Mercer International Inc. Reports 2004 Third Quarter Results

Share Name	Share Symbol	Market	Type
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 Third Quarter Results NEW YORK, Nov. 8 /PRNewswire-FirstCall/ -- Mercer International Inc. (Nasdaq: MERCS; TSX: MRI.U) today reported results for the third quarter ended September 30, 2004. Results of Operations - Three Months Ended September 30, 2004 Total revenues for the three months ended September 30, 2004 increased to euro 49.1 million from euro 45.8 million in the comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were euro 47.3 million in the third quarter of 2004, versus euro 43.7 million in the comparative period of 2003. Costs of pulp and paper sales in the three months ended September 30, 2004 decreased to euro 39.8 million from euro 45.4 million in the comparative period of 2003, primarily as a result of lower pulp production costs at our Rosenthal mill. We started up our Stendal pulp mill in the quarter ended September 30, 2004. On September 18, 2004, we commenced expensing all of the costs of the Stendal mill whereas previously most of its costs, including interest, were capitalized. Pulp sales increased to euro 34.5 million in the quarter ended September 30, 2004 from euro 30.0 million in the same period a year ago, primarily as a result of higher prices. List prices for northern bleached softwood kraft ("NBSK") pulp in Europe were approximately euro 519 ($635) per tonne in the third quarter of 2004, approximately euro 535 ($645) per tonne in the second quarter of 2004 and approximately euro 444 ($550) per tonne in the third quarter of last year. The increase in NBSK pulp prices was partially offset by the weakness of the U.S. dollar versus the Euro in the current period. In the current quarter, our pulp sales by volume were 73,128 tonnes, compared to 73,747 tonnes in the comparative period of 2003. In the three months ended September 30, 2004, we did not report any pulp sales revenues from the Stendal mill. Pulp sales realizations were euro 472 per tonne on average in the current quarter, compared to euro 471 per tonne in the second quarter of 2004 and euro 407 per tonne in the three months ended September 30, 2003. Transportation and other revenues for the pulp operations were euro 2.2 million in the three months ended September 30, 2004, compared to euro 2.0 million in the three months ended September 30, 2003. Cost of sales and general, administrative and other expenses for the pulp operations were euro 33.4 million in the three months ended September 30, 2004 compared to euro 35.3 million in the comparative period of 2003, and included euro 2.5 million of operating costs related to the Stendal mill. On average, fiber costs for pulp production decreased by approximately 4.6% compared to the third quarter of last year. Depreciation for the pulp operations was euro 3.8 million in the current quarter, versus euro 5.5 million in the year ago period. In conjunction with establishing the depreciation period for our Stendal mill, we reviewed the useful life of our Rosenthal mill and, effective July 1, 2004, increased its estimated useful life from an initial 15 to 25 years. This change in estimate resulted in a decrease of euro 2.2 million in cost of sales and net loss, and a decrease in net loss per share of euro 0.13 for the quarter ended September 30, 2004. For the three months ended September 30, 2004, our pulp operations generated operating income of euro 4.0 million, versus an operating loss of euro 2.6 million in the year ago period. Paper sales in the three months ended September 30, 2004 were euro 12.8 million, compared to euro 13.7 million in the same period of last year. Sales of specialty papers in the three months ended September 30, 2004 and 2003 were euro 8.6 million, respectively. For the current quarter, total paper sales volumes were 14,712 tonnes, versus 15,979 tonnes in the comparative period of last year. On average, prices for specialty papers realized in the current quarter increased by 2.5%, reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 2.8% reflecting generally weak demand. Cost of sales and general, administrative and other expenses for the paper operations in the three months ended September 30, 2004 increased to euro 20.3 million from euro 14.9 million in the comparative quarter of 2003, primarily as a result of a non-cash euro 6.0 million impairment charge relating to our paper operations. Depreciation for the paper operations was euro 0.6 million in the three months ended September 30, 2004 and 2003, respectively. For the quarter ended September 30, 2004, our paper operations reported an operating loss of euro 7.6 