Good morning, and welcome to Mercer International's Third Quarter 2020 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 would now like to hand the call over to David Ure. Sir, please go ahead.

Thank you. Good morning everyone. I'll begin by reviewing the third quarter's financial highlights and following my remarks, I'll pass the call to David, who will comment on our ongoing response to the COVID-19 pandemic, key markets, operational performance progress on our strategic initiatives, along with our outlook for the fourth quarter of 2020. 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. Our third quarter results were up when compared to Q2, primarily due to record operating results from our wood products segment, solid operating performance from our pulp mills and the continuation of lower pulp wood costs in Europe. These positive influences were partially offset by lower pulp sales realizations, a weaker US dollar and a slightly heavier annual maintenance program in Q3 when compared to Q2. We generated EBITDA in the third quarter of about $45.6 million compared to EBITDA of about $40.5 million in Q2. This quarter we curtailed our Celgar mill for 30 days to address a temporary spike in fiber costs, a decision that resulted in a modest savings on fiber and fixed costs. In addition, as a result of improved pulp pricing outlook, we reduced our inventory impairment provision to $8 million from $12.3 million in Q2. We also applied for and received about $3.5 million of subsidies from the Canadian Federal Government in connection with its COVID-19 wage support program in Q3. Our Pulp segment contributed EBITDA of $32 million and our wood products segment contributed record quarterly EBITDA…

Yes, thanks very much, Dave, and good morning everyone. As you all know the COVID-19 pandemic is hitting its second wave in many countries around the world. As a result, we are redoubling our measures to ensure the safety of our employees and the continued operation of our facilities. I would like to thank our employees for continuing their efforts to keep themselves, their families and our colleagues safe. I'm pleased with our Q3 operating results during this challenging time. Our mills all continue to run well. We are effectively managing our costs and we are experiencing steady demand for our pulp products. Our Friesau sawmill continues to set operational and financial records as our expansion project gets nearer to completion. NBSK pulp prices in Q3 were generally flat in both Europe and the US while China experienced modest upward pricing pressure at the end of the quarter due to steady demand and improving economic activity. However, when compared to Q2, average pulp prices in all markets were either down nominally or were flat. In China, the Q3 average NBSK net price was $572 per ton unchanged from Q2, European list prices averaged $840 per ton in the current quarter compared to $850 per ton in Q2 and the average Q3 net hardwood price in China was $443 per ton down $22 from Q2 and the hardwood list price in the US market averaged $868 per ton in Q3 compared to $897 in the prior quarter. The pandemic's second wave of infections and various governmental responses to limit its spread have created significant economic uncertainty. Currently, we are expecting a modest seasonal increase in pulp demand through the fall and winter. We also expect to see moderate demand increases from certain end uses including printing and writing as countries continue…

[Operator Instructions] Your first question is from Hamir Patel of CIBC Capital Markets, your line is now open.

Hi, good morning, David. With the recent upgrades, what level of lumber - lumber production are you targeting in 2021. And do you see that mix of volumes directed to the US changing next year.

Good morning, Hamir. Yes, I think we'll sort of your plan to top out around the 40% range, we won't go much beyond that. With our new equipment, I think we'll be expanding quite significantly, we're offering J grade as well. The higher quality dimension lumber into the Japanese market and we've got a lot of really steady customers in Europe that we don't want to abandon, we don't want to turn this mill into purely dimension lumber mill. We want to maintain that more diverse base as you - I think you know, the European market is a lot less volatile than the US market. So, on balance we'll, depending on how we are seeing what the outlook is, we can - we'll move that mill between 25% say and 40% US to mention and the rest in the other markets with an increase in component of Japanese J grade as well.

Okay, great. And then David, just in terms of overall lumber output there next year, what would you be targeting?

Yes, well I expect that will produce more than 500 million board feet of lumber depending on how we shift it, it will have a capacity of 750 million, but it's - the question would be how the markets - what's the labor supply for shifting and how we feel about maintenance capacity and all those are the sort of things, but to be conservative, it will run easily at the 500 million level.

Great, thanks, that's helpful. If I recall, I think on the last call you mentioned Celgar's power agreement was scheduled to expire, I think maybe last month, where does that stand today. I'm just thinking with all this talk in the province now that site C potentially being canceled.

