Mercer's Q2 net income falls to €1.5M from €14.4M in year-ago period, revenue down 13.0% to €204.1M on lower average pulp realizations; pulp prices down in Q2 on economic uncertainty in Europe, softening of Chinese demand, CEO says

NEW YORK , August 2, 2012 (press release) – Mercer International Inc. (MERC) (MRI.U) today reported results for the second quarter ended June 30, 2012. Operating EBITDA* in the second quarter of 2012 was EURO32.9 million ($42.2 million), compared to EURO50.1 million ($72.1 million) in the second quarter of 2011 and EURO30.6 million ($40.1 million) in the first quarter of 2012.

For the second quarter of 2012, we had net income of EURO1.5 million ($1.9 million), or EURO0.03 ($0.04) per basic share, compared to net income of EURO14.4 million ($20.7 million), or EURO0.32 ($0.46) per basic share, in the second quarter of 2011 and net income of EURO1.2 million ($1.6 million), or EURO0.02 ($0.03) per basic share, for the first quarter of 2012.

Summary Financial Highlights
  Q2 Q1 Q2 YTD YTD
  2012 2012 2011 2012 2011
  (in millions of Euros, other than per share amounts)
Pulp revenues EURO 186.0 EURO 199.4 EURO 217.3 EURO 385.5 EURO 427.7
Energy and chemical revenues 18.0 18.9 17.2 36.9 33.1
Operating income 18.3 16.2 36.2 34.5 72.9
Operating EBITDA 32.9 30.6 50.1 63.5 100.9
Gain (loss) on derivative instruments 1.3 0.9 (2.3) 2.2 9.9
Foreign exchange gain on debt - - 0.3 - 1.5
Income tax benefit (provision) (2.3) (0.7) (3.6) (3.0) (4.4)
Net income attributable to common shareholders 1.5 1.2 14.4 2.7 43.4
Net income per share attributable to common shareholders          
Basic EURO 0.03 EURO 0.02 EURO 0.32 EURO 0.05 EURO 0.97
Diluted EURO 0.03 EURO 0.02 EURO 0.26 EURO 0.05 EURO 0.77
Common shares outstanding at period end (000s) 55,816 55,779 45,828 55,816 45,828
           
           
Summary Operating Highlights
  Q2 Q1 Q2 YTD YTD
  2012 2012 2011 2012 2011
Pulp production ('000 ADMTs) 365.0 380.3 367.9 745.4 726.5
Scheduled production downtime ('000 ADMTs) 22.6 - 16.2 22.6 19.9
Pulp sales ('000 ADMTs) 349.2 384.8 357.6 734.0 706.6
Average NBSK pulp list price in Europe ($/ADMT)(1) 837 837 1,017 837 988
Average NBSK pulp list price in Europe (EURO/ADMT) 652 638 706 645 704
Average pulp sales realizations (EURO/ADMT)(2) 526 512 599 519 596
           
(1) Source: RISI, PPPC pricing report.
(2) Average realized pulp prices for the periods indicated reflect customer discounts and pulp price movements between the order and shipment date.
   
* Operating EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States ("GAAP") and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. See page 12 of the financial tables included in this press release for a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA.
           
  Q2 Q1 Q2 YTD YTD
  2012 2012 2011 2012 2011
Energy production ('000 MWh) 425.4 436.2 419.6 861.7 827.3
Energy sales ('000 MWh) 182.7 182.4 175.9 365.1 333.8
Average spot currency exchange rates:          
EURO / $(3) 0.7795 0.7623 0.6946 0.7710 0.7122
C$ / $(3) 1.0102 1.0009 0.9677 1.0056 0.9765
C$ / EURO(4) 1.2959 1.3129 1.3934 1.3044 1.3711
           
(3) Average Federal Reserve Bank of New York noon spot rate over the reporting period.
(4) Average Bank of Canada noon spot rate over the reporting period.


President's Comments

Mr. Jimmy S.H. Lee, President and Chairman, stated: "Despite a weak NBSK pulp price environment and approximately 23 days of scheduled maintenance downtime at our Rosenthal mill, we achieved Operating EBITDA of EURO32.9 million, primarily as a result of strong pulp production at our Celgar and Stendal mills combined with strong energy sales at all of our mills."

Mr. Lee continued: "Pulp prices decreased in the second quarter of 2012 due to economic uncertainty in Europe and a softening of Chinese demand. Overall, at the end of the second quarter, list prices in Europe were approximately $820 per ADMT and in North America and China were approximately $900 and $660 per ADMT, respectively. Although we currently believe that NBSK pulp prices will decline slightly during the traditionally slower summer months, we believe that the market is bottoming and we currently anticipate that NBSK pulp prices will begin to gradually increase in the medium term."