million, which included the non-cash euro 6.0 million impairment charge, compared to an operating loss of euro 1.1 million in the same period of last year. For the three months ended September 30, 2004, consolidated general and administrative expenses increased to euro 7.3 million from euro 4.2 million in the year ago period, primarily as a result of the inclusion of operating costs related to the Stendal mill. In the quarter ended September 30, 2004, we reported a loss from operations of euro 4.8 million, compared to a loss from operations of euro 5.1 million in the same period last year. Interest expense in the three months ended September 30, 2004 increased to euro 4.2 million from euro 2.2 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in October 2003 and the inclusion of interest costs of euro 1.7 relating to the Stendal mill after September 18, 2004. In the quarter ended September 30, 2004, the marked to market valuation of variable-to-fixed-rate interest swaps and forward interest rate and interest cap contracts entered into by our Stendal and Rosenthal mills resulted in a net non-cash holding loss of approximately euro 14.1 million before minority interests versus a net gain of euro 5.9 million before minority interest on such interest rate contracts in the prior period of 2003. In the three months ended September 30, 2004, we recorded a net non-cash holding gain of approximately euro 6.0 million before minority interest on the marked to market valuation of currency swaps and currency forwards entered into by our Stendal and Rosenthal mills as a result of the weakening of the U.S. dollar versus the Euro and changes in interest rates relating to such currencies. In the comparative period of 2003, we reported a net gain of euro 3.8 million before minority interests on the then outstanding currency derivatives of our Rosenthal and Stendal mills. In the current quarter, minority interest, representing the two minority shareholders' proportionate interests in the Stendal mill, was euro 6.7 million, compared to euro (1.9) million in the comparative period of 2003. For the three months ended September 30, 2004, we reported a net loss of euro 9.9 million, or euro 0.57 per share, which reflected the euro 6.0 million non-cash impairment charge related to our paper operations, the inclusion of euro 4.2 million of operating and interest costs related to the Stendal mill and the net non-cash holding loss on the marked to market valuation of our derivative instruments. In the comparative period of 2003, we reported net income of euro 0.9 million, or euro 0.05 per basic and diluted share. We generated Operating EBITDA of euro 5.3 million in the current quarter, compared to Operating EBITDA of euro 1.1 million in the comparative period of 2003. Operating EBITDA is defined as income (loss) from 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. At September 30, 2004, our cash and cash equivalents were euro 42.6 million, compared to euro 52.0 million at December 31, 2003. We also had euro 29.3 million of cash restricted to pay construction costs payable and euro 19.1 million of cash restricted in a debt service account, both related to the Stendal mill. In addition, we had euro 28.5 million of cash restricted in a debt service account relating to the Rosenthal mill's loan facility. At September 30, 2004, we had a working capital deficit of euro 122.5 million, primarily because we had Stendal construction costs payable of euro 161.0 million for which we had not yet drawn down under the Stendal project loan facility and, under our accounting policies, we do not record certain government grants until they are received. The Stendal construction costs will be paid pursuant to the Stendal project loan facility in the ordinary course. As at September 30, 2004, we qualified for investment grants totaling approximately euro 65.2 million related to the Stendal mill from federal and state governments in Germany, which we expect to receive in 2005. Approximately euro 61.2 million of these grants, when received, will be applied to repay amounts drawn under a dedicated tranche of the Stendal project loan facility. These grants are not reported in our income and reduce the cost base of the assets purchased when they are received. We expect to qualify for additional investment grants totaling approximately euro 23.3 million when the Stendal construction costs have all been substantially paid. Results of Operations -Nine Months Ended September 30, 2004 For the nine months ended September 30, 2004, revenues increased to euro 153.9 million from euro 144.1 million in the prior period, primarily because of higher pulp sales. In the nine