Good morning, and welcome to Mercer International’s Third 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 third quarter's financial highlights. Following my remarks, I'll pass the call to David, who will comment on our key markets, operational performance, progress on our strategic initiatives along with our outlook into the final quarter of 2019. 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. Overall, we are pleased with our operating performance this quarter. We achieved solid pulp and lumber production, and were able to take advantage of modest improvements in pulp demand across most markets to reduce our finished goods inventory to more normal levels. Q3 consolidated EBITDA was almost $51 million, compared to $70 million in Q2. The decrease in EBITDA was principally due to lower European pulp prices, which were partially offset by stronger U.S. dollar, lower fiber costs and higher sales volumes. In addition, we recorded a reversal of previously accrued wastewater fees related to our Rosenthal mill during the quarter. Our pulp segment contributed $51.1 million of EBITDA and our wood products segment contributed EBITDA of $2.6 million. Our improving wood products segment results reflect steady production, despite the construction activities currently underway on site, along with the benefit of lower sawlog prices. As usual, you will find additional segment disclosures in our 10-Q. Quarterly average list prices for both softwood and hardwood pulp were down sequentially in all markets. Compared to Q2, our average pulp realizations negatively impacted EBITDA by about $52 million. Our pulp sales volume totaled 542,000 tons, which…

Thanks, Dave. Good morning, everyone. As Dave has highlighted, the story of our Q3 results was dominated by weak pulp markets, which obscures our solid operating performance this quarter. Our pulp production was down only slightly this quarter, due to Rosenthal's annual maintenance shut, but otherwise remained at near record levels. Similarly, our Friesau sawmill production was down slightly as we worked through the occasional construction disruption, but we had a strong financial result in Q3, despite historically low lumber prices. Our strong operating performance is a result of our long-term value-creation strategy. And as a reminder, the key pillars of that strategy are to maintain modern world-class assets, seize acquisitions and organic growth opportunities in adjacent businesses and spaces where we have core competence, prudent management of the balance sheet, all while maintaining the highest standard of safety and sustainability. Now, turning to our markets. European NBSK pulp prices weakened steadily through Q3 and China prices were essentially flat through the quarter. However, we saw increased demand late in the quarter, leading us to implement a $10 price increase for October. European list prices in Q3 averaged $860 per ton, compared to $997 in Q2. October's European list price was about $825 per ton. In China, the Q3 average NBSK price was $585 per ton, which was down from $653 per ton in Q2, decreasing producer inventory levels, resulting from maintenance downtime and recent NBSK curtailment announcements, combined with tightening fiber supply in some regions lead us to believe that the Chinese NBSK market price is at or near the floor. The average Q3 hardwood list price in China was $507 per ton, down $130 from Q2. And hardwood list price in the U.S. market averaged $970 per ton Q3, compared to $1,100 in Q2. The pulp markets continue…

[Operator instructions] And your first question comes from Hamir Patel with CIBC Capital Markets. Your line is open.

Good morning. David, I wanted to get your thoughts on this European beetle situation. How impactful do you see it for global lumber markets, and how much further could your pulp costs fall in coming quarters?

Hi, Hamir. So, I think, there's a lot of wood that's going to come out. One of the things that happens over here is, the very, very strong discipline to get out the trees as they're impacted. And the further south you go in Europe, the more you will see the spruce beetle. For us, our Stendal mill and Friesau, more sort of closer to the north of Germany as opposed to the south. I think, another -- Friesau buys from both directions -- buy spruce and pine. Another factor to consider is, the sawmills in the south of the country tend to be the sort of one-off sawmills or sawmills held by smaller groups. So, they are really limited to their truck logistics. Whereas in Mercer, we've got rail -- rail logistics that can take us all the way to the further stages of Poland and Czech, and we can bring in wood from the Baltics as we've discussed many times, Norway, other places. So, it's an interesting situation. We've got more than a 30% reduction in the wood cost today at the sawmill, lots of pulpwood. I think, it's going to continue for quite some time. Whether it accelerates or not, I think has a lot to do -- we're being told by our foresters, a lot to do with the weather this year. So, for example, if we have a really wet winter, that has a really damaging impact on the beetle. I think, that will destroy a lot of the population under the bark. But, if it's a super dry winter and dry in the spring, then, the next summer could be a similar year to we had this year, and then that would be a continuation of the kind of conditions that we're seeing today. So, I'll stop there, Hamir, to see if that answers your question.

Yes. Thanks, David. That does. But, I was curious, if the beetle wood, when -- the pulpwood portion of it, does that result in a lower price pulp product when you sell it? How does that impact the quality?

