Q1 2021 Mercer International Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until then your lines will again be placed on music hold thank you for your patience.
[music].
Good morning, and welcome to Mercer International's first quarter 2021 earnings conference call.
On the call today is David Gandossy, President and Chief Executive Officer of Mercer International and David Yu, Our senior Vice President Finance, Chief Financial Officer, and Secretary I will now hand, the call over to David Your please go ahead.
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 ongoing response to the COVID-19 pandemic market conditions operational performance progress on our strategic initiatives along with our outlook.
For the second quarter of 2021.
Please note that in this mornings conference call, we will make forward looking statements. The 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 first quarter EBITDA improved considerably compared to Q for the increase was primarily due to improved pulp wood lumber pricing with average pulp list prices up over $150 per ton in all markets and lumber prices in the U S hitting new highs in the quarter.
The positive impact of higher product prices was partially offset by the impact of a larger annual maintenance program in Q1, when compared to Q4.
We generated EBITDA in the first quarter of about $82 million compared to EBITDA of about $49 $5 million in Q4.
Our pulp segment contributed EBITDA of $52.3 million and of our wood products segment contributed record quarterly EBITDA of $31 $7 million.
Our wood products segment continues to benefit from strong demand and increasing sales prices in all markets and relatively low saw log prices.
As usual you can find additional segment disclosures in our form 10-Q, which can be found on our website some of that of the S. E C.
Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets. This quarter from China. The Q1 average and the S. K net price was $883 per ton.
$246 from Q4.
European list prices averaged $1037 per ton in the current quarter compared to $880 per ton of Q4.
And the average Q1 net eucalyptus hardwood price in China was $692 per ton up 202 hundred $12 from Q for.
The hardwood list price in the U S average $1020 per ton in Q1, which was up over $150 compare to the private the prior quarter.
In total our average pulp sales realized he students were up over $80 per ton this quarter positively impacting EBITDA by about $40 million compared to the prior quarter.
Hope demand remained strong in the quarter. However, our sales volume was down compared to the previous quarter due to our annual maintenance shut at Sul Gar compared to record sales volumes for Q4.
For Q1 sales totaled about 488000 tons, which was down about 75000 tons from that of Q4.
Our lumber realizations also increased considerably during the quarter, particularly in the U S. The random lengths U S benchmark for Western S. P F <unk> and better average of about $970 per thousand board feet in Q1, which was up over $270 from last quarter.
U S lumber prices rose steadily through the quarter. The benchmark lumber price is currently over $1300 per thousand board.
Our Q1 average lumber sales realization was $622 per thousand board feet up $155 compare to Q4.
Our wood products segment continues to perform well, we sold about 108 million board feet of lumber in the quarter, which was up over 4 million board feet from our sales volumes in Q4.
Our electricity sales totaled 217 gigawatt hours in the quarter, which was down relative to Q4, primarily due to the lower production of her cell Garden mill as a result of our annual maintenance downtime.
Our Cariboo pulp, you'll joint venture, which is accounted for using the equity method contributed another eight gigawatt hours to this total.
We.
Ported net income of almost $6 million for the quarter were nine cents per share compared to a net loss of $13 million of <unk> 20 per share in Q4. The increase in income reflects our stronger EBITDA. It was partially offset by the recognition of of 30 million dollar or 46 cents per share loss.
Loss on the early extinguishment of debt as a result of our senior note refinancing.
Cash generated in the quarter totaled almost $34 million compared to $16 million in Q4 the.
Principal contributor to the increase was the modest top up of the new senior note issue as we took advantage of the strong debt market to prepare for increased Capex program, which David will speak to momentarily.
Our cash flow from operations was other lives otherwise flat as our stronger EBITDA was offset by increased working capital.
Our strong results and prudent cash flow management in 2020 of left US left us with a solid liquidity position at the end of this quarter totaling about $672 million comprised of $395 million of cash of $277 million of under.
Drawn revolvers this liquidity will support the seasonal growth and working capital along with the bulk of our ambitious 2021 capital spending program in the next two quarters.
In Q1, we completed 27 days of planned maintenance downtime at our sell Garden mill. We originally intended to limit the shop to 20 days of maintenance this quarter, but elected to extend the shot to complete additional work to address of elements that were revealed upon inspection. This.
This compares to a total of 16 days of planned maintenance in Q4 at our Rosenthal at Peace River Mills, the impact of the Q1 maintenance.
The lower production and higher direct cost reduced Q1, EBITDA by almost $16 million compared to Q4.
As a reminder, our competitors of report their results under Ifr S are permitted to capitalize the direct costs of their annual maintenance shuts, while we expense ours as cost of the period of the shut completion.
And while we noted this in subsequent as a subsequent event in February I will remind our listeners that in January we issued $875 million of senior notes the bear interest of five in one eight per cent per year. The will mature in 2029. The net proceeds from this offering were used to redeem both of our.
Our outstanding six 5% Twenty-twenty for senior notes and our seven and three eights percent 2025 senior notes with the remainder of being used for general corporate purposes. The transaction extends our earliest senior note maturity to 2026 and lowers our annual interest cost by about 12.
Dollars per year.
And as you have seen from our press release, our board has approved a quarterly dividend of six and a half cents per share for shareholders of record on June 30 of 2021 per paid for.
For which payment will be made on July seven 2021.
That ends my overview of the financial results I'll now turn the call over to David.
Yeah.
Yeah, Thanks, Dave Good morning, everyone.
As you all know COVID-19 continues to be of critical global health risk.
