Mercer International Inc. Reports 2004 First Quarter Results

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Mercer International Inc. - Shares OF Beneficial Interest (MM)	NASDAQ:MERCS	NASDAQ	Ordinary Share

Mercer (NASDAQ:MERCS)
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Mercer International Inc. Reports 2004 First Quarter Results NEW YORK, May 7 /PRNewswire-FirstCall/ -- Mercer International Inc. today reported results for the first quarter ended March 31, 2004. Results of Operations Total revenues for the first quarter of 2004 increased to euro 52.9 million from euro 50.4 million in the first quarter of 2003, primarily because of higher pulp sales. Pulp and paper revenues were euro 49.2 million in the 2004 first quarter, versus euro 46.2 million in the first quarter of 2003. Costs of pulp and paper sales in the first quarter of 2004 increased to euro 46.7 million from euro 45.0 million in the comparative period of 2003, primarily a result of increased pulp sales volumes. For the 2004 first quarter, pulp sales increased to euro 33.9 million from euro 31.4 million in the same period a year ago and euro 34.2 million in the 2003 fourth quarter. List prices for Northern Bleached Softwood Kraft Pulp ("NBSK") in Europe were approximately euro 464 ($580) per tonne in the first quarter of 2004, approximately euro 441 ($480) per tonne in the first quarter of last year, and approximately euro 444 ($560) per tonne in the fourth quarter of 2003. The increase in NBSK prices was largely offset by the general weakness of the U.S. dollar versus the Euro in the current period. Increased production volumes due to enhanced operational efficiency lead to higher pulp revenues. In the 2004 first quarter, pulp sales by volume were 81,493 tonnes, compared to 78,479 tonnes in the first quarter of 2003 and 81,729 tonnes in the fourth quarter of last year. Pulp sales realizations were euro 416 per tonne on average in the 2004 first quarter, compared to euro 400 per tonne in the first quarter of 2003 and euro 418 per tonne in the fourth quarter of 2003. Transportation and other revenues for the pulp operations were euro 3.4 million in the 2004 first quarter, compared to euro 3.8 million in the first quarter of last year. Cost of sales and general, administrative and other expenses for the pulp operations increased to euro 38.5 million in the 2004 first quarter from euro 37.5 million in the first quarter of 2003, primarily as a result of the inclusion of certain non-capitalized expenses of approximately euro 3.1 million related to the Stendal mill as described below. On average, per tonne fiber costs for pulp production decreased by approximately 5.4% compared to the first quarter of last year. Depreciation for the pulp operations was euro 5.6 million in the current quarter, versus euro 5.4 million in the year ago period. For the first quarter of 2004, our pulp operations generated an operating loss of euro 0.8 million, versus an operating loss of euro 1.4 million in the year ago period. Paper sales in the 2004 first quarter were euro 15.3 million, compared with euro 14.8 million in the first quarter of last year. Sales of specialty papers in the 2004 first quarter were euro 10.9 million versus euro 11.1 million in the first quarter of 2003. For the first quarter of 2004, total paper sales volumes were 17,406 tonnes, versus 15,707 tonnes in the first quarter of last year. On average, prices for specialty papers realized in the current period decreased slightly, reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 16% reflecting generally weak demand. Cost of sales and general, administrative and other expenses for the paper operations in the first quarter of 2004 increased to euro 15.8 million from euro 13.2 million in the comparative quarter of 2003, primarily as a result of higher paper sales volumes. Depreciation for the paper operations was euro 0.6 million in the 2004 first quarter, compared to euro 0.5 million in the 2003 first quarter. For the 2004 first quarter, our paper operations generated an operating loss of euro 0.4 million, compared to operating income of euro 3.8 million in the first quarter of last year. For the first quarter of 2004, consolidated general and administrative expenses increased to euro 7.2 million from euro 4.8 million in the year ago period, primarily as a result of the inclusion of certain non-capitalized expenses of approximately euro 3.1 million related to the Stendal mill. Such costs are comprised principally of personnel and other supervisory expenses in respect of staffing and preparing for the start-up and operation of the Stendal mill. As such costs are not directly related to the construction of the Stendal mill, they are not capitalized. We expect the amount of costs relating to the Stendal project that are expensed to markedly increase as we complete and start up the mill through the remainder of the current fiscal year. In the first quarter of 2004, we reported a loss from operations of euro 1.9 