Mercer's Q2 net income up 31% year-over-year to US$20.7M, total revenues up 8.9% to US$332.9M; results driven by strong NBSK pulp prices, mill production levels

NEW YORK , August 2, 2011 (press release) – Mercer International Inc. today reported strong results for the second quarter ended June 30, 2011. Operating EBITDA in the second quarter of 2011 was EURO50.1 million ($72.1 million), compared to EURO62.1 million ($79.1 million) in the second quarter of 2010 and EURO50.8 million ($69.5 million) in the first quarter of 2011. Operating EBITDA is defined beginning on page 4 of this press release and reconciled to net income on page 8 of the financial tables in this press release.

In the current quarter, total revenues were EURO231.2 million ($332.9 million), compared to EURO240.2 million ($305.8 million) in the comparative quarter of 2010. We reported net income of EURO14.4 million ($20.7 million), or EURO0.32 ($0.46) per basic share, for the second quarter of 2011, compared to net income of EURO12.4 million ($15.8 million), or EURO0.34 ($0.43) per basic share, in the second quarter of 2010 and net income of EURO29.1 million ($39.8 million), or EURO0.66 ($0.90) per basic share in the first quarter of 2011.

President's Comments

Mr. Jimmy S.H. Lee, President and Chairman, stated: "We are pleased with the strong second quarter as we achieved Operating EBITDA of EURO50.1 million and net income of EURO14.4 million, despite a 5% decline of the U.S. dollar versus the Euro from the first quarter and some seasonal softening of markets towards the end of the quarter."

Mr. Lee continued: "NBSK list prices continued to be strong in the second quarter, as list prices increased in Europe by $45 to $1,025 per ADMT and in North America and China by $50 and $30 to $1,040 and $920 per ADMT, respectively. The seasonal summer slowdown has resulted in softer demand with prices in China and North America declining in August to about $830 and $990, respectively. However, since current inventory levels are well balanced at around 28 days, we expect NBSK pulp prices to generally remain strong over the near term."

Mr. Lee added: "Our mills continued to perform well in the second quarter. Our Rosenthal mill achieved record pulp production in the second quarter and both our German mills achieved record pulp production in the first half of 2011. Our German mills also achieved record energy sales in the second quarter. Overall, we anticipate energy sales to continue to increase at all of our mills in the second half of 2011."

Mr. Lee continued: "We are also pleased with the progress of our continuing deleveraging strategy. During the quarter, we announced the redemption of all of our outstanding $37.0 million 2012 8.5% convertible notes. In July, these were converted into approximately 11.2 million shares. After giving pro-forma effect to such conversion, at June 30, 2011, our net debt (debt minus cash on hand) to equity ratio for our restricted group was 0.3 to 1 and, on a consolidated basis, was 1.9 to 1."

Mr. Lee added: "We have now completed the feasibility studies regarding converting our mills into 'swing mills' able to produce both NBSK and dissolving pulp. The studies were generally favorable and did not identify any material technical impediments. However, we have determined that, as a result of significant new dissolving capacity coming online, certain ongoing technical and equipment developments and other available opportunities, including for enhanced power generation, to defer proceeding at this time. We will continue to closely monitor developments and the opportunity."

Mr. Lee concluded: "With our mills running at near historic production levels and current continued strong NBSK pulp prices, we are well positioned to generate strong returns for the balance of 2011."

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Total revenues for the three months ended June 30, 2011 decreased slightly to EURO231.2 million ($332.9 million) from EURO240.2 million ($305.8 million) in the same period in 2010, primarily due to lower pulp revenues, partially offset by higher energy revenues. Pulp revenues for the three months ended June 30, 2011 decreased to EURO217.3 million from EURO228.3 million in the comparative period of 2010, primarily due to a weaker U.S. dollar more than offsetting higher U.S. list pulp prices. The U.S. dollar was approximately 12% weaker versus the Euro in the current quarter compared to the same quarter of last year. Energy revenues increased by approximately 17% in the current quarter to a record EURO13.9 million from EURO11.9 million in the same quarter last year, primarily as a result of record energy sales at our German mills, combined with increased energy sales at our Celgar mill resulting from the Celgar Green Energy Project.

Pulp production increased to 367,914 ADMTs in the current quarter, from 359,694 ADMTs in the same quarter of 2010, primarily due to record levels of production at our Rosenthal mill and only 11 days of scheduled maintenance downtime at our Celgar mill in the current quarter, compared to 12 days in the second quarter of 2010.

Pulp sales volume decreased to 357,585 ADMTs in the current quarter from 365,002 ADMTs in the comparative period of 2010, primarily as a result of an earlier seasonal market slowdown this year. Average pulp sales realizations decreased to EURO599 per ADMT in the second quarter of 2011, compared to EURO618 per ADMT in the same period last year, primarily due to a weaker U.S. dollar relative to the Euro.