National vaccine programs are making progress with getting the mall do quickly continues to be of challenge.
This continues to be of significant concern trust as we manage through our heaviest major maintenance quarter. We remained focused on our protocols to ensure the safety of our employees contractors and the ongoing operation of our mills I would like to once again, thank our employees for continuing their efforts to keep themselves their families and our colleague sales.
Overall, our mills ran well, but the main driver of our results this quarter with strong product demand.
From demand in all our markets drove significant pulp price increases and sustained the record high lumber prices that we've been seeing.
Both softwood and hardwood pulp prices rose steadily and significantly through the quarter.
A number of factors have aligned to create favorable supply demand fundamentals, including low paper producer inventories unusually high.
Pulp producer downtime much of which has been unplanned are.
The global shortage of containers and has limited the volume of pulp into China in a relatively strong Chinese currency.
In addition on the demand side, we're seeing the paper producers successfully implementing price increases the separate pricing pressure was originally focused on China, but ultimately pushed prices up in Europe, and North America as well.
The pandemic continues to negatively impact global economic activity that we're seeing indicators of future growth and assuming vaccine rollouts for successful global GDP is expected to rebound significantly in 2021.
The rental economics support is also expected to help fuel this growth.
As a result, we are optimistic that steady economic growth and strong market fundamentals along with the weak U S. Dollar will continue to support pulp prices.
Adding to the positive pulp market fundamentals, we expect the aging pulp production assets will continue to have unplanned downtime and transportation limitations that are creating supply constraints may not be resolved for several quarters.
March pulp market statistics reflect strong demand for both N B S K on hardwood the hardwood.
Hardwood statistics Hollywood of very tight market and the envy of SK inventory statistics reflect a slightly heavier producer inventory level, but this indicator is lagging what we're seeing on the ground.
We believe the extra days of MBS K inventory for the result of tons put aside by producers in advance of the Q2 maintenance outages combined with pulp stuck on the supply chain due to COVID-19 related logistics challenges.
Our wood products business once again achieved record operating results due to the strong U S market pricing, which is now also pushing prices up in other markets.
The European lumber market experienced modest upward pricing pressure in the quarter, while the U S market remains at historically high levels.
The strong number of prices in the U S. Despite some volatility continue to be driven by solid housing market on solid housing market and steady home renovation related demand.
This strong demand has been combined with the reduced supply of lumber due in part to reduced global annual cuts in regions, such as Western Canada, and pandemic related production logistics challenges to create a strong seller's market.
The U S market supply demand dynamics are expected to remain favorable for the near term is the largest American homebuilding companies continue to predict strong sales this year due to low home inventory levels in many areas of the U S and what are widely expected to be sustained low borrowing costs.
We will continue to optimize the mix of lumber products and customers to achieve the strongest sustainable realizations that we can in Q1, 44% for a number of sales volumes were in the U S market with the majority of the remainder of our sales in the European market.
We expect the European lumber market to remain steady with some modest upside of certain European number of manufacturers move inventory to the U S market.
This we expect the U S market to stay strong.
Our mills ran well this quarter in spite of the pandemic related challenges, including our Cariboo joint venture. We produced 478000 tons of pulp down 46000 tonnes from Q for the decrease was primarily due to sell cars planned maintenance shut exclude.
Excluding the Cariboo mill of pulp Mills produced 519 gigawatt hours of power down 49, Gigawatts from Q4 again due to the maintenance of cell guard.
Finally, with the Selco shut finally, the ship while the silica shut was completed without incident, we struggled the restart the mill in April due to a number of unfortunate issues. While the mill is running well now it took us a better part of two weeks after the shut to return the mill to full production, resulting in an even tighter order book that existed prior to the shut.
Our wood products segment achieved another production record as we continue the commission and optimize our new production equipment, producing almost 118 million board feet of lumber, which is up 6 million board feet compared to Q4.
In Germany, our wood costs, particularly for pulpwood remain at historically low levels due to the abundance of beetle damaged wood, while we.
We expect this pulp log supply dynamic to last well into 2021, we are seeing early indications of modest wood cost inflation will come later in the year the.
The situation for saw logs is more current and we will begin to purchase more expensive, but higher quality losses early in Q2.
In Western Canada, pulpwood supply remains steady and prices are modest due to saw mills running full out to take advantage of the strong U S market.
Overall, we expect fiber prices to increase only modestly in Q2.
We are of significant annual maintenance program plan for 2020, one the majority of which is happening right now on.
All of our major maintenance shuts carry significant risk as a result of the pandemic and the large number of contractors required in the mills we.
We have developed strict safety protocols to mitigate these risks. So we are confident this maintenance can be completed safely and effectively.
Our remaining 2021 major maintenance schedule is as follows.
In this quarter Stendal is taking its 18 months, which will last 21 days, we should be coming out of that this weekend terrible will take the 11 day shut in Peace River will take of 63 day shut.
You'll recall that this extended shut to rebuild the recovery boiler was deferred from last year due to the inability of contractors being able to guarantee the availability of skilled tradespeople during the pandemic.
As a reminder of the costs associated with the recovery boiler rebuild will be reimbursed by insurance proceeds and.
In Q3 Rosenthal has a 15 day shut plan and saga will take a four day. Many shut in Q4 Stendal has a two day many shut plant.
And so while the majority of our annual major maintenance work will be behind us in the next couple of months capital expenditures to grow the company or now ramping up.
As Dave mentioned after the full year of carefully managing capex to protect our liquidity in response of the pandemic.