million, compared to income from operations of euro 1.3 million in the same period last year. Interest expense (excluding capitalized interest of euro 7.1 million relating to the Stendal pulp mill) in the first quarter of 2004 increased to euro 3.0 million from euro 2.5 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in October 2003. In the 2004 first quarter, the marked to market valuation of variable-to- fixed rate interest swaps entered into by our 63% owned subsidiary, Zellstoff Stendal GmbH ("Stendal"), to manage the interest risk exposure with respect to approximately euro 612.6 million under its project loan facility (the "Stendal Loan Facility") for the construction of a 552,000 tonne NBSK pulp mill (the "Stendal project") resulted in a net non-cash holding loss of approximately euro 17.4 million before minority interests, primarily as a result of a decrease in long-term interest rates. In the comparable period of 2003, we recorded a net non-cash holding loss of euro 10.4 million before minority interests on such interest rate swaps. Under these swaps, Stendal pays a fixed rate and receives a floating rate with respect to interest payments calculated on a notional amount. In March 2004, Stendal converted approximately euro 306.3 million of its indebtedness under the Stendal Loan Facility into U.S. dollars through a currency swap and entered into a currency forward in the notional amount of euro 20.6 million. In the 2004 first quarter, we recorded a net non-cash holding loss of approximately euro 0.2 million before minority interests on the valuation of such currency swaps and currency forward as a result of the strengthening of the U.S. dollar versus the Euro at the end of the current quarter. In March 2004, we entered into currency swaps to manage the exposure with respect to an aggregate amount of approximately euro 184.5 million of the principal long-term indebtedness of the Rosenthal mill and a currency forward contract in the notional amount of euro 40.7 million. The currency swaps converted all of Rosenthal's bank indebtedness to U.S. dollars from Euros. We had previously entered into forward interest rate and interest cap contracts in connection with a portion of the indebtedness relating to the Rosenthal mill. For the first quarter of 2004, we recognized a net non-cash holding loss of euro 4.9 million before minority interests on the marked to market valuation of such derivatives, versus a net gain of euro 1.8 million before minority interests on Rosenthal's outstanding derivatives in the year ago period. Minority interest for the 2004 first quarter amounted to euro 7.4 million, representing the two minority shareholders' proportionate loss in the Stendal project. In the first quarter of 2003, minority interest was euro 3.8 million. Our results for the prior period of 2003 included an adjustment of euro 5.5 million for the non-cash impact of other-than-temporary impairment losses of our available-for-sale securities. There was no similar adjustment in the current period of 2004. We reported a net loss for the first quarter of 2004 of euro 19.0 million, or euro 1.11 per diluted share, versus a net loss of euro 10.9 million, or euro 0.65 per diluted share, a year ago. As the Stendal project is currently under construction and because of its overall size relative to our other facilities, management uses consolidated operating results excluding items relating to the Stendal project to measure the performance and results of our operating units. Management believes this measure provides meaningful information on the performance of its operating facilities for a reporting period. Upon commencement of commercial production, the Stendal project will be evaluated with our other operating units. Excluding items related to the Stendal project, we would have reported a net loss for the 2004 first quarter of euro 5.8 million, or euro 0.34 per diluted share, which was determined by adding the non-cash holding loss on the interest rate swaps of euro 17.4 million, non-cash holding loss on the currency swap and currency forward of euro 0.2 million and general and administrative expenses of euro 3.1 million related to the Stendal mill to, and subtracting other income of euro 0.1 million related to the Stendal mill and minority interest of euro 7.4 million from, the reported net loss of euro 19.0 million. This compares with a net loss of euro 4.5 million, or euro 0.26 per diluted share, in the first quarter of 2003, when items related to the Stendal project are excluded, which was determined by adding back the non-cash holding loss on the interest rate swaps of euro 10.4 million and general and administrative expenses of euro 0.1 million relating to the Stendal mill to, and subtracting other income of euro 0.1 million related to the Stendal mill and minority interest of euro 3.8 million from, the reported net loss of euro 10.9 million. Operating earnings before depreciation and amortization ("Operating EBITDA") for the first quarter of 2004 were euro 4.5 million, compared to euro 7.2 million in the same period a year ago and euro 3.9 million in the 2003 fourth quarter. The decrease from the prior period results is primarily due to the inclusion of certain non-capitalized expenses related to the Stendal mill in the current period. 