sometimes, it's a little lower. But on average, that's kind of our philosophy about at it all. And then there's also some of our -- some of the work we do is informed a bit by opportunities that may exist, things like wastewater offset -- wastewater fee offset programs in Europe or government grants that might be available, in concluding, in Western Canada for things like carbon reduction and so on. And so if we can reduce the return with some by focusing on things with the jurisdiction in our -- where our millers want then that, obviously, is…

I greatly appreciate that breakdown. So the $170 million becomes what number in '19?

Well, we haven't got a number to give you at this stage. The way we approach it is, we look at long -- we have long-term planning, that's always rolling forward. We continue to have some very attractive projects at all of the pulp mills, and we will develop next year's plan in the context of where we are in the market and wood availability and all these other kinds of things that we need to take into consideration as we think about what the next priorities will be.

Okay. One last question, just on the price...

Joe, sorry just to -- maybe I didn't answer that well enough. I mean, the $170 million could be -- like, a lot of that's discretionary, right? Like, it's capital, we don't have to spend, but we do because we think it makes a lot of -- creates value. But our capital opportunities are very flexible.

And just one quick question on pricing, just for the 3 areas, China, the United States and Europe. What was the high in '18? And what's the current price?

Well, in Europe, we went from $1,230 down to, where we have $1,130-ish today.

Yes, that's right. So we were at $1,230 in Europe for a large portion of the year, that was the high in Europe. The U.S. reached a high on some spot pricing in the U.S. was $1,450. And today, it's around $1,400. And then in China, the peak in China was $910 earlier last year and today, as David had mentioned, we're around $700.

Okay. And with the acquisition in Canada, what portion of total pulp production will go to China? Be sold in China?

Total? Yes, I don't think that's scheduled...

It's about 1/3 to China, just over 1/3.

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

Just on the pricing commentary, just so we understand, you mentioned some buyer strike. We've heard that from smaller companies that I look at. Up $10 off the January bottom, you said a $20 price increase was announced, I guess, for February. You could sell a lot of tonnes in January. Can you sell a lot of tonnes in February? And does that give you confidence that the [indiscernible] price increase has been announced?

Yes, maybe just break those down into understanding the market over there. So generally, when a -- market like China, when buyers believe the prices are more likely to go down than to go up, they hold back, and they buy only what they really absolutely need. So they'll have varying degrees of inventory they can rely on, and they'll buy what they need to feel comfortable in that circumstance. But they -- I call it a buyer strike, it's like they just say, they're not buying because they know it's going to be cheaper next month or think it will be. So that's what was happening in the fourth quarter. So in a commodity business like ours, price comes down, trying to find that place where these guys will place orders, right? And it came down pretty quickly. The other markets didn't react because they were very tight. Europe and the U.S. were supertight, in fact, we were redirecting tonnes that would have otherwise gone to China and selling them in the spot market in the U.S. at tremendous prices. That's why the mix looks so good in the quarter. So anyway, right towards the end of the year, producers dropped to $680 and that was the price that China was looking for. And anything -- you could sell anything at that price, like the market would take all you could give them. And so I'm sure there was a big -- and everybody would have been selling, and so there will be a big transfer of inventory from the producer side over to the paper side. And then, producers announced $20 up. And pre-Lunar New Year, there would have been transactions and there would have been successful at that $700. Then everybody goes on holidays over there, and we're waiting to see what happens when they come back. And it'll either be they're big buyers, and then we'll start to creep back up or there maybe may not, maybe they're still cautious, they're uncertain, maybe with some of the news it comes out of the trade discussions between the U.S. and China will signal a direction, whether people are optimistic or pessimistic, and it's too early to tell how that's going to go.

Okay. That's an awful color. I was up late last night, you had me read the 10-K. One other things I noted was North American sales in terms of revenue mix were up almost 100%. I mean, more than that in 2018. Can you just touch on that briefly? Should we expect continued growth in North American sales into 2019? And I'm saying that -- caveating that with the mill mix has changed, but even excluding the mill mix, would we be selling more from Celgar into the U.S.?

Yes, we've got some new opportunities with our acquisitions as well. So we've got the hardwood piece, and we've got some -- Peace River who will produce some softwood, and we have choices where some of that goes. I mean, we'll continue to support Japan and some of our Southeast Asian markets, where the margins aren't as volatile as what's been happening in China. And those are long-term relationships. So we'll honor all of those, but there will be some flexible tonnes for us, depending on where the higher mill nets are, we'll be a little bit -- we have a chance to be a bit more opportunistic this year, I think.