Reducing our expenditures to some core high return projects the strength of our balance sheet liquidity and our markets are allowing us to pivot doctor of strategic plan and more specifically the objective of adding shareholder value by growing the company in areas, where we have core competencies.
To summarize some of the project related work that has been ongoing during the cryogenic you're continuing the stendal pulp mill expansion of <unk>.
Roughly $60 million project that will increase our pulp production by 80000 tons of power production by about 70 gigawatt hours.
The pre Joe we're also on the process of commissioning of the April of sort of component of the phase two expansion project.
The new Planer sorter and killed so that had been ramping up over the past few quarters are now been optimized production is approaching half of 1 billion board feet and improved grade out turn from profile of optimization and products sorting is pushing average realizations higher.
We've also commenced new projects that combined with the projects I just noted will create significant value over the next couple of years.
We have commenced the construction of the centralized wood room at our Peace River pulp mill.
And an expanding expansion of the wood room at SOCAR the.
The projects will allow us to transform our supply chain increase our capacity and reduce the cost to produce our own wood chips. The projects will also allow us to accept alternative forms of lower quality wood that we previously left in the for us.
The total cost for these projects will be about $50 million and we were eligible for a number of carbon reduction grants that could exceed $20 million. We expect the projects to be largely completed by mid 2022.
In addition, we've advanced the engineering and permitting process for our Stendhal sawmill. The initial plan for the mill contemplates of 400 million board foot capacity with the product line.
Up and flexibility of our freestyle mill, but we expect to build the mill in such a way that will allow for incremental capacity increases in the future.
We expect construction construction costs to be between 202 hundred $50 million and subject to board approval could commence foundation of construction before year's end.
We're now entering the more sensitive permitting wood supply of equipment procurement process and we have much more of this will have much more to say on the timing at our Q2 call in July.
All in and depending on the speed of certain construction.
The prerequisites in deposits, we expect total capital expenditures to be between 175 of $200 million in 2021.
I remain confident that the effective execution of our strategy will continue to bring of success.
We will remain focused on our world class assets and our sustainable operations will continue to serve us well as we focus on optimizing our fiber handling and logistics of controlling our costs.
This completes the prepared remarks, but if I could take a moment to remind listeners of COVID-19, and its curious variance.
And mutations remain a significant risk to us all I encourage everyone to get the vaccine when it is available and keep the families friends and colleagues say thanks for listening on I'll turn the call back to the operator for questions.
Ladies and gentlemen, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad again that of Star wanted to ask a question from we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of EMEA Patel Wood.
CIBC capital markets.
Hi, good morning.
David could you speak to.
How lumber prices on some of your European markets and Japan today.
How are the returns would compare to what you would get on the U S.
Yeah sure here good morning, Yeah, they're not.
Well Europe is is.
It is not what the U S margins are but but they're improving in and they've been the.
I mean, you've been much when they really really moved compared to what would be normally in the case of Europe's usually.
The pre splad moves up.
5% to 10% or down 5% to 10%.
But we've seen some really big moves.
In that market and it's continuing to tighten.
Japan lagged a little bit, but by J grades are really starting to improve as well.
Great margins in that market, we're not a huge day grade producer just yet where we're working on on J grade program as we speak with all of the new equipment.
But that is that is going to be.
Important market for us as I've said before it could be up to we're hoping to be up to about 10% of our volume could could find that between the that market.
Great. Thanks, David the no in Germany.
Some trade reports are about.
Sort of changes in the.
I guess characterize as an allowable cut but what.
You know what are you seeing in terms of long term fiber fiber availability in Germany can you just remind us maybe how much of that forest is privately owned.
Yeah.
Sort of in General terms, you could think of it roughly 50% of state or federal the owned and 50% would be privately owned and.
And the the beetle is I mean, it's a really regional sort of the thing it really depends on where you are paid out of the block for US. That's one thing if you're up north.
The stendhal, it's predominantly of pine for us is a totally different situation.
The yeah, we've been studying the long term.
Expectations, you know, we run quite a few different consultants through all the data and.
Our feeling is that this beetle wood is.
We're going to continue to be.
The support lower prices until until the bark beetle really resolves itself.
Yeah.
In the fullness of time.
There will of been areas, where there's been heavier harvesting them when otherwise from occurred. So so there will be lower volumes available in some regions and other regions not impacted for us.
Where.
I'm feeling very comfortable with with the situation of free shall end with the timber supply up in the north and the Stendhal region.
There are a number of smaller saw millers are around that.
<unk> continued to reinvest in our not not world class Mills that are <unk>.
Struggle with the dry beetle wood they don't they don't produce of planed for a kiln dried products, usually producing of green products.
So it's it's not all good for everybody in Germany, with the situation, but with our mills they are freesia mill it.
Runs really well with beetle kill.
No.
I know I'm kind of wondering around the topic I don't have a lot of day to day specific by region Amir but.
There's lots of timber there for us for the future in our view.
Okay, great. Thanks, Thanks, David and just the last question for me.
On British Columbia the Premier.
Recently may made some remarks <unk> got a lot of media attention about long term.
Potential changes to how tenure is owned or controlled in the province.
What impact do you expect that to have on Mercer and the BC pulp industry.
Yes, it's hard to know.
You know for us.
You know we've got the <unk>.
GAAP interest in caribou, which is.
Partners of West Fraser.
Massive saw milling company in that region. So.
I'm sure those.
Taken the restructuring hits.
The reduction of the AC.