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 is not an actual cash cost, and varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA as calculated by other companies. 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. At March 31, 2004, our cash and cash equivalents were euro 48.1 million, compared to euro 52.0 million at December 31, 2003. We also had euro 28.1 million of cash restricted to pay construction in progress costs payable and euro 19.1 million of cash restricted in a debt service account, both related to the Stendal project. In addition, we had euro 26.9 million of cash restricted in a debt service account relating to the Rosenthal mill. At March 31, 2004, we recorded a working capital deficit of euro 21.2 million, primarily because we pre-finance certain governmental grants which we expect to receive under a dedicated tranche of our Stendal Loan Facility but, under our accounting policies, do not record these grants until they are received, as well as Stendal construction in progress costs payable for which we had not drawn down under the said loan facility. At March 31, 2004, we qualified for investment grants totaling approximately euro 100.7 million from the federal and state governments of Germany, of which we expect to receive euro 85.0 million this year. These grants, when received, will be applied to repay the amounts drawn under the dedicated tranche of the Stendal facility. The grants are not reported in our income and reduce the cost basis of the assets purchased when they are received. At March 31, 2004, we had Stendal construction in progress costs payable of euro 13.4 million, which will be paid pursuant to the Stendal Loan Facility. We expect to continue to generate sufficient cash flow from operations to pay our interest and debt service expenses and meet the working and maintenance capital requirements for our current operations. We expect to meet the capital requirements for the Stendal mill, including working capital and potential losses during start up, through shareholder advances already made to Stendal, the Stendal Loan Facility, which includes a revolving line of credit for the mill, the receipt of government grants and, when operational, cash flow from operations. Stendal Project Status As of March 31, 2004, progress on the Stendal project was substantially on schedule and on budget. The Stendal project has advanced to an average stage of 97% completion. Engineering is approximately 99% completed. Procurement and equipment delivery is approximately 99% completed, and civil works and mechanical assembly are approximately 97% and 93% completed, respectively. President's Comments Mr. Jimmy S.H. Lee, President and Chairman, stated, "Our 2004 first quarter results reflect improving pulp demand and prices and the overall weakness of the U.S. dollar versus the Euro. In the quarter, pulp prices and demand steadily improved with list prices for NBSK pulp in Europe reaching approximately $600 per tonne by the end of the quarter. Such price improvements were, in part, offset by the overall weakness of the U.S. dollar versus the Euro during the quarter. Markets for our paper products remained generally weak." He noted, "Our first quarter results included approximately euro 3.1 million of general and administrative costs relating to the Stendal mill that are not capitalized". Mr. Lee continued: "As the selling price for our principal product, NBSK pulp, is quoted in U.S. dollars whereas our costs are principally incurred in Euros, we are exposed to changes in the Euro/U.S. dollar exchange rate. In order to mitigate, in part, such exposure and because of the general weakness of the U.S. dollar and uncertainty with respect to exchange rates, in March we effectively converted all of Rosenthal's outstanding long-term bank indebtedness from Euros to U.S. dollars through currency swaps. Further, as we are expecting the Stendal project to be completed in the third quarter of this year, we converted approximately one-half of its indebtedness under the Stendal Loan Facility from Euros to U.S. dollars through a currency swap." He continued: "We believe these and certain currency forwards we have entered into will help mitigate the risks from a further weakening of the U.S. dollar. In the event that the U.S. dollar were to strengthen, we believe that in the ordinary course the company would benefit from higher pulp sales realizations as NBSK pulp is priced in U.S. dollars." Mr. Lee added: "We are very excited with respect to the near completion of the Stendal pulp mill. The project is substantially on time and on budget and we are expecting it to be completed in the third quarter. At that time, we will commence the start-up, bringing the 552,000-tonne capacity mill into production." Mr. Lee concluded: "The pending completion of the Stendal pulp mill project and the current strength shown in pulp markets leaves us well positioned for growth in the remainder of 2004 and into next year. We are also seeing some improvements in our paper markets." In conjunction with this release, Mercer International will host a conference call, which will be simultaneously broadcast live over the Internet. Management will host the call, which is scheduled for Friday, May 7, 2004 at 10:00 a.m. (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.mercerinternational.com/, or at http://www.firstcallevents.com/service/ajwz405247545gf12.html. 