Q1 2020 Earnings Call
And gentlemen, this is the operator today's conference is scheduled to begin momentarily until then your lunch will again be placed on musicals. Thank you for your patience.
[music].
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until then your lunch will again be placed on musicals. Thank you for your patience.
[music].
On the call today is David Gandossi, President and Chief Executive Officer of Mercer International and David Your Senior Vice President Finance, Chief Financial Officer, and Secretary I'll now hand, the call over to David Yours.
Good morning, everyone.
I'll begin by reviewing the first quarter's financial highlights following my remarks, I'll pass the call to David who will comment on our response to the cold at night to.
Key markets operational performance congrats on our strategic initiatives, along with our outlook into the second quarter 2020.
Please note that in this morning's conference call, we will make forward looking statements.
According to the Safe Harbor provisions will go private Securities Litigation Reform Act of 1995 click to call your attention to the risks related to these statements which are more fully described in our press release, then in the company's filings with Securities Exchange Commission.
Our first quarter results were seeing significant improvement over last quarter, primarily due to the absence of the large agile scheduled maintenance activities that we completed the Q4.
The cold at 19 pandemic impacted our results only marginally in the form of lower sales volumes moving in the quarter due to logistics challenges in China.
The pandemic did however significantly impact how we operate David will speak to back at the moment.
We generated EBITDA on the first quarter of about $57 million compared to EBITDA loss of about $34 million in Q4.
This quarter.
Got it from strong production at all of our mills, including record production at our free cell sawmill, along with effective cost controls.
Now for all of our products with study this quarter and well product pricing remained low the U.S. dollar strengthened considerably during the quarter contributing about $14 million to our EBITDA.
Our pulp segment contributed EBIT dollar $52 million or what product segment contributed to record quarterly EBITDA up almost $8 million.
Or what products segment results reflect strong sales volumes record production and the benefit and historically low sawlog prices.
As usual you can find additional segment disclosures in our form 10-Q, which can be found on our website about the FCC.
Average MBS Keegan list prices were up marginally in all of our markets average hardwood pricing was up slightly in China and down slightly in the U.S. during the quarter.
However, due to the timing of our sales and modestly higher discounts. It took effect in January our average coal sales realizations fell during the quarter impact to EBITDA by about $9 million compared to prior.
Our pulp sales volumes totaled 504000 tons, which was up about 22000 tons from Q4, reflecting higher production and steady demand in all of our markets.
Sales in our wood products business were also strong because we sold the equivalent of about 180 million board feet of lumber in the quarter, which was up about 17 million board feet from Q4 with about 31% of this volume being sold to U.S. market.
Electricity sales totaled 254 gigawatt hours in the quarter, which is up significantly relative to Q4 due to our heavy to core annual maintenance schedule and strong Q1 production at all of our mills or caribou Polk joint venture, which was accounted for using the equity method.
Contributed another 19 gigawatt hours to this total.
We recorded a net loss of $3.4 million for the quarter or five cents per share compared to a net loss of $72.7 million were $1.11 cents per share in Q4.
Cash used cash usage in the quarter totaled $65 million compared to $86 million of cash inflows from Q4.
Our cash usage in Q1 was anticipated was primarily driven by working capital movements.
Our heavy maintenance schedule to Q4 left us with significant payables at the end of year, which were substantially paid in Q1.
In addition, receivables were up due to higher sales volumes and the timing of sales well finished goods inventory was also up as a result of our strong production.
Yes.
We also invested about $23 million of capital builds this quarter, David will speak more to that.
Yes.
As expected after temporarily rising in Q4 on unusually low working capital and liquidity was roots produced in the quarter remains considerable totaling roughly $517 million, including $287 million of cash and $230 million of Undrawn revolvers.
Low pulp prices continue to force us to revalue certain components of our inventory.
And in Q1. This resulted in a non cash 5.7 million dollar inventory write down.
However, after considering the realized so you should not the Q4 inventory write down $9.2 million.
Our net positive EBITDA aren't impacted Q1 is about $3.5 million and reflects our current expectations downward pricing pressure is diminished in recent weeks.
To the extent pulp prices increase we will recognize a profit on this written down inventory in Q2.
In Q1, we completed a short and successful to date clad shot at Celgar compared to Q4, when we executed larger planned maintenance shots at Stendal Sonepar Peace River that in aggregate totaled 54 days.
The benefit of higher production and lower direct costs benefited Q1, EBITDA by about $73 million compared to Q4.
As a reminder, our competitors reported their results under IRS are committed to capitalize the majority of their annual maintenance costs, but we expense our cost in the period of schuff completion.
Our current share buyback program expires today and in response to the uncertainty created by the cool Goodnight T. pandemic. Our board has elected not to renew the program for the time be.
I have not being particularly active in the market, but did purchase about 24000 shares in the first few weeks with a quarter at an average price of $6 at 84 cents.
And consistent with that prudent stance in respect to the pandemic. Our board has approved a moderated quarterly dividend of six and a half centsper share for shareholders of record on June 20 kept for which payment will be on July 7th 2020.
That ends my overview of the natural results and I'll turn the call over to Dave.
Thanks, Dave Good morning, everyone.
Let me begin by saying that covert 19 isn't unprecedented event certainly in my lifetime and it has presented a number of challenges to our business.
I'm proud of how our employees who responded to these challenges.
Working environment and work related changes have not been easy.
And I want to 10 color employees for working cooperatively to keep safety at the forefront.
I'm also pleased to note that despite these challenges, including running large industrial manufacturing facilities, while maintaining social distancing requirements. Our mills ran very well this quarter.
We also benefited from strong cost controls and steady demand for products.
Free shelf saw no reported record production and the second consecutive quarter of record EBITDA.
Oh prices in Q1, generally experienced modest upward pricing pressure due to steady demand MBS capable prices in all markets increased slightly midway through Q1.
In China, the Q1 average MBS K net price was $573 per tonne up slightly from the $563 per ton in Q4.