That situation will be stable.
Sell guard in the southeast corner of the provinces.
And of Green Forest lots of somnolence around us.
I.
I wouldn't imagine there would be much change down there.
We are.
60, 65% of our.
The.
Raw material comes in the form of the sawmill residual chips from sawmills around us inner for clusters of Echo.
And the rest is the residual harvest of.
Pulp heavy log stands or.
For the.
The knockdown from from Salt log harvesting.
And that and that.
Of that material is becoming more and more available and our view I think the province has done a lot of good things around ensuring that material comes out of the bush.
Talked about this on previous calls it's a.
It's really happening.
The the harvesters pay either way if they bring it out the.
The pay stumpage, if they don't bring it update based on pension. So they can recover a few bucks and the cost of the stumpage on the stuff that is not of saw log is.
Being reviewed and adjusted and I think that I think the provinces on the right track there.
So I think for us and British Columbia were one of them pretty good situation.
We're comfortable with the situation of the wood room project as of this is going to be a real game changer from a cost perspective, so really what we're doing the areas.
What we've been doing is receiving these.
Pulp logs at remote satellite yards and the kind of like receiving stations if you like.
Regions, and then shipping them up with with noble shippers.
Shipping them to the pulp mill this is kind of.
The standard procedure for pulp mills in British Columbia, what we're doing as we're moving to put in a different type of day Barking system in <unk>.
Alignment can handle the <unk>.
On the smaller shorter and sort of tangled.
Material that comes in from the byproduct of harvest Bycatch from call, it and and processing of chips embark for us ends and so it just streamlines all of the logistics and.
Rather than having trailer loads of chips coming at the mill, we've got trailer loads of of.
Pulp on pulpwood coming in.
And it's.
And it's a really significant cost saving on on on the raw material processing and handling so we're pretty excited about that.
Great. Thanks, Thanks, David Thats, the till I have.
Okay next year.
Your next question comes from the line of Sean Stewart with TD Securities.
Thank you good morning, a couple.
Couple of questions.
David.
Several of the puts and takes in pulp markets right now.
And I guess I'm, hoping you can gauge how much of the current market momentum.
Is shipping constraints versus.
Overall solid demand.
And I suppose what I'm looking at is if I'm looking at day the supply for softwood pulp in the mid to high 30 day range.
Giving given shipping constraints of that closer to what we would normally think of the 30 days in the normal environment any context, you can give on that element in and how much the engine of that of the market.
Yeah sure of it we've been watching that and thinking about it quite a bit and.
So.
I think the hardwood and softwood inventories could be maybe eight days higher than what you would normally expect in a really tight market.
But if you reflect on the amount of a.
Second quarter maintenance being done and you think about producers like ourselves we.
We put pulp away.
To be able to service our contract volume. So this is particularly true in the.
North.
<unk> net new European customers so.
So you've got that issue and then you've got.
The Scandinavian mills that are finding it really difficult to get their pulp to China.
And if you if you can't get containers you. Your best your next options you have to reserve some break bulk that.
And you don't you don't ship hundreds of tons on break bulk like you do on containers you need to put 15000 tonnes of 20000 tons of site and ship it all on one big chunk. So.
So it's really not it shouldn't be a surprise that the.
That the producer inventories are higher than what would otherwise be considered to be a tight market but on.
On the ground.
It's a tight market.
Gosh. It is really tight we're sold out we can't.
Think of supplying spot tons to anybody they are just trying to keep up with the commitments that we've made on contracts. So.
That's how I see that on the hardwood side, it's really low.
And then when you think about all of the new capacity in the southern Hemisphere on how long net supply chain is to get to its natural markets.
You would expect.
Our growing sort of normal.
Inventory level and yet it's been shrinking and shrinking so some of that market Super tight I think there's no question about it in my mind.
So that's an indication that consumption is really really moving along.
And on the softwood side do.
Do you expect the caveat of restarted.
In fact things at all.
There's enough volume.
Oh, it's under it's not it's not very big that's what the three.
300000 tonnes.
But I am not worried about that.
Got it I mean, the puts and the puts and takes on our business far exceed the Derby every quarter anyway right.
Yes.
Yes, I agree.
Dave on the Peace River shy.
I'm, hoping you can help us with a little bit of guidance on the Q2, EBITDA impact and I guess specifically around.
The insurance coverage you have there does that offset the full impact this quarter or is there of timing lag on.
How that will flow through.
Yeah. So if it does of the reinsurance is designed to cover of the majority obviously, there's two elements to it the property and Theres the business interruption, which is what I think you're referring to on the insurance is designed to cover of the vast majority of of the biz.
This interruption.
And it's pretty efficient and generally we can expect that the the timing will be because we've been talking to the insurers. So as you might imagine we've been talking to them regularly about our our schedule.
The work we're doing the work right now they know the business interruption of this happening right now and we're expecting that that or accounting purposes, we'll probably see that offsets in Q2.
Sometimes sometimes with these these programs there is a little bit of a time lag.
If if we're still settling the final idle invoices or final determination on exactly which which sales we lost and exactly what the <unk> should be but in general it's pretty it's pretty efficient and the for.
Fact that.
The Shadows as David had mentioned we're into the shock right now the two the two months' shadows happening right now so we'll sort of have June will be.
Returning the mill to production so we'll have a <unk>.
<unk> to work with the insurers to try to dial in that.
Dialed in that claim.
So my expectation is that you won't.
If all goes well you it'll be pretty pretty seamless, but we might have some of the proceeds it.
