Q2 2021 Mercer International Inc Earnings Call
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Excuse me. This is the operator today's conference is scheduled to begin momentarily until that time your lines will again be policed and hold this thank you.
Okay.
Yes.
Hi.
Yeah.
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Yeah.
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Good morning, and welcome to Mercer International second quarter 2021 earnings conference call on the call today is David Goulden, Bossie, President and Chief Executive Officer of Mercer International.
And David <unk>, Senior Vice President Finance, Chief Financial Officer and Secretary.
I'll now hand, the conference over to David viewer. Please go ahead.
Good morning, everyone before David begins I would like to remind you that in this mornings conference call we will make.
Certain forward looking statements.
And according to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095, I would 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.
David.
Yeah. Thanks.
David and good morning, everyone.
Well Q2 was a remarkable quarter for us.
We advanced key elements of our strategy growing our annual pulp capacity by 80000 tons at Stendal <unk>.
Building a recovery boiler at Peace River, Inc.
Moving our ESG ratings and demonstrating the potential of our free zone sawmill.
We delivered.
Solid operating earnings and executed 3 large maintenance shuts all while navigating the complexities of a global pandemic wildfires in Western Canada and flooding in Germany.
Now despite these challenges, including the current volatility of end product markets were very bullish on our future and I'd like to take a few minutes to step away from the quarterly earnings.
Discuss why.
For many years, we have been pursuing a strategy to create long term value for stakeholders.
We are focused on market pulp building products clean energy and chemical extracted because we believe that in the fullness of time. These products produced and modern facilities with a focus on long term sustainability.
The low compete mainly weaker players in this space and deliver superior performance.
Invest only in large and modern facilities that have the potential to be world leaders.
We focus on timber supply procurement and logistics and making our investment decisions.
We promote a value based approach to our human resource development that honors health and safety.
Innovation boldness accountability sustainability and the pursuit of excellence.
We maintain our mills to a very high standard.
We look for and execute on high return projects to provide superior returns not just financially, but environmentally including resource efficiency.
We don't buy junk we don't.
Safety too much we have a point of view on the future and are seeking growth in areas, where we have a strong commitment and where we feel we have sufficient core competencies to be successful.
We do this while remaining true to our commitment to maintaining a strong balance sheet gearing at times, what might appear to be excess liquidity, which could ultimately be described as dry powder.
For those opportunistic opportunistic ideas that come can come at any point in the cycle.
We focused hard on sustainability, we know the planet are struggling under the weight of climate change.
We believe our assets activities are part of the solution and this will become ever more apparent as science and policy converge to fight climate change.
We support and promote sustainable Forest management practices, we have a track record of going above and beyond when it comes to ecosystem based management practices promoting biodiversity and forest health.
We also understand how critical it is for us to focus on our people.
Taking the time to explore our web site.
Recognize us as a progressive company.
Working hard to develop our teams to maximize our team members' experiences and engagement with us.
<unk> is a truly unique company had exceptional people and we strive to ensure that every 1 of our employees is proud to be part of the team.
From our website and disclosures you will also recognize a company committed to transparency regarded regarding.
And then relative to ESG performance indicators.
We understand that we need to continuously improve and we have a good track record of doing this I see many of our competitors underperforming in this area and time is catching up on them.
I'll have more to say in a few moments and I know listeners will be interested to discuss our product market fundamentals.
Let's give the floor day.
A porter to review our financial performance.
Thanks, David.
Our second quarter EBITDA was comparable to Q1, despite the significant planned downtime. We took this quarter to facilitate capital projects and annual maintenance combined we took about 16 weeks of planned downtime.
David Your second quarter, which negatively impacted EBITDA by approximately $80 million. In addition, our Q2 operating results were negatively impacted by the effects of a weaker U S. Dollar on our foreign currency denominated operating expenses.
More than offsetting these negative impacts.
We're higher prices for our pulp and lumber products with those higher lumber prices driving record earnings for our lumber business.
We generated EBITDA in the second quarter of almost $84 million compared to EBITDA of about $82 million in Q1.
Our pulp segment contributed.
EBITDA of $41 million and our wood products segment contributed record quarterly EBITDA of $46 million.
Our wood products segment benefited from strong demand and record U S sales price was in Q2.
Recently, the U S market has weakened significantly and David will speak more.
To start shortly.
And as usual you can find additional segment disclosures in our form 10-Q, which can be found on our website or that of the SEC.
Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets. This quarter Inc.
China.
For Q2 average <unk> net price was $962 per ton up almost $80 from Q1.
European list prices averaged $288 per ton from the current quarter compared to $1037 per ton in Q1.
And.
The hardwood price in the U S market averaged $297 per ton in Q2, which was up $277 compared to the prior quarter.
In total higher average pulp sales realizations positively impacted EBITDA by about $62 million when compared.
The prior quarter.
Pulp demand remained steady in the quarter. However, our sales volume was down compared to the previous quarter due to our planned downtime. Our Q2 sales totaled almost 361000 tons, which was down about 127000 tonnes from Q1.
Yes.
To the from Q2, our mills were down a combined 117 days for capital and annual maintenance work. This was roughly the equivalent of 173000 tons of production.
Our Peace River Mill was down 79 days from Q2, the majority of this time related to the rebuild of the mills.
Free boiler and will be covered by insurance.
The claim settlement process is ongoing and while we have recognized about $4 million of business interruption insurance recovery in the current quarter. We currently expect the final the final business interruption claim to be in excess of 15 million.
