Mercer International Inc. Reports 2007 First Quarter Results

NEW YORK, May 7 /PRNewswire-FirstCall/ -- Mercer International Inc. (Nasdaq: MERC; TSX: MRI.U) today reported results for the first quarter of 2007. In 2006, we divested our paper mills and account for this business as discontinued operations and its results are reported separately. As a result, previously reported amounts have been reclassified to conform to the current presentation. Except as otherwise noted, the following discussion relates to our continuing operations. Highlights of the 2007 First Quarter -- Revenues increased by 20% to euro 169.5 million from euro 141.7 million in the comparative quarter of 2006, primarily due to higher pulp prices. -- Operating EBITDA increased to euro 28.3 million in the first quarter from euro 24.7 million in the comparative quarter of 2006, primarily as a result of higher pulp prices, partially offset by higher fiber costs and a weakening U.S. dollar. For a definition of Operating EBITDA, see page 5 of this press release and for a reconciliation of net income to Operating EBITDA, see page 6 of the financial tables included in this press release. -- Pulp markets strengthened quarter over quarter. Average list prices for NBSK pulp in Europe were $757 per ADMT in the first quarter of 2007 and $730 per ADMT in the fourth quarter of 2006, compared to $618 per ADMT in the first quarter of 2006. -- Fiber costs increased materially in the current quarter and, on average, were up approximately 20% over the prior quarter and over 50% from the first quarter of 2006. -- Mill net pulp realizations continued to increase in the first quarter of 2007 to euro 512 per ADMT on average from euro 425 per ADMT in the first quarter of 2006, primarily as a result of higher pulp prices. -- We had net income from continuing operations of euro 1.1 million, or euro 0.03 per basic and diluted share, in the current quarter which included a net gain on our derivatives of euro 6.6 million, compared to net income of euro 16.2 million, or euro 0.49 per basic and euro 0.40 per diluted share, in the same period of 2006 which included a net unrealized gain on our derivatives of euro 40.8 million. President's Comments Mr. Jimmy S.H. Lee, President and Chairman, stated: -- "Pulp markets remained strong in the first quarter of 2007. List prices in Europe increased by approximately $27 per ADMT in the quarter. However, much of the price increase was offset by a decline in the value of the U.S. dollar versus the Euro during the quarter. -- Our mills generally performed well during the quarter, particularly the Celgar mill which is benefiting from our Blue Goose capital expenditure program. As part of the program, we expect to complete a dryer expansion at the Celgar mill in the second quarter which will further improve efficiencies and increase production capacity. -- Our first quarter results were negatively impacted by high fiber prices. The severe storms in January in central Europe, which felled over 60 million cubic meters of wood, has recently resulted in increased fiber availability. This has already resulted in some price relief early in the second quarter and we are anticipating additional declines in fiber prices for deliveries throughout the balance of the year." Mr. Lee added: -- "Strong prices and the efficiency of our mills resulted in Operating EBITDA increasing by 15% to euro 28.3 million in the current quarter from euro 24.7 million in the comparative quarter of 2006, despite significantly higher fiber costs, a weaker U.S. dollar and a much reduced contribution from the sale of emission allowances. Operating EBITDA in the prior quarter was euro 50.2 million and benefited from a euro 13.0 million reversal of accrued wastewater fees. -- We had previously put into place currency swaps to partially protect us in the event of a weakening U.S. dollar. In the quarter, we settled the balance of our outstanding currency swaps and realized a cash gain of euro 6.8 million which is not included in our Operating EBITDA." Mr. Lee continued: "We are seeing continued strong demand in all our markets. This strong demand, coupled with a weak U.S. dollar and higher fiber costs, should result in higher pulp prices in the upcoming months. We expect the NBSK market to remain strong in 2007 as evidenced by the April NBSK price increase to approximately $770 per tonne in Europe and approximately $810 per tonne in the United States." Mr. Lee concluded: "Looking forward, we expect the current strength in pulp markets to continue and to generate solid returns for our stakeholders." Summary