Good morning, and welcome to Mercer International's First Quarter 2019 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 first quarter's financial highlights. Following my remarks, I'll pass the call to David. He will comment on our key markets, operational performance, the integration of our new assets, progress on our strategies and our outlook in Q2. Please note that 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 risk 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're very pleased with our financial and operating performance and how they are beginning to reflect the benefits of our long term value creation strategy and our operational priorities. We achieved record EBITDA in Q1 as a result of strong operational performance which was a result of solid pulp and energy production, a full quarter of our new pulp assets from the DMI acquisition and was despite lower prices for both pulp and lumber compared to Q4. If we excluded the results from the recent acquisitions, this quarter would have still been our second highest quarterly EBITDA result in our history. Q1 consolidated EBITDA was $123.8 million compared to $118.1 million in Q4. When compared to Q4, our Q1 results were also positively impacted by higher pulp and lumber sales volumes, lower annual maintenance spending, and moderating fiber costs. We did not have any planned maintenance in Q1, while in Q4, Stendal had a three day shut which resulted in lost production and direct costs impacting Q4 EBITDA by about $3 million. Our pulp segment contributed $121.5 million of EBITDA and our wood product segment contributed EBITDA of $3.5 million. As usual, you can…

Thanks Dave and good morning everyone. As Dave mentioned at the beginning, we're very pleased with our record Q1 performance. It's very gratifying to see the benefits of our long-term value adding strategy taking shape and as a reminder the key pillars of that 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 strategic focus on our assets has allowed us to achieve solid production and record quarterly EBITDA and is driving our enhanced capital expenditure plan in 2019. We will continue to invest in our mills with more than half of our investment being in high return projects, with remainder focused on asset maintenance supporting mill reliability. Some of the projects planned include Phase 2 of Friesau sawmill upgrade. The second phase includes a new cleaner mill, more efficient kilns and improved lumber sorting, which will allow us to increase volumes and significantly improve product values. Celgar will see productivity improvements through a debottlenecking project on its pulp packaging line. We'll also build a turpentine extraction plant at Celgar that generates turpentine sales and chemical cost savings. In Germany, we have commenced construction through long-term capital lease arrangements of another 300 high efficiency rail cars. The majority of which will be operational this year, as well as many smaller targeted strategic investments. Many of our capital projects also have benefits that reduce our environmental footprint. We are completing projects at both standalone Rosenthal that had their origins in the wastewater offset program. And I'll remind listeners that in three-year cycles, we can benefit from approximately EUR18 million of wastewater fee offsets through strategic capital projects that lower wastewater emissions.…

[Operator Instructions] Your first question comes from Hamir Patel from CIBC Capital Markets.

David, how much beetle and storm wood is there to still get work through in Germany? I'm just trying to get a sense as to how long your fiber costs could stay low in Europe?

Well it's, I mean it's going to be all of this year for sure, possibly well into next year. Part of the answer will depend on what happens this summer. But expectations are that and experienced to date are such that you know there is a lot less water that's a lot less rainfall than there traditionally is. So I think there's a fair degree of alignment among the foresters that we could have another summer like last summer. So it's the - yes, the spruce log costs are down a lot and are expected to stay down and probably continue to decline further.

And David you mentioned that that the lumber prices in Europe are down 15% on average from the peak. How does that maybe differ within some of the regional markets? I imagine that Germany would be down even more with the low fiber cost. But how does you know maybe markets like Scandinavia share?

Yes, not really - can't really take the time to go through market-by-market. You know what's behind my comment, I look at the sort of the three main products that we produce outside of the dimensional markets such as KVH, [indiscernible] and packaging grades, quite a bit of green. And each market really has its own dynamic in lot of ways. The German market as you say is really heavily influenced by log cost. You know the guys buying lumber see log cost going down, they expect lumber prices to go down a bit. To this point in time, log costs have fallen further than lumber prices. But we also have that grade, you know the value that is more off grade with the type of logs that we're able to get. So that it's, it's a little sort of, it's a weaker situation from a profitability point of view. But as you saw in our results, not terrible.