Okay, that's helpful. And then can you help us understand your outlook on fiber costs going into 2019 by market?

Yes, well, in Europe, I think, we're going to see fairly steady fiber costs at the current level. Maybe some little marginal improvements, lots of availability. And we'll just continue to work on optimization, using our logistics to continue to work those costs down. In Western Canada, just at the moment, log costs are pretty high for the saw millers. And as you know, they're curtailing the production of lumber, have been pretty significantly, which is helping the lumber price side, but it's been tough for them at current levels. But with all the curtailments, lumber prices, as we're heading into this -- we're getting into, guys needing to order lumber for the spring building season and although weather has been challenging for everybody, it's only -- we're only weeks away from when -- we're expecting to really see some significant bidding for volume, and I think, that will get our sawmills back up and running, and there may be some rationalization due to log availability in some regions. But I'm not concerned at all that we won't have access to fiber. But I think we'll probably be in and around the levels we are today for the extended period with some improvement in volumes possibly and some optimization over the coming months. But generally, good shape. And for Peace River, on the hardwood side, what's really nice about that is what we acquired with that mill is a really big FMA, forest management agreement. It's 2.7 million hectors of land that has growing forest on it, and we manage that area ourselves. And so we can optimize, I mean, it's a tremendous long-term wood supply without any of these other kind of complications in other regions, so.

Okay. And you touched on the capital management, which is always helpful. When you look at the balance sheet, high-level problem, we have $240 million of cash. That number probably gets higher in the first quarter with profitable quarter and then some working capital changes, it sounds like $350 million plus this year in cash. Is that -- should we think about that more as dry powder for potential opportunities? Or does it make sense to start to do something on the debt side with some fairly attractive call prices on some of our outstanding bonds?

We'll be certainly watching that. So it'll be a continuation of our balanced approach and honoring the dividend and growing it over time, debt reduction, reinvesting in our businesses, being balanced in our approach. We will continue to do that.

[Operator Instructions]. Your next question comes from Adam Zirkin with Knighthead.

Just two things. One -- first is with respect to fiber costs. David, with the environment you just laid out with the sawmills about to get more active in Europe, frankly, I would have expected you to say that you expected the fiber costs to fall a bit more significantly. So are there any other countervailing factors happening that are causing putting inflationary pressures while the sawmill activity perhaps pull things down? And perhaps as part of answering that, can you maybe remind us as to the advantages of the railcars? Because I didn't realize and maybe I should have that you had another 150 of those coming this year.

Yes, well, there's so many factors that impact wood in Europe. Our approach is to -- and some of it's logistics, some of it's the timing of when you're buying, some of it's how the sawmills are running, some of it's weather, some of it's what is happening in other regions from a competition point of view. So sort of balancing all that, we -- like, we are strategic in what we do. So we'll buy more wood in the summer and fall to build wood decks for the winter. And then when the winter conditions come and it's maybe the forest floor is too muddy or there's too much snow or whatever, we have wood available to keep the mills running that we built up an inventory. And then as we get into the spring, we work that down again and make sure that we can buy fresh wood again for the next year. So that's one cycle. Another is, there is times when maybe other, like, the demand in the forest, in general, gets fairly heavy, like, lumber prices are really high and everything is going very well for everybody. So what we do in those cases is we'll use our logistics capability to go further away. And so from Central Europe, we can go into the Eastern countries, like Poland, Czech, and we can get down to the Baltics very efficiently. We can bring wood in from anywhere in that either -- Norway, either by rail or by ship. And then we control port infrastructure. We have rail-siding infrastructure, and we have our very superefficient railcars that we designed and built. And if you can lower your logistics costs, you can go further away where the wood is cheaper, and it's just kind of balancing that import…

That's great. Actually, the second question I was going to ask you, David, was about the Friesau project because that is, though, exciting obviously, very, very difficult to model. Have you -- is there anything you can say to us sort of with respect to how you think about the economics of that project? Because Friesau, it's is a big one. Does it fit that three year payback parameter? And how do you think about defining that?

That's how I would model it, Adam, is give us a 3-year payback on that capital when it's completed and grow the synergies at Rosenthal, from a percentage perspective. By the time we're done, if we're adding 200 million board feet more lumber from what was 430, that's an increase in the synergy to Rosenthal.

Can you remind me just what the base synergy number is, were there as well as the total size of the project? I should have those off the top of my head.