months ended September 30, 2004, we reported a loss from operations of euro 7.6 million, which reflected the inclusion of operating costs of euro 7.9 million related to the Stendal mill and a non-cash impairment charge of euro 6.0 million relating to our paper operations. In the comparative period of 2003, we reported an operating loss of euro 2.5 million. We reported a net loss of euro 12.6 million or euro 0.73 per diluted share in the nine months ended September 30, 2004, compared to a net loss of euro 9.2 million or euro 0.54 per diluted share for the nine months ended September 30, 2003. Stendal Pulp Mill Our Stendal pulp mill was completed substantially on its planned schedule and budget in the third quarter of 2004. The mill is currently in the start- up phase and is undergoing extensive testing and evaluation. The mill has all of its requisite permits in place to commence operations and has secured sufficient fiber supplies for the balance of 2004 and into the first quarter of 2005. At September 30, 2004, the mill had filled in excess of 77% of its overall staffing requirements. The Stendal mill is currently being supervised by the contractor using Stendal's personnel to operate the mill. Stendal commenced the initial production of pulp in the third quarter of 2004. The initial pulp produced was off-grade pulp which was primarily sold into the recycled fiber, corrugated board and similar markets. The mill is currently producing "start- up quality" pulp. The prices realized on the sale of off-grade and start-up quality pulp are lower than the selling price for on-grade NBSK pulp. Under our current start-up plan, we expect the Stendal mill to commence ramping up pulp production and quality so that it will be producing a significant proportion of saleable kraft pulp in the fourth quarter of 2004. Pursuant to our start up plan, we expect that the mill would be operating at approximately 80% of its design capacity by the end of 2004. In conjunction with the start-up of the Stendal mill, we built up the fiber and finished goods inventory at the mill. We expect that as the Stendal mill ramps up operations, inventory levels at the mill will decrease to more normalized levels. The mill is currently undergoing extensive testing and evaluation in connection with its mechanical completion and to determine whether it satisfies certain stipulated performance requirements, referred to as the "Acceptance Test". The Acceptance Test requires that the mill continuously produces pulp for a 72-hour period in compliance with specified operational, quality and environmental requirements. Following completion of such testing, if the requisite performance requirements are met, we are required to provide the contractor with an acceptance certificate. Once we deliver the acceptance certificate, we assume responsibility for the operation of the mill, subject to the contractor's warranty obligations. Under the current start-up plan, we expect that the contractor will shut down the mill for approximately one week in the fourth quarter of 2004 for the completion of any adjustments, installations and the replacement of any equipment that may be required in order to fulfill its obligations under the construction contract. We also expect that, in the latter part of 2004, the Stendal mill will be shut down for a few days for fine tuning and cleaning so that the contractor may commence trials for the Acceptance Test. Our planned start up of the Stendal mill is subject to risks commonly associated with the start up of large greenfield industrial projects which could result in the Stendal mill experiencing operating difficulties or delays in the start-up period and the Stendal mill may not achieve our planned production, timing, quality or cost projections. These risks include, without limitation, equipment failures or damage, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship, defective equipment or installation, human error, industrial accidents, weather conditions, failure to comply with environmental and other permits, and complex integration of processes and equipment. President's Comments Mr. Jimmy S.H. Lee, President and Chairman, stated: "We are very excited about the completion of the Stendal pulp mill. The Stendal mill is now producing start-up quality pulp that is being sold. Although we have experienced minor difficulties and delays associated with equipment, installation and integration of processes and systems, we are generally pleased with the same. Our current expectation is that the Stendal pulp mill should achieve a steady state of saleable pulp production in the fourth quarter of 2004." He added: "Our results for the current