Selected Highlights Q1 Q4 Q1 2007 2006 2006 (in millions of Euro, except where otherwise stated) Revenues euro 169.5 euro 160.5 euro 141.7 Sales of emission allowances 0.7 2.4 5.6 Income from operations 14.5 36.2 11.0 Operating EBITDA(1) 28.3 50.2 24.7 Realized gain (loss) on derivative instruments 6.8 1.7 (3.6) Interest expense 20.1 23.1 22.8 Unrealized (loss) gain on derivative instruments (0.2) 33.1 44.4 Unrealized foreign exchange gain on debt 1.3 3.8 6.1 Net income from continuing operations 1.1 28.6 16.2 Income per share from continuing operations Basic euro 0.03 euro 0.85 euro 0.49 Diluted euro 0.03 euro 0.67 euro 0.40 (1) For a definition of Operating EBITDA, see page 5 of this press release and for a reconciliation of net income (loss) to Operating EBITDA, see page 6 of the financial tables included in this press release. Q1 Q4 Q1 2007 2006 2006 Pulp Production ('000 tonnes) 347.3 328.9 318.5 Pulp Sales Volume ('000 tonnes)(1) 329.1 344.4 327.1 NBSK list price in Europe ($/ADMT) 757 730 618 Average pulp price realizations (euro/ADMT) 512 480 425 Average Spot Currency Exchange Rates euro / $ 0.7630 0.7962 0.8312 C$ / $ 1.1716 1.1344 1.1547 C$ / euro 1.5354 1.4244 1.3886 (1) Excluding intercompany pulp sales volumes of nil ADMTs in Q1 2007, 603 ADMTs in Q4 2006 and 4,986 ADMTs in Q1 2006, respectively. Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006 Revenues for the three months ended March 31, 2007 increased by 20% to euro 169.5 million from euro 141.7 million in the comparative period of 2006, primarily due to higher pulp prices, partially offset by a weakening of the U.S. dollar versus the Euro. List prices for NBSK pulp in Europe were approximately euro 578 ($757) per ADMT in the first quarter of 2007, euro 553 ($730) per ADMT in the fourth quarter of 2006 and approximately euro 514 ($618) per ADMT in the comparative first quarter of last year. Pulp sales volume increased marginally to 329,135 ADMTs in the first quarter of 2007 from 327,101 ADMTs in the comparative period of 2006. Mill net pulp sales realizations increased to euro 512 per ADMT on average in the first quarter of 2007 from euro 425 per ADMT in the first quarter of 2006, primarily as a result of higher pulp prices. Cost of sales and general, administrative and other expenses in the first quarter of 2007 increased to euro 155.8 million from euro 136.3 million in the comparative period of 2006, primarily as a result of higher fiber costs which increased by over 50% from the year ago quarter. Fiber costs at our German pulp mills increased in the first quarter of 2007, primarily as a result of increased demand for wood residuals and tight supply in the fourth quarter of 2006. Fiber costs at our Celgar mill increased, primarily because of a weakening U.S. lumber market that has caused a sharp reduction in sawmill residual production. We expect fiber availability in Europe to increase materially as a result of severe storms in January that felled approximately 60 million cubic meters of timber, primarily in Germany and Scandinavia. This, coupled with an improving European lumber market, has started to provide some price relief and we expect further downward pressure on fiber prices for deliveries throughout the balance of the year. We recorded a contribution to income of euro 0.7 million on the sale of emission allowances in the first quarter of 2007, compared to euro 5.6 million in the first quarter of 2006. For the first quarter of 2007, operating income increased by approximately 32% to euro 14.5 million from euro 11.0 million in the comparative quarter of 2006, primarily as a result of higher pulp prices and improved operating results at our Celgar mill. Interest expense in the first quarter of 2007 decreased to euro 20.1 million from euro 22.8 million in the 2006 comparative quarter. Derivative Instruments and Minority Interest We recorded a net gain of euro 6.6 million on our outstanding foreign currency and interest rate derivatives at the end of the current quarter, including a realized cash gain of euro 6.8 million on the settlement of our currency swaps, compared to a net gain of euro 40.8 million on our derivatives in the comparative quarter of 2006. In the first quarter of 2007, minority interest, representing the minority shareholder's interest in the Stendal mill, was euro 1.0 million, compared to euro 0.4 million in the comparative quarter of 2006. Discontinued Operations We disposed of our paper operations in 2006 and now account for them as discontinued operations. Earnings Per Share and Operating EBITDA We generated "Operating EBITDA" of euro 28.3 million and euro 24.7 million in the three months ended March 31, 2007 and 2006, respectively. 