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 14, 2004 at 11:59 p.m. (EDT). The replay number is (800) 642-1687, and the passcode is 6989417. Mercer International Inc. is a European pulp and paper manufacturing company. To obtain further information on the company, please visit its web site at http://www.mercerinternational.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 As of March 31, 2004 and December 31, 2003 (Unaudited) (Euros in thousands) March 31, December 31, 2004 2003 ASSETS Current Assets Cash and cash equivalents euro 48,136 euro 51,993 Cash restricted 28,083 15,187 Receivables 27,551 32,285 Unrealized foreign exchange derivative gains 843 743 Inventories 26,922 23,909 Prepaid expenses 5,783 4,284 Total current assets 137,318 128,401 Long-Term Assets Cash restricted 45,948 44,180 Property, plant and equipment 789,316 745,178 Investments 1,533 1,644 Equity method investments 3,010 2,309 Deferred note issuance costs 4,193 4,213 Deferred income tax 10,000 9,980 Total assets euro 991,318 euro 935,905 LIABILITIES Current Liabilities Accounts payable and accrued expenses euro 43,541 euro 37,414 Construction in progress costs payable 13,384 42,756 Note payable 1,267 1,377 Debt, construction in progress 85,000 80,000 Debt, current portion 15,339 15,801 Total current liabilities 158,531 177,348 Long-Term Liabilities Debt, construction in progress 401,828 324,238 Debt, less current portion 249,716 255,901 Unrealized interest rate derivative losses 60,544 43,151 Unrealized foreign exchange derivative losses 4,640 - Capital leases and other 2,318 2,412 Total liabilities 877,577 803,050 Minority Interest - - SHAREHOLDERS' EQUITY Shares of beneficial interest 79,349 78,139 Additional paid-in capital, stock options 14 223 Retained earnings 30,230 49,196 Accumulated other comprehensive income 4,148 5,297 Total shareholders' equity 113,741 132,855 Total liabilities and shareholders' equity euro 991,318 euro 935,905 Certain reclassifications were made to the prior period results to conform to the current period presentation. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS For the Three Months Ended March 31, 2004 and 2003 (Unaudited) (Euros in thousands, except per share data) 2004 2003 Revenues Pulp and paper euro 49,233 euro 46,233 Transportation 735 1,042 Other 2,954 3,126 52,922 50,401 Cost of sales Pulp and paper 46,677 45,000 Transportation 726 1,066 47,403 46,066 Gross profit 5,519 4,335 General and administrative expenses (7,162) (4,807) Flooding losses and expenses, less grant income (253) 1,729 (Loss) income from operations (1,896) 1,257 Other income (expense) Interest expense (2,988) (2,463) Investment income 934 537 Derivative financial instruments Unrealized loss, construction in progress financing (17,555) (10,362) Unrealized and realized net (losses) gains, other (4,890) 1,796 Impairment of available-for-sale securities - (5,511) Total other expense (24,499) (16,003) Loss before income taxes and minority interest (26,395) (14,746) Income tax benefit (expense) 20 (12) Loss before minority interest (26,375) (14,758) Minority interest 7,409 3,836 Net loss (18,966) (10,922) Retained earnings, beginning of period 49,196 52,789 Retained earnings, end of period euro 30,230 euro 41,867 Loss per share Basic euro (1.11) euro (0.65) Diluted euro (1.11) euro (0.65) Certain reclassifications were made to the prior period results to conform to the current period presentation. MERCER INTERNATIONAL INC. BUSINESS SEGMENT INFORMATION For the Three Months Ended March 31, 2004 and 2003 (Unaudited) (Euros in thousands) Rosenthal Active Pulp Paper Production Segments Three months ended March 31, 2004 Sales to external customers euro 33,940 euro 15,293 euro 49,233 Transportation and other 2,997 301 3,298 Intersegment net sales 429 - 429 37,366 15,594 52,960 Operating costs 27,722 13,978 41,700 Depreciation and amortization 5,582 552 6,134 General and administrative 2,109 1,239 3,348 Flooding grants, less losses and expenses - 253 253 35,413 16,022 51,435 (Loss) income from operations 1,953 (428) 1,525 Interest expense (2,449) (145) (2,594) Unrealized net gain (loss) on derivative financial instruments (4,890) - (4,890) Investment income 985 5 990 (Loss) income before income taxes and minority interest euro (4,401) euro (568) euro (4,969) Three months ended March 31, 2003 Sales to external customers euro 31,385 euro 14,848 euro 46,233 Transportation and other 3,810 410 4,220 Intersegment net sales 870 - 870 36,065 15,258 51,323 Operating costs 29,969 11,058 41,027 Depreciation and amortization 5,384 525 5,909 General and administrative 2,072 1,609 3,681 Flooding grants, less losses and expenses - (1,729) (1,729) 37,425 11,463 48,888 (Loss) income from operations (1,360) 3,795 2,435 Interest expense (3,034) (92) (3,126) Net gain (loss) on derivative financial instruments 1,796 - 1,796 Impairment of investments - - - Investment income 391 11 402 (Loss) income before income taxes and minority interest euro (2,206) euro 3,713 euro 1,507 Stendal Pulp Corporate, Construction Other and Consolidated in Progress Eliminations Total Three months ended March 31, 2004 Sales to external customers euro - euro - euro 49,233 Transportation and other 391 3,689 Intersegment net sales - (429) - 391 (429) 52,922 Operating costs - (590) 41,110 Depreciation and amortization - 159 6,293 General and administrative 3,132 682 7,162 Flooding grants, less losses and expenses - - 253 3,132 251 54,818 (Loss) income from operations (2,741) (680) (1,896) Interest expense (57) (337) (2,988) Unrealized net gain (loss) on derivative financial instruments (17,555) - (22,445) Investment income (221) 165 934 (Loss) income before income taxes and minority interest euro (20,574) euro (852) euro (26,395) Three months ended March 31, 2003 Sales to external customers euro - euro - euro 46,233 Transportation and other - (52) 4,168 Intersegment net sales - (870) - - (922) 50,401 Operating costs - (870) 40,157 Depreciation and amortization - - 5,909 General and administrative 78 1,048 4,807 Flooding grants, less losses and expenses - - (1,729) 78 178 49,144 (Loss) income from operations (78) (1,100) 1,257 Interest expense - 663 (2,463) Net gain (loss) on derivative financial instruments (10,362) - (8,566) Impairment of investments - (5,511) (5,511) Investment income 146 (11) 537 (Loss) income before income taxes and minority interest euro (10,295) euro (5,959) euro (14,746) Certain reclassifications were made to the prior period results to conform to the current period presentation. MERCER INTERNATIONAL INC. RECONCILIATION OF PRO FORMA RESULTS For the Quarters Ended March 31, 2004 and 2003 (Euros in thousands, except per share data) For the Quarter For the Quarter Ended Ended March 31, 2004 March 31, 2003 (unaudited) Net loss reported under GAAP euro (18,966) euro (10,922) Adjustments for: Loss on interest rate swap contracts, Stendal project 17,393 10,362 Loss on currency derivatives, Stendal project 162 - General and administrative expenses 3,132 78 Other income (113) (146) Minority interest (7,409) (3,836) Pro forma net income (loss) euro (5,801) euro (4,464) Pro forma income (loss) per share Basic euro (0.34) euro (0.26) Diluted euro (0.34) euro (0.26) MERCER INTERNATIONAL INC. COMPUTATION OF OPERATING EBITDA For the Quarters Ended March 31, 2004 and 2003 (Euros in thousands) For the Quarters Ended March 31, 2004 2003 (unaudited) Net loss euro (18,966) euro (10,922) Minority interest (7,409) (3,836) Income taxes (20) 12 Interest expense 2,988 2,463 Investment income (934) (537) Derivative financial instruments 22,445 8,566 Impairment of investments - 5,511 (Loss) income from operations (1,896) 1,257 Add: Depreciation and amortization 6,429 5,921 Operating EBITDA(1) euro 4,533 euro 7,178 (1) Operating EBITDA does not reflect the impact of a number of items that affect the company's 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 the company's results as reported under GAAP. MERCER INTERNATIONAL INC. COMPANY SALES BY PRODUCT CLASS, GEOGRAPHIC AREA AND VOLUME (Unaudited) Quarter Ended March 31, 2004 2003 (Euros in thousands) Sales by Product Class Pulp(1) euro 33,940 euro 31,385 Specialty Papers 10,865 11,056 Printing Papers 4,428 3,792 Total(1) euro 49,233 euro 46,233 Sales by Geographic Area Germany euro 22,778 euro 20,171 Italy 13,496 13,318 European Union(2) 7,840 7,498 Eastern Europe and Other 5,119 5,246 Total(1) euro 49,233 euro 46,233 (Amount in tonnes) Sales by Volume Pulp(1) 81,493 78,479 Specialty Papers 11,038 11,136 Printing Papers 6,368 4,571 Total(1) 98,899 94,186 (1) Excluding intercompany sales of 1,009 tonnes and 2,129 tonnes of pulp and intercompany net sales revenues of approximately euro 0.4 million and euro 0.9 million in the three months ended March 31, 2004 and 2003, respectively. (2) Not including Germany or Italy. NOTE: One tonne = 1.0160 of one ton. DATASOURCE: Mercer International Inc. CONTACT: Jimmy S.H. Lee, Chairman & President of Mercer International Inc., +41-43-344-7070; Investors, Eric Boyriven or Kellie Nugent, or Media, David Schemelia, all of Financial Dynamics, +1-212-850-5600, for Mercer International Inc. Web site: http://www.mercerinternational.com/

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MERCS Mercer International Inc. - Shares OF Beneficial Interest (MM)