quarter reflect continued strength in pulp demand and the overall weakness of the U.S. dollar versus the Euro. However, seasonally weaker summer months resulted in a build up of producer inventories in the quarter and list prices for NBSK pulp in Europe falling to approximately $605 per tonne by the end of the quarter. Markets for our paper products remain generally weak." He further added: "Effective September 18, 2004, we commenced expensing all of the costs relating to the Stendal mill. Our current quarter results reflect approximately euro 4.2 million of operating and interest costs relating to the Stendal mill during a period when we reported no pulp sales revenues therefrom." Mr. Lee concluded: "The start-up of the Stendal mill is an important step to our becoming a leading NBSK market pulp producer and leaves us well positioned for growth into next year." 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 Monday, November 8, 2004 at 10:00 AM (EST). 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://phx.corporate-/ ir.net/playerlink.zhtml?c=62074&s=wm&e=962689. 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 November 15, 2004 at 11:59 P.M. (EST). The replay number is (800) 642-1687, and the passcode is 1955749. 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 September 30, 2004 and December 31, 2003 (Unaudited) (Euros in thousands) September 30, December 31, 2004 2003 ASSETS Current Assets Cash and cash equivalents euro 42,643 euro 51,993 Cash restricted 29,346 15,187 Receivables 33,003 32,285 Unrealized foreign exchange derivative gains 899 743 Inventories 59,225 23,909 Prepaid expenses 4,603 4,284 Total current assets 169,719 128,401 Long-Term Assets Cash restricted 47,538 44,180 Property, plant and equipment 942,249 745,178 Investments 878 1,644 Equity method investments 3,993 2,309 Deferred note issuance costs 3,908 4,213 Unrealized foreign exchange derivative gains 14,442 - Deferred income tax 10,000 9,980 Total assets euro 1,192,727 euro 935,905 LIABILITIES Current Liabilities Accounts payable and accrued expenses euro 64,373 euro 37,414 Construction costs payable 160,952 42,756 Note payable 1,403 1,377 Debt, Stendal 50,000 80,000 Debt, current portion 15,465 15,801 Total current liabilities 292,193 177,348 Long-Term Liabilities Debt, Stendal 476,301 324,238 Debt, less current portion 234,317 255,901 Unrealized interest rate derivative losses 58,874 43,151 Unrealized foreign exchange derivative losses 594 - Capital leases and other 8,853 2,412 Total liabilities 1,071,132 803,050 Minority Interest - - SHAREHOLDERS' EQUITY Shares of beneficial interest 79,736 78,139 Additional paid-in capital, stock options 14 223 Retained earnings 36,592 49,196 Accumulated other comprehensive income 5,253 5,297 Total shareholders' equity 121,595 132,855 Total liabilities and shareholders' equity euro 1,192,727 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 Nine Months Ended September 30, 2004 and 2003 (Unaudited) (Euros in thousands, except per share data) 2004 2003 Revenues Pulp and paper euro 145,084 euro 134,935 Transportation 2,134 2,850 Other 6,650 6,351 153,868 144,136 Cost of sales Pulp and paper 131,420 131,838 Transportation 2,222 2,388 133,642 134,226 Gross profit 20,226 9,910 General and administrative expenses (21,182) (12,961) Settlement expenses - (630) Impairment of capital assets (6,000) - Flooding losses and expenses, less grant income (669) 1,162 Loss from operations (7,625) (2,519) Other income (expense) Interest expense (9,554) (6,887) Investment income 1,679 1,055 Derivative financial instruments Unrealized loss on interest rate derivatives (15,825) (22,832) Unrealized and realized gain on foreign exchange rate derivatives 14,748 19,228 Other - 20 Impairment of available-for-sale securities - (5,511) Total other income (expense) (8,952) (14,927) Loss before income taxes and minority interest (16,577) (17,446) Income tax benefit (expense) 37 (226) Loss before minority interest (16,540) (17,672) Minority interest 3,936 8,499 Net loss (12,604) (9,173) Retained earnings, beginning of period 49,196 52,789 Retained earnings, end of period euro 36,592 euro 43,616 Loss per share Basic euro (0.73) euro (0.54) Diluted euro (0.73) euro (0.54) 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 September 30, 2004 and 2003 (Unaudited) (Euros in thousands, except per share data) 2004 2003 Revenues Pulp and paper euro 47,316 euro 43,661 Transportation 667 828 Other 1,119 1,333 49,102 45,822 Cost of sales Pulp and paper 39,752 45,366 Transportation 753 525 40,505 45,891 Gross profit (loss) 8,597 (69) General and administrative expenses (7,348) (4,231) Settlement expenses - (630) Impairment of