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 (loss), 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 (loss) or income (loss) 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) to Operating EBITDA, see page 6 of the financial tables included in this press release. We reported net income from continuing operations for the first quarter of 2007 of euro 1.1 million, or euro 0.03 per basic and diluted share, which included an aggregate of euro 7.8 million of net gains on our outstanding derivatives and foreign currency denominated long-term debt. In the first quarter of 2006, we reported net income from continuing operations of euro 16.2 million, or euro 0.49 per basic and euro 0.40 per diluted share, which reflected a net gain of euro 46.9 million on our outstanding derivatives and foreign currency denominated long-term debt. Earnings Release Call In conjunction with this release, Mercer International Inc. will host a conference call, which will be simultaneously broadcast live over the Internet. Management will host the call, which is scheduled for Tuesday, May 8, 2007 at 10:00 AM EDT. Listeners can access the conference call live and archived over the Internet through a link at the Company's web site at http://www.mercerint.com/en/newsCurrent.cfm, or at http://www.videonewswire.com/event.asp?id=39577. Please allow 15 minutes prior to the call to visit the site and download and install any necessary audio software. A replay of this call will be available approximately two hours after the live call ends until May 15, 2007 at 11:59 p.m. (Eastern Daylight Time). The replay number is (800) 642-1687 for domestic callers or (706) 645-9291 for international callers, and the passcode is 7956375. 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/. The preceding includes forward looking statements which involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market conditions, competition and other risk factors listed from time to time in the company's SEC reports. MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS March 31, 2007 and December 31, 2006 (Euros in thousands) March 31, December 31, 2007 2006 ASSETS Current Assets Cash and cash equivalents euro 44,970 euro 69,367 Receivables 97,454 75,022 Note receivable, current portion 5,814 7,798 Inventories 82,702 62,857 Prepaid expenses and other 5,800 4,662 Current assets of discontinued operations 1,261 2,094 Total current assets 238,001 221,800 Long-Term Assets Cash restricted 45,000 57,000 Property, plant and equipment 965,709 972,143 Investments 3 1 Unrealized foreign exchange rate derivative gain - 5,933 Deferred note issuance and other costs 6,639 6,984 Deferred income tax 27,026 29,989 Note receivable, less current portion 8,408 8,744 1,052,785 1,080,794 Total assets euro 1,290,786 euro 1,302,594 LIABILITIES Current Liabilities Accounts payable and accrued expenses euro 88,918 euro 84,173 Debt, current portion 33,364 33,903 Current liabilities of discontinued operations 1,074 1,926 Total current liabilities 123,356 120,002 Long-Term Liabilities Debt, less current portion 850,955 873,928 Unrealized interest rate derivative loss 35,670 41,355 Pension and other post-retirement benefit obligations 17,605 17,954 Capital leases 7,432 6,202 Deferred income tax 23,200 22,911 Other long-term liabilities 4,643 1,441 939,505 963,791 Total liabilities 1,062,861 1,083,793 Minority Interest - - SHAREHOLDERS' EQUITY Common shares 202,626 195,642 Additional paid-in capital 102 154 Retained earnings 15,526 15,240 Accumulated other comprehensive income 9,671 7,765 Total shareholders' equity 227,925 218,801 Total liabilities and shareholders' equity euro 1,290,786 euro 1,302,594 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2007 and 2006 (Unaudited) (Euros in thousands, except per share data) 2007 2006 Revenues euro 169,531 euro 141,668 Costs and expenses: Operating costs 134,747 114,907 Operating depreciation and amortization 13,729 13,688 21,055 13,073 General and administrative expenses 7,305 7,717 (Sale) purchase of emission allowances (727) (5,638) Operating income from continuing operations 14,477 10,994 Other income (expense) Interest expense (20,068) (22,814) Investment income 1,611 1,740 Unrealized foreign exchange gain on debt 1,254 6,113 Realized gain (loss) on derivative instruments 6,820 (3,562) Unrealized (loss) gain on derivative instruments (248) 44,377 Total other (expense) income (10,631) 25,854 Income before income taxes and minority interest from continuing operations 3,846 