Q4 2019 Earnings Call
Our senior Vice President Finance, Chief Financial Officer, and Secretary I will now on the color today, but Youre you may begin sir.
Good morning, everyone.
I'll begin by reviewing the fourth quarter's financial results. Following my remarks, I'll pass the call to David who will comment on our key markets operational performance.
Graphs on our strategic initiatives, along with our outlook into the first quarter of 2020.
Please note that in this morning's conference call, we will make forward looking statements.
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 fourth quarter results were noticeably impacted by our most ambitious plan to annual maintenance period in recent history, along with weakness in the pulp markets, which combined to dampen our financial results considerably or heavy maintenance spending this quarter leaves us well positioned to operate without major maintenance.
Until the third quarter, allowing us to take full advantage of improving market conditions when they occur.
We are incurred an EBITDA loss in the fourth quarter of about $34 million compared to positive EBITDA of about $51 million in Q3.
The majority of the sequential drop was anticipated and reflects the completion of the annual maintenance shots at our three largest pulp mills in Q4 in total our scheduled maintenance negatively impacted EBITDA by about $74 million.
In addition to the planned impact of the shots and modest reductions in pulp realized stations. The U.S. dollar weakened significantly also signal negatively impacting EBITDA.
The EBITDA losses entirely attributed to the pulp segment, which incurred a 37 million dollar EBITDA loss, while our wood products segment contributed positive EBITDA of about $7 billion are strong wood products segment results reflect improved sales realizations and strong production.
The ongoing construction activities underway on site, along with the benefit of lower Sawlog prices.
As usual you can find additional segment disclosures in our form 10-K, which can be found on the FCC web site.
Well, then B.S.K. price market pricing was relatively flat sequentially in China, we experienced some deterioration in European list prices hardwood pricing in all markets also fell during the quarter.
Compared to Q3, our average pole realizations negatively impacted EBITDA by about $12 million.
Our pulp sales volumes totaled 482000 tons, which was down about 60000 tons from Q3, reflecting the plan Q4 maintenance shots at Stendal, Celgar and Peace River.
On the wood products side of our business sales were solid and we sold the equivalent of about 101 million board feet of lumber in the quarter with about 32% of this volume being sold to the U.S. market.
Electricity sales totaled 178 gigawatt hours in the quarter, which is down roughly 25% relative to Q3 due to our heavy Q4 annual maintenance schedule.
Caribou pulp joint venture, which has accounted for using the equity method added another 20 gigawatt hours to this total.
We reported a net loss of $72.7 million for the quarter or $1.11 cents per share compared to net income of $1.2 million or two cents per share in Q3.
Cash flow in the quarter totaled $86 million compared to $8 million in Q3, despite the low level of EBITDA operating cash flow was strong at $56 million and reflected a considerable reduction in working capital of just over $19 million.
Also contributing to the increase was the issue of $200 million in face value of our 2025 senior notes.
This transaction was completed in October.
The proceeds of which were used in part to redeem the remaining $100 million face value of the 2022 senior notes.
We also invested about $50 million and capital at our Mills this quarter, David will speak more to our 2019 capex spending expectations in 2020.
Our leverage is being elevated somewhat to about 3.5 times annual EBITDA increase was primarily due to the drop in EBITDA and reflects our current position in the market cycle.
However, our liquidity improved during the quarter and remains solid totaling $638 million, including $351 million of cash and $287 million of Undrawn revolvers.
During the quarter, we recorded the reversal of $13.7 million of previously accrued wastewater fees. The reversal is the result of a waiver provided by regulatory authorities based on our successful completion of qualifying capital expenditures that targeted mission reductions at our stand.
All mill, you will recall that in Germany wastewater fees accrue to water consuming industries. However, under certain conditions those fees will be waived water consuming entities complete capital projects the lead to permanent reductions in permitted emission levels.
The reversal comes in addition to $7.2 million reversal at our Rosenthal mill recorded in our Q3 results.
Low pulp prices continue to force us to revalue certain components of our inventory in Q4. This resulted in a noncash 9.2 million dollar inventory write down however, after considering the reversal of the Q3 inventory write down of $6.9 billion, our net negative.
EBITDA impact in Q4 was about $2.3 million.
To the extent pulp prices increase we will recognize a profit on this written down inventory in Q1.
In addition, stendal Celgar and Peace River is planned maintenance shut this quarter's totaled 54 days and resulted in lost production and direct costs impacting Q4, EBITDA by about $74 million our competitors. The report the results under I FRS are allowed to cap.
Utilize the majority of these costs.
Earlier this year, we completed filings necessary for us to acquire Mercer shares on the market. The filings prescribe a maximum program of $50 million that is not extended will expire in may 2020 during the quarter, we did not purchase any additional shares.
And as we noted in our press release yesterday, our board has approved our quarterly dividend of 13, and three quarter cents per share for shareholders of record on March 25th for which payment will be made on April Onest 2020.
That ends my overview of the financial results I'll now turn the call over to David.
Thanks, Dave Good morning, everyone.
As Dave is highlighted our financial performance in the quarter was dominated by our heavy annual plan maintenance program in combination with weak markets.