Yes, well, we've - yes, we've finished our negotiation, we crossed that timeline what we - where we are is where the rest of the industry is. BC Hydro is treating us in a similar fashion finally, so we're at 80% of what we had in volume and in price, but there are some interesting features in there. We've got options if we find better - better uses for the energetic value of our black liquor, for example. We can sell everything above the 80% at market, whatever that is, and we can also - we're not exclusive to BC Hydro, so we have the option to move that power into other - another source if we care to and we've got some fuel optimization opportunities with the 80% volume at the higher price, we'll back off on the fossil fuel use obviously and so when you take fuel use optimization into account, the difference in power revenue from Celgar compared to the average of the last couple of years would be really not that material in there, sort of more or less about $1 million range. This is our guess so not a bad result considering how concerned we were about it initially.

Yes, it's definitely higher than a sound of thought and then Dave, just the last question from me, Alberta had made some pronouncements about growing harvest levels in the province. What sort of impact do you see from that on your operations there?

Yes, we will be got so much potential in that province, I don't know if listeners understand but the size of our forest management area is massive. We utilized a little less than 50% of the available hardwood today. There is a whole section of our forest management area that is really a traditional territory of the First Nations band in Alberta that didn't settle under Treaty 8 but did settle in the last couple of years with the Federal Government, so they're are interested to start to manage their land with us and it's that - that forest is getting quite old and more at fire risk also, it's a whole big area, working for us that will be - as we enter into another agreement, we'll be able to start managing with the lubricants and coal [ph] produce I think pretty significant volumes of softwood timber that will be available either to embedded quota holders, our partners in the region or we dream of sawmill of our own there at Peace River someday, and we're also looking hard at what other uses for Aspen might be available to us to value-add to sort of support the pulp mill produce additional value. Similar to what we did to Rosenthal and Friesau situation. So, and the cut is going up in the province as well, which will just take that I just described and add it - multiply it by a percentage of some kind, so there is, that's what we really like about Alberta. They've just got lot of fiber we've got a lot of control and the early work there for us is going to be the optimization that we are seeing some pretty exciting opportunities to reduce the logistics and handling costs of the wood we're bringing in today. So if we can make a structural shift in the wood cost, that mill will be much more profitable at times like this when we're at the bottom of the cycle and actually be more profitable (inaudible) points in the cycle, but we still see lots of potential in that mill and it does not - it's not producing free cash flow today, but there is - there is a path forward for it for sure and so, we're quite excited about that.

Great. Thanks, that's all I had, I'll turn it over.

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

Thank you. Good morning. David, I wanted to get your thoughts on the mid-term pulp supply outlook disproportionately heavy to hardwood growth over the next couple of years, you've downplayed substitution dynamics on previous calls, but can you comment on softwood price. I guess the softwood market's ability to withstand extreme hardwood supply growth especially with the softwood price premium already quite high relative to historical norms.

Yes, well I guess my first reaction is - if I thought the long-term hardwood supply demand was its going to be over-supplied, I'd be concerned, but I don't believe that I - I think this is a short-term anomaly that's brought on by the impact of COVID on printing and writing and you have to remember that a big chunk of a lot of these printing and writing grades, a lot of that's mechanical and very little chemical pulp in it compared to the amount of chemical pulp that go into the growing grades and so, the things that I think about are; one, the very rapid changes in the recycled fiber baskets globally, so more than half of all fiber that goes into any kind of paper product today is a recycled furnish and borders are now closed bot just because of COVID but because of countries not wanting to transfer the pollution associated with the recycled furnishes into their countries. In the last - in the early stages of this transition it was - we didn't see a substitution of virgin for recycle. I mean, it was just recycle is always the cheapest grade and virgin is the more expensive grade and you didn't really, it never got to the point, I don't think where there was a significant substitution. There were some paper makers that changed their furnish like we've seen machines that go from making a recycled product to back to a virgin product for example, but that was a brand switch, longer term decision but today I mean we're already seeing in Asia, some of the bigger higher-end packaging producers starting to look for furnish, like the next year even a clean white grade of recycle are not going to be going into China.…

That's great detail. Thanks for that. Question for Dave Ure, can you give us some context on the sales of investments during the quarter, what was that if you can give us any detail.