Mr. Lee added: "We continue to implement capital projects designed to enhance our mills' technical capabilities and improve operating efficiencies. We completed an upgrade to the Rosenthal mill's recovery boiler in the second quarter of 2012 to reduce the mill's emissions, increase production capacity and lower operating costs. Our Project Blue Mill at our Stendal mill is also currently on schedule."

Mr. Lee continued: "Fiber costs at our German mills continued to decline primarily due to weak demand from European particle board producers. We also currently anticipate that our Celgar mill's fiber costs will begin to decline slightly in the third quarter."

Mr. Lee concluded: "In connection with our focus on the growing bio-energy market, our Stendal mill had EURO3.2 million in revenues from the sale of a bio-chemical called tall oil. Tall oil is a by-product of our production process and is used as both a chemical additive and as a green energy source. We currently expect the proceeds from the sale of tall oil to remain stable in future periods."

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Total revenues for the three months ended June 30, 2012 decreased to EURO204.1 million ($261.9 million) from EURO234.5 million ($337.7 million) in the same period in 2011, due to lower average pulp realizations. Pulp revenues for the three months ended June 30, 2012 decreased to EURO186.0 million from EURO217.3 million in the comparative period of 2011, primarily due to lower pulp prices, partially offset by a stronger U.S. dollar relative to the Euro.

Revenues from the sale of excess energy increased by approximately 6% in the second quarter to EURO14.8 million from EURO13.9 million in the same quarter last year, as a result of higher energy sales at our Celgar mill and record energy sales at our Stendal mill. Revenues from the sale of a biochemical called "tall oil" were EURO3.2 million in the second quarter, compared to EURO3.3 million in the same period last year.

Pulp production marginally decreased to 365,047 ADMTs in the second quarter, from 367,914 ADMTs in the same quarter of 2011, primarily due to annual maintenance shut down at our Rosenthal mill, partially offset by increased production rates at our Celgar and Stendal mills. We had 23 days (approximately 22,600 ADMTs) of scheduled maintenance downtime at our Rosenthal mill in the second quarter of 2012 in order to perform annual maintenance and to upgrade the mill's recovery process.

Pulp sales volume marginally decreased to 349,177 ADMTs in the second quarter from 357,585 ADMTs in the comparative period of 2011, primarily as a result of decreased demand in Europe. Average pulp sales realizations decreased to EURO526 ($675) per ADMT in the second quarter of 2012, compared to EURO599 ($863) per ADMT in the same period last year, due to lower pulp prices, partially offset by a stronger U.S. dollar relative to the Euro.

Costs and expenses in the second quarter of 2012 decreased to EURO185.8 million from EURO198.3 million in the comparative period of 2011, primarily due to lower fiber costs.

On average, our per unit fiber costs in the current quarter decreased by approximately 7% from the same period in 2011, due to lower fiber costs in Germany caused by reduced demand for fiber from the European particle board industry. Fiber costs at our Celgar mill were slightly higher, primarily due to increased demand for fiber. As we move into the third quarter, we currently expect fiber prices at our German mills to decrease slightly due to continued weakness in the particle board industry, partially offset by reduced harvesting rates, while we currently expect fiber prices at our Celgar mill to decline slightly through the third quarter due to increased sawmill activity.

Selling, general and administrative expenses were unchanged at EURO8.6 million in the second quarter of 2012, compared to the second quarter of 2011.

For the second quarter of 2012, operating income decreased to EURO18.3 million from EURO36.2 million in the comparative quarter of 2011, primarily due to lower average pulp realizations, partially offset by a stronger U.S. dollar relative to the Euro.

Interest expense in the second quarter of 2012 decreased to EURO13.9 million from EURO14.9 million in the comparative quarter of 2011, primarily due to the conversion of our remaining convertible notes in 2011 and lower debt levels associated with the Stendal mill.

Our Stendal mill recorded an unrealized loss of EURO0.3 million on our interest rate derivative in the current quarter, compared to an unrealized loss of EURO2.3 million in the same quarter of last year. We also recorded an unrealized gain of EURO1.6 million related to a fixed price pulp swap contract entered into in the second quarter of 2012.

In the second quarter of 2012, the noncontrolling shareholder's interest in the Stendal mill's income was EURO1.6 million, compared to EURO1.5 million in the same quarter last year.

In the second quarter of 2012, Operating EBITDA decreased to EURO32.9 million from EURO50.1 million in the second quarter of 2011. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool and should not be considered in isolation or as a substitute for our results as reported under GAAP. See page 12 of the financial tables included in the press release for a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA.