Despite the impact of these elements on our financial results were generally satisfied with our mills operating performance. Our freezer. All saw mill recorded strong production and Stendal ran at record capacity on a per operating day basis.
But prices in Q4 generally experienced negative pricing pressure due to higher producer inventory levels European and North American NB escape pulp prices weakened early in Q4, and then remained flat in China average MBS K prices were essentially flat through the quarter.
Pulp shipments were strong and we saw considerable reductions in Chinese ports stocks through the quarter.
This is reflected in the latest inventory industry inventory statistics at the end of November 2019, NBS K and then be HK producer inventories were 34, and 48 days respectively.
These metrics may increase slightly at the end of December due to seasonal logistical slowdowns at the end of December, but we expect inventories to continue to move toward being in balance in 2020.
In China, the Q4 average MBS K price was $580 per tonne virtually unchanged from the $585 per ton in Q3.
European list prices averaged $822 per ton in the quarter compared to 860 in Q3.
The average Q4 hardwood list price in China was $475 per tonne down $32 from Q3, and the hardwood list price and us market averaged $893 per ton in Q4 compared to 970 in Q3.
As we closed 2019 high industry maintenance downtime levels.
Mill closure in Eastern Canada.
Thread of a lengthy strike in Finland and.
And lower producer inventory levels combined with tightening fiber supply in some regions, let us to believed that the MBS K market price would start to increase.
The hard when inventory levels on the other hand has been an overhang, but we'll have also that we have also seen big inventory shifts from producers to customers, particularly in China, which is a positive development.
With both transaction volumes high Papermakers, writing hard and generating profitable, particularly in China, we felt that turn could be near unfortunately, the outbreak of the Corona virus has added a new variable to the global economic outlook.
It's difficult to evaluate at this time.
Despite this uncertainty the improving market conditions have led many of our competitors to announced price increases for February and March across all major markets.
We consider the soft market to be in good shape, but the low prices for hardwood was dampened upward momentum because we believed there are limits to how wide the spread can go between the grades.
We believe hardwood prices are at the bottom, but it will take some time to work through the current inventory situation in China.
Now that if you comment specifically on the corner writers threat and its impact on our markets.
The risk to us mainly relates to quarantine actions and logistics. Some highways have been closed to restrict movement in certain regions. Some factories of deferred start up after the lunar new year and employees, who left the jobs to return home for holidays have been slow to return.
All of this is requiring us to work with their customers to manage to return to normal of operations remains unclear when that might happen.
We continue to believe that steady demand combined with the absence of new capacity, along with announced curtailments and possible supply constraints will answer upward pressure on pulp prices in the coming months.
With regards to our wood products business the European lumber markets continue to experience steady demand. However, pricing was down slightly compared to Q3, which continues to be impacted by lower sawlog prices.
Lumber markets in the U.S. showed considerable improvement in Q4, we believe that lumber production curtailments in British Columbia due in part to the limited supply of Sawlogs and positive statistical data on the U.S. housing market and creating this upward pricing pressure.
The random links U.S. benchmark for Western SPF number two and better averaged $380 per thousand board feet in Q4 compared to 356 in Q3.
Today, the benchmark is close to $418 per thousand.
In Q4 about 32% of our lumber sales volume we're in the U.S. market with the majority of the remainder of our sales in the European market.
When comparing to Q3, our average realized lumber prices sales prices increased slightly to $347 per thousand in Q4 compared to $337 in Q3.
Outside of the annual maintenance shut we had some instability in our full productivity as we optimize new equipment installed in the Q4 shuts.
Routing or caribou joint venture, we produced 442000 tons of pulp.
We estimate that the fifth 54 days as scheduled annual maintenance downtime at our pulp mills reduced production by about 87000 tons.
Excluding our caribou joint venture or pulp Mills produced 433 gigawatt hours of power. This total was negatively impacted by our heavy Q4 planned maintenance.
Oh.
Segment performed well this quarter, despite relatively weak, but improving market conditions and ongoing disruptions and production as we work through the free ship construction project.
We produced almost 107 million board feet of lumber.
As Dave mentioned or wood product segment generated about $7 million of EBITDA in Q4, the future us on will also allowed us to achieve over four and a half million dollars of synergies. This quarter. The majority of which resulted from reduced wood chip costs for the Rosenthal pulp mill.
Year to date fee show has created almost $14.7 million of synergies.
In Germany, butyl damage would remains plentiful and is resulting in lower log cost generally we expect this log supply dynamic to last at least through the first half of 2020.
In Western Canada, pulpwood supply remains tight sawmill curtailments have limited the saw mill chip supply, resulting in higher cost options being used to replace those volumes.
Looking forward, we expect it would cost to be stable in Q1.
Our annual maintenance program for 2020 is firming up our preliminary expectation is that one stendal will take two short three day shuts likely in Q2 in Q4.
Terrible will have a five day shut in Q2.
Rosenthal will take US typical 15 day shut in Q4 Peace River will take at 60 de recovery boiler rebuild shut in the fall straddle in Q3 in Q4, and I remind listeners that.