It might be a little bit bumpy from Q2 for Q3, that's our.
Our expectation is we will try to limit that for sure.
The other way of thinking about it I guess in the.
The Q2 expense it should really be limited to just on Dol with respect to the downtime program this quarter.
Right Yep.
Well, except that no.
Correct, a little bit Dave.
There is a regular maintenance component to the sort of shadow so should.
So the the.
Yeah the.
So if you would have otherwise had a 14 day of 12 to 14 day shut that'll be that'll be major maintenance in the quarter.
Okay. Okay.
That's all I have thanks very much guidance.
Your next question comes from the line of Sam Mcgovern with Credit Suisse.
Hey, guys. Thanks for taking my questions.
As you roll through the remainder of the year as you generate free cash flow of how do you think about the priority uses for for for that cash you've got obviously the.
<unk> has two 2026 that become callable later this year.
When you look the target that.
Is it the small amount of revolver that you could pay down could you look at M&A. How do you think about where you focus your priorities.
Yeah. So thanks, Sam the.
We've got a balanced capital allocation strategy.
We're a growth oriented company we've caught on.
Got a number of really exciting projects in front of us.
The.
Really kind of pulled the covers off the stemmed also on mill today.
We've got more like that in the Hopper.
And we also so we want to grow.
We also.
Wed like to de lever to some extent so as we generate free cash flow will be we'll be balancing our our allocations to de lever when and if and how it makes sense to do that and.
That's kind of the direction.
The balance of those two priorities is really how we're thinking about our capital allocation right now.
Okay, great. Thanks, along with along with not getting ourselves pregnant.
Recognizing the volatility of of.
The World These days.
We also want to be conservative we don't we don't want to get too far ahead of ourselves.
Yes.
Proving too much capital and having having the bottom fallout of the.
Global markets for a year or something so we so we were trying we are doing this in a very safe way, we don't want to ever risk of the company.
But we do want to aggressively growth. So that's kind of how we're balancing price.
Okay, great. Thanks, so much I'll pass it on.
Yes.
Your next question comes from the line of Andrew Kuske with Credit Suisse.
Thanks, Good morning, David you mentioned, a little bit in your prepared comments and it's also on the notes on the grants you've received in relation to GHT of reductions on the other related activities could you maybe give us a bit of a glimpse on the investment of potential you have for that.
The interplay with carbon taxes as the existing Canada and how do you see this is helping to reduce costs the costs on a longer term basis.
Yeah sure so sofa shell of guard.
The capital for the modernization of the wood room is about $21 million and.
We have a nice fit grant of for 5 million so of net.
<unk> call it with the with the cost saving roughly of.
But of $15 million EBITDA impact for.
Just lower transportation and processing costs and better yield by putting putting wood through.
The big electric.
Modern shippers opposed to grinding it up with the with the diesel fired mobile chip or out in the bush.
Diesel shippers run about 300 liters of diesel in our.
Six of the morning at any point in time.
And then you get a better chip on the centralized wood room, you get the much more whitewood recovery and it's just it's the and so that's so this is the carbon because of carbon calculation in that that the ties into these grant applications for.
For Peace River for the.
We're rebuilding the the <unk>.
<unk> had on wood room way back when under the day show of days, but it hasnt.
It was dismantled 10 years ago or something like that and they went to the satellite yard strategy.
We've analyzed this in.
The new equipment innovations we're able.
Our project is going to be.
It's close to $45 million.
We have I fit money of about $8 of half and we of SAE money, which is which is the carbon grant of about five and a half.
So net 32, and the and the cost savings are about $20 million of year end.
And what we're doing there is instead of harvesting aspen and bringing poultry links into of satellite yard storing it they're putting it down picking it up putting it through mobile shippers and moving the chips to the to the mill.
We'll be using these.
10 axle logging trucks that are approved in Alberta now.
Awesome.
The trucks and we will do everything cut to length. So we'll cut the the trees to roughly 20 foot links.
And we'll get about close to 40% more wood on one hall.
And we'll bring that all the way into the mill instead of stopping at the satellite yard and will be processing at the mill again.
Much better recovery of wood from the wood from everything we handle we don't have to handle that twice.
<unk>.
Turn off all of the costs of all of this remote satellite yard and so on and so forth.
And up with the better chip in the but at 8% better better yield of.
Multiple chips for the same amount of trees that were harvesting so.
So there's the grant money for that we have on outstanding application for.
For some additional grants through Alberta, we won't know of for successful we've been Shortlisted, we won't know for successful until June.
But we're hopeful there might be a little bit more there.
These are projects of the.
The provinces and the federal government of Canada, and very excited about.
<unk> been very successful with the grant applications because of the.
On the innovation aspects on the carbon aspects of these projects.
The very hard on.
Alright.
Yeah, I would just maybe kind of mentioned a couple of other things.
The in Alberta. There is there is on offsets program, it's called the tier program and so we regenerate.
Credits that are.
The confirmable that they get audited and lack of compliance based credit system and we are selling these credits.
Two to other industry players, who who need.
Carbon offsets basically they traded of site site of site discount to the carbon cost.
So we got about $6 million of credits were of the process of selling for.
For past years.
And those numbers will grow, particularly with the wood room at Peace River, we will learn additional credit so on that so there'll be a revenue stream less.
Things change <unk> going into the future, which would be quite noticeable.
And.
And then as far as and sell Gar there's.
The provincial government is very interested in.
Renewable natural gas.