European list prices averaged $833 per ton in the quarter compared to $822 per ton in Q4.
The average quarter, one hardwood net price in China was $460 a ton of $5 from Q4.
And the hardwood list price in the U.S. market average $890 per ton in Q1 compared to $893 in Q4.
The pandemic and government responses to limited spread have created significant economic uncertainty and be recognized it changes can happen quickly.
Currently we are expecting steady pulp demand from tissue in hygiene producers.
I would expect expect demand from the printing and writing producers to be under some pressure.
You're also seeing a large drop and recycled office paper, which we believe will create increased demand for Virgin pulp.
On the supply side, we're expecting certain pulp mills to announce production curtailments due to a lack of fiber.
We recently announced that our joint venture Turbo Mill started four weeks of downtime beginning in late April taking about 30000 tons out of the market with our shared being 15000 tons.
As a result of social discussing requirements and virus outbreaks, we have seen several announcements of unplanned shots and mills being forced to further scheduled annual maintenance shuts. These deferrals will increase the likelihood of unplanned downtime and will reduce supply of pulp and the second half of 2020.
Hope sales volumes remain high and localized supply shortages have led some producers to announced price increases. Despite overall mid term market conditions remain uncertain.
March market statistics reflect positive movement, and sales volumes and supply demand dynamics for both softwood and hardwood.
The short term demand declined pretty young Lady grades will be.
We believe pulp pricing this year floor pricing and if we see any further downward pricing, we expect to see further pulp curtailments that are market based.
I will add that our pulp products are an important part of the health care supply chain and some jurisdictions were considered in the central service.
We expect to continue to run and we will continue to follow all government health related recommendations to ensure we keep our people safe and to reduce the risk of the virus spreading through one of our facilities.
With regards to our wood products business, the European lumber market experienced steady demand, however, pricing was down slightly compared to Q4.
Lumber markets in the U.S. continued to show improvement in Q1, 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 create this upward pressure.
The random lengths U.S. benchmark for Western SPF number two and better averaged $399 per thousand board seat Q1 compared to $380 in Q4.
Today uncertainty regarding the pandemic is push the benchmark down to close to $332 per thousand board feet.
In Q1 about one third of our lumber sales volumes were in the U.S. market with the majority of the remainder of our sales in European market.
When comparing to Q4, our average realized lumber sales price was a flat was flat at $348 per thousand board feet in Q1.
Hard to $347 in Q4 as higher U.S. market pricing.
If you had prices.
As we move through Q2, we expect number markets remain relatively weak along with sales realizations todays prices have been volatile as lumpy buyers look for clarity in housing starts and do it yourself project to ban will fare as governments begin to reopen the global economy.
Our mills ran very well this quarter in spite of all the pandemic related challenges, including our caribou joint venture. We produced 534000 tons of pop up 92000 tons from Q4, when we had 54 days of scheduled annual maintenance at the pulp mills.
Excluding or caribou joint venture or put most produced 578 gigawatt hours of power.
The 148 gigawatt hours.
So what hours from Q4 again due to our heavy Q4 planned maintenance.
I would product segment performed at a record level this quarter. Despite ongoing production disruptions as we work through the future construction project.
Produced 160 million board feet of lumber and as Steve mentioned or wood products Sabic segment generated record EBITDA up almost $8 million in Q1.
In Germany, butyl damaged what remains plentiful and is resulting in more log cost generally we expect to slug supply dynamic to last well into 2021.
In Western Canada, pulpwood supply remains very tight so I'm not curtailments have limited.
So I know chip supply, resulting in higher cost options being used to replace those volumes.
I would cost complained which combined with historically low playstations pitching margins considerably.
Right well maintenance program for 2020 has changed in order to reduce exposure to cope with the occur when the tradition large numbers of contractors entered the site to assist with maintenance during a shot.
Current expectation is that Stendal will take two short three day shots in Q1 in Q4.
Sure do has deferred its five day shut to Q4.
Rosenthal will take its typical 15 day shut in Q4.
The piece certainly we'll take a five day shut in Q4 its recovery boiler rebuild shot has been deferred until Q2 2021 due to the inability of contract is being able to guarantee the availability of skilled trades people during the pandemic.
And Celgar will take three day shots in Q2 in Q4, and a slightly larger shut in Q3.
In Q1, we invested $23 million in high return projects that are mills, we've also reduced or expected plan 2020, Capex program to about $90 million to manage cash in anticipation of the reduced availability of skilled labor as a result, the fantastic.
A more modest 2020 capital program will focus on the completion of the free showpiece two expansion project along with some smaller high return productivity and cost reduction initiatives. We also expect to commence what do you work on the production expansion project at Stendal, which when completed 2021 will increase the total capacity of that mills from 606.
2000 tons to 740000 tons per year.
Q1, 2020 has been unprecedented in terms of operating challenges and potential market shifts.
I've been comforted by our success in implementing our strategy our focus on world class assets strong balance sheet discipline and focus on sustainable operations has and will continue to serve us well as we focus on optimizing our fiber handling and logistics and controlling our costs.
Our balance sheet is in good shape with considerable liquidity and continued financial discipline will contribute to shareholder value over the longer term.
As Steve mentioned, our board has decided to reduce our dividend as caution given the global economic uncertainty created by this pandemic.
This reduction gives us increased financial flexibility, we're cautiously optimistic this reduction will be short lived.
This completes our prepared remarks, but if I can take a moment to see that displays despite gardens, beginning to take steps to reopen society. The virus is still out there remains a significant risk. So as we see the Waller employees. Please continue to keep your family's friends and neighbors shapes.
Thanks for listening I'll now turn the call back to the operator for questions. Thank you.
Ladies and gentlemen, if you'd like to ask an audio question. Please press Star then the number one on your telephone keypad.
Now to start wanted to ask a question.
Your first question comes from Samir Patel with CBC capital markets.
Good morning, I, David how much do you expect.
Softwood pulp demand to be down this year from a couple of 19.
Yes so.
It's a real it's a mixed bag so maybe just said.