Other than the normal shut period that will be covered by insurance and Celgar will take the three D will take three many shots in Q1, two and four and its larger 10 day shut in Q3.
2019 was a year of heavy capital spending in total we have invested approximately $132 million and our mills. The majority of which were high return investments like or few shosanna upgrade.
When finished in 2021, we'll make that one of the largest and most efficient in the World. In addition, we'll not included in our Capex numbers. We have continued to invest in German would logistics by increasing our fleet is highly efficient log and lumber hauling railcars.
And before I turn the call over for questions I'll take a moment to content comment on our operating approach for 2020.
In terms of capital spending we have planned a much more modest program for 2020, you will focus on the completion of the free show Phase two expansion project along with some smaller high return productivity and cost reduction initiatives will also expect to commensurately work on the production expansion project at Stendal, which when completed 2021 will increase the total capacity of that.
Bill from 660000 to 740000 tons per year.
Early estimate is that our total capex spend for 2020 will be below $100 million.
2020 is starting out with pulp prices on the floor. So we will be operating with a view to doing everything we can to optimize our fiber handling and logistics and to control and reduce costs. Our balance sheet is in good shape with ample liquidity that discipline at this stage in the cycle will contribute to shareholder value over the long term.
That completes our prepared remarks, I'll now turn the call back to the operator for questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again, the star one to ask a question, we'll pause for a moment took about the Q and a roster.
Again, ladies and gentlemen to ask your question. Please press Star then the number one at this time.
Your first question comes from Sean Stewart with TD Securities.
Thanks, Good morning, guys few questions to start.
With respect to NBS K prices you noted the uncertainty in the near term in China can you give some context on how the February hikes are progressing in the other markets.
Yes, it's not a push back obviously, Sean so it's it's hard to say.
How much if any of those increases will get.
Really too early to two really to be definitive but there is.
It is an overhang in China so.
Everybody kind of looks events as well, maybe we should hold the line here so.
That makes sense.
The buyback activity in light of the the more recent weakness and your share price any.
Context, you can give us on your intent to.
Get busy on the buyback.
Through the next few months.
No I don't want us to signal anything too specific Sean it's a tool we have that we can use if we feel the timing as rates.
Okay, and then last question for now.
You touched on incremental volumes on for freeze out going into the U.S. market.
Can you give us a sense of your your sales plan.
Geographically for that asset in 2020, how much more incremental supply would you expect to move into the U.S. market.
Yeah. It's.
You know, we're sort of around 30% range right now and I can see that keeping up little bit.
What's what's really nice about the free show mill now that we've got trans Rescreening and trimming capabilities and enhancing all are sorting obviously.
We can take that lower value log and that we get the calamity would in Germany, and we can we can process select number out of it so.
So many of the European Mills can't do that and so and there's a there's limitations on Greenwood.
In Europe, when they're everybody's chasing the lower cost calamity wed so.
So sometimes a European markets going a little tied up with.
Too much capacity chasing the same profile and with our flexibility, we can step out of that and with good logistics to to the U.S. market.
We'll be taking advantage of that I.
I think we'll also be expanding or G. agreed offering.
We have and also dimension lumber in the UK can be fairly good return for us as well, so we'll be well be honoring or roots in the European market, but we'll be taking advantage of our ability to service the higher margin markets dimension lumber markets.
In the coming coming here I'm sure.
Okay.
Thanks, David that's all I have for now.
Your next question comes from I mean Patel with CNBC capital markets.
Hi, good morning.
David.
Ask about the calamity would.
You know how.
How much supplied you see is that a multi year event for you heard different things from from different companies as to how long that could persist and are you seeing signs, but some of the your European competitors looking to invest in their saw milling capacity to take advantage of that.
Yes, so it's we're sort of on the third year of a drought in Europe and and some of the older spruce, obviously is impacted by the beadle and so there's been lots of it available.
Interim and for US you rules don't allow you to leave it standing like.
Pine beetle situation British Columbia is a very aggressive approach to bringing that would hope so.
Theres lots on offer and it's pretty pretty cheap compared to what but it would have been if it was a prime sawlog before the calamity.
Yes.
What the future holds partially depends on whether that beetle doesn't like really wet conditions. So if we get get some good wet weather here.
For the summer that could have a big positive impact.
If it's dry again and continues to be dried and there'll be calamity would again for the foreseeable future.
You know this could be.
We don't know, but if you look at like the pine beetle situation I mean that was a 15 year.
15 years situation, where there was excess would available.
Canada.
Lots of the.
Super Mills were built up to take advantage of that.
It's quite interesting, we're not seeing any of that in Europe. Like we have we just are not seeing anybody else moving into.
The commitment to get into planning drying and transfers.
You know.
Optical greeting and those kinds of things, it's everybody seems to be hunker down a lot of it lot of the Sawmilling a smaller family owned.
Cities and I just not.
He them, taking a bit too to build bigger mills to process. This kind of wood so.
I think I think we'll benefit from it for quite some considerable period of time, we've got the flexibility.
As.
The calamity resolves.
We can process fresh with like the best So then if calamity what's available then and that we can hit it out of the park because of the low cost.