And David, one of your Canadian peers recently indicated they're going to switch back the 12-month maintenance cycles from 18-months. Can you remind us what are the major maintenance cycles at your various mills and how do you think about timing of those?

Yes, but we still do 18 at Stendal, and that works fine for us. But at our other mills, we're on 12, and I think we're going to stay there. You need to you know the older mills you need to get in and do your inspections and make sure you're staying on top of everything, and we just - we don't like the risk of going too long with some of the older pieces of equipment. Like we have the modern mills but they are - you know once you start getting up over 10 or 15 years, you I think annuals - I think an annual shut is a way to go.

Your next question comes from Sean Steuart from TD Securities.

Few questions. Pulp markets to start with. You mentioned that it feels like the market in China is settling out and David I'm just hoping you can reconcile that with what looks to be still relatively high mill inventories and another buyer inventories in Europe are still elevated as well. What are you seeing, what are you guys seeing on the ground in China in terms of inventories there that gives you confidence that market is settling?

Oh it's, I mean pulp is really starting to move in China. The mood in China is a lot better than it was three or four months ago. There's you know there's economic stimulus programs going on, things like you know 3% reduction in the VAT rate, income tax reductions going down, lots of positive messaging around small medium enterprise. You know organization is being supported. So, the mood is better. There is on the hard - there's a lot of - the big chunk of inventory is on the hardwood side, but the majors are holding the line on price it seems. So, you know it doesn't look like that price is going to crack further. And if that's the case, then softwood will hold pretty steady. And you know the buyers think the price is going to be lower than they hold off. If they think they hit the floor then they start to buy. And that's what they're doing. I mean you know everybody's getting normal volumes and we're working our way through the inventory. And I see generally this condition continuing through to the end of the summer. Sean I don't, I don't see a catalyst for a big upsurge obviously with the inventory there, but we're seeing the inventory coming down and you know consumption is happening at a good pace. So I think we'll work through it and then in the back half of the year, you know there's a - particularly in Europe, there's a lot of maintenance. It's all back end loaded this year in Europe. There's the spring maintenance in Canada. But for Europe, it's almost all back end second half of the year. You combine that with some of the other conversions that are going like Valdivia, Enocell, couple of Stora Enso mills. And you know we're going to - I think we'll see things tighten up fairly quickly following the summer.

Does it - by your math does it look like we'll see net capacity reductions globally in NBSK next year with these conversions?

Yes, sure.

The second question is capital allocation I suppose, I mean it seems like the mid-term priority is returning more capital, shareholders and the various discretionary CapEx initiatives you've laid out. Is there a point at which you guys start to refocus on potential M&A opportunities would scale over the longer term? Would you be comfortable looking at and when does your mind maybe get around those types of larger initiatives again?

Well I mean it's lot of different things to think about and all that. One of the - I mean what's driving us I think is a recognition that there is some liquidity discount in our stock. We feel it would be really important to be bigger. But having said that we want to always maintain our culture and our execution excellence and all those kind of things. So we're going to take it a step at a time and be disciplined. Sometimes value expectations of others are too high for us. We don't make any, will create any value by paying too much for things. And we've been trading at a fairly low EBITDA multiple relative to what we consider to be our inherent value. So we're not prepared to use our equity as consideration on acquisitions. So that's a limiting factor. But I think as the market starts to appreciate more, our platform and the fundamentals in pulp and lumber for the medium and longer term, those conditions could change. And we'll have more opportunity to execute on M&A. But we always have lots we're working on and looking at and thinking about, but we have to be balanced and keep all of these factors in our mind.

Your next question comes from DeForest Hinman from Walthausen & Company.

As a person and firm, that's been involved and coming for very long time, I think the share repurchase authorization is a good decision from the Board. It'll be appreciated by shareholders as well. And I think as part of your toolbox in terms of capital deployment, it's something good to have and then hopefully we can execute on it. Digging a little further into capital deployment, can you help us think about how you're looking at your bonds? Some of them are callable I believe, not at huge premiums. Any other thoughts you have on that cash balance?