Look at the various grade site. So I think a tissue and hygiene is going to continue to be strong. That's that's our feeling receives expecting.
Their forecast for this year I think is to be two shouldn't be an incremental 2.6 million tons of pulp acquired.
On the graphic side, though I'd been concerned about the printing and writing side for some time here with the state on an economic conditions it impacts things like magazines Flyers.
Certain types of packaging and so on so.
You on the.
On the graphics side I think the receipt number is it showed a reduction of about 9.2 million tons.
Paul.
In in 2020.
But having said that two thirds of that number is would contain or recycled fiber so you're going to be talking about 3 million tons of pole as much about 25% of that is softwood some 750000 tons.
Packaging that coarser grades.
I'm going to be down about a million tons. This is a risi forecast.
And then on the supply side, so far we've seen a little more than a million maybe a million two tons of coal.
Supply has been taken off so.
On a net net right now.
Oh good.
And it's a that's that's the forecast coming out the receipt.
Yes, we see at the same you know our we see see lots of paper machines, taking downtime both in U.S. and.
And in Europe.
In Europe.
<unk> for sure there's there's really no glier capacity, so that's not resulting in more.
More market pulp and it's just simply a reduction of paper grades and as I mentioned you know.
Those could create your what combination of different finishes.
These big European Pan European companies take downtime at a machine quite often they'll move orders to other machines are really trying to do as Keith.
Keep keep the profitable machines, running and and and take down the.
The less profitable machines, so for our customer base were.
I'm reasonably positive about the rest of year, you expecting it'll be slow in the summer slower in the summer but.
The net basis.
Should should balance out and then I think the what's really going to be interesting to watch is is whether any of the other pulp mills that are.
You mean, you know a little more.
Older and not as well maintained its you know if they can't do their maintenance shuts weapons out looks like for them in the back half of the year. So.
Literally every pulp mill is deferred any maintenance from the first after the second half. So thats one issue, but then you're going to have a lot of maintenance.
And challenged operations in the back half a year, which I think could could create quite an interesting dynamic for us as we go through the recovery.
Thanks Center in the last that long winded, but there you go yeah.
That's helpful and then just didnt.
Given the scale off the sawmill curtailments.
I do you do you think we'll get to a tipping point, where we'll see some some some pulp mills finally kind of permanently go way NBC, just because of the structural fiber constraints.
Oh, Yeah, I don't know you know I think.
The part of the answer to that question really depends on the.
British Columbia Provincial government.
Yeah, I'm starting to feel quite critical about their ability to make bold strategic policy decisions. So.
In the absence of the change there.
Would suggest or our mills that are at risk in British Columbia.
Unfortunately for us we.
Our Celgar mill.
We've we've had a long history of processing Roundwood. You know this is the non sold on quality log scitor harvest set as a byproduct of sawmill long harvesting.
So we've got good programs and procedures in equipment to process that so so celgar. It's got a good good Decca logs in front of that which should should do well for the.
Short to medium term.
How long the solid sawmills stay down is a question for me.
As he doesn't do something and they don't seem like they are.
These one week announcements, we've been hearing construction thats fixing to eat into 10, who knows and if it continues into the back half of this year, that's going to be a challenge for us as well.
So.
We have to expect them to do something or for the recovery to be strong and for sawmills to get back to business because the economics begins it makes sense for them again.
Great. Thanks, David that sets will add I'll turn it over.
Your next question comes from the line of Sean Stewart with.
Courteous.
Thanks, Good morning.
Following up on Amir's question with respect to Celgar specifically.
Can you give us an idea of what the cost differential between residual chips for that mill and.
The whole lot shipping what that cost differential looks like for that mill.
Yes, it's a good way to look at it actually.
So if you.
This is a hypothetical number okay, but let's let's just say your wood costs.
Per ton of pulp is just below $300, a time like somewhere between 250 and 300.
The spectrum of would that comes into a mill is a balance of everything from your sawmill residuals, which in our case, we might have chips coming on a built from either for saw no weighted cost events that would be our lowest cost fiber.
And then you come to the other the other saw mills in the region and somebody incremental cost is transportation.
And then you move into Roundwood, which is the non sawlogs.
Byproduct of harvesting the saw mills and depending on where those logs are some of them with fairly close to the mill and so there maybe a little bit more than that's done the highest cost sawmill because you have the processing and transportation costs and then you go right out to you know you're picking up your highest cost marginal fiber, which is maybe 100 220.
Kilometers away and that could be enough $400 per ton of pulp and when you blend. It all together you get your average.
What's happening right now is that virtually all of that song lower cost sawmill residuals supply is not happening.
And they you know there.
They've all I don't think anybody's announced anything more than four weeks.
We've got well over four weeks of.
Chip inventory in front of the mill, including blogs that we've already purchase so.
So we'll keep going but.
The question is like how to look do we need to be buying these higher costs sawlogs to keep stockpile going.
And with wood pulp prices are today, there's not a lot of room to be heroic bringing in high higher cost fiber. So that's the balance we've got to manage here and a big.
A big driver in the outcome of that's going to be when the sawmills come back.
Understood Thanks for that detail.
A question on the the downtime schedule that you've laid out.
Do you have the contractor cruise lined up for that schedule and committed.
Is there risk that theres potential deferrals to that schedule.
Social distancing.
Initiatives remain in place how should we think about that.
Okay.
Well.
Well really big things like like the power like the recovery boiler at Peace River. For example, like we just know that's not feasible.
So so we defer that and it's fine that's.
For this in good shape. It's this is not a safety issue.
It's just inconvenient.
But given the modern nature of our mill so out of the things that we need to do trade and maintenance shut you can do on many shots and we can do with our on people. So it's actually a bit of a silver lining for Mercer that we've been seeing with his pandemic is.
Recognizing that it's unlikely we're gonna have 500000 contractors on site during a shot. So so we've been we've been doing any splitting the work up and.
Doing kind of pit stops on different areas of the mill to keep everything in good shape. So.