Fuel switching and add carbon reduction and all of these kinds of things. So as we're training of real shift in government's attitude towards supporting and providing incentives to to do some of these future looking projects. So we're we're all over that right now.
A lot of it.
Sort of work on the and.
In the kitchen trying to imagine how to how to do things that meet the needs of the government and how and how that could be really economically beneficial.
Contribute towards sustainability of the long term. So it's it's an exciting time actually on it.
So a lot of a lot of.
A lot of opportunity for us.
Participate these programs same thing in Europe Gillies of its going to be massive amounts of money for them for.
For the right kind of projects as governments really really wrap their heads around how to get to.
Carbon neutral in 2030 to 2015 so.
Great time to be innovative.
And to be a growth company.
Figure out the right types of projects can be quite quite accretive.
Well, it's quite encouraging given the numbers I'm just the extent of what Youre doing and then I guess, maybe just on the offsets to build upon that.
Given your power generation was basically weighted waste heat related.
Do you have qualification for green power or carbon offsets from that and then when you think about the expansion of not just the pulp mill stand all but the power side of it do you get an uplift as it relates to our the carbon reduction or some offsetting benefit.
Well there is the I'm not sure how to answer that exactly.
The the carbon offsets really come true.
The each program is going to be different but.
I think the tiered program is kind of like of a benchmark of what your emissions would be the intensity would be for what it is you've produced compared to your peers and if you are on on the wrong side of that equation you have to buy carbon credits and if you're on the right side of that then you have you have.
Excess credits, which you can have audited and sell them into a complaint in the compliance grade offset program.
In.
I think what's coming globally in time is going to be getting really focusing on the scope one fossil carbon.
In industries, and and so as an industry the pulp industry, we're pretty low already like the only natural gas that the Mercer Burns is in our lime kilns and a little bit on our either recovery boiler of power boilers during startup conditions or an upset conditions.
It's still profitable in some cases to burn a bit of natural gas to the power that we sell like Theres always limits on how much you can do but the but that still exists over time that will tighten up and carbon will become more expensive and so we'll be decarbonising the fossil carbon components by.
Switching fuels from.
Burning natural gas in the Lyon county to possibly producing of syngas or extracting lignin applying that into the into the kill them as the fuel source as opposed to the natural gas in.
Get away from get away from the carbon costs of doing things and these are decent type of programs I'm sure that there'll be support for and.
And we don't want it you don't do them too soon the would do at wood.
It makes economic.
Since the do it in and try it and our view is we want to be an early on early movers because there.
It won't be incentives for everybody, but certainly those that are out in front of everything and have shovel ready projects will be the ones that get the support.
We're going to be able to make the changes.
I appreciate the color. Thank you welcome.
Welcome.
Again, ladies and gentlemen, if you would like to ask on audio question. Please press Star then the number one on your telephone keypad again net of Star wanted to ask a question.
Your next question comes from the line of Andrew Shapiro Lawndale capital.
Alright, thank you.
Thank you clarified the question I had regarding the timing of the peace River boiler rebuild reimbursement, how thats going to flow it sounds and just if you can quickly clarify.
Any timing differences on all of that on the in the flows of the regarding the Reimbursable amount is not going to be of capitalized.
<unk> through its going to go through the income statement is that correct.
Yeah for the business interruption.
Andrew Yeah, it'll it'll go where it'll.
It will be matched to into the P&L to the extent of its covering costs or covering loss revenue and go to the P&L to the extent that there's covering property it'll go to the balance sheet.
Got it Okay, and then regarding the new large construction projects on saw.
So on mill in particular.
When does your current expectations of that.
Large enterprise to begin operations and start generating the payback.
Yes.
Sawmill swung the equipment suppliers today are on a two year lead time so.
It's really really become quite competitive to two.
To order equipment.
So that's why we're in this early you can get in the lineup early if you without release any kind of material deposits until you get closer to the window.
But it's it's the same consultants of all about getting in line.
So.
So we're two years from starting to receive equipment.
And then.
For both.
All of that together I guess it'd be like general terms. So we're really three years out before youre going on.
Okay and then once it starts operations you obviously have a.
Projection of why we're making this investment in terms of cash for incremental cash flow and all of that what is the.
The the payback rate that you guys were using or anticipating.
For such a large investment.
Get a feel for what we think our incremental returns should be for this.
Yeah well.
We think about we think about an investment like that.
The number of ways.
But if we if we look at trend pricing and we think about the synergies with the pulp mill.
That's better than three year payback on that capital potentially.
And in peak and peak pricing it'll be better and then trough pacing of it'll be worse, obviously, but but there's a there's a tremendous synergy there.
You can imagine every log of sitting in front of the pulp mill, that's going to be going through.
The scanner and it's going to say well, hey, that's not really of pulp log that's us all on that.
The pulp log doubts of pulp plug of this one's of saw logs. So we're going to be harvesting saw logs out of our pulp log.
The wall of wood, if you like and there is there is just a really strong maturing timber supply in and around the central region. So we'll be we'll be the.
The <unk> sawmill in the region enjoying that and.
And basically what you're doing is you're providing the lowest cost shipped to the pulp mill displacing its highest cost fiber the stuff that you would have been bringing in from the Baltics of places like that so there's it is a bit like free shell on that way.
In addition to the EBITDA from the Salt elders, there's a real benefit to the pulp mill.
Now is there an anticipation by supplanting, let's say the.
The wood brought in from the Baltics on all of that that we will then develop in excess of all of those railcars in all of the other the logistics that this company has built up.
