Business News

Mercer International Inc. Reports 2008 Second Quarter Results

Thursday 31. July 2008 - Mercer International Inc. (NASDAQ:MERC) (NASDAQ:TSX:) (NASDAQ:MRI.U) today reported results for the second quarter of 2008. Revenues and Operating EBITDA in the second quarter of 2008 decreased to euro 170.6 million (U.S.$266.5 million) and euro 19.8 million (U.S.$30.9 million) from euro 176.6 million (U.S.$238.1 million) and euro 25.0 million (U.S.$33.7 million), respectively, in the second quarter of 2007, primarily due to the continued weakness of the U.S. dollar which more than offset pulp list price improvements and higher sales and production volumes.

Operating EBITDA is defined on page 4 of this press release and reconciled to net income from continuing operations on page 7 of the financial tables in this press release.
Summary Financial Highlights

Q2 Q1 Q2
2008 2008 2007
(in millions of Euro, except where otherwise stated)

Revenues euro 170.6 euro 179.1 euro 176.6
Operating income from continuing
operations 6.2 18.6 10.9
Operating EBITDA 19.8 32.8 25.0
Unrealized gain (loss) on derivative
instruments 20.6 (7.9) –
Foreign exchange gain on debt 0.2 6.0 1.3
Net income from continuing operations 0.9 2.9 3.3
Net income per share
Basic euro 0.02 euro 0.08 euro 0.09
Diluted euro 0.02 euro 0.08 euro 0.09



Summary Operating Highlights

Q2 Q1 Q2
2008 2008 2007

Pulp Production (‘000 ADMTs) 356.8 360.9 326.4
Scheduled Production Downtime (‘000 ADMTs) 15.0 1.5 24.0
Pulp Sales (‘000 ADMTs) 347.3 348.2 337.0
NBSK pulp list price in Europe (US$/ADMT) 900 880 783
NBSK pulp list price in Europe (euro/ADMT) 576 586 579
Average pulp sales realizations (euro/ADMT)(1) 485 510 518
Average Spot Currency Exchange Rates:
euro / $(2) 0.6401 0.6666 0.7416
C$ / $(2) 1.0099 1.0015 1.0981
C$ / euro(3) 1.5783 1.5060 1.4810

(1) List price, less discounts and commissions.
(2) Average Federal Reserve Bank of New York noon spot rate over the reporting period.
(3) Average Bank of Canada noon spot rate over the reporting period.