Great. Thanks, Dave would you look too I think free so potentially could you added another shifts there.
Good yeah, but we've got a we've got to finish off the.
The ramp up of the planar and then we've got the the final sorting lines to do this year. So I don't think we'll be doing that this year, but but certainly adding a third shift in the.
In the coming years is totally doable it'll be a very efficient saw mills, so the manning issues or not that challenging anymore.
Yes.
Okay. Great. Thanks. That's helpful. Then just a final one for me your performance bio filaments partner Resolute, they're building a plant to produce.
Cellulose filaments commercially keeps update us as to how you are looking to commercialize other fire products from your on pulp mills.
Well it about products that we produce or things like Green energy, obviously, a crew tall oil turpentine moving into bio methanol that our stendhal plant.
We look at Steriles and other other products their old just sort of additive.
Down the road, we certainly see lignin in our future for a variety of different applications. A number of had been a lot of lot of people lot of money spent looking at add to.
Opportunities with lignin I think some of that's getting close to being.
Being very viable so so we're all over that.
Very very pleased with Resolutes decision to.
To build the CF plant were partners with resolute on.
We have a we're partners in all non pulp and paper novel products that are made with with bio filaments. So.
There their commitment to building. The plant is is a sign of their confidence in the future of this material and.
It's a it's a longer term project as I've always said, but we're removing well.
Good positive direction there.
Great. That's that's all I had I'll turn it over thanks.
Your next question comes from and Deforest Hinman with Walthausen <unk> company.
Hi, Thanks for taking my questions. This morning, just a little bit more color Chinese activity, you mentioned that corona buyers, but.
Can you can you give us a minimal play by play in terms of what happened in January from.
The volume perspective, and then what's been going on last couple of weeks in February and color from our customers from a customer basis would be helpful. And then also from a trader.
Perspective as well.
Sure.
Well, there's a number of things to forest.
I'll start with leading up to the to the Corona virus outbreak.
Chinese paper makers in general, we're running really hard and consumption was good margins were great, particularly on tissue I was fantastic.
And it looked like things are really about to turn and then let this outbreak is done is.
Everybody goes home for lunar new year, and all of sudden that the.
Virus hit and then it so people get stuck where they are.
And you can't get back home.
During the lunar new year, our understanding is that most of the big paper Mills kept running.
Which is not always the case, but this year because they were so profitable.
And consumption was strong.
The big guys, all around and so and there is still running the little guys that went down small medium.
Mills, we're just starting to come back now it's been.
The authorities delayed the the lunar new year holidays to try to encourage people to stay where they are.
But as these people are all coming back to work now these mills are ramping up and trying to get going.
There are challenges are there is twofold. The first they got to get to people back.
Then they have to get raw materials into the mills and they have to get their finished products to their markets and the authorities doing everything they can to restrict the movement of the virus you could imagine that trucker.
He's got to sign is like a way that's as you get to drive down. This highway from eight to be and you can't go anywhere other than a to b.
And somebody in the background is trying to.
Hi them to turn off at sea and the authorities are blocking entrances and it's it's it's a bit of a gong show is our understanding so it's really restrictive.
Are they can go and what they can do.
And that and that's the overhang is it's a getting getting their finished goods to the market getting getting our pulp into their mills.
And just you know just.
Things would get back to normal.
And once the system starts to open up over through it and and.
Things are things over to start to start to move.
Some of the reports you read about the the on the hardwood side are interesting I guess.
Leading up again to the end of the year there was.
Some feeling that a you know there's been a big shift of inventory from producers to the customers a lot of that was in the hands of traders then and so there would be a lot of that gets pulled off the market and there is going to be a push in the new year for for higher prices and so you saw announcements and producers were pushing for higher prices and what you.
We're seeing now is with the slowdown.
The paper makers are saying I don't want to honor that order I'm, just going to keep taking it a field price and Suzanne who is offered flat pricing in Q1, which which is kind of ties into that story. So I don't think it's a signal that things are that bad that theyre pushing back from orders I think it's just the signal the hey, they know the prices flat so they don't need to paint.
More than what.
Contract prices.
And ER and so we're just waiting.
Right.
So.
One final comment on the dynamic of at all a lot of it depends on the discipline of the of the South Americans, obviously last year.
The I think they ran at something like 82% so they probably.
Let the couple of million tons off off the table.
As a result of this inventory a hiccup.
And what they do this year is completely within their control. If they you know everybody knows if they run super hard and just keep flooding pulp into the market well, it's trying to recover it's going to take longer.
They show some discipline and things could correct fairly nicely. So that's.
That have a wildcard from my perspective.
Foot on other hand, as I said earlier in my Mark remarks is balanced supply demand is in good shape, we just need to eliminate the congestion and get everything running again.
And and that that grade will be will be tight.
Held back somewhat by the overhang of argument.
And just so we're clear I don't have kind of asking the same question twice put on the traders side I think in the past utility could be up to 30% of the volume going into China.
Our neat Hardie back buying and you did mention in the press release fourth quarter Chinese demand was very strong wins. So we then encompassing you know BTB then you can sell so traders or.