Yes, so as you know, we've been accumulating a little bit of cash, well considerable amount of cash, so we're always looking at just trying to trying to see if we can do something better than virtually zero as an interest rate. So we had a some small - certain small investments using some of that cash over the last few quarters and we just - we just elected to just sell the investments this quarter. We thought they had done what they were intended to do, so we sold them and yes, it's as simple as that, really trying to just trying to get a little bit something more with our cash balances.

Were those public equities.

We're not at liberty to disclose what we - what we invest and we just don't think it's something we want to talk about too much, but it's - I think what I can say to listeners is we're not risking the balance sheet, we're being very cautious and careful, but if we see things which are a no-brainer and we can get a little bit of return on our cash holdings then we're prepared to do that. We are very risk averse, we're not taking big flyers or anything like that.

Well done. Last question for me, you guys were reported bidder on the Klausner sawmill and I guess, can you talk a little bit about appetite for growing the sawmill footprint outside Europe having a non-integrated sawmill platform. Appreciate you probably want to be cautious with respect to growth, but what's the appetite look like beyond Friesau and maybe additional growth in Europe.

Yes, well I just start with, we do see lumber in our future. It's a core strategy for us, and I've talked before about the benefits of having an integrated model like Friesau and Rosenthal, so just big numbers, we're thinking somewhere around maybe 1.5 billion board feet of lumber in Europe, that's an aspiration that we have. With the platform we have today, Klausner sawmill made a lot of sense to us. Actually it's a link mill, which is the technology that we run in Europe, we knew that North American majors don't run link assets, they don't understand them, it's just not something they will ever really looked into. So we felt the competition would be light for the asset and we've got a really strong sales team and a lots of demand for lumber in the US market side. So, at the right price that would have been a really great expansion step for us and we felt comfortable to a level, but it's the bidding, we had a couple of European bidders that showed up literally the weekend before the auction. Bidders had to qualify, we were the only qualified bidder up until three days before the auction, with a socket horse bid which would have been a steal but two European showed up and they started going crazy on each other and so we just stepped away, it's - we really would have liked it, would have been a good growth step for us and it would have given us a footprint in the US sales, which is obviously if you're close to fiber, close to your customers and you've got a good asset, that's a way to make some money, if you buy it for the right price. So we stepped away from that, Klausner too came along as well, we're not participating in that. We just - it's a different situation and mill is not as far along, it's not ready to go. So the cash generating capacity of that mill is further out. And it would take some work to get it up to snuff and with COVID I just couldn't dream of sending our European colleagues over to the US South right now to work on the sawmill. So we're kind of in that - would have liked to have done it, but it didn't line up for us on that.

Understood. That's all I have. Thanks very much guys.

Your next question is from Andrew Kuske from, Credit Suisse. And your line is now open.

Thank you. Good morning. If you could maybe just give us a bit of color on what you're seeing in pulp markets with a particular focus on just the boots on the ground view of what you're seeing in Asia where most parts are really through the pandemic. And then what you're seeing in Europe where you've got operations where clearly the second wave is happening; whatever we'll call it and we're seeing pockets of shutdowns happening again.

Yes. So China was sort of first to go ahead obviously complete shutdown in the areas where they have the virus, everything kind of stopped, travel and logistics were really challenging, any trucker that wanted to go somewhere had a very rigid protocol he had to follow, he couldn't deviate. It was a challenge - challenging situation and then they more or less got through they started opening up and if you look at their manufacturing activity, it looks a bit like a V, I mean, they still have outbreaks but they clamp down on them very hard, very isolated and more or less things are - things are moving again. So demand is good. I think the pulp situation is one of - there is, I mean if you're paper producer in China and you don't have a full warehouse of pulp, you missed it because it has been a lot of inventory available from producers, particularly on the hardwood side. That is all transacted, I think most of the pulp in Asia today is owned by the end producers and they're running well. Demand for these products is improving and they are buying as much as they can get to replenish. They don't want to fall behind because prices remain low, but there is upward momentum, we're seeing that, we moved from the 570 to 600 now looking like 610 to 615 and generally, the mood is one of things are improving and demand is actually robust. There is no shortage of hands for pulp right now. In Europe, I guess the mood would be - there has been a, then a lot of shifts. I think the paper companies have done quite a bit of rationalization, shedding machine is to manage the drop in demand of certain…

That's very helpful and then has there been any change to really your geographic sales mix since the start of the pandemic, or is it held pretty constant.