It doesn't have any impact on pulp quality at all. We cook the wood apart in an alkali solution and we wash the cellulose. So, no, there is no quality impacts. Sometimes the woods are a little drier, so you have to adjust for chemistry a little bit. But, as you know, from North America, the pulp mills in Western Canada have been moving off dry pinewood for the years, and it’s very, very suitable for our process. Not a problem.

Great. David, I want to turn to your pulp contract discussions for 2020. Do you have a sense yet as to the discounts for North America and Europe, should we expect continued discount creep in, in 2020, and then, any indication yet of what that might be?

You’re catching me just before I go to London Pulp Week. So, I got be very careful about this. Obviously, discounts, they're tough to -- you roll them back when things are tight, and there’s pressure to widen when things are sloppy. And with the inventory levels where they are, I'm sure we'll be having those discussions with our customers. But, also when you think about discounts, you have to think about short-term and medium-term outcomes. And I think, even though we got elevated hardwood inventories today and somewhat elevated softwood inventories, I think the medium and a longer-term view is fiber will be will tight. So, I think the discussions with our customers will be very respectful, and thinking more about the long-term rather than just trying to grind because of the current speed bump that we're in today. So, it will be -- I mean, they might widen a little bit, but I'm not expecting anything too significant.

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

Thanks. Good morning, guys. A couple of questions. David, just more generally speaking, it sounds like softwood pulp markets are starting to tighten up certainly faster than hardwood, which makes sense, given the relative inventory gap. I guess your broader thoughts on over the mid-term, the industry's ability to potentially raise softwood prices while hardwood arguably should remain under pressure until that excess supply gets cleaned up. Any thoughts on the ability to have a divergent trend, over the midterm, until hardwood settles out?

Well, let me sort of talk around the corners of that question because that's what everybody is trying to get their heads around, obviously. I guess, first of all, I think, my view is that if softwood prices get too far ahead of hardwood prices, you get substitution. When you're going the other direction, there is a limit on how much softwood you can take out of paper grade. But if -- there's always room. And I think where we’ve come from has been more an elevated softwood component because the prices of hardwood and softwood have been closed for a while. And now, as we start to pull away that excess amount of softwood, then the grade is going to start pulling back down to the minimum level. So, there is definitely a substitution element to it, hard to measure exactly how big it is, but it's there. And then, it’s the whole psychological impact that the customers have as the gap widens. We've seen gaps of $200 in the past, but it just doesn't feel like that's a sustainable situation and probably not something to hope for. Another part of the whole thing to think about -- we think about it, if you’re at Mercer, is when we think about the psychological impacts of improving conditions or weakening conditions to the pulp buyer. And by that I mean, if things are tight, and everything is normal for Chinese pulp buyer, he knows it's going to take 80 days from the time he cuts his order to the time he's ready to use that pulp in China. And so, when things are tight, he tends to carry 80 days of inventory because that's how long it takes for -- you just always have to have that pipeline coming. So,…

That’s great detail. I appreciate that. I apologize if I missed this earlier. But, if you guys wrap your heads around 2020 CapEx budgets relative to where you’re spending this year?

Our 2020 capital plan can call for about $100 million. That includes carry-ins, ignoring capital leases for things like railcars and chip rail bins, which is really just cost reduction initiative. So, we're continuing on with our expansion plans at Stendal, completing the planer and the sorters obviously for Friesau, and then so maintenance of business and a number of smaller hydrogen projects. You've got a bit of wastewater fee work going on at both the mills in Germany obviously, and got a bit of work going on at Peace River where we've got access to some government grants and low carbon fund stuff. And Celgar has got some utilization improvements, bin order [ph] and a chip conditioner, little things like that. But, so, we're carrying on with the important things. But, we've brought the club back quite a bit considering where pulp prices are.

Makes sense. That's all I have for now. Thanks very much, guys.

You’re welcome.

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

Hi. Thank you. A real quick one. You -- or two. Dave, you mentioned in your script that you implemented a $10 price increase in October. Did that increase take or when would you guys get a feel for whether that's stuck?

That's stuck. We announced up $20 and got $10 of it.

Okay. Well, that's good. Now, with the decline in pricing, and it seems like there’ve been some curtailments. Do you have any feel that you can share with us about any industry curtailments or potential curtailments that might become more permanent in nature from some of the higher cost competitors?