Costs and expenses in the second quarter of 2011 increased marginally to EURO195.0 million from EURO192.3 million in the comparative period of 2010, primarily due to slightly higher fiber costs at our German mills. Our costs and expenses in the current quarter included approximately EURO7.7 million for regularly scheduled maintenance costs. Several competing producers and members of the peer group that we benchmark our performance against now report their financial results in accordance with International Financial Reporting Standards which permit a significant portion of such maintenance costs to be capitalized instead of expensed. Such costs are not charged to EBITDA by the peer group companies and are expensed as depreciation.

On average, our per unit fiber costs in the quarter increased by approximately 4% from the same period in 2010, primarily due to slightly higher fiber costs at our German mills as a result of strong demand for sawmill residuals and pulp logs in the early part of the second quarter of 2011. As we move into the second half of the year, we expect fiber prices for our German mills to be stable as the German fiber market is currently well balanced. We expect fiber prices at our Celgar mill to marginally increase in the short term due to a seasonal decrease in the availability of sawmill residuals.

For the second quarter of 2011, operating income decreased to EURO36.2 million from EURO47.9 million in the comparative quarter of 2010, primarily due to lower pulp revenues resulting from a weaker U.S. dollar and lower sales volumes.

Interest expense in the second quarter of 2011 decreased to EURO14.9 million from EURO16.9 million in the comparative quarter of 2010, primarily due to reduced levels of debt associated with the Stendal mill and a weaker U.S. dollar versus the Euro.

Our Stendal mill recorded an unrealized loss of EURO2.3 million on our interest rate derivatives in the current quarter, compared to an unrealized loss of EURO4.5 million in the same quarter of last year. We recorded a foreign exchange gain on our debt of EURO0.3 million in the second quarter of 2011 compared to a loss of EURO9.4 million in the same period last year.

In the second quarter of 2011, the noncontrolling shareholder's interest in the Stendal mill's income was EURO1.5 million, compared to income of EURO3.6 million in the same quarter last year.

In the second quarter of 2011, Operating EBITDA decreased to EURO50.1 million from EURO62.1 million in the second quarter of 2010, primarily due to a weaker U.S. dollar relative to both the Euro and the Canadian dollar. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

Operating EBITDA does not reflect the impact of a number of items that affect our net income, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income or income from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA, see page 8 of the financial tables included in this press release.

We reported net income attributable to common shareholders of EURO14.4 million, or EURO0.32 per basic and EURO0.26 per diluted share, for the second quarter of 2011, which included a non-cash unrealized loss of EURO2.3 million on the Stendal interest rate derivatives and a EURO0.3 million non-cash foreign exchange gain on our debt. In the second quarter of 2010, we reported net income attributable to common shareholders of EURO12.4 million, or EURO0.34 per basic and EURO0.23 per diluted share, which included a non-cash unrealized loss of EURO4.5 million on the Stendal interest rate derivatives and a non-cash foreign exchange loss of EURO9.4 million on our debt.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Total revenues for the six months ended June 30, 2011 increased to EURO455.4 million ($639.4 million) from EURO420.5 million ($558.6 million) in the same period in 2010. Pulp revenues for the six months ended June 30, 2011 increased by approximately 7% to EURO427.7 million from EURO399.4 million in the comparative period of 2010, due to higher pulp prices and sales volumes, partially offset by a weaker U.S. dollar. The U.S. dollar was approximately 5% weaker versus the Euro in the first half of 2011, compared to the same period of 2010. Energy revenues increased by approximately 31% to a record EURO27.6 million in the first half of 2011 from EURO21.1 million in the comparable period of 2010, primarily as a result of energy sales from the Celgar Green Energy Project.

Operating EBITDA increased by approximately 7% to EURO100.9 million in the first half of 2011 from EURO93.9 million in the first half of 2010. See the discussion of our results for the second quarter of 2011 for additional information relating to Operating EBITDA and page 8 of the financial tables for a reconciliation to net income (loss) attributable to common shareholders.

We reported net income attributable to common shareholders of EURO43.4 million, or EURO0.97 per basic and EURO0.77 per diluted share, for the first half of 2011, which included a non-cash unrealized gain of EURO9.9 million on the Stendal interest rate derivatives and a EURO1.5 million non-cash foreign exchange gain on our debt, partially offset by a non-cash charge for stock compensation of EURO2.5 million. In the first half of 2010, we reported net income attributable to common shareholders of EURO4.9 million, or EURO0.13 per basic and EURO0.11 per diluted share, which included a non-cash unrealized loss of EURO11.0 million on the Stendal interest rate derivatives and a non-cash foreign exchange loss of EURO14.6 million on our debt.

Liquidity and Capital Resources

As at June 30, 2011, we had approximately EURO26.3 million and C$28.2 million available under our Rosenthal and Celgar facilities, respectively. At June 30, 2011, the principal amount outstanding under the Stendal loan facility was EURO486.1 million.

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