Yes. Well I think that we're always thinking about what's the right timing on the bonds. And we've got $100 million of 2022s out there, so that's obviously on our radar screen. We don't want to pay too much of a premium to get them back. So there's no rush. There's also as interest rates. The environment changes over time and there may be an opportunity to refinance some of our bonds with some M&A activity that we might do in the future. And so that would be on the table as well. So we're just no specific strategy to enunciate here other than maintaining a strong balance sheet and good duration on our debt is important. And we'll always keep that in mind.

And then turn on the M&A front. Can you help us understand the focus area there? Is it pulp? Is it lumber derivative chemicals? Where is the focus right now?

For sure they're all open for us. We're delighted with the DMI acquisition of two pulp mills both hardwood and softwood. Conservative being a swing mill, we're delighted with our Friesau acquisition and the value we're able to create by implementing some strategic capital investments there. Similarly, very pleased with our investment in Western Australia in sandalwood, in expanding our extractives business and tying into that our investments in our own mills for things like methanol extraction and turpentine extraction and so on. So we look at all these areas and we expand in a disciplined way, targeting investments that won't tax the balance sheet, require us to pay too much for them, create a way for us to create shareholder value. And so it's, so we're digging around in all the areas and looking at different opportunities all the time and could be - next step could be any one of them.

And then on the SG&A number, I'm just trying to get my math right. It was a little bit higher in the fourth quarter, actually stepped down sequentially and we had a full quarter of DMI expense load. Is that some of the synergy gains, is that FX movement, is that the new run rate going forward? Is it a $17 million to $18 million range for the remainder of the year?

Yes. I think that's going to be pretty close or so we get a little bit of bumpiness there. So - and some of it has to do with stock compensation. So part of our compensation is stock and it has a relationship to the price. So there's, there's adjustments to stock comp expense when there is a price change in the stocks. So if it moves quite a bit you see a little bit of bumpiness in the G&A. So quarter-over-quarter it was broadly putting in the DMI, adding the DMI G&A, and then there was a reduction because the stock price was a little bit lower through the, through the period.

And then just help my understanding on the moving parts, with pricing down what it sounds like costs coming down and then realizing there's some work in process and there's some chip and log inventory on the balance sheet. Does the margin outlook anyway you want to describe it gross margin or gross operating profit or EBITDA margin, is that outlook better or worse in the second quarter than the first quarter?

Well I think, I think the only material change in the margin is going to be the pricing. So the mill net, so depending on your view of pulp pricing, that'll be the - that'll be the biggest contributor to the change in margin. The rest of the cost structure should be pretty, that should be pretty quiet. Although as David mentioned, we're still seeing - still seeing a little bit of getting a bit of downward pressure on fiber costs in Europe. But other than that ,the margin is about price whatever your view on price and foreign exchange is.

Your next question comes from Adam Zirkin from Knighthead.

So first of all just congratulations on a really exceptional quarter in a tough environment. Frankly, I think this will go down, we'll following this for probably a decade and this will go down as one of the more significant ones. So really, really great job. A couple of questions for you. Number one, what's your sense of how your pulp competitors are faring right now? You spoke about the lumber guys and I asked because you know if you had told me you know that inventories were at 37 days and asked me what the price was, I would have thought it would be lower than it was today. Right? So what do you see as the fundamental sort of cost curve based supports at these levels and how are they function?

Well, I think we've still got a pretty steep cost curve, you know in both grades. We've got quite a bit more consolidation on the hardwood side, which I think is a contributing factor to what we're experiencing today. In that it seems to be a higher floor than what would traditionally be the case. So for our peers, yes, it's hard to generalize. We have competitive peers and we have a lot of peers that have a much higher cost structure than we do, and you also have to take into account the timing of maintenance shuts between all the different companies as well. So, but look you know the prices at these levels are you know they're not what they were a year ago but they're still, they're still healthy prices for us. And you know when you take all of our competitive advantages to consideration, you know we'll continue to do quite well I believe. And that's really what was behind our thinking on the share buyback and increasing the dividend, and we wanted to express our confidence in that view.

No. I think that, I think that makes a lot of sense. I guess I'm wondering do you believe that there are guys out there at these prices who are struggling?