36,848 Income tax provision (3,801) (21,113) Income before minority interest from continuing operations 45 15,735 Minority interest 1,048 449 Net income from continuing operations 1,093 16,184 Net (loss) income from discontinued operations (7) 404 Net income 1,086 16,588 Retained earnings (deficit), beginning of period 14,440 (47,970) Retained earnings (deficit), end of period euro 15,526 euro (31,382) Net income per share from continuing operations Basic euro 0.03 euro 0.49 Diluted euro 0.03 euro 0.40 Income per share Basic euro 0.03 euro 0.50 Diluted euro 0.03 euro 0.41 MERCER INTERNATIONAL INC. RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE Combined Condensed Balance Sheet As at March 31, 2007 (Euros in thousands) The terms of the indenture governing our 9.25% senior unsecured notes requires that we provide the results of operations and financial condition of Mercer International Inc. ("Mercer Inc.") and our restricted subsidiaries under the indenture, collectively referred to as the "Restricted Group". As at and during the three months ended March 31, 2007 and 2006, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and Rosenthal, and the Celgar mill. The Restricted Group excludes the Stendal mill and the discontinued paper business. March 31, 2007 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group ASSETS Current assets Cash and cash equivalents euro 32,540 euro 12,430 euro - euro 44,970 Receivables 51,392 46,062 - 97,454 Note receivable, current portion 618 5,196 - 5,814 Inventories 55,186 27,516 - 82,702 Prepaid expenses and other 2,726 3,074 - 5,800 Current assets of discontinued operations - 1,261 - 1,261 Total current assets 142,462 95,539 - 238,001 Cash restricted - 45,000 - 45,000 Property, plant and equipment 387,639 578,070 - 965,709 Other 7,837 (1,195) - 6,642 Deferred income tax 13,286 13,740 - 27,026 Due from unrestricted group 53,881 - (53,881) - Note receivable, less current portion 4,798 3,610 - 8,408 Total assets euro 609,903 euro 734,764 euro (53,881) euro 1,290,786 LIABILITIES Current liabilities Accounts payable and accrued expenses euro 48,050 euro 40,868 euro - euro 88,918 Debt, current portion - 33,364 - 33,364 Current liabilities of discontinued operations - 1,074 - 1,074 Total current liabilities 48,050 75,306 - 123,356 Debt, less current portion 295,053 555,902 - 850,955 Due to restricted group - 53,881 (53,881) - Unrealized derivative loss - 35,670 - 35,670 Capital leases 4,422 3,010 - 7,432 Deferred income tax 4,097 19,103 - 23,200 Other long-term liabilities 22,234 14 - 22,248 Total liabilities 373,856 742,886 (53,881) 1,062,861 SHAREHOLDERS' EQUITY Total shareholders' equity (deficit) 236,047 (8,122) - 227,925 Total liabilities and shareholders' equity euro 609,903 euro 734,764 euro (53,881) euro 1,290,786 MERCER INTERNATIONAL INC. RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE Combined Condensed Balance Sheet As at December 31, 2006 (Euros in thousands) December 31, 2006 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group ASSETS Current Cash and cash equivalents euro 39,078 euro 30,289 euro - euro 69,367 Receivables 38,662 36,360 - 75,022 Note receivable, current portion 620 7,178 - 7,798 Inventories 41,087 21,770 - 62,857 Prepaid expenses and other 2,352 2,310 - 4,662 Current assets of discontinued operations - 2,094 - 2,094 Total current assets 121,799 100,001 - 221,800 Cash restricted - 57,000 - 57,000 Property, plant and equipment 408,957 563,186 - 972,143 Other 8,155 4,763 - 12,918 Deferred income tax 14,316 15,673 - 29,989 Due from unrestricted group 51,265 - (51,265) - Note receivable, less current portion 5,023 3,721 - 8,744 Total assets euro 609,515 euro 744,344 euro (51,265) euro 1,302,594 LIABILITIES Current Accounts payable and accrued expenses euro 46,838 euro 37,335 euro - euro 84,173 Debt, current portion - 33,903 - 33,903 Current liabilities of discontinued operations - 1,926 - 1,926 Total current liabilities 46,838 73,164 - 120,002 Debt, less current portion 293,781 580,147 - 873,928 Due to restricted group - 51,265 (51,265) - Unrealized derivative loss - 41,355 - 41,355 Capital leases 2,720 3,482 - 6,202 Deferred income tax 2,832 20,079 - 22,911 Other long-term liabilities 19,395 - - 19,395 Total liabilities 365,566 769,492 (51,265) 1,083,793 SHAREHOLDERS' EQUITY Total shareholders' equity (deficit) 243,949 (25,148) - 218,801 Total liabilities and shareholders' equity euro 609,515 euro 744,344 euro (51,265) euro 1,302,594 MERCER INTERNATIONAL INC. RESTRICTED GROUP SUPPLEMENTAL DISCLOSURE Combined Condensed Statements of Operations For the Three Months Ended March 