capital assets (6,000) - Flooding losses and expenses, less grant income - (214) Loss from operations (4,751) (5,144) Other income (expense) Interest expense (4,200) (2,236) Investment income 215 416 Derivative financial instruments Unrealized gain (loss) on interest rate derivatives (14,110) 5,933 Unrealized and realized gain on foreign exchange rate derivatives 6,005 3,806 Other - 9 Total other income (expense) (12,090) 7,928 Income (loss) before income taxes and minority interest (16,841) 2,784 Income tax benefit (expense) 236 (28) Income (loss) before minority interest (16,605) 2,756 Minority interest 6,726 (1,880) Net income (loss) (9,879) 876 Retained earnings, beginning of period 46,471 42,740 Retained earnings, end of period euro 36,592 euro 43,616 Income (loss) per share Basic euro (0.57) euro 0.05 Diluted euro (0.57) euro 0.05 Certain reclassifications were made to the prior period results to conform to the current period presentation. MERCER INTERNATIONAL INC. BUSINESS SEGMENT INFORMATION For the Nine Months Ended September 30, 2004 and 2003 (Unaudited) (Euros in thousands) Rosenthal Pulp Stendal Pulp Total Pulp Nine Months Ended September 30, 2004 Sales to external customers euro 103,743 euro -- euro 103,743 Transportation and other 8,338 600 8,938 Intersegment net sales 1,822 -- 1,822 113,903 600 114,503 Operating costs 78,773 509 79,282 Depreciation and amortization 14,166 795 14,961 General and administrative 7,960 6,645 14,605 Impairment of capital assets -- -- -- Flooding grants, less losses and expenses -- -- -- 100,899 7,949 108,848 Income (loss) from operations 13,004 (7,349) 5,655 Interest expense (6,345) (1,888) (8,233) Net loss on derivative financial instruments (275) (802) (1,077) Other income (expense) 2,327 (453) 1,874 Income (loss) before income taxes and minority interest euro 8,711 euro (10,492) euro (1,781) Nine Months Ended September 30, 2003 Sales to external customers euro 92,418 euro -- euro 92,418 Transportation and other 8,249 -- 8,249 Intersegment net sales 2,178 -- 2,178 102,845 -- 102,845 Operating costs 80,968 -- 80,968 Depreciation and amortization 16,311 -- 16,311 General and administrative 5,588 1,752 7,340 Settlement expenses -- -- -- Flooding grants, less losses and expenses -- -- -- 102,867 1,752 104,619 Income (loss) from operations (22) (1,752) (1,774) Interest expense (5,961) (8) (5,969) Net gain (loss) on derivative financial instruments 18,335 (21,939) (3,604) Impairment of investments (4,441) -- (4,441) Other income (expense) 1,475 50 1,525 Income (loss) before income taxes and minority interest euro 9,386 euro (23,649) euro (14,263) Paper Corporate, Other and Consolidated Eliminations Total Nine Months Ended September 30, 2004 Sales to external customers euro 41,341 euro -- euro 145,084 Transportation and other 314 (468) 8,784 Intersegment net sales -- (1,822) -- 41,655 (2,290) 153,868 Operating costs 39,869 (2,210) 116,941 Depreciation and amortization 1,740 -- 16,701 General and administrative 3,960 2,617 21,182 Impairment of capital assets 6,000 -- 6,000 Flooding grants, less losses and expenses 669 -- 669 52,238 407 161,493 Income (loss) from operations (10,583) (2,697) (7,625) Interest expense (421) (900) (9,554) Net loss on derivative financial instruments -- -- (1,077) Other income (expense) 152 (347) 1,679 Income (loss) before income taxes and minority interest euro (10,852) euro (3,944) euro (16,577) Nine Months Ended September 30, 2003 Sales to external customers euro 42,517 euro -- euro 134,935 Transportation and other 796 156 9,201 Intersegment net sales -- (2,178) -- 43,313 (2,022) 144,136 Operating costs 37,581 (2,179) 116,370 Depreciation and amortization 1,545 -- 17,856 General and administrative 3,721 1,900 12,961 Settlement expenses -- 630 630 Flooding grants, less losses and expenses (1,162) -- (1,162) 41,685 351 146,655 Income (loss) from operations 1,628 (2,373) (2,519) Interest expense (323) (595) (6,887) Net gain (loss) on derivative financial instruments -- -- (3,604) Impairment of investments (1,070) -- (5,511) Other income (expense) (51) (399) 1,075 Income (loss) before income taxes and minority interest euro 184 euro (3,367) euro (17,446) Certain reclassifications were made to the prior period results to confirm to the current period presentation. MERCER INTERNATIONAL INC. BUSINESS SEGMENT INFORMATION For the Three Months Ended September 30, 2004 and 2003 (Unaudited) (Euros in thousands) Rosenthal Stendal Total Pulp Pulp Pulp Three Months Ended September 30, 2004 Sales to external customers euro 34,517 euro - euro 34,517 Transportation and other 2,575 (327) 2,248 Intersegment net sales 643 - 643 37,735 (327) 37,408 Operating costs 24,702 