I can't think of anything in any of our mills this year.
That would.
Hold us back from operating if we were unable to get third party contractors.
I think we could I think we could be.
Pretty well everything ourselves.
And do it in smaller bites.
So I don't I don't I don't see in any big operating risks, there, particularly for us, but I wouldn't say that for others. That's what I meant earlier in my comments for the older Mills somebody's somebody's smells need because of the age of equipment. They need to go down they need to water wash and do complete.
Cleat inspections, and quite often a lot of remedial work, which their own resources, usually insufficient to do and you know given short period of time that we usually conduct be shut so.
It's going to for everybody is correct. Each mill, it's really depends on what's the what's the state of the equipment and the big pieces are the Digesters and <unk> and the borders and.
If you're in good shape of moves too and you can just defer for 12 18 months, then that's easy and if you're not Dennis can be challenging for some.
Yes.
Last question for for Dave You're the you laid out at various leavers you're pulling through.
Liquidity preservation.
Lower capex, the dividend reduction and I guess, an unwinding of working capital.
In the near term are there any other options in terms of tax deferrals refunds coming.
That's sort of thing that we can look to for liquidity support.
And I guess and.
In terms of I would say not though the examples if you do you ever like tax refunds I would say not not material no where we're obviously adjusting guard were taxable and some jurisdictions.
And like.
Like like we're accustomed to in Canada, there are certain circumstances, where you're paying quarterly you can adjust those quarterly payments to Tibet your forecast and work we're doing that so to the et cetera. We believe our taxable income will be lower for 2020 reevaluating those forecasts said.
Modifying our quarterly.
Tax.
Earns a big material me farms I would say not.
Not material.
In terms of of working capital obviously were its a bounce here, we we'd like to hold there are certain operational reasons and market reasons why it's good times have or have some some working capital for instance, having.
Suitable woodpiles is part of yard is good to make sure that you can you can keep control of your one costs and same with from a customer service point of view, having having pulp inventories and lumber inventories that are sufficient to keep you.
In addition to able to meet your customer demands, but that's helpful too, but we're we're evaluating all of those things to make sure that were regularity doing that that cost benefit analysis, and we'll keep working sharpening up for working capital and as David mentioned, we sharpen up the capex as well well, we'll be doing that.
As.
As warranted.
Thank you for that that's all.
Your next question comes from the line of Marcus Campo with RBC capital markets.
Hey, guys good morning.
Really.
Ah with Cobot, 19, obviously, creating a lot of uncertainty in the market here could you just walk us through how you're thinking about capital allocation, whether that be bouncing maintenance needs growth opportunities or even eventually returning capital.
Yes so.
I think it's.
As I mentioned in my in my.
Opening remarks.
I don't have a crystal ball for for how how cold it results.
There just seems to be a lot of pent up.
Energy to get back to work at the economy going I mean, it's it's just an unprecedented times so.
I'm not overly negative I mean, I think when we come out of this we're going to things are going to recover gray quickly, but well we're in the middle of that we have to be you have to be cautious I think because I just don't know what the downside looks like so.
Steve mentioned, we've got well over half a billion of liquidity after that in cash after that and Undrawn revolvers.
We're able to operate.
We're still able to generate EBITDA.
We we have some very attractive high return capital projects and several maintenance things that we we will continue to do in the prepared for that.
We have bench and that we have not renewed our.
Share buyback program.
We can always call a board meeting the answer to that launch would wonder if we need to but at this point in time.
We're really and we and we cut our dividend by 50% at this point in time, it's all about living to fight another day maintaining.
Our long term strategy of creating value.
In difficult times quite often there are opportunities there may be maybe some things that that we will want to do and so having as much liquidity as possible. When things are very weak as I think very I think that's a wise when they go.
We're continuing to different cap allocation point, if you were finishing the fee shallower because we see so much upside in that channel.
I would be the one so I just saw them in the world probably something probably.
Yeah, I'm one of the best margin producers as well given given that the whole.
Would situation and the flexibility about mill and it's just it's access to global markets.
And we.
We were continuing the expansion program at Stendal, we boarded the two digesters for that and we'll have that completed and 2021.
And I've guided no that's not an will really huge capital expenditure considering the benefits its 40 million range with.
More than.
After that in and offsets from other wastewater program. So means we spend the capital we don't have to pay a wastewater fee.
So, let's say getting it back perhaps equipment so.
So were still moving forward still intending to create long term value.
But we're being very cautious in the short term.
Thanks, and then maybe on pricing many are appearance of Ben I think a price announcements at about the main.
What are you hearing from your customers and pricing discussions and have you seen any notable differences by geography.
Well there is you know in Q1, there's been.
So steady pressure.
Across in all markets I would say.
Yeah, I don't want to be too. It's you know the there's a lot of discussion about main right now and not in our markets I don't want to see too much.
You know some of the some of the.
Some of the incremental demand is coming from.
Paper producers.
Worried about supply risk. So there it's kind of like it's kind of people going to Costco you know your bleeds you hear you read the news that.
Meat packing plants May go down are you can't get to other paper, so everybody buys a whole bunch and it's a little bit like that in our industry too. So I mean it has been.
I would say almost every tissue customer.
It's taken or asked for more than they would have otherwise been allocated but having said that on the printing and writing side.
It's he instead of 5000 tons. This month can it be 4000.
That's the kind of thing so there's.
Yes, how well we do on price increases in this.
[noise] uncertain time is the mean.
I don't know yeah.
I'm reasonably optimistic that as long as we don't get a second or third wave.
Going to take out of this quite nicely in the back half of the year.
I wouldn't I wouldn't read too much into five to 10 dollar price increases are five or $10 price decreases in any particular market it's really.
Function of.
The the different situations at all the different players or do you are dealing with you know it's there.
Uncertainty of supply the slowdown in printing and writing grades slowdowns and packaging grades.
Incremental supply and tissue insulin and it's a mosaic out there and I think it'll be.
I think we should expect to stay the course here too that.