Well some are but for different reasons. You know I think you know some don't have access to fiber the way we do, and maybe you know having to make heroic decisions to keep their mills running, even despite they just haven't - you know not everybody who's got the logistics and the innovative activities necessary to do it, to make it happen. So, see I think there's some mills that are really, really struggling. And I also know that some of the mills are getting to an age where their issues are pretty big and gets harder and harder for them to address those issues as time goes on. So I also - no, we haven't really seen any big supply disruptions yet this year. I think the first quarter everybody ran successfully. So unlike last year or the year before when we started to see some fairly significant upsets. That hasn't happened yet. But I'm kind of the view that we will see some more and more of that as time goes on.

Can you talk a little bit about the scope of the fiber opportunity in Europe? You mentioned in the capital plan that you're taking on another 300 railcars. Perhaps I should know this because you just let me know the total anticipated size of that opportunity and for lack of a better phrase what ending of that you're in?

Well, we're well into it. It's not as though cost reduction. We can move roughly 40% more on wood on the same length of train if you have modern reserve railcars compared to what you would otherwise rent or lease from a Deutsche Bahn or other entities. So there's a cost saving, but there's also the strategic potential that they create for us. So we can bring wood in from a long way away. We can go Eastern Poland, Eastern Czechs, we've got all the Baltics that can feed into ports in Northern Germany. We have what we call satellite yards, so we are accumulating more and more rail holding places. These are sightings where you can locally buy wood from markets that we wouldn't have previously tapped into and then have the local operators bring the wood to that location. It's a storage facility and then we load it on a railcar, on a train when we're ready. So we've just got lots of different strategic advantages to having that kind of horsepower around. And the net result is - there's less pressure on the fiber basket in our traditional procurement areas because we're able to import into our operating region that we wouldn't have otherwise been able to do economically. So I think it's a really big strategic advantage for us and something we're continuing to further develop.

And then lastly just on the capital return, obviously you know we've been talking about it for a long time so obviously and I think it's the right decision. But I'm curious. Was that decision made to the exclusion of anything, any large capital projects or other stuff that you guys sort of had on the drawing board for the short-term or is it something that you sort of intended just weave into the longer term capital allocation strategy of the company?

Yes, as I said in my comments, it doesn't in no way changes our enthusiasm for you know the organic or external growth opportunities. It's something we can afford comfortably. And it's – I just think it's a really important statement for us to make that to you know pay attention to the changing conditions in this world. Fiber scarcity is going to come and it still has access to tremendous fiber baskets with great mills and all of the strategic wherewithal to make it happen in a profitable way for ourselves. So we just wanted to make that statement that, we’re here to create shareholder value. And this is something we can do and it doesn't really change anything else for us operationally.

Your next question comes from Paul Quinn from RBC Capital Markets.

I understand wood costs are coming down in 2019 here, but maybe you can just talk a little bit about wood availability in BC given that we expect some saw mills to be rationalized over time. And then in terms of give us an idea of a percent from a large shipping versus percent residual and what you see with those relative percentages going forward?

Okay, well you're right. In BC there maybe for some of the listeners to think about what's happened is so there's been a pine beetle issue. And there has been a lot of saw milling capacity built up to process that incremental volume that was going to be available for a period of time. And now that incremental volume is starting to diminish, everybody is expecting and it has been and there will continue to be some rationalization of that capacity that was put in place to deal with it. We're also in a short-term period here where the weather has just been so rough for builders and I think there's been some maybe confidence issues perhaps it increased costs that have impact housing starts. And a bunch of issues that have just resulted in a much slower building season so, far this year. So, there's – sawmills around British Columbia are curtailing for market reasons. Oil costs are still high lumber price still now. So the whole dynamic is pretty challenging for everybody where we are in the Kootenay we're in a green forest. We don’t really have much pine in our region we've tended to opportunistically go after the pine. We could go north up past [indiscernible] buying the Okanagan and float it down the Arrow Lakes which is a 160 mile highway to the mill if you like at the Columbia River. We've been very innovative over all these years focusing on round wood programs because we see a lot of waste in that in the BC processing. There's just the way the forest management regime has been there. These saw millers have tended to leave quite a bit of round wood behind when they're harvesting for sawlogs and we participated in a lot of the policy…

And some of the share buyback, I mean you guys have been hesitant to do that in the past. Part of that is related to just the liquidity of your shares in the marketplace is there, is stops in place to make sure there's enough liquidity i.e. how much you can buy is there a limit on that?