No no we're going to be using all of that equipment. In fact, we're continuing to strengthen and expand our logistics.
We're on.
The current focus is too.
Develop more wood terminals throughout Germany. So these are <unk>.
During sections of land on rail track that previously industrial of some sort of where you can put wood.
Down that's gathered in the region. So when harvesters are working in the region. They can put wood down at the terminal and then we'll just load up on.
Our our trains is we need to and so we will have inventory all over the place.
It's all about controlling the timber logistics you don't have been on the trees. If you control of the logistics so.
So it will be we'll be fully utilizing our fleet of.
The modern.
Roundwood railcars, we also have a new fleet of modern chip railcars as well.
It will be fully utilized.
Now this is a very big project.
Hundreds of millions and it is also one that you've just.
Discussed is there's a long there's a long line to get into.
The company has recently wonderfully refinanced an and.
For far lower cost and gone out of eight years.
On the on.
Great chunk of the company's debt. So that's kind of behind us, but you have this very large investment that has the along the line.
Where does that fit into the idea that capital allocation is obviously best to be put into high return projects.
When you you you.
When the board members.
Kind of decide where are we going to allocate capital.
On high return projects, you want to put it there but.
But also we're balancing the issue of when does the dividend.
Start going back up again.
And towards former levels, but also in our.
Depending on the stock price when it makes sense to be buying back and retiring shares.
Does such a long wait in line for such a large.
Project.
Put those two other capital allocation decisions.
On a longer term hold or is there a more on.
Near term time horizon for win.
These other capital allocation items for shareholder returning shareholder value.
You can take an equal seat at the table.
Yes, I think the I think the latter.
For sure. If there is I mean, there's lots of tools available. These days for projects like the Stendhal sawmill, we don't have to keep cash on the balance sheet. All the way through three years to make that happen. We can we can get committed project financing for example.
We can continue to think about opportunities to de lever, we can think about growing the dividend under the right conditions.
<unk>.
Okay.
Balancing our capital allocation strategy. It's there's there's lots of different moves we can make in this kind of economy that the.
We will continue to support of shareholder value and that's that's what we're all about so we'll be we'll be thinking about all of those things.
Okay. So it's not off the table for that time horizon. This is the near term.
Duration now that the debt issue and now than it was the bad issue, but now that the debt's been really put in the fine position and the company is really enhanced its cash flows for the foreseeable future. Yeah. Yeah. We just have to do things in the right order, Andrew but there's but there's lots of lots of opportunities. We don't we're not stuck on the bite.
Here from a liquidity point of view we have.
Once we get commitments get board approval get the financing in place then we can take that liquidity and do the things we need to with it so.
Okay and is there any update on the status of the <unk>.
On the bio filaments venture and the timing of cash flows.
Yeah, it's still it's still an R&D project at the stage so.
No no no we got some small sales and on lots of trials going on but its not developing into.
Our commercial products no big news worthy thing yet.
And then on the.
The Santa mall.
I think you said before the time period for the first harvest is around the end of 'twenty 'twenty two.
I can't imagine there'll be a shift or change in that but what are the metrics is it premature or.
Because the pricing and cost.
On a volatile or not what are some of the metrics that will be involved in terms of acres.
Tons of trees that are annually harvesting the pounds of oil that ore tons of oil that would be generated on an annual basis.
Around when might you be expected to provide an estimate of kind of of the quantity of oil to be produced and the potential.
Price range, just so we can get a feel for because this is going to become an annuity and other like recurring revenue stream just like our power generation, if not even more sustainable.
Yeah Yeah.
I guess.
Maybe maybe that's when we start seeing the EBITDA.
Rolling in and once we really start noticing it.
I'll be able to start talking about it without without getting too much future looking guidance.
But it'll.
The timing is still still that still into.
Wrapping up harvesting next year in 2022, and then 2023 for it.
For five years, so it will be fairly heavy.
And and we'll be starting to see the EBITDA that we can talk about it it's not like a pulp mill.
It is not a huge investment but you.
910 11 million of EBITDA.
For those years would be quite great.
Certainly expected kind of on kind of read on that.
Gives the handle the kind of the scope I know, it's small for the company, but hey, that's incremental and sustainable cash flow of that.
It would be viewed by the board of others thinking of dividend policy or anything else. So it's nice now.
I think Thats all my question. Thank you.
Okay. Thank you Andrew.
Your next question comes from the line of Deforest Hinman with <unk> <unk> company.
Hey, thanks for taking the questions.
Just a couple follow ups on the sawmill project that spend all of our.
Can you.
Give us any color in terms of what the longer term.
Pricing realization wood.
And that you're using to get that three year payback.
Payback would be.
Yeah I don't.
Of course, I shouldn't really run through the economics of everything.
On a call like this.
I mean, if you look at.
Free showers, a good example of what this mill is going to look like and how it is going to operate.
Uh huh.
The smell the 31 million in the last quarter three show under pricing and under.
Under trend conditions of the D and the 15% EBITDA margin on.
<unk>.
Okay.
Tuition so.
Yeah.
I don't know what more I can say at this stage.
Okay, that's fair I understand.
I think in the past there was the discussion of.
Making of separate subsidiary for the Stendhal.
All of mill, that's still the thought process around how that would be set up from a corporate structure.
Yeah, well it'll be it'll be part of Mercer timber products of that division be managed by our managing director of Kirshner for us.
It's sitting on the on land right adjacent to the pulp mill.
Purchase the land.
And that that's true.
But the technical design, that's where it sits.