The next quarter, a little bit a weakness in the summer and then as long as we don't have a pretty serious problem with.
Weve to the back half of your my line I'm cautiously optimistic, but it did better.
All right. That's all I had thanks and good luck.
Your next question comes from the line of Andrew Shapiro with Lawndale capital management.
Hi, Good morning can you hear me okay.
And you find Andrew I can really excellent shelf sheltering. So it's kind of not sure connections are so following on this up prior questioners calls that I could approach the.
Shareholder return question from a different angle.
Which is what milestones or thresholds.
Are you in the board looking at.
With respect to.
Reinstate I understand you can reinstate the buyback on a short notice, but what what milestones in thresholds.
You guys going to be looking too in terms of determining.
When you would reauthorize the buyback in addition.
When you would reset the dividend either for an increase and based on how you described the moderation of the dividend would it be a gradual increase or would it be just a decision to reinstate to the level we were at.
Well I think there's there's lots of.
There's lots of different ways to approach both of those questions and I and I think you know.
Underpinning all of that is is our confidence in in the.
Cash generative potential of the business compared to how well that the stock trades. So.
There's a whole bunch of theoretical math you can do around these things, but you know our argue is that.
You know, we want to provide a dividend return to our shareholders through time and.
And committed to that.
We want it to be a good return and and we intended and we've always said that the overtime, we intend to continually push and increase the dividend return to shareholders as the company grows and gets stronger and.
After the ball shareholders will be rewarded to the dividend in times of extreme weakness.
Share buy backs or you know there's I understand it uses for it yeah in our with our focus on growth and it.
Yes, as we recognize there was a bit about liquidity discount in the stock.
Buybacks if not then.
You know a real focus for us.
Okay and ready for that reason.
Another factor that I should just put out there is that you know for companies that want to tap into some of these government support programs and consider no support programs coming.
I believe you cannot anyway b.
A lot like the pulp and paper Green transformation program, you know when it comes when when governments try to simulate stimulate the economy and they're looking for shovel ready projects and.
They want they want to get.
People working.
There is gonna be support programs for that and it's kind of hard to apply for that kind of stuff when you've been buying back your stock right like why would they give you had a one year.
You know you.
Same back stock site site I, just don't want to put Mercer in a position where we can't.
Tap into some of that stuff and sure no. It's not so there's there's a whole bunch of these different factors.
When it comes back to when we when we move it back up again, Andrew I should be I shouldn't pretend that I have control over that this will be a board decision and.
Well, we'll we'll beat all the different factors in our this confidence if you look at times, but.
The board will be the board would be very focused on this question you know through this whole sure and and I understand I understand your comments on the on the buyback and and just to flush out a little bit more in the dividends because it sounded as if you were talking of the dividend as something that might be stock price based and if.
Thats the case does that mean your yield targeting.
I'm not the dividend okay. So we so no rural rural were Yeah. We were very happy we were either the access in the 6% yielding we're very proud of that.
But it's just when you can't see the future and you've got.
Well, you've mentioned risk, we just better to knock it down to closer to three rigs.
So then so in terms of the dividend forgetting about the buyback you touched on that clear enough I understand in terms of the dividend and in terms of milestones or threshold is it sounds as if it's it's it's visibility and if it were up there were visibility would that mean a reinstate.
Men or a gradual increase from present levels that the board would have in mind or that's been kind of the discussion about.
I understand I understand your your desire for specificity, but I you know I don't want to comment I don't know what we'll do okay.
It would it would be incorrectly but anyway.
So then so then.
In terms of the Capex King and when you elaborate then on on that.
The Capex reduction.
Uh huh.
Are there any particular projects that youre canceling are pushing back or is it just across the board.
Well, we went to every mill, obviously, we David.
These discussions we have and our chief operating officer and I.
Support him in that and really what we're looking for is it.
Let's let's.
Lets ignore outage that we're going to we're going to produce.
However, we're being prudent.
But lets evaluate each individual project on its merits, what what what project can be deferred that doesn't create risk or the company.
For those that.
Hi return would have the superior returns what are the most important things to do strategically and you know, it's almost a different factors that come in.
And.
Honest, we deferred a lot of really attractive.
High return projects.
But don't.
Don't cause any risk to the business by doing that don't impact the strategic direction of the mill and we'll be able to bring back when when when liquidity or when pricing improves.
Okay. No. We don't have any big maintenance issues that were not addressing we have we the part of our strategy is to is to maintain or assets in good shape throughout the cycle and not taking any risks on that so.
You know.
A different company might have said, let's go down to 50 or 40.
You know, where we didn't want to stop and I've said this when we did our our bond.
Last year, we do want to stop the slow down the free found work and we don't want to stop the slowdown that stendal work and similarly, a much smaller project, but the wastewater project Rosenthals also very important for for that mill in terms of.
Let me know project and having a government wastewater fee offset.
The capital for it so you're right it strictly on liquidity, but its you know it's it's a freebies. So children. So weve maintained those types of things.
I have asked in the past, but I don't know if I need to ask anymore is the do you my integration complete or what remains.
Yes, some [noise].
Well, it's it's always a work in process you know our culture is continuous improvement. So so we're not finished yet, but I, but I I was going to summarize how it's gone I'd say, it's been fantastic in terms of a cultural fit.
Great team up there.
I.
They think of themselves as part of the Mercer family now there.
Is there like us to do.
Can do people they.
We're just really really really pleased with that acquisition with the team. We got there and you know this there's you know I think on the marketing side, we're continuing to unwind some of the arrangements that the previous owners had put in place and.
Running our own program.
You know, it's strictly accounting systems side, there's still still work to be done in terms of creating more efficient systems for them and getting them onto the most or you know enterprise wide system. So that work is ongoing and little bit of its been deferred because of cold it.
Makes it difficult to do some of these things but.
Uh huh.
Yeah, It's it's a Mercer mill now Mercer People's the cultural fit is great and does all ongoing all going fine, but the rest of the synergies have been created.