31, 2007 and 2006 (Unaudited) (Euros in thousands) Three Months Ended March 31, 2007 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group Revenues euro 99,933 euro 69,598 euro - euro 169,531 Operating costs 77,116 57,631 - 134,747 Operating depreciation and amortization 6,686 7,043 - 13,729 General and administrative expenses 4,359 2,946 - 7,305 (Sale) of emission allowances (264) (463) - (727) 87,897 67,157 - 155,054 Operating income from continuing operations 12,036 2,441 - 14,477 Other income (expense) Interest expense (7,458) (13,525) 915 (20,068) Investment income 1,305 1,221 (915) 1,611 Derivative financial instruments, net - 6,572 - 6,572 Unrealized foreign exchange loss on debt 1,254 - - 1,254 Total other expense (4,899) (5,732) - (10,631) Income (loss) before income taxes and minority interest from continuing operations 7,137 (3,291) - 3,846 Income tax provision (2,738) (1,063) - (3,801) Income (loss) before minority interest from continuing operations 4,399 (4,354) - 45 Minority interest - 1,048 - 1,048 Net income (loss) from continuing operations 4,399 (3,306) - 1,093 Net loss from discontinued operations - (7) - (7) Net income (loss) euro 4,399 euro (3,313) euro - euro 1,086 Three Months Ended March 31, 2006 Restricted Unrestricted Consolidated Group Subsidiaries Eliminations Group Revenues euro 81,011 euro 60,657 euro - euro 141,668 Operating costs 69,139 45,768 - 114,907 Operating depreciation and amortization 6,629 7,059 - 13,688 General and administrative 4,960 2,757 - 7,717 (Sale) of emission allowances (1,767) (3,871) - (5,638) 78,961 51,713 - 130,674 Operating income from continuing operations 2,050 8,944 - 10,994 Other income (expense) Interest expense (8,463) (15,226) 875 (22,814) Investment income 2,261 354 (875) 1,740 Derivative financial instruments, net (79) 40,894 - 40,815 Unrealized foreign exchange gain on debt 6,113 - - 6,113 Total other income (expense) (168) 26,022 - 25,854 Income before income taxes and minority interest from continuing operations 1,882 34,966 - 36,848 Income tax provision (3,033) (18,080) - (21,113) Income (loss) before minority interest from continuing operations (1,151) 16,886 - 15,735 Minority interest - 449 - 449 Net income (loss) from continuing operations (1,151) 17,335 - 16,184 Net income from discontinued operations - 404 - 404 Net (loss) income euro (1,151) euro 17,739 euro - euro 16,588 MERCER INTERNATIONAL INC. COMPUTATION OF OPERATING EBITDA For the Quarters Ended March 31, 2007 and 2006 (Unaudited) (Euros in thousands) Three Months Ended March 31, 2007 2006 (in thousands) Net income from continuing operations euro 1,093 euro 16,184 Minority interest (1,048) (449) Income taxes 3,801 21,113 Interest expense 20,068 22,814 Investment income (1,611) (1,740) Derivative financial instruments, net gain (6,572) (40,815) Unrealized foreign exchange gain on debt (1,254) (6,113) Operating income from continuing operations 14,477 10,994 Add: Depreciation and amortization 13,792 13,688 Operating EBITDA(1) euro 28,269 euro 24,682 (1) Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States, and should not be considered as an alternative to net income (loss) or income (loss) 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. COMPUTATION OF RESTRICTED GROUP OPERATING EBITDA For the Quarters Ended March 31, 2007 and 2006 (Unaudited) (Euros in thousands) Three Months Ended March 31, 2007 2006 (in thousands) Restricted Group Net income (loss) from continuing operations(1) euro 4,399 euro (1,151) Income taxes 2,738 3,033 Interest expense 7,458 8,463 Investment and other income (1,305) (2,261) Derivative financial instruments, net loss - 79 Unrealized foreign exchange gain on debt (1,254) (6,113) Operating income from continuing operations 12,036 2,050 Add: Depreciation and amortization 6,749 6,629 Operating EBITDA(2) euro 18,785 euro 8,679 (1) For the Restricted Group, net income (loss) from continuing operations and net income (loss) are the same. (2) Operating EBITDA does not reflect the impact of a number of items that affect net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States, and should not be considered as an alternative to net income (loss) or income (loss) 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. DATASOURCE: Mercer International Inc. CONTACT: Jimmy S.H. Lee, Chairman & President, 604-684-1099, or David M. Gandossi, Executive Vice-President & Chief Financial Officer, 604-684-1099, both of Mercer International; or Investors, Eric Boyriven, Alexandra Tramont, Media, Scot Hoffman, all of FD, for Mercer International, 212-850-5600 Web site: http://www.mercerint.com/