Well we sized it at 50 million as you can see and that's a level we're comfortable with. And we'll put it in our tranches. This is normal work for us to implement it. But I'm not worried about liquidity from the share buyback or we wouldn't doing it.

And then just – well new for you mill up in Peace River area and there's saw millers and others who is been affected by the mitigation strategies around Cariboo just wondering if you could address that whether there's any kind of long-term issues on the fiber supply for that facility?

We’re not - I mean Cariboo species at risk issue that is concerning for all of us. Our FMA, our Forest Management Area is so large that we'll be fine. This is going to require some management attention obviously but it's not going to fundamentally change anything in terms of our access to wood or what we're going to have to pay for it. The size of the FMA gives us optionality and we've always had an ecological based forest management approach in Alberta. And I'd say that well we I mean DMI before us they had a really strong team and I think they did it right. They've been focusing on Cariboo corridors and managing the landscape in a way that replicates what nature would do like if you had a forest fire for example in the boil, you'd have a patchwork of burned areas and green areas and it looked a bit like a mosaic. And that's the way we've always harvested. And we close off hall roads and create speed bumps for wolves and things like that we've done all the things right. I just don't think that anything that we're doing is exacerbating the issue for the Cariboo. And but we will continue to do the right things. And as I say if we just step away from one area and move to another it's not on a big deal like we've just got lots of options so.

[Operator Instructions] And your next question comes from Dan Jacome from Sidoti & Company.

Yes, hi, good morning. Kudos on the quarter for sure with the dividend buyback and the earnings seems like almost a hat trick, this was a hockey game. Just one question sort of to satisfy my curiosity on the beauty of the timber and wood product coming out of Delaware. In the last six months have you guys seen any difference in the end market EU versus U.S.? Just high level, how lumber is customized. I think when you first entered the timber lumber business, you noted that the EU is a little bit more focused on kind of robust finishing. And then in the U.S. if I'm not mistaken the lumber tends to be more typically standardized. Have you seen any changes and if you have, how is your capacity unique and production efficiency adapting to this market, that was it for me really?

Well maybe just the character of the two markets either European and the U.S. markets are quite different. The European market tends to be much more stable, less volatile. Many, many different types of products not just whereas the U.S. market tends to be a dimensional lumber market for construction. There are other products obviously, but the big driver is the dimensional market and that's similar to the U.K. market also which moreover obviously and then Japan. But in Europe, we make many, many different products for lots of different reasons and some of the big greats I mentioned earlier are KBH, which is a construction beam that's single jointed, can be made into any length. So we're providing a product to somebody else who's adding value to it and they've got their customers and their view of price is really informed mostly about what they think our load costs are. Pretty steady market, steady demand, steady supply and prices is really related to our cost structure. So that's same for CLT products and it's the same for a lot of the packaging grades and other things. So no change to our strategy. I've always said that we’re committed about 25% of free help to the U.S. market I think over a cycle and that market will perform very well for us. I really like the fundamentals of lumber. I mean, it doesn't feel like it just the moment when you look at the curtailments and you know, some of the guys in Canada are suffering from higher log costs so that you know it’s not a lot of good news coming out of peers but I think that the medium to long term fundamentals for lumber feel really good to me. And so want to be in that U.S. market to capture those margins as they come. Also you know we're developing quite a successful following in Japan, which is a dimension product but it's a very high quality lumber product. And with higher margins, if you can make the grade and develop those relationships to service the market. So we're going to continue that strategy, 25% U.S., 10% Japan and the rest sticking to Europe and possibly bits to the other you know Europe has a lot of different markets obviously but just generally speaking that would be how we break it down.