509 25,211 Depreciation and amortization 3,030 795 3,825 General and administrative 3,186 1,185 4,371 Impairment of capital assets - - - 30,918 2,489 33,407 Income (loss) from operations 6,817 (2,816) 4,001 Interest expense (1,953) (1,720) (3,673) Net gain (loss) on derivative financial instruments 4,997 (13,102) (8,105) Other income (expense) 713 (108) 605 Income (loss) before income taxes and minority interest euro 10,574 euro(17,746) euro (7,172) Three Months Ended September 30, 2003 Sales to external customers euro 30,004 euro - euro 30,004 Transportation and other 1,993 - 1,993 Intersegment net sales 633 - 633 32,630 - 32,630 Operating costs 27,212 - 27,212 Depreciation and amortization 5,534 - 5,534 General and administrative 1,611 913 2,524 Settlement expenses - - - Flooding grants, less losses and expenses - - - 34,357 913 35,270 Loss from operations (1,727) (913) (2,640) Interest expense (1,978) - (1,978) Net gain on derivative financial instruments 3,734 6,005 9,739 Other income (expense) 698 (356) 342 Income (loss) before income taxes and minority interest euro 727 euro 4,736 euro 5,463 Corporate, Other and Consolidated Paper Eliminations Total Three Months Ended September 30, 2004 Sales to external customers euro 12,799 euro - euro 47,316 Transportation and other (124) (338) 1,786 Intersegment net sales - (643) - 12,675 (981) 49,102 Operating costs 11,837 (967) 36,081 Depreciation and amortization 599 - 4,424 General and administrative 1,849 1,128 7,348 Impairment of capital assets 6,000 - 6,000 20,285 161 53,853 Income (loss) from operations (7,610) (1,142) (4,751) Interest expense (137) (390) (4,200) Net gain (loss) on derivative financial instruments - - (8,105) Other income (expense) 21 (411) 215 Income (loss) before income taxes and minority interest euro (7,726) euro (1,943) euro(16,841) Three Months Ended September 30, 2003 Sales to external customers euro 13,657 euro - euro 43,661 Transportation and other 236 (68) 2,161 Intersegment net sales - (633) - 13,893 (701) 45,822 Operating costs 13,223 (634) 39,801 Depreciation and amortization 556 - 6,090 General and administrative 951 756 4,231 Settlement expenses - 630 630 Flooding grants, less losses and expenses 214 - 214 14,944 752 50,966 Loss from operations (1,051) (1,453) (5,144) Interest expense (120) (138) (2,236) Net gain on derivative financial instruments - - 9,739 Other income (expense) (379) 462 425 Income (loss) before income taxes and minority interest euro (1,550) euro (1,129) euro 2,784 Certain reclassifications were made to the prior period results to conform to the current period presentation. MERCER INTERNATIONAL INC. COMPUTATION OF OPERATING EBITDA For the Quarters Ended September 30, 2004 and 2003 (Euros in thousands) For the Quarters Ended September 30, 2004 2003 (in thousands) Net (loss) income euro (9,879) euro 876 Minority interest (6,726) 1,880 Income taxes (236) 28 Interest expense 4,200 2,236 Investment income (215) (416) Derivative financial instruments 8,105 (9,739) Other -- (9) Income (loss) from operations (4,751) (5,144) Add: Depreciation and amortization 4,005 6,254 Impairment charge 6,000 -- Operating EBITDA euro 5,254 euro 1,110 (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. COMPANY SALES BY PRODUCT CLASS AND VOLUME (Unaudited) Nine Months Ended Three Months Ended September 30, September 30, 2004 2003 2004 2003 (Euros in thousands) Sales by Product Class Pulp(1)(2) euro 103,743 euro 92,418 euro 34,517 euro 30,004 Specialty Papers 28,039 30,185 8,597 8,610 Printing Papers 13,302 12,332 4,202 5,047 Total(1)(2) euro 145,084 euro 134,935 euro 47,316 euro 43,661 (Amount in tonnes) Sales by Volume Pulp(1)(2) 229,462 221,926 73,128 73,747 Specialty Papers 28,144 30,420 8,519 8,745 Printing Papers 19,357 16,568 6,193 7,234 Total(1)(2) 276,963 268,914 87,840 89,726 (1) Excluding intercompany sales volumes of 3,897 tonnes and 5,166 tonnes of pulp and intercompany net sales revenues of approximately euro 1.8 million and euro 2.2 million in the nine months ended September 30, 2004 and 2003, respectively. (2) Excluding inter-company sales volumes of 1,348 tonnes and 1,555 tonnes of pulp and intercompany net sales revenues of approximately euro 0.6 million and euro 0.7 million in the three months ended September 30, 2004 and 2003, respectively. NOTE: One tonne = 1.0160 of one ton. DATASOURCE: Mercer International Inc. CONTACT: Jimmy S.H. Lee Chairman & Chief Executive Officer, +41-43-344-7070, or David M. Gandossi, Executive Vice-President & Chief Financial Officer, +1-604-684-1099, both of Mercer International Inc.; Investors - Eric Boyriven, Media - Scot Hoffman, both 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)