Well I can see it to work in process. So so we've optimized we've optimized the wood costs like the.
Good chunk of what goes on in a in a pulp mill is wood costs and we've been studying we've optimized what they have and now we've been studying what could we do differently. What can we do better and there there are opportunities high return capital project opportunities to continue to lower the wood cost, but those are on hold until we have a better.
Minus eight one on on on the recovery. So we're not finish I will never be finished but.
We're in great shape, and there's still lots of good when it sounds like the big steps done I don't need DAF that regularly. So that's the main thing I was getting off to the place here I was late to the call did you break out what the net currency effects were for the quarter.
Oh, I think we had some of that in our Q, but I, maybe Dave could speak to that for a minute.
Yeah, we we had a boat so that the U.S. dollar strengthened considerably during the quarter against because both the euro and Canadian dollar and where we estimate that that had a positive impact that you could talk about 14 million.
Okay.
In the prior.
Call not too long ago, we talked about the impacts of the pandemic in China being primarily.
Transport and logistics around the country.
They're mills, otherwise kind of up and running although demand might have been constrained.
Where do things stand and.
And in China and business in China for the company, the transport and logistics issues now behind us or what what remains as major hurdles other than we'll call. It just net demand.
Yeah, I think things have opened up a lot you know the.
The last call we were describing you know the challenges of at about <unk>.
Simply make for a truck driver to try to get for me to be and you know I think most of that.
Logistic constraint as has.
Been alleviated.
With the other pieces the availability of containers and shipping capacity I think at the beginnings.
There was a lot of tonnage.
Shipping tonnage sitting over an Asian waters, not wanting to come back empty not having cargo to bring back. So there was what we called link selling so were just a lot of ceilings. It didnt happen.
And and that now has is unwinding. These ships are coming over with material dipping in containers with them they'll be empty continues to go back so.
He is probably two or three more months to unwind to the point, where container prices come back down due to normal and that's happening as we speak.
So.
I think that whole.
You know.
Yes that was like a brick wall in front of us for a little while there I think that's that's really been solving itself.
Well I'm on that topic I think in Europe, it's been a similar story only not as dramatic containers or time, there, where you really couldn't cross the border between Germany, Poland or check the accuse me just.
Crazy and truck drug would have to city dollars to cross the border. That's all resolve they've got green and blue lanes now and.
Freed us moving freely throughout Europe. So.
Not having any not really having those kind of challenges anymore.
Great and then lastly from me given the pandemic and obviously, the inability to travel and and and the cancellation of many conferences in all what are the companys plans to continue to reach out to new and existing investors in the coming months.
As well as new and existing customers.
Yeah well.
On the onions.
The will be participating more and more and in some of the bank led a virtual conferences. We got a couple of those lined up now they can speak to those.
And you know we're always available we're not target marketing on the IR site at the moment, Oh pretty busy, but but we will do our best in to tell our story.
Well I'm on telling the story.
Look at our new website for those listening if any of you haven't had a chance to see or new website. It's we put a lot of thought into it and.
Steve and I have our own voice in it. So that you can hear how we think about a lot of these things so could you do.
To have a look at that this is quite a bit of new yesterday the trail in there as well.
As far as well so something okay. Thank you, yes. Its first customers go like Mercers, a leading global producer we they all know us on our teams on them.
There's great open channels of communication within the marketing sphere, and so kobin, it's not I mean as much as our guys like to travel and it's important to maintain relationship there's the.
We're all learning to work from home or some remote locations. We use were on the Google platform. So we have Google hang out school neat, we very easy for us to see each other face to face here customers.
And if you had.
We wanted to do assume or Google meat.
Loved to have you know such though I think that.
Well the future spiritual conferences, yeah. The conferences are intending for investor purposes, now virtually would actually enable us to participate or listen in.
More than what we could have otherwise traveling around on short notice to wherever you are going here and you're doing their thing. So what are what are the ones that you're already scheduled out if on a ticket and he just an excellent and we can line that up.
Yeah, and actually it's a little bit too early because we don't have a pin down the date, but it looks like it's quite at the early June So I think, albeit there will be doing two of them in early June but maybe what I can do is we'll get we'll make sure we get that posted on our website once those once those materialize.
Thank you guys.
That we could also say open invitation to anybody who wants to do a face to face we're very happy to do that.
Awesome.
Your next question comes from the line of Andrew Coskey with Credit Suisse.
Thank you good morning, I'm, David you did a good job of breaking down all the categories. Its end use demand that we get asked a lot of granularity there.
Maybe just a broader question I was a tricky one but it's to the degree we've seen prices move upwards and they've moved up modestly.
What part of that is really supply related where we're seeing some downtime and just some issues and operating some of the bells globally versus just underlying demand changes.
Yeah. Good question you know I.
It's all psychological in the market.
So my view and so.
No I think there's real demand pickup on the tissue and hygiene side.
You know when I think I think kobin is going to change some habits permanently even you know I'm, what I'm thinking about here, we've been talking a lot about about Tal as a grade.
And Mike My working career I can still remember when when diapers for another thing in China, and I and the industry.
[music].
Developed economy industry took a campaign to Asia about acres and it I mean, they just exploded and it was very successful thing.
And as that economies evolved being no third of all fiber demand.
They're tell consumption is minimal like I think it's below below 5%.
You know compared to.
Maybe a 30 or 35%.
And use fiber in the developed economies so.
When you think about hygiene.
You know you'd be aerosol impacts of co. Good like why would you use at dice in hand, dryer, which is what you see all throughout China is below your germs all over the place to draw your hands off.
So you know industrial paper towels Pctels for waking up in home I'm, just having in your pocket when you want to pushing a little better but in all those kind of things.
I think isn't real big potential shifts in.
Yeah.
Hope going into into hygiene products.
I think the graphic side is.
A lot of that.
Demand losses, probably permanent and its young people are.
Going to travel as much most of the magazines are happening in airports like that so I don't see that coming back anytime soon so.
So on that on the demand boss side.