As shown on there so what happened so there's two types of traders I guess really in simple terms, you've got the traders who facilitate trade finance for customers and so there's traders that bring the Russian pulled into China as regular basis that is and that's part of the normal.
Order fulfillment.
Process, but there is also speculators and speculators can be the state owned entities that bye bye bye commodities, but there is also big big paper companies will well speculate as well.
And our understanding is that you that big shifts that big push to sell to sell hardwood out of the warehouses in China in the fourth quarter a good chunk of that would have been picked up by traders that are speculating.
So that's not going to come back on the market until there's until there is profit it obviously or it might show up in the market if yep yep pulp prices fell further and they could they could.
By low sell sell this right so.
So I. So I think that pulp is just kind of part right now in these current conditions until you start to see some upward movement.
Okay, and then maybe this different question, but.
Similar lines.
If we think about our I guess contracted volumes than our spot volumes as it stands today.
Are those customers still taking contracted volumes and then stuff on the spot basis is the phone still ringing or has the market kind of just pause.
Yeah, no. So we have to be clear, we have we have no problem selling our pulp our contract customers are all taking product and Thats fine in China, you don't really have firm contracts. So we do in Europe, and North America, but you have a relationship contract for a volume and they're taking orders I mean, there hasn't been.
Big price increase so they're happy to happy to buy their monthly allotments. So so we're not having any problem making locally.
Okay, and then can you give us any color on fiber cost outlook.
Across the different markets.
Maybe percent change year over year as it relates just started a year.
Well you know from our fourth quarter results I think in Europe, you can expect sort of got modest continual down down downward slope, and that's really just us optimizing and managing logistics and really.
Getting in sync with this calamity would that's available to us and working off the the higher cost average cost of would that.
You know as we've always got a pretty big a pretty big bundle of wood in front of the mills. So.
As cost comes down the average cost comes down so we're a.
A little bit more improvement coming in Germany, I wouldn't call it overly material to for us, but generally that direction.
As I said in my earlier remarks, a effort for the Celgar mill I think wood costs are going to be kind of stuck at the current level for a while until until you see we cease and improve sawmilling activity.
I'm actually quite optimistic about that there's.
The U.S. markets or are really starting to recover for lumber and.
The curtailments the closures that we saw last year those those those mills have now run down there log decks there.
They ship their lumber off to the markets and it's really starting to bite and.
And I don't really think there's a.
Much.
Much inventory in the pipeline and and and I also know that Ah that's not the traits are scheduled to come down here in British Columbia, and the near future. So so generally it quite positive so what that translates into pulp mill for like Celgar is that it's going to have more availability of sawmill residuals, which will allow it to.
I'll take the foot off the pedal on some of the higher costs roundwood programs that they run.
Peace River is.
Table, it's just.
The only thing that really impacts it is the seasonality weather conditions. So it's kind of things, but it's very stable diversified.
Not much change right.
Thank you and then my last question could you just remind everybody about your covenants on your senior.
Fixed rate loans.
Now, let Dave talked to the financial thing, yes, so their their their senior unsecured notes. They don't have a they don't have material covenants. They have some some baskets on on the the taking on of new debt, but oh, but we're not near any we've got to.
Several hundred million available in those baskets to take on on new debt.
And then the revolvers are do the German revolver has a has one covenant, but very very flexible it to leverage covenant, but it's based on the leverage is based on the borrowing on that facility and as you know from our disclosure we have not a we've not borrowed on that facility.
Yet so lots of room, there and then the Canadian revolvers are springing covenants. So there's no covenants until you reach till you get close to borrowing.
The maximum borrowing base. So the maximum imagined the working capital that supports those covenants and Oh, we've got a lot of room a lot of room there.
So the the debt is quite flexible.
Okay, and just so everyone understands.
Is there any restrictions on share repurchases currently.
No there are not I mean, there are there are baskets in the in the notes for restricted payments and and that would be one of them, but there are there's a lot of room in those baskets. So.
Okay. Thanks for taking my questions.
Your next question comes from Andrew Shapiro with Lawndale capital management.
Yes, hi, Thank you just a few one is a follow up on the new cell dose the bio filament.
Can you summarize for us the.
I guess the details are the economics.
Oh the.
Joint venture and no particular business model in terms of maybe the timing for the revenue ramp and.
It won't be consolidated up four or how will that show on the balance sheet as that business generates revenues.
Well, it's a it's a 50 50 joint venture.
And we have a commitment to each other that that as we develop these novel product applications that we would do it together.
And we'll share the economics 50 50.
They are building the plant they've they've.
It it ties into other work they are doing and come back with.
One of their paper mills.
As a joint venture we have access to that product with them and so that further ties us together.
In terms of I think the product itself is it's a it's a refined.
It's really were highly refined pulp that creates like a strengthening agent and and and it provides properties to a number of different applications that can go and concrete and creates a stronger slab through its impact on on the drying.
It can change the viscosity of liquids.
And.
You know have some of the applications might be in drilling mud and some of these other other things as a lubricant so right now and then the timing.
While the timing is always longer than we'd like it to be so.
Looking at this for four years and.