Yes. It's tough to see what might happen. There is a few situations where pulp mills are curtailing more because of access to wood than they are necessarily about price. I think one thing to remember about pulp mills is that it’s got a pretty high fixed cost component. So, sometimes you can lose a bit of money selling pulp, but you’d lose a lot more if you curtailed. So, you don't typically see curtailments to pulp pricing. I don't think pulp prices are at a level now where you would see that. But being short of fiber, it's possible we saw some of that out of the Western Canada this summer. There is a couple other situations out there where the mills are in just such rough shape, these old mills eventually just get older and older. But, there is quite a bit of an industry speculation about who might be the next mill -- or two mills might go down just because the amount of capital left to keep them running and is now really justified. So, I think, there is some things coming on the horizon but I can't be certain of how long it will take obviously. And I don't think we’ll ever know, until it’s actually happened.

And then, you’ve had DMI now for a little while. It's under your belt a bit but I think you implied that you'd seen the majority of synergies in the first 12 months and that there were other synergies to be seen a little bit longer term. What sort of integration’s done or more importantly what needs to be done in order to achieve the full synergies you estimated on this acquisition?

Yes. I think the synergies to come that take a little bit of time is really rolling off the contracts that we inherited for pulp sales and getting it into the Mercer program. So, it's the timing of when we bought the Peace River mill and the Cariboo tons. They had sort of locked that in for a year. There are various programs. Usually, you settle that up a month or month and a half before the end of the year. So, we weren't really able to influence that at that time. But, I think, it's not terrible. But, I think in the Mercer system, we would have done better, and I think we can redirect some of the pulp a bit going forward as well. But, we have seen pretty significant synergies in things like chemical purchasing and some other freight logistics programs and that sort of thing. And so, I think, we’ve done pretty well and we’ve got more to come, once we roll through this year's re-contracting of the pulp volumes.

Right. It seems like when prices improve, we’ll see the full benefit of this deal. My last one is a typical question. I wanted to get a feel for your plans for investment presentations, non-deal roadshows in the coming months.

Do you want to take that Dave?

Yes. So, we’ve got a non-deal roadshow coming up on in the week of November the 25th, the beginning of that week, the Thanksgiving week. And it will be in the East Coast, New York, Baltimore. And then, in the first week of December, we’ll be attending a Bank of America High Yield Conference in Florida; and next week -- or the week after next week, we’ll be completing a small non-deal roadshow in London.

Your next question is from DeForest Hinman with Walthausen & Company. Your line is open.

I think, in the past you've discussed, and you've alluded to a little bit on this call, the clearing of the market on the softwood side is important. And you've commented in the past, I believe, about how active can those traders be in terms of taking inventory rather quickly. You did mention in the prepared remarks and the press release that there was better sales to China. But, can you just give us more color in terms of what you're actually seeing? I mean, how much is the phone ringing? Have the order sizes picked up in terms of the amount they're looking to spend? And any read-through into October so far would be very helpful for everybody, I believe.

Sure. Well, I guess for thinking about the paper side in China, our feeling is that paper companies over there had a pretty good year. Demand is good for their products. I think, they've done a really good job of clearing their paper inventories. I think, that's primarily a result of them out competing in the export markets to the detriment of Europe, to be honest. They're just -- pulp prices have been low, sentiment’s improved over there. And so, those guys are running pretty hard is our understanding. So, on the softwood side, what we are seeing is orders for consumption. I don't think there's really any trader activity in that at all, no speculative trader activity in that at all. On the hardwood side, our feeling is and what our team believes is that really there isn't any speculative buying yet by traders. And I should maybe mention that the trader activity can be a really big component in some months, it could be as much as 30% of the buy. And so, those guys aren't in at all. I think, they just got smoked on the way down. And I think they're on the sidelines, waiting until they're really sure that pulp prices have bottomed and things are starting to improve. And that's another big driver. It's hard to predict. But, once sentiment rolls over and things look like they're tightening up, those big traders will come back in. And when they do, they take a lot of volume. So, we haven't seen it yet, but that's a dynamic that's out there.

And just so we’re very clear that's inclusive of the October period as well where you did get a 12 -- $10 increase is without traders coming back to the market in October.

That's correct. Yes. No, I think, October's volumes are great, lots of demand for pulp, but it's all going for consumption, at this stage.

Okay. And then, on the capital management side, capital deployment, I think I would agree with your commentary. The bond deal was opportunistic. Your debt structure is in really good shape, CapEx stepping down next year after a pretty high investment year. If this is the bottom of the pricing cycle, does it make sense to be more active with the share repurchase authorization? Your thoughts there would be helpful.