Right.
Lot of that's going to be would containing you know so that's the non chemical pulps, and and big shifts and recycle fiber markets as well.
So net net I feel pretty positive about or.
<unk> chemical going forward all these reasons [noise].
It'll be bumpy getting there a lot of how we get there's going to depend on the psychology in the market like you know as your short term supplying risks that customers are thinking about or.
You know or.
Customer thinking about taking the machine down and and.
Not wanting to have too much Bolton inventory when they do that this kind of.
Using factors will will drive it.
Globally as I've mentioned, the Big picture I think we should.
Not expect because I don't think this meeting.
Much downside at all on pricing for either hardware or software I can just don't see that maybe five or 10 bucks up or down could bump around based on how different markets and the purchase participants feeling about the supply demand tension at the time.
But if you get any kind of serious price reduction, there's all kinds of capacity globally that would that would shut down.
Supply capacity I'm thinking about.
And.
You know as soon as soon as things start to open up.
There's a lot of pent up demand on the packaging and on the.
Specialty grades to but that are temporarily on hold that will come back with of engines. So I.
Upsides much greater than the downside.
That's very helpful. There yes.
Appreciate the color.
Your next question comes from the lineup Adam Zircon with night.
Gentlemen, appreciate you taking time.
You know.
David David You mentioned in early in the comments that that the crisis was causing you to change the way you operated and you didn't really speak to that too much you spoke about it with with respect to to maintenance and contractors and social distance.
But not in any debt beyond that so I'm wondering sort of how's the operations of the middle schools.
Change because obviously, despite this changes right, they're running well and or any of those changes permanent and are there any opportunities to utilize things learned in the crisis to see reduce the cost structure your long time or improve efficiencies you no longer.
Yes, Thanks, Adam a great question, there's all kinds of changes and there's a lot of silver linings and all this so you just to maybe talk about a few examples. So some very early on we recognize that that things were things are coming out of sick of freight trains. So.
We initiated our crisis management response plan.
And met as a senior team and and recognize that the needed to react very quickly. So so we have a team of the top 40 in the company. We meet every morning, we bet for about five or six weeks. We met every morning at 715 on Google vehicle.
And we we just discussed all the different things we were hearing about the pandemic, what the stats, where we had her health and safety guys scarring wins websites looking for information.
So that we can see what was coming and we started you started adopting practices to keep our people safe and some of the so for example, the risks that you did that exist and these big industrial facilities that could take you down would be things like if you had an outbreak and I can team.
It just takes one person they can team who said 150 people during the day.
The third used to say you know you're gonna have to shutdown booking 14 day quarantine until we know how wide the spread is gonna be.
So we changed all that procedures in her canteens.
Truck drivers coming into pick up finished goods or bringing in loads of hogs fuel or chips. So we have.
Different procedures proxy glass windows.
A different scanners instead of a pay performs.
Social dispensing and policing of that heavy heavy pp policy initiatives to ensure a people where all the right kind of stuff.
And then we and then we started moving into changing our ship configuration. So he had a big but can you imagine you got a big operating team and you've got a big maintenance team instead of two teams of 150 people, we break them into Fourteens smaller teams.
And the off the work at different hours, a day and they don't they don't intersect in the middle and one of their real interesting things simple it that is.
We have much more consistent coverage like we can have people to work three on three offs around three or four on for a user base right.
Or pods doing the same thing you almost.
Evan.
Ah coverage on maintenance, whereas we used to have weekends uncovered and we'd have eat nights uncovered.
Now we've got a you know a morning in an afternoon shift that gives you coverage to 10 or 11 o'clock at night.
And you've got that you've got to security that if you know if you do get a contagion you know somebody makes and mistaken and Texas is coworkers you lose applied you don't lose the whole team.
And we also.
You know we risk assess every or guys are understanding the risk assess every every procedure that they need to do whether it's changing changing a pump or.
A valve or what have you if they need to work in construction. Many with another individual then it's heavy PPH you know, it's really tight you know probably sitting at 95 masks pay shields.
Hazmat suits the whole nine yards, there were just extremely careful and and so far it's been working.
So that you want to ship side do you.
We could never have done any this kind of shift adjustment historically I mean.
So as human nature, you like what you got you don't want to do anything differently.
And in a crisis anything's possible and and and you know it's surprising a lot of them are starting to as well we how long are we going to stay like this.
And they want the certainly so they know about their vacation times in the summer and Sean.
So we've indicated will it's we're just a you know we just keep tweaking as we as we learn more but so far it's.
So far it's working I think its mitigating risk and it's it's given US you know more coverage and actually getting a lot more maintenance done with our own people is supposed to happen to bring and there's some from the outside and it's just.
He's got more.
More hours on the tools with other people as a result with these changes in the shipped so.
Well start tailoring.
Yes.
Obviously didn't safety is paramount, but are there are their financial implications to that as well.
Well the biggest one is that a you know if you're doing if you're doing work with your with your own workforce.
You are not pit spending money on contractors and if I were going to see the single largest cost reduction initiatives reimbursing today is is the benefit of.
Recognizing we can do so much more ourselves and and beauty limit. These.
Large.
15 day thousand Christian contractor.
And shots and then you have to have.
Major shut.
Periodically you know historically they've been 12 months since you we've talked Mercer has been moving to the 18 month and possibly even two years in certain mills.
And this whole.
Change and the shift structure and the way, we do maintenance and ability to bring it home side contractors is just accelerating.
Our our move down that down that path.
You know it it's changing it's changing.
And we are people think about doing responsibility to the company into the mill as well because it's.
In our company. It is just that we had but we've got I can do spirit, where where everybody's doing whatever they need to do to to help us be successful and they're proud of that and and they're proud of their seats.
Values as well.
You know digging in and doing work that we used to have contract because do is something to be prepared to take on.
I'm very encouraged but.
Great and they follow up if you somewhere on the but in the meantime, that's all I think you guys.
Your next question comes from the line of Deforest Hinman with Walthausen <unk> company.