I just can't.
I don't want to signal that it's going to become a material contributor to our bottom line here in the next year or two.
Over time these things.
Has the potential to be very significant so so it's I think you should park it and in the category of R&D right now.
Long term potential value creation, it's not consuming.
Any material resources per se.
We need to 3 million dollar commitment four years ago, and we still still have room and not to go.
It's not a not overly expensive development process. It's just it's it's the qualification the time that takes for customers to really.
Get their heads around how to use it and.
Okay make the commitment.
And the plants at their constructing when would it be.
Completed and starting to produce in I guess, so small amounts of product.
I think it's going to be less than 12 months to be completed.
Okay.
Yes, that's I'm just trying to figure out where we can watch milestone send them with Santa Tal similar long term investment.
But with.
Back to high.
Opportunities.
When do you start seeing I guess harvest station and.
Revenue creation from that investment.
Yeah the.
Right now the activities are fine tuning the all of the care and management of the trees and getting the team to be really demonstrating as sophisticated team.
Working on our marketing resources to be able to bring the product to market. We've we've been able to.
There are trees are kinda like 13 years old and younger and the optimum harvest time is around 15 years. So we've had we've been quite successful obtaining product to produce to sell in the market and we sell like $10 million of oil year something like that.
Our trees start becoming harvestable in there in there.
Based on their birthdates, starting towards the end of 2021.
And I think the the scale of that'll be something like 200, hectors per year of harvest from there on and replanting tumbling forward.
In that way and that's that's when it will really be that's when you'll be able to see the business and it's true form.
Okay excellent back to the core business here, Suzano recently announced the earnings et cetera, but one of the things that came out and then they announced was I guess a pretty substantial drawdown on the the large inventories that had been booked up is this.
There's this.
It was this a typical activity where they've been like.
Called the were dumping, but they've been flowing to the blowing it out or is this now a stabilization of the market, creating the floor since there's such a big player.
Well.
Maybe if that's a great question and I'll just try to.
Can re characterize the backdrop. So this suzanne who is a combination of of Santo in February of two very large companies and so they became.
The consolidator, some big big hardwood producer.
And as you know we've had really good run on hardwood and softwood pricing and then as the.
Trade wars started to slow down activity in China in other parts of the world.
As as the price of hope started to fall like all commodities, it's just that sentiment move.
This big company, just kind of drew the line and said we're not hitting the bid we're going to this is our price and if you want to people. This is our price in the market price spot price fell quite a bit below what they were prepared to sell out and they felt there we're big enough. They can just hold the line. They held the line the held the line held the line and finally, they realized a failed so they offered.
Fire sale in the fourth quarter last year, they say, they basically announced to the world.
For the fourth quarter, you can buy as much pulp in China as you like you can come and pick it up or you can leave it in a warehouse, but but after the end of the fourth quarter prices are going up.
So as I was as I was discussing on my last call, we were expecting a pretty good shift of ownership and in fact that happened like that.
The pulp in China, they've been a massive sale off a lot of its hasn't left the warehouses, yet corona viruses holding some of that back, but that's more or less has all been sold and and a big chunk of that would have been purchased by traders as I was saying earlier, so that kind of takes it off the market until the price goes up now says animals come out and said okay prices flat.
Again for the first quarter I guess, it just it and see the momentum to be able to raise prices. So it's flat for the first quarter. So thats kind of holding everything in this limbo pattern.
And if they can.
Keep keep the volume moving once the current of ours crews up and things get back to normal.
You know that I'm sure. They are intending to they're not very happy with these bolt prices item. So it's just getting through these.
It's really is what everybody's trying to do.
Right and is your intelligence coming back from China, We're all somebody here in the dark, but you have business relationships. There. So you might have better input and even the typical media coverage and I'll use. It is it that can consumption itself is slowed up or just it's now.
Now the movement.
Of the goods and and unlike lets say people, who are not going to visit a hotel and the hotel sits vacant and that's lost inventory nights right.
Is that this is the whether its consumption of toilet paper consumption of coated freesheet consumption of whatever cardboard is the consumption levels. They materially taken a hit that you can tell or not.
It's a great question in my view is that consumption. It doesn't change. The users. These are these are consumable products.
What I, what we think is going on is that.
It's probably getting difficult to buy stuff on the shelves like the inventory in the shops is getting lower and lower the supply chain is draining but the consumption of some of our products is probably going up quite significantly like as an example in every single elevator anywhere in China, there will be a box of tissue that is used to push the buttons because this virus.
Lives on surfaces and they all know that so they will not touched and elevator button. They were not touch a door handle their walking around a little packages a tissue and doing everything they can to protect themselves. So so it's.
The challenges is getting inventory from the from the manufacturing facility into the stores, making sure. The stores are able to be open and people can move around to go and buy stuff like that's the congestion.
Okay, and then lastly, or what are your plans for investment presentations non deal road shows in the coming months.
Yeah. So we've we'll be attending the RBC forest products for them at the end of March in Toronto and then we're also just the details are a little bit fluid at the moment, but we're hoping to put together a little bit of a road show on the.
East Coast a in the next two months as well.