The way I've been thinking about it is -- we’ve been thinking about it is that the stock’s held up reasonably well, we’re really committed to the dividend. We think things are bottoming, and we should start moving into recovery. So, we’ve just been patient. We've just done the bond thing to enhance liquidity to allow us to continue our capital strategy. So, I can't say what we’re going to do in the fourth quarter or if -- what conditions we would do things. But, it's in place for us till the end of May if we decide we want to access it. But, for this quarter, it just didn't make sense for us to buy stock.

And then, I know, in the past you've always had some plans and you always work on plans in terms of mill-based projects like we’ve mentioned 2019, more of an investment year; 2020, less so. But, when we think about the mill portfolio, can you give us some color in terms of things you're thinking about or things you may be working on? How much could they potentially cost? And then, what would be return profile and volume expansion on that? I call it like a wish list. I don't know what you guys call it. But, can you help just frame some things up for us, what are some opportunities that we are thinking about?

Well, I think the near-term term things are Stendal and Friesau. So, Stendal is a 660,000, 670,000 ton mill, we'll turn that into a 740,000 ton mill in a next couple of years. And I think that's relatively very high return capital. It's just -- it's a super mill. So, that work is under way. The cash cost of that could be around €40 million. But there's subsidy components to that which will help defer or defray our cash cost. On Friesau, it's about $20 million of spending left for next year, taking that mill from roughly 500 million board feet up to on a capacity basis 750 million board feet. It'd be the largest mill in the world. It’ll be all the bells and whistles, optical scanning, CT scanning, edge trimming and the planer. It will make -- it will have new high-volume bin sorters. So, we can optimize every log that goes through it sell into J grade for the Japanese market 2 and better for the U.S. market, make all the grades we want over here in Europe. The different flexibility we have in that mill will be tremendous. So, that's -- the margins on that mill I think will surprise the industry. And I'd like to do that again. We've talked openly about doing a similar mill for the Stendal area. We'd actually be right on the Stendal site and totally integrate it with that mill the same way Friesau is with Rosenthal. And then, there'll possibly be one or maybe two other sawmills in the northern part of Germany that would fit into that cluster quite nicely, which is sort of a longer term vision that we have. The Stendal sawmill and the other acquisitions are all really sort of dependent on time. We're obviously not going to do it with -- we don't have the firepower today. We wouldn't take that kind of risk. So, we would just continue to do the work to be ready. And then, when things are -- when cash flows are stronger, then you'll see us start jumping away on that.

Your next question is from Sam McGovern with Credit Suisse. Your line is open.

Hey, guys. I just had a question about the currency impact. And there was a $14.6 million FX impact during the quarter. Can you break out the operating component of that relative to the one-time gains due to accounts receivable and cash GAAP adjustment?

Sure, Sam. Dave's ready for you on that one.

Yes. It's roughly half and half this time, Sam. So, half of it is related to revaluing foreign denominated monetary items, so think accounts receivable, cash, accounts payable; and the other half -- a little bit less than half is related to the translation of our foreign denominated costs, so our euro denominated and Canadian dollar costs to U.S. dollars.

Okay, got it. Thanks. And then, just in terms of 2020, how do we think about what the cost impact would be with or without maintenance?

With respect to foreign exchange, Sam, or in general?

No, no, sorry. Just sort of ongoing costs in terms of that, like dollar per ton?

Yes. Well, the big swinger for us is of course fiber. Fiber is our by far largest cost. And as you know, it's been quite -- we’ve been experiencing some pretty considerable fiber cost reductions really for the last four or five quarters. And as David was mentioning, we believe that there's still -- for the -- in the near term, there's going to be considerable low cost fiber available for us for both the pulp business in the form of pulpwood and the lumber business in the form of sawlogs. So, I think we have -- we think the rate of reduction will start to settle off here and level off. But, there's still a considerable amount of low cost wood available to us. So, I think you'll see that again in the next few quarters.

Your next question is from Adam Zirkin with Knighthead Capital Management. Your line is open.

Hey, gentlemen. I appreciate you taking the time. Most of what I have has been asked, just two quick questions. You've said a lot about the fiber cost. I mean, David, the -- or Dave, the cost per ton, sort of just look at the difference right between EBITDA and revenue as a proxy, it was down really significantly, right, almost $50, it looks like on my numbers, sort of net of maintenance per ton from the second quarter to the third quarter. Is that all fiber and FX or is there anything else that's happening on the cost side?