We reported net income attributable to common shareholders of EURO1.5 million, or EURO0.03 per basic and diluted share, for the second quarter of 2012. In the second quarter of 2011, we reported net income attributable to common shareholders of EURO14.4 million, or EURO0.32 per basic and EURO0.26 per diluted share.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Total revenues for the six months ended June 30, 2012 decreased to EURO422.4 million ($548.0 million) from EURO460.8 million ($647.0 million) in the same period in 2011, due to lower average pulp realizations, partially offset by higher energy revenues. Pulp revenues for the six months ended June 30, 2012 decreased to EURO385.5 million from EURO427.7 million in the comparative period of 2011, primarily due to lower pulp prices, partially offset by a stronger U.S. dollar relative to the Euro.

Revenues from the sale of excess energy increased by approximately 12% in the first half of 2012 to a record EURO30.9 million from EURO27.6 million in the same period last year, as a result of strong pulp production at our Stendal and Celgar mills. Revenues from the sale of tall oil increased to EURO6.0 million in the first half of 2012, compared to EURO5.5 million in the same period last year.

Costs and expenses in the first half of 2012 remained relatively stable at EURO387.9 million, compared to EURO388.0 million in the same period of 2011, primarily due to higher sales volumes offset by reduced fiber costs.

On average, our per unit fiber costs in the first half of 2012 decreased by approximately 5% from the same period in 2011, primarily due to lower fiber costs in Germany caused by decreased demand from the European particle board industry.

For the first half of 2012, operating income decreased to EURO34.5 million from EURO72.9 million in the comparative period of 2011, primarily due to lower pulp prices, partially offset by a stronger U.S. dollar relative to the Euro.

Interest expense in the first half of 2012 decreased to EURO28.0 million from EURO30.8 million in the comparative period of 2011, primarily due to the conversion of our remaining convertible notes in 2011 and lower debt levels associated with the Stendal mill.

In the first half of 2012, Operating EBITDA decreased to EURO63.5 million from EURO100.9 million in the first half of 2011. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool and should not be considered in isolation or as a substitute for our results as reported under GAAP. See page 12 of the financial tables included in the press release for a reconciliation of net income (loss) attributable to common shareholders to Operating EBITDA.

We reported net income attributable to common shareholders of EURO2.7 million, or EURO0.05 per basic and diluted share, for the first half of 2012, which included a non-cash unrealized gain of EURO2.2 million on the pulp price and Stendal interest rate derivatives, partially offset by a non-cash charge for stock compensation of EURO0.9 million. In the first half of 2011, we reported net income attributable to common shareholders of EURO43.4 million, or EURO0.97 per basic and EURO0.77 per diluted share, which included a non-cash unrealized gain of EURO9.9 million on the Stendal interest rate derivative and a EURO1.5 million non-cash foreign currency translation gain on our debt, partially offset by a non-cash charge for stock compensation of EURO2.5 million.

Liquidity and Capital Resources

The following table is a summary of selected financial information as at the dates indicated:

     
  As at June 30, As at December 31,
  2012 2011
  (in thousands)
Financial Position    
Cash and cash equivalents EURO 130,887 EURO 105,072
Marketable securities(1) 10,368 12,372
Working capital 239,354 247,159
Property, plant and equipment 816,892 820,974
Total assets 1,225,695 1,217,250
Long-term liabilities 795,087 807,641
Total equity 289,868 283,542
     
(1) Principally comprised of German federal government bonds with a maturity of less than one year.

As at June 30, 2012, we had approximately EURO26.4 million and C$36.3 million available under our Rosenthal and Celgar facilities, respectively. As at June 30, 2012, approximately EURO467.9 million was outstanding under our Stendal mill's loan facility, compared to EURO486.1 million as at June 30, 2011.

Restricted Group

The following table is a summary of selected financial information for the Restricted Group (which, under the indenture for our 2017 9.5% Senior Notes, is comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills) as at the dates indicated:


As at June 30, As at December 31,
  2012 2011
  (in thousands)
Financial Position    
Cash and cash equivalents EURO 50,096 EURO 44,829
Marketable securities(1) 10,368 12,372
Working capital 141,916 149,973
Property, plant and equipment 355,633 353,925
Total assets 665,623 658,844
Long-term liabilities 267,713 262,770
Total equity 342,869 344,415
     
(1) Principally comprised of German federal government bonds with a maturity of less than one year.



Mercer International Inc. is a global pulp manufacturing company. To obtain further information on the company, please visit its web site at http://www.mercerint.com.

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