So there's anybody with I'd like to like like a meeting please give one of US a call and we'll make sure we get your picture on the list.
Great. Thanks, Thank you for answering the multiple questions.
Your next question comes from Paul plan with RBC capital markets.
Yes, thanks, very much Marine gave marine you gave people.
Yeah. Thanks for the plug for the are forced to focus by the way.
Yes.
I guess.
Stepping back a bit it's been over years since that deal I acquisition, just wondering what the a major takeaways.
Are you guys are from though.
On that deal that Bob and whether you're ready for Britain underwear.
Well.
Yes, so having operate at the mill free year, I would say Mercer is delighted with that acquisition.
I'd like being in Alberta.
Very supportive government, they're very helpful on on clearing clearing away red tape and regulatory burdens those kinds of things, so I really like that progressive conservative government there.
We've got a tremendous f. M&A with a lot of would on it.
And as we're doing the inventories for our renewal, we're finding that the annual Albert cut on that on that.
If I may is growing quite significantly so our biggest challenge is gonna be we've got so much would we got to figure out what to do with it.
<unk> foot and hardwood.
We've got great team Great mill.
Looking forward to getting this recovery boiler work done.
We're in the boiler last year.
During the shot I think as those who follow us know that the tubes were not available for the timing of the shut so we've deferred into this year, but the boiler itself is fine is it safe and operating well and will do for many years.
But this boy there Rick is something that we need to do for the long term of the boiler and when we're finished it will be like a brand new boiler and so.
Looking forward to getting that done.
We see continuing opportunities to refine and improve our logistics and our wood processing logistics.
Currently that's done.
Primarily in remote bought a remote satellite yard shipping and we think there's opportunities to centralize that bring costs down and improve the yields.
It was kind of initiatives don't see any major capital.
Nothing nothing really big going to be done in the middle here other than optimizing its cost structure and continuing to continuing to run with it.
As to whether we would buy another pulp mill at this stage in the market certainly not I think the our focus is.
No.
Steady hand on the tiller operate as best we can really focus on the sustainability story that.
We'll be putting a.
Sustainability report out this year with with the demand for MSG metrics are becoming so strong we'll be putting out our numbers and I think I think they'll surprise most people.
In terms of how how how.
Efficient and well we performed both in the European market and also in the Canadian North American context. So.
And also you know I just don't Paul I, just don't I, just don't see Mercer buying any of these older pulp mills. So you just know it's not in our business strategy. We you know our strategy is to operate world class modern pulp mills.
And you know, we you know there's a threshold of on which we participate where we might.
So you can see getting a mill up to our level, but.
You know there just aren't really many targets like that out there that would ever become available sites I think our strategy is really growth in the solid Woodside.
In conjunction with our sawmill with ours with our pulp mill operation. So like what we've done with free short Rosenthal, we see that duplicating that.
And Stendal and I actually can see we're seeing the beginnings of a project similar nature with the Peace River mill on this off with side. So that's really where focuses.
As well as unexpected yes.
That's all that but select guys. Thanks. Thank you.
Again, if you would like to ask a question. Please press Star then the number one at this time.
Your next question comes from Adam Zircon with night head.
Hi, gentlemen, appreciate I appreciate you taking the time just a few questions for you.
David you know most of the when we talk about fiber optimization over the last couple of years assumes most of those conversations have been around Europe and he does have done a great job. There is there anything that could be done, particularly given the environment.
And whats the economic position or some of the other Nols.
Western Canada to optimize the fiber planning in Canada.
Absolutely out you know so one of the one of the topics is working with with the regulators to to get the bigger truck configurations that could get to 10 axle.
Both for a both for log calling in for two and for the Tandems for chips, and we're making really good progress in Alberta things have been a bit slow NBC.
So that's one.
There is you know there's other strategies that like you can always do better and one of the things we're working on its a concept of drop trailers. So instead of having somebody who's doing a long haul for roundwood, which is what you have to do and you don't have enough sawmill residuals coming from the sawmills near the pulp mill.
Like the guys can only drive for so long so you guy drives and he stops and you just but purchases trailer in.
In us holding spot and he goes to wherever he goes and another guy.
Is doing back and forth back and forth from there to the mill you know what I'm, saying, so such as two legs, one guy goes back and forth and when they come on Guy goes back and forth another leg and they just detached and attach.
And you got loaded and unloaded going in different directions, and that that can significantly improve your cost structure.
And goes kind of volumes of wed. So that's an example of the strategy.
Also there is it's always centralized shipping is better when you're when you're when you're chipping in the Bush, which is to lower capital salute cost solution, but you could have an 8% degradation of the wood in terms of these are pretty bill shipping machines. So you got a lot of sawdust and fines and smashed would versus if you have a crop or what.
Room at a pulp mill you know you get an ice cream shifting don't have as much sawdust pins are fines.
Takes a little capital to get there, but the returns are tend to be quite nice.
And we just kind of we do have a would room at at Celgar.
Theres optimization possibilities for it but it's just a recent development, where we've had the you know that the fall down in sawmill activity.