Yes, I see if there was one change where we're really putting our focus on getting more of Stendal into Asia. So we've, been defining optimal logistics patterns for that mill. You know, like booking well ahead, freight services to move product there, we just don't want to put any pressure on the European market. Europe is steady and I just - we don't want to exacerbate the condition that could put it in an oversupply situation. Not that one mill could do that, but just pushing sometimes into Asia where there is strong appetite for small discount compared to European realization is in our mind, still way to go. So, yes, that would be the only real change I would say. We've also, I should say we do continually look at our customer list and we think about the machines and we are very connected to our customers discussing the prospects, different products and so on, and we really do focus on servicing customers in grades that have a long-term future. Yes, we don't, need to be in the spot markets and we don't need to be with customers that need credit support or that we think may be one of the next to succumb to the shifting demand patterns. So, feel pretty comfortable that we've got a good steady customer base as we go through the pandemic (inaudible) however, the one that is.

That's very helpful. Thank you.

Your next question is from Andrew Shapiro of Lawndale Capital Markets, your line is now open.

Hi, good morning, congratulations on the honors, David. Well deserved.

Thank you.

The cash flow that came out this quarter. And your discussion of the prospects and pricing et cetera, it seems to indicate at least stabilization in cash flow if not likely a trend likely to grow from these levels. What's kind of your priority on the use of cash flows. Is there an optimal debt level or level of turns et cetera that you're looking for when the allocation of cash flows might be going to more towards other growth investments and for evaluation and increase in either dividends or other, I won't call a return on capital, but if the company's stock price and valuation stays this low repurchase?

Well, yes, thanks for the question. Andy. Yes, this is the way I think about things. I kind of have to separate like the conditions that we're in just today with what would maybe be considered normal condition. So by that I mean today the focus is controlling costs, servicing our customers being strategic around fiber, finished the Friesau out expansion, finished the Stendal project, which is just such an accretive positive thing for that mill when you take the wastewater fee offset program into account like it was a real - really great project that we put together there with support from wastewater program. So that's a priority, finished those things, maintain the mills, keep all our people healthy, continue to work on process controls, just keep optimizing, doing what we do and when we get through the pandemic, and we're starting to generate the free cash flow that these mills can generate, then we need to get back to our balanced capital allocation approach and that would be re-reinstate the dividend, continue to grow the dividend, look for opportunities to delever, continue to - we're going to have some in our notes that are coming up as we get in the call periods, we're going to have some options there and we're going to have some interesting growth opportunities to pursue. So we'll be - we'll do what we've always done, which is to be balanced, protect the balance sheet, but great long-term value through that process.

Okay. And then in this new era which is extending of virtual most of your sales efforts or all of your sales efforts these days with customers is all done virtual or is there any travel and in-person activities going on at all yet.

Well, there has been a fair amount of in-person things happening. So not for me obviously, but I can't get to Europe from Canada right here, but our European sales team visit with customers or have been, they're not - this week they're not because things have locked up again. But there has been - there's been quite a bit of we've had meetings with our large pan-European customers, we'll meet somewhere safe where they can be in a big conference room and compare notes that kind of thing. We've got an on the ground sales force in China obviously, so there is still that direct contact going on. For our leaders like our Vice President here in Canada, it's more of a virtual arrangement because the international travel is not possible but that's been going reasonably well and we've done really well servicing our customers throughout this pandemic. And we just continue to build that relationship and that trust and so in the market side of our stakeholder engagements, I think is doing very well.

Like, so the trade shows like the London on the other paper and pulp week.

Not happening.

Do they have it at all?

Yes. The other Hawkins Wright symposium will be virtual next week.

Right. All right. So they do that virtual and they will still be the various networking opportunities and things that you.

All right. The industry thrives on. And then on the investment side of the coin, what's on the calendar for your virtual storytelling to articulate the main the Mercer proposition and value here.