On top.
How the how we.
Put the subsidiary.
The.
Vs Division and all of the blocks together.
Is still still a bit complicated the ties into the.
<unk> laws and other things in Germany, So we're still still working our way through that.
Okay very helpful and this is going way back, but originally when the Stendhal mill was built I believe there were some government.
Backed financing there was also some government grants involved is anything like that still available as we're evaluating the project financing for that facility.
Sure.
There may be some incentives available.
Certainly not like there were when we built the stendal Greenfield pulp mill.
Refresh the memory on that one we received about 276 million on which I think the other one.
1 billion spend.
For the sawmill.
There will be Germany is still pre proactive when it comes to rail cost so.
It is about.
$10 million of rail costs, and the whole thing probably 50% of that will be covered by the government subsidies.
Whether we can tap into some of these new funds for.
Carbon funds are.
Restart the economy funds.
There's a number of programs developing will be we'll be monitoring those very closely to see if we can participate but at this stage.
I can't say that.
We of the any kind of line of sight on on what that level of support might be.
Okay, and you may or may not be able to answer the separate topic, but on the price realizations, you know very meaningfully announced higher.
Prices and.
The Europe from some of your competitors.
Is there going to be abnormal discounts relative to those.
The price announcements or.
More along the lines of historical levels of discounts to the <unk>.
Louis.
Yeah. So so quick answer is the discount doesn't change during the year.
So these prices or increases or increases in the structure of all of the contracts of the company has with the customers. So no change to discounts at all.
You're right I I am expecting.
Price announcements very shortly in Europe.
I think everybody is this is announced April for me business is probably up 100 Bucks.
And the.
When you when you have this kind of condition. If it continues what we'll be doing is we'll be.
But the.
These are the type of conditions that theoretically would allow us to reduce the discount when we get into those negotiations in the November and December of this year.
Too far away to tell but.
You wouldn't have pulp prices, increasing and discounts widening.
It would be the other way around.
Okay. Maybe maybe this is just really this is this is a seller's market right now so we're not gonna okay anymore on discount.
That's helpful. I mean can you can you just as it is.
Investors can you just help us just hypothetically is.
Is the math working out with pricing realizations I know you have some more downtime than normal but it is the pulp business isn't just where pricing is now is it making over a million Bucks of EBITDA day, I mean is it.
On an realistic number or is the much higher than that.
On a day.
Yeah, I don't have that in my head of RSA I know, what our I know other forecasts for the quarterly so around the year end.
Yeah.
So shouldnt comment on it openly like this so we don't give guidance range.
Okay I'll, let the I'll just work on the math myself, thanks for taking the questions Youre welcome.
Your next question comes from the line of Austin Nelson with AIG.
Hi, Thanks for taking the question actually.
Essentially the follow up on the last question just.
Just looking at where the indexes are on the pulp side versus the realization of the reported in the quarter.
I guess I'm just trying to understand.
On the mix between the guest counts on contract and then just timing of sales in the quarter versus the.
The downtime that you took.
Is it reasonable for us to expect that the realizations were lower than what we can see in the index because it was earlier in the quarter.
The downtime was later in the quarter and then given your commentary about.
On the nation's going out that you would expect can be up pretty meaningfully.
As you come out of the big shots in the <unk> that.
<unk> should be better because youre, just producing more pulp in the second half of it what lease right now looks like will be even higher prices.
Okay well.
Maybe to start.
So.
When you talk about the indexes I presume youre looking at Risi list or those kinds of indexes and youre seeing like the top line price announcements of the Hunter box. So whenever it is.
And the realizations are some lesser percentage of that and.
So there's two things in there one there is a structural industry discount off of the list that.
Free for Europe, and for North American can be on the high 30% range.
For starters. So that's that's a structural we all live in that world.
The the discounts that the producers provider.
They are within a percentage of each other like it's that gets the structural it's a discount so that's one factor and.
And then the other piece is that the.
Of the announcements.
As most of Europe is this way is that when you announce of <unk>.
Price increase it's for the following months so you'll.
You'll see.
You'll see the announcement, but it's for orders that will be taken and written in the following months, so theres always a little bit of lag.
And in this in the first quarter.
We've had.
Like in the U S market.
January to February.
Up of 115 Bucks February to March up of 120 Bucks same thing.
Europe January to February up of 70.
February to March up about 90.
April for me going to be up about 100 years, So theres a lag effect as you.
So if youre looking at the quarterly results you have to.
Sort of blend of forward if you like.
So I think that might be what's going on in your model of years Youre seeing realizations that are lower than what you would've otherwise expected based on the index.
Okay I don't know if that helps you or not all of us and is that.
No. That's very helpful. I guess, the way to think about independent of that.
All of being equal on production, which isn't going to be the came from <unk>.
But all else being equal if we're in an up cycle.
Because of the lag effect, you should kind of keep giving better until and then as the cycle turns you'll actually be ahead of the the downturn.
And the kind of chasing it back down.
Okay.
That answers my question. Thank you very okay Youre welcome.
Again, ladies and gentlemen, if you would like to ask on audio question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time I would like to turn the call back over to David Gandossy for any additional or closing remarks.
Okay. Thank you Samantha and thanks to all of you for joining the call and as always Dave and I are available to talk more of it anytime so don't hesitate to reach out to us would be great to hear from you. So.
Look forward to speaking to you again on our next earnings call in July.
Bye for now.
Ladies and gentlemen, this does conclude today's conference call you may now disconnect your lines.
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