And at <unk> and my guess is that's going to become an back here and then in the near future. So I don't want to put in too much capital until we're really sure what the long term requirements need to be.
And at Peace River again, it's the.
So it's it's the bigger truck configurations, and there's ways to optimize how we how we deal with the satellite yards.
Well, that's a really interesting ones. So in in Alberta, you can go anywhere in the winter race roads in summary, you can't go anywhere so.
You have to a you know we have to work hard where should the satellite yard be how do we do the drop trailer and the transfers where it is a chipping actually occurred that could be the most efficient that kind of thing so.
We're doing our think we're continuing to monitor optimize and edge or way forward into more and more efficient configurations and so there is.
Lots of room for improvement obviously, but.
But a pretty good not about starting point either so its a good team there.
Got it and as you roll those things out.
David is the stuff that a nurse to that benefited from Mercer, specifically or sort of pulls fiber down for the entire.
Industry for I want to one of the one of the appeals of the railcar program. Obviously in Europe was that it was sort of yours and yours alone.
Yeah, there, they're all different dynamics, so in Alberta, it's all our fiber so and it's cheap fiber that because the lean cost is processing and logistics or whatever we can do to be more efficient.
All for us.
And and also at a the more softwood, we can speak out of that for us to where softwood pulp. We can produce obviously, so because you know it's a swing mill. So we're also we're moving in that direction.
For in British Columbia for the silver situation and I guess, it's a lot the same caribou its.
You know it these are regional fiber plays and the more efficient we can be mobilizing fiber in and around the pulp mill to lower the cost for the problem others to its benefit.
In Germany cost more of a global situation, where as you point out you've got Central Europe, and then you've got the fringe.
Supplies coming you know, Russia, Poland, Czech that kind of those kind of areas where are you can get cheaper what the logistics kinda prevent that would from flowing for most most sawmills in Europe never buy anything further than 150 kilometers away, they're all completely restricted by truck logistics.
Whereas there is Mercer Mercer luck trains just went into pull into the other move and what around so so we bring.
Well over one and a half million cubic meters of wood into Germany, and that has the impact and lowering the entire wood basket in Germany, just by taking demand off the table.
Just we have to fit into different options for supply.
That's very very helpful. David touched Heska also just to sort of a larger capital investment question.
I know you guys have been very consistent interview that there's really nothing to buy in pulp land in terms the quality of assets, but but you are sitting here.
At a tough pointing to cycle very well capitalized with a ton of liquidity right I know I know you've thought about.
You thought about saw no project I know kicked around whether to build one right or by one I mean, how how are you seeing.
Larger scale investment and how are you thinking about perhaps that timing.
Cruiser, you're looking for maybe from.
Dictate the way we the way we think about things is.
We're at the bottom of the cycle. So it's time to be really disciplined about costs and about capital and we want to preserve.
If everybody's investments in us and not create any risk and all that kind of good stuff, but we don't want to lose a momentum either.
So we're very focused on what it is we want to do we're moving those projects along at a at the appropriate pace in the context of where we are in the cycle.
And when when things improve and pulp prices start to improve and the free cash flow is coming then we'll deploy capital in a very.
Absolutely.
And its a.
It's a longer term value creation strategy. It's we're not trying to hit a home run next year.
Over time this is going to become like a really.
Efficient basket of assets that produce well throughout the cycle and elsewhere, that's where we're driving too.
So were we Havent, we're not a we're not abandoning those activities, where we really no we're going to go but we're not going to be watching anything.
Scott of size in the short term until until we got a much better line of sight on the recovery.
Got it and one west as a very quick housekeeping question, how do you see the working capital flows over the next quarter to I thought you typically consume some working capital in the winter Didnt see so much that in the fourth quarter. So just curious.
What should we expect to scale model cash from there'll be a bit of a shift from the normal fourth quarter that first quarter, So little more little heavier builds in the first quarter and Thats partially explained by.
The dynamic of having the DM I assets as I was mentioning before you really got to be got to make hay, while the underground is frozen.
In Europe and around Celgar.
Well I guess, if they're both different so celgar sitting on quite a bit of what because we've been very worried about the health of the sawmilling industry and the there's a lot of regulatory challenges for us on Miller said get locks. These days and so I know there's going to be.
Further supply restriction. So the saw mills, so we've got enough roundwood and our inventory that we run will run through Unimpacted, regardless of what the worst case scenario.
So we'll be working through that into the spring. So that's I think we'll see a big working capital release from that.
And.
In Europe I think our goal is to now that we can see volumes of calamity would that are available we're going to continually ratcheting down.
We need to carry.
And continue to keep our foot on.
Both on the on the price of the wood and <unk> and keep the volumes down because I don't see much risk that they're going to run away from us on my side.
Got it.
Well I appreciate it thanks.
Thanks for taking sometimes you can.
There are no further questions at this time Mr. Youre I'll turn the call back over to you.
Phil on behalf of Dave and I. Thank you all for joining the call lots of good questions. This morning, obviously, it's interesting time and markets. So.
Anybody has any follow ups to don't hesitate to call either of US, we're always available and happy to take your calls.
Yeah.
Thank you for participating in today's conference you may now disconnect.