Hi, Thank you can you hear me.
Yes, Deforest love unclear.
Okay, Great you mentioned earlier in the call though.
Okay.
I think your term was being the hero.
So garside.
Taking higher cost log inventory.
And then later on in the call you talked about pricing even secret down.
Too much could you see a scenario where.
Log pricing remains elevated and British Columbia.
And then and market pricing.
As a soft what remains where it is and there's a potential that that mill could.
Good shot or do you.
You run it.
[music].
Got it even with that environment.
Well no I, certainly do see the risk and.
I've been quite vocal here in British Columbia with government and.
You know our profitability or if it does not coming out of the Canadian mills today, it's really a European and or energy businesses and.
The Canadian Mills, well in a normal market are great mills with what's happened with cost right now or more or less breakeven. So.
Yes.
At the this situation deteriorates, though unfortunately make the right decision to.
Minimize the the impacts of that.
Unfortunate circumstance.
Speaking today or any today, we settled out a rent sorry to courses because we want you got a.
The average cost on the wind in front of the mills already spent the.
The decisions that were having to make is like would we would we keep the scales open and allow 450 dollar went to come to the mill.
I'm, saying today, no I'm not going to do that so.
So if we.
Burn through a pile in new snow sawmills running them and unfortunately, we would have to take that no doubt.
In in terms of the union structure at the mill.
That is that going to be an issue. If we had to do a shot and if the union able to.
Relay this message anyway to the government about what's going on as well.
Yeah, Yeah, we are very well aligned with with her unionized employees.
It's a tremendous.
Workforce and they're all on all on that same team so all I.
Second Noah's Ark, we're doing everything we need to do together and we see all kinds of flexibility and engagement and and on the lobby front.
You know.
Union executive support us or or mayors, and then malaise and community Chambers of Congress Cedars you know we all.
We all are putting pressure on this provincial government to do something different but.
So far we had been an unsuccessful.
But you know thank you.
Recovery of coal that would change everything.
Once the sawmills come back things will normalize.
Okay. Thanks for taking my question.
Again, ladies and gentlemen, if he would like to ask an audio question. Please press Star then the number one on your telephone keypad.
Your next question comes from a line of Austin Nelson with energy.
Hi, Thanks for taking my question I just wanted to go back I'm hearing recognizing that you don't add to the Senate.
Very hard to have any outlook, but if you had kind of walk through you tend to think that were out of bottom in pricing you walk through the puts and takes on demand and supply coming down and you know maybe summers little bit weaker in kind of fewer twoq is going and then you'd expect.
Back half ramp.
Assuming we don't have secondly, weve grown a virus if if that's the case if I'm just kind of running back every envelope mass on.
The dividend cut the reduction in Capex, Yeah already and then how the working capital moves it fair to think that.
Things.
Progress, there, where you think or progress that you'll actually generate cash this year and you're right I understand you're being prudent around liquidity, but it looks like just looking at how the quarter went that depending on working capital swings you shouldn't really have any problems.
But the cash burn and could potentially generate positive cash flow is that correct.
Well it's a.
That's that's a question that you asking me directly my opinion on what the what the back half of the year is gonna be a night and I'm not smart enough to understand how this pandemic unwinds.
But I can point to the cash generating potential of this company and these assets.
It's a it's a it's a great suite of assets that we own with a great fiber supply entered normal operating condition. So it's it's really.
<unk>.
I don't want to be.
I don't want to pretend that I'm clairvoyant I don't know how this pandemic unfolds them very nervous about it I am very nervous about some of the things I see a boat.
You know you know the energy and effort that's going into opening up the economy and it without all the testing in place and in certain Jim geographic location. So.
No it if it's.
I'm just gonna, it's unknown I don't I don't know what it looks like in the back half of here and I I don't want to be guessing or misleading.
And we're doing everything we can and the company to be as cautious and prudent as we can under these conditions.
Sorry for that answer, but that's that's the best I can do you know I understand that I understand.
Then my my other question is just I understand it makes a lot of sense that Capex comes down there should just because it's hard to actually get it done if we're thinking about and I also understand what kind of depends on how things progressed with depend them, but.
The event that.
You are comfortable having the cruise come in 21 is it fair to think that we yeah, you're essentially deferring it when they see a capex like.
In 21.
Yes is it just a question I was also how the market is and you're willing to cash flow to to accelerate some of those high return projects versus just the actual magnets and you have to continue doing.
Yeah, you know I agree that.
Status, we were very focused on growth you know.
Industries had been with us for a while you heard me talk about.
ER.
Aspirations for a saw no like a super mill at Stendal Mill.
We believe there's the wood supply is there.
With our logistics superior logistics thing scale of that pulp mill and its economics.
Having a sawmill there for the long term.
I would be fantastic and would you need [noise].
Underpin the whole.
You know that put know where the somo Rick site. It can can compete anything.
And.
So that's a that's just priority and we have a similar similar initiative and Peace River and we believe we've got enough enough would build a good sized sawmill softwood sawmill there.
Or maybe even a combination softwood hardwood.
And we've done a lot of bought of the strategic work and quite a bit of the preliminary engineering work on these things so that he can speak to various agencies and communities that we need to to keep moving those projects forward.
And so those are two examples of organic growth opportunities. When time is right, we'll we'll be able to move forward on.
Stendal this moving forward for yourselves moving forward.
I missed the M&A piece and and you know we are always.
We're spending a lot of time looking at things.
Oh.
Yeah, there'll be lots to talk about in coming years.
That's helpful. Thank you I was I had.
There are no further questions at this time I would now like to turn the call back over to the speakers for any closing or additional remarks.
Okay. Thank you Symantec, thank you own for for joining our call as always Stephen are building to talk any time and in fact, if anybody wants to do as human or Google meat just to.
See each other we'd be very happy to do that so.
And feeling that we'll look forward to speaking to you all again on our next earnings call in July.
Thanks again bye for now.
This does conclude today's conference call you may now disconnect your lines.
[music].