Yes, we've disclosed a $12 million synergy for 2018.

Got it. And then the total cost of the project, David? Remind me.

Doing $50 million this year. We put about $25 million into it last year.

And there's some in '20. Is there a little bit less in 2020 or it actually finishes this midyear?

A little bit. Yes, a little bit. The $50 million covers everything. It might -- some of that might carry into 2020, yes.

I see. Okay. So $50 million plus $20 million, so $75-ish million is a good sketch number?

Yes.

Awesome. And then very lastly, on the Chinese markets, I recognized we're sort of sitting in the midst of the Chinese New Year uncertainty. But did you get a sense perhaps in the first quarter -- sorry, in January of where the inventory transfer left inventories at the paper companies? Were you trying to team sharing anything on the status of their stocks?

Well, nothing specific. I mean, I think, we've all recognized they were on papers going into it. And they would have bought as much as they can, but logistics are what they are. It takes a while to gather all that pulp out. And I think it's important to understand. I mean, there's still a lot of inventory out there, like hardwood and softwood. I mean, there's been a slowdown. And so there is inventory we've got to work through. It's just a question of how well these guys run on their end products. I'm not worried about the tissue guys or a lot of the specialty guys, but when you get into some other grades, like some of the packaging and the export packaging markets, some of the printing and writing, a lot of it's going to depend on how healthy China is. It's coming through this trade dispute.

Yes. Got it. And then -- sorry, if I can sneak in one more. I noticed that, David, in the prepared comments, you mentioned some extra shipments out of inventory at Celgar in the fourth quarter, which I think we were expecting coming out of the third. It looks like on a whole though, the company built a little inventory...

Yes, we're still...

Is that reflective of the same trends we're talking about here? Or was there anything anomalous there?

Yes. No, it's reflective of exactly the markets. So in Europe, there was some caution. It's a contract world over there. So we sold all our contract volumes, but we built inventory a bit in combination of nobody taking any extras, pretty light on the spot side and the Christmas. So all that stuff is in there. And I think, the market just got careful in the last 1.5 months and sort of built inventory. The guys are -- we've -- there is -- we don't speculate. We intend to hit the bid as a company is our strategy. So the guys are working hard to sell it without impacting the markets and by -- it will work its way down over the coming months.

Got it. And as we sit here in mid-February, so far this quarter, the assets are running well?

Yes, very well.

Your next question comes from Joe Pratt with Stifel.

Just a quick question here. What was the high on U.S. lumber prices? And what is that number now? And then correspondingly, lumber, the high in Europe and the current?

Joe, we should be doing these kind of things offline. I just don't have a steel-trap memory.

Okay. Let me call later.

Yes.

Your next question comes from Graeme Witts.

David and Dave, congratulations on a brilliant year and the acquisition of the new assets. My question is, are you happy you have the management to integrate these new assets and to look further into the future for further acquisitions?

Yes, thank you, Graeme. Thank you for your comments and they are great questions. So I am really proud of our team and thrilled with the team that we've just joined. The Peace River team is -- they're excellent. It's a nonunion operation. It's way up north as we all know, but the people that work in that mill are there because they love the north and it's never really thought about it this way, but they recruit from communities that are local. They have a pay scale that encourages additional trades. So there's a lot of guys ticketed 3 and 4 trades, and they all -- they're all in the same kind of -- they are all rowing in the same direction. There's about 100 less people in a nonunion mill than you have in a typical Canadian unionized mill, and it runs really well, touching wood. It has -- it's historically run well. It's well invested, and they're very professional and they're fitting really nicely with the Mercer culture there. They have the same values as us, continuous improvement, world -- striving to be world class, all over health and safety. So I think, we're going to learn from them and they're learning go -- they'll learn from us. And I -- yes, it's just -- it's not going to be a difficult integration. It's a really nice fit. And I -- we've made a change in Celgar. We've got a new manager there, Bill MacPherson. I'm just thrilled that he's agreed to join Mercer. He comes from the Domtar system. He is a great guy. He's got a great team there. And our European teams are stronger as ever. We've got Adi Koppensteiner fully embedded as our Chief Operating Officer. He's doing a great job. You can see it in the performance of the mills. So we're good.

There are no further questions at this time. I will now turn the call back over to the presenters.

Well, thanks, Marianna. Thank you, everyone, for joining the call. And as well, David and I are happy to take questions in the meantime. But thanks, again, and we'll talk to you again in May. Thanks for listening.

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