No, it's very helpful. I totally forgot that you are the Japan market. What is it like over there, is they closer to the U.S. market or more like the EU market in terms of standardized versus more customized

It's not as volatile simply because not everybody can service it. And it's a relationship market as well. You have to earn your right to play there. You have to produce a high quality product consistently. The service has to be right on point and it takes a while to build up that relationship. And so, it's a less volatile market than the U.S., which is lumber and railcar down the track. Guys taking positions on it if you know what I mean,

Your next question comes from Frank Duplak from Prudential.

I'm just curious maybe I missed it. Have you guys sort of given a range of what CapEx might be for 2019 said maybe a little more aggressive this year. Can you give us some range around that please?

Yes, I can - yes sure including carryovers from last year and approvals from this year, you know we'll spend somewhere around $150 million to $170 million in the year on a whole variety of different things, half of which, half of that would be high return and the other half would be what we call maintenance, but maintenance of business does include usually cost savings we both on the maintenance side but also energy, chemical usage and other efficiency savings as well.

So we see a material bump up in the rate next quarter because I mean obviously we didn’t first quarter wouldn't get you there if you annualize it, when do we expect to see really the pace of that pickup?

I wouldn't think it's going to be pretty steady through the rest of the year and obviously it will be higher than it was in the first quarter.

So maybe $40 million or 50 million a quarter for the rest of this year make sense?

I just said we had a look here.

Might be a heavier, a little bit heavier to the second half because some of these projects are completed during the shutdowns. And as David was mentioning, most of our maintenance shuts are in the second half of the year.

And then if you had to look out into 2020 is this kind of a one year event? Or do you think we'll be elevated CapEx now for a longer period of time, just curious?

Yeah. No this is not run rate CapEx. This is a strategic capital that we're putting in place to as part of our strategy to invest in our assets so that they're reliable and they can produce the results that we expect. We don't need to keep doing this every year. Once we get through this, there'll be no opportunities to significantly reduce the amount we spend. But there's also - there continues to be projects available to us that are very attractive that increase our volumes. I've talked about those in the past and we're continuing to work on some of those were if we can increase the productive capacity of a mill with a three or better year payback. Hoping to have some project announcements down the road that's on our organic growth strategy.

Hello Cindy. Are there any more questions? Hello Cindy?

Your next question comes from Tony Graves.

Just three quick questions for me, just follow up on the CapEx guidance. Is that gross or net of insurance recoveries for the NPR project?

Well that's gross, not net.

And then maybe shipments and production by mill too?

David you want to address that?

Yes, we - sure you recall we talked about this a little bit last quarter and we made the determination that we wouldn't be disclosing those detailed shipments and production numbers by mill. We sort of looked at our what our peers are doing and now that we've we're a much larger company than we were last year. We've made the decision to not do that disclosure but I would say that I think for us you'll find that our production is pretty consistent as long as you have you understand what the shut schedule is and that's why we go to considerable effort to make sure that we disclose when the mills are shutting down in particular the number of days and if you can understand the shut schedule you'll generally get pretty close on our productivity numbers.

Thanks for a clarification. And then last one from me, could you maybe size the turpentine opportunity at Celgar and is it something you can do in addition to crude oil refining or are these processes are exclusive?

Well they're exclusive. So the two things, well first of all the size. So the capital investment for the turpentine plant will be about 3.5 million. The project itself will generate just around a two year payback and there's two things that happen we'll have turpentine to sell but we'll also have reduced chemical costs by turpentine in the bleach plant required drives the chemical costs up so by extracting it pulling it out we'll be more efficient chemical usage downstream. So it's not huge. We do this in the Rosenthal and Stendal. And it's just a bolt on technology that's well proven and generate roughly 2 million to 2.5 million or maybe 2 million sales a year on turpentine.

I'll now turn the call back over to the speakers for further comment. We have a question from Graeme Witts. He's a private investor.

My question actually has been answered. It was to do with a buyback share versus debt buyback and why share buyback, but you've covered it very well during the meeting. Thank you.

Thank you, Graham. Okay. Well thank you everyone for joining the call. As always Dave and I are happy to take calls anytime. So don't hesitate to reach out to us. And feeling that, we'll look forward to speaking to you again on our next earnings call in August. Bye for now.

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