Yes. Well, fiber is a big chunk of it. We are starting to see some improvement in our chemical costs and in Canada in particular. With the bigger footprint we’ve got there, we’ve been able to lever down both for Peace River and for Cariboo, their chemical costs. So, some improvements there. But it's -- and costs are also impacted by the shuts. And then, I guess, the third piece, that variable is hard to describe is the impact of the wastewater fees. And so, we had Rosenthal in the third quarter, anticipating Stendal either in the fourth quarter or first quarter of next year. That will drive things positively when that happens.

And then, lastly, you mentioned the delay in the Peace River work. I guess, for a delay in delivery of parts. Is there any operating issue there that we should expect or can that mill run sort of until that maintenance on -- just it's on schedule?

Yes. No, it's not an operating issue. The boiler is fine. We wouldn't want to have those tubes in that boiler long term, like 10, 15, 20 years, because they had that event. So, they were compromised. And over time, they will -- over time, they will need -- more maintenance and they will need to be replaced sooner than if that hadn't happened. But, it's an insurable event. So, we are going to completely rebuild the walls of the boiler and the floor where the impact was. And, it's just that the supplier of those tubes had a quality issue that we caught and which is resolved. But, it just couldn't get ready for the timing of this year’s shut. So, it's pushed out to next year. It will be a similar time frame. It will be roughly 50-plus days, bridging the third and fourth quarter of 2020. Operationally, at this stage, we don't believe there would be any impact between now and then, for sure. We'll know when we open the boiler up in their November shut this year, but we shouldn't expect there to be an issue.

[Operator Instructions] We do have a question from Paul Quinn with RBC Capital Markets. Your line is open.

Yes. Thanks very much and sorry, I joined late. So, I'm not sure what questions have been asked, although I'll ask my question anyways, and if we can take it offline because it has been answered fine. But, just wondering the maintenance schedule in Q4, how that looks in 2020.

Okay, Q4 and 2020. Paul, I'm glad you asked the question because if somebody hadn't I was going to raise this in my closing comments. So, we do have three large shuts in the fourth quarter of this year. Right? So, we’ve got Stendal, Celgar and Peace River. And so, analysts need to think about that. And I could point you to the IFRS disclosure that we’ve historically always included in our conference call scripts. And the reason we put the disclosure out is to help you see the magnitude of the shuts from an EBITDA impact, and you can do that by looking at what -- it is under U.S. GAAP compared to IFRS, because the IFRS companies capitalize it and they depreciate it through their depreciation and amortization line, whereas for Mercer it gets expensed in the quarter. So that number is all out there. So, you know these numbers. And the impact of these shuts for the big mills is around $15 million per quarter on the direct costs. And then, for the additional costs for your energy loss, your chemical costs, and the lost tons, that's about $5 million per mill. And all of that's happening in the fourth quarter. So, you need to factor that in. In 2020, the lineup is Rosenthal will again be in the third quarter, roughly 12 days; for Stendal, we won't have a big shut next year, it will be too many shuts for second quarter and fourth quarter, that's roughly three days each; for Celgar, we’re not completely sure what we are going to get away with here. But, the thinking is just to do four mini shuts rather than a big shut. We're trying to migrate that mill towards an 18-month frequency. We have got a lot of the work behind us and it should be -- if we can start lengthening out the time between shuts over the course of three years, you save the cost of a four-year shut. So, we may have a slightly extended shut in the third quarter. It really depends on what the regulatory bodies say to us about further washouts and digester work. Then, in Peace River, as I've already mentioned earlier, we’ve deferred the boiler outage to the third and fourth quarter of 2020, roughly -- I guess, it's 36 days in the third quarter and 22 in the fourth, remembering that a very large component of that will be covered by -- well, the capital is all covered by insurance for the boiler work and DI insurance will pick up any lost margin on tons that we would have otherwise produced.

Your next question is from Dennis Collins with Stifel. Your line is open.

Hi, David. I appreciate you taking the call. Would you be able to give us, or give me the percentages by country, by revenue that you do witness?

I don't have that in front of me. David might be able to dig it out. But, that will be in the Q, I guess, if you don't mind waiting for that. Just don't have the paper.

Yes. The Q is out now. So, it should be there.

It should be there? Okay.

Yes.

Okay, got you. Thank you, gentlemen.

Okay.

[Operator Instructions]

It sounds like there's no more questions, operator. So, thanks everyone for joining the call. As always, Dave and I are happy to talk anytime. So, reach out to us. We're on CET time these days, but happy to go offline, if anybody needs any more information. Thanks again.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. And you may now disconnect.