President’s Comments
Mr. Jimmy S.H. Lee, President and Chairman, stated: “While all of our mills performed generally well and production volumes increased approximately 9% from the same quarter last year, our results were adversely impacted by the continued weakening of the U.S. dollar versus the Euro and by 11 days of scheduled production downtime at our Celgar mill.”
Mr. Lee continued: “Pulp prices during the quarter were relatively flat but our average pulp sales realizations declined by 6.4% from the second quarter of 2007 because of the slumping U.S. dollar.”
Mr. Lee added: “In June the German government approved amendments to the country’s Renewable Energy Resources Act, its legislative framework for the promotion of electricity generation from renewable energy sources, including biomass. A key element of the Act is that public electric utilities give priority to electricity from renewable energy sources and pay a fixed tariff for a period of 20 years. The amount of tariff is generally dependent on the technology used, the year the installation was put into operation and the size of the plant. The Act is only applicable to installments with a capacity of 20MW or less, effectively excluding our Rosenthal and Stendal mills, as large industrial complexes, from the statutory scheme. The recent amendments to the Act, currently scheduled to take effect January 1, 2009, raise this capacity limit, permitting our German mills to participate in the program, and increase the tariff for biomass energy. As a result, once the amendments become effective, we expect to be able to materially increase the revenues from our sales of surplus energy in Germany.”
Mr. Lee concluded: “We are pleased with the legislative developments in Germany which, along with progress on our Celgar green-energy initiative, help advance one of our key objectives of increasing production of and revenues from green energy. We also expect that certain fiber supply initiatives that have recently been implemented will take some pressure off fiber costs for the balance of the year. Although pulp prices have been impacted by slowing world economies, we believe the supply and demand fundamentals for NBSK pulp are fairly balanced and will support strengthening markets over the mid to long term. As one of the lowest cost NBSK producers in the market with highly modern facilities, we believe we are well positioned to take advantage of opportunities in our industry.”
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenues for the three months ended June 30, 2008 decreased by 3.4% to euro 170.6 million from euro 176.6 million in the comparative period of 2007, primarily due to the weak U.S. dollar.
Pulp production increased to 356,819 ADMTs in the current quarter, from 326,350 ADMTs in the same quarter of 2007 as all of our mills performed generally well.
Pulp sales volume increased to 347,259 ADMTs in the second quarter of 2008 from 337,016 ADMTs in the comparative period of 2007. Average pulp sales realizations were euro 485 per ADMT in the current quarter of 2008 compared to euro 518 per ADMT in the second quarter of 2007, as the weakness of the U.S. dollar versus the Euro more than offset pulp list price improvements.
Costs and expenses in the second quarter of 2008 decreased marginally to euro 164.4 million from euro 165.7 million in the comparative period of 2007, despite higher freight costs and warehousing expenses in connection with the shipment backlog at the Port of Vancouver.
On average, our fiber costs decreased by approximately 2.9% in the second quarter of 2008 from the same period of 2007. Our fiber costs in Germany decreased in the current quarter from the comparative period of 2007 and are expected to remain stable in the short term because of lower demand from the European board industry. However, there is some uncertainty related to Russian government tariffs which are expected to reduce Russian wood exports to Europe and which may begin to exert upward pressure on pricing if Scandinavian producers, who traditionally import significant amounts of Russian wood, seek out alternative supply markets such as Germany.
In the second quarter of 2008, fiber costs at our Celgar mill were comparable to the same quarter of 2007 and the prior quarter. Fiber costs have remained consistent despite significant curtailments in sawmilling activity as a result of the faltering North American housing and lumber markets which have sharply decreased the availability of fiber. Recent fiber initiatives at our Celgar mill, such as new pulp log procurement arrangements and the addition of a second shift in the woodroom, have helped stabilize fiber supply to the mill and we believe will provide some pricing relief over the balance of the year.
During the second quarter of 2008, our raw material inventories increased to euro 30.8 million from euro 29.0 million at the end of the first quarter of 2008. Our pulp inventories increased by approximately 100% and 7.7% at the end of the current quarter of 2008, compared to the same time last year and the end of the first quarter of 2008, respectively. Pulp inventories at our Celgar mill remained high and largely the same as at March 31, 2008 due to delays in shipments to China caused by a sustained backlog at the Port of Vancouver. While this inventory is generally already committed to customer orders, we do not record the sale until the pulp is shipped. Pulp inventories increased at our Stendal mill, as slowing economies and tighter credit caused certain of its customers to delay purchases into the second half of 2008.
We recorded no contribution to income from the sale of emission allowances in the current quarter as the applicable emissions certificates were not issued until after June 30. In the same quarter last year, we recorded only a negligible contribution to income as a result of weak markets and prices for the sale of emission allowances. In the current quarter, sales of surplus energy were approximately 20% higher than the second quarter of 2007.
For the second quarter of 2008, operating income from continuing operations decreased to euro 6.2 million from euro 10.9 million in the comparative quarter of 2007, as the generally positive performance of our mills was more than offset by the continued weakness in the U.S. dollar against the Euro.
Interest expense in the second quarter of 2008 decreased to euro 16.0 million from euro 17.6 million in the comparative quarter of 2007, primarily due to a lower level of borrowing.
We recorded an unrealized gain of euro 20.6 million before minority interests on our interest rate derivatives at the end of the current quarter, compared to an unrealized gain of euro 18.1 million in the same quarter of last year. We recorded foreign exchange gains of euro 0.2 million and euro 1.3 million on our debt in the periods ended June 30, 2008 and 2007, respectively.
In the second quarter of 2008, minority interest, representing the minority shareholder’s interest in the Stendal mill, was euro 3.4 million, compared to euro 1.1 million in the same quarter of last year.
Operating EBITDA decreased to euro 19.8 million in the second quarter of 2008 from euro 25.0 million in the second quarter of 2007. Operating EBITDA is defined as operating income (loss) from continuing operations 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 to Operating EBITDA, see page 7 of the financial tables included in this press release.
We reported net income from continuing operations for the second quarter of 2008 of euro 0.9 million, or euro 0.02 per basic and diluted share, as compared to net income from continuing operations of euro 3.3 million, or euro 0.09 per basic and diluted share in the second quarter of 2007.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues for the six months ended June 30, 2008 increased to euro 349.7 million from euro 346.1 million in the comparative period of 2007, primarily due to higher pulp list prices which were in large part offset by the weak U.S. dollar.
Operating EBITDA was euro 52.6 million in the first half of 2008 compared to euro 53.3 million in the six months ended June 30, 2007. 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. See the discussion of our results for the second quarter of 2008 for additional information relating to Operating EBITDA and page 7 of the financial tables for a reconciliation to net income from continuing operations.
We reported net income from continuing operations for the first half of 2008 of euro 3.7 million, or euro 0.10 per basic and diluted share. In the first half of 2007, we reported net income from continuing operations of euro 4.4 million, or euro 0.12 per basic and diluted share.