Yes. We've been doing the bank virtual conferences, which actually work really well. It's interesting that in a day or two, we can meet as many as 75 investors, I just made that number up, I mean big numbers, and I have one on ones with certain ones, investors that really want to talk one on one and then sometimes the banks put them into a group and you know, David and I have had groups of up to 20 investors on one call. You do a little bit of show and answer the bunch questions that we have this morning, so that's working really well and I think we'll be busy through the fall, continuing to do that.

What is next up on your calendar for that - I'm sorry - what the next upon your calendar for those.

Yes, I'll just ask Dave to the list.

Yes. we've got, two conferences coming up and they happen to be in the same week, the week of November 30 will be attending the Bank of America Fixed Income Conference and also, that same week the RBC Forest Products Conference. So that's in the week of November 30.

Okay, excellent. All right, thanks guys.

[Operator Instructions] Your next question is from Adam of Knighthead [ph]. Your line is now open.

Hey, gentlemen. Thanks for taking the time and David congratulations again. Well deserved.

Thank you.

Quick question to Dave Ure. I know you don't want to comment on the nature of the investment sold during the period and that's fine. I'm just curious, are those - are those investments that were in prior periods accounted for as cash equivalents meaning, is the $21.5 million that we see as proceeds is that truly additive or is it just really a reclassification of liquid assets.

Yes. They were not in the cash, so they were not cash equivalents. No.

Got it, okay. So the balance today is $21.5 million higher than otherwise would have been if I think about equivalents.

Right. Yes. Got it, thanks. That's a helpful clarification and then the - just curious if you can comment as to what you're seeing or thinking around pulp maintenance cycles globally. You mentioned in the press release that you think we'll see some capacity curtailments, just on account of deferred maintenance that the scene we've been talking about for a couple of quarters now. So I'm curious where you see what inning of that we're in - how you think about it. Thanks, Dave.

Yes, well, it's challenging, we've done some shuts ourselves, Rosenthal we've completed that we're successful, but it was a nail biter frankly, we had one contractor who typically comes in to do high pressure cleaning of the boilers and they just three weeks before maybe a month before the shut, they just - we can't send the crew and we're not going to do it, we're not comfortable and so you are going to risk scrambling around looking for an alternative supplier. We were successful ultimately and as optimal because it was kind of a new process for, they did it for us. But so that was an example of the skirting around to get qualified trades, if you like. And then I know that if we had to do that shut today it couldn't happen, you can't cross the border from Austria, you can't cross the border from the Czech Republic today, you can't stand hotels as a guest. So you - what does that look like. So we just, we got lucky as this thing comes in waves, if a company has got a shot at a time when there is a wave in their area, there's going to be disruptions and I can't predict that. I don't have a crystal ball, but it's for these big manufacturing facilities, it's a struggle and I'm sure it's impacting the decisions that other companies are making around the timing and the availability of contractors to do the work. Yes, we've had, I mean the hygiene protocols that are necessary to conduct a maintenance shut, these days are extraordinary. You could imagine whole parking lots with tents and rows and forms and people in gowns and taking your temperature, filling out questionnaires, verifying information, special trailers for canteens, and bathroom facilities protocols that don't mix contractors, they tend to become a little part among themselves, they don't actually physically meet with our people like they're barricaded part, they work separately, hygiene clean tools that kind of stuff. I think it's an extraordinary amount of effort to conduct these big shuts and Mercer is a very modern company with strong operating process controls we can handle that kind of stuff, but I'm not sure all our competitors are up to the challenge. So I'm still expecting to see unplanned downtime as a result to COVID just can't imagine, everybody is going to be successful doing what they want to do what they want to do it.

Got it. Super helpful, thanks Dave. Congrats on a good quarter.

Yes. Thank you.

And there are no further questions. And I would like to turn it back to David Gandossi. For more information.

Yes. Thank you, operator and thanks everybody for joining the call. As always Dave and I are always happy to take calls anytime. So don't hesitate to reach out and we look forward to speaking to you all upon the completion of the year and stay safe everyone, look after your families and be careful. Thanks.

Ladies and gentlemen, this concludes today's conference call and thank you for participating. You may now disconnect.