Yeah.
Our Stendhal mill was down a total of 26 days, which is longer than the mills regular maintenance downtime.
Extra time was needed to finalize the installation of 2 new batch Digesters will add 80000 tonnes of incremental capacity.
Our lumber realization.
Riccardo so increased considerably during the quarter, particularly in the U S. The random lengths U S benchmark for Western S. P F 2 and better averaged over $1300.42 per thousand board feet in Q2.
Which is up $370 from last quarter.
U S lumber prices rose steadily.
<unk> order and it was the largest contributor to our Q2 average lumber sales realization increasing to $789 per thousand board feet from $622 per thousand in Q1.
The benchmark lumber price is currently $490 per thousand board.
Our wood products business continues to perform extremely well, we sold about 109 million board feet of lumber in the quarter similar to the strong level of Q1.
Our electricity sales totaled roughly 152 gigawatt hours in the quarter, which was down relative to Q1 due to lower production.
Production related to our planned downtime.
Our caribou mill joint venture, which is accounted for using the equity method contributed another 17 gigawatt hours to this total.
We reported net income of $21 million for the quarter or <unk> 32 per share compared.
To a net income of $6 million or 9 cents per share in Q1. The increase in income reflects the absence of the Q$1.30 million or <unk> 46 per cent.
<unk> 46 per share loss in the early extinguishment of debt as a result of the senior note refinancing.
Cash used in the quarter totaled approximately $11 million compared to cash generated of $34 million in Q1, our cash usage from Q2 was primarily the result of our ambitious capex spending and the repayment of our revolving credit facilities, which were partially offset.
Working capital movements in the form of higher accounts payable balances.
We invested $62 million of capital in our mills this quarter and we remain on course to invest between 150 and $185 million in our mills. This year, David will provide an update on our Capex program.
Shortly.
Our strong results and solid cash flow led to a modestly improved liquidity position at the end of the quarter totaling about $695 million comprised of $385 million of cash and $310 million of Undrawn revolvers. After.
By down $42 million of short term debt in the quarter.
Our strong liquidity position will support the planned seasonal growth and working capital along with the remainder of our ambitious 2021 capital spending program.
As I noted, we completed 170.117.
Paying as a planned capital and maintenance downtime in our mills in Q2, and this compares to a total of 27 days of planned maintenance in Q1, and our sell guardrail E&P.
The impact of the Q2 planned downtime, including lower production and higher direct costs reduce Q2 EBITDA by all.
David million dollars when compared to Q1.
As a reminder, our competitors that report their results under Ifr S are permitted to capitalize the direct costs of their annual maintenance shuts, while we expense our costs in the period of shut completion.
And.
Most people noted in our press release, our board has approved a quarterly dividend of 6 and a half cents per share for shareholders of record on September 29th 2021 for which payment will be made on October 6.2021.
With that ends my overview of the financial results and I'll turn the call back.
And as you.
Thanks, Dave.
I'm encouraged by the global rollout of COVID-19, vaccines and the positive effect. It is having on global economic activity. Unfortunately, though that remains.
Uncertainty about the impact of the COVID-19, dance and increases in infection rates and as.
We remain focused on our protocols to ensure the safety of our employees contractors and the ongoing operation of our mills.
I'm pleased with all that we accomplished this quarter and as I said earlier, we've added 80000 tons of N V. S. K pulp production at our Stendal mill.
Rebuilt peace river's recovery boiler effectively giving the mill a new boiler.
Water.
Combined they completed 117 days of capital and major maintenance work and we successfully completed all this work without allowing COVID-19 into our mills.
Overall, our mills ran well.
But a significant level of planned downtime resulted in lower than normal production levels, which was a drag on our results obviously.
Wherever.
Strong demand for our products and related price increases when compared to Q1 more than offset the impact of our planned downtime.
With our lumber business, leading the way with record quarterly earnings.
Both softwood and hardwood pulp prices rose steadily and significantly through the quarter favorable supply demand fundamentals, including low paper producer inventories.
Usually high pulp producer downtime much of which was unplanned.
Logistical challenges due to the global shortage of containers that has limited the volume of pulp into China, and a relatively strong Chinese currency, all factored into favorable supply demand dynamics during Q2.
Late in the quarter pulp prices began to retreat in China, primarily.
As a speculative forces, but the supply demand factors that created have created a soft landing well in Europe, we successfully implemented a $40 price increase taken a less price 10, $13.40 per tonne overall, we feel pulp prices globally will trade in a narrow band through the traditional slow summer months.
Supporting.
Due to their views are the main pulp statistics, which continued to reflect good demand for both of them get scanned hardwood the hardwood markets statistics hardly a tight market and then Biscay amatory statistics reflect a balanced market after factoring in shipping delays caused by limited container availability.
In addition, we're seeing more indicators, reflecting growing global economic.
Supporting Liberty and supporting analyst predictions for significant GDP growth of 2021, which will support the demand for all commodities, including pulp and lumber.
We also believe government economic support will help fuel this growth and as a result, we are optimistic that steady economic growth and strong market fundamentals along with a weaker U S. Dollar will continue to.
Pulp prices.
Our wood products business once again achieved record operating results due to the strong U S market pricing.
The European lumber market also experienced upward pricing pressure in the quarter.
Recently U S lumber prices something when a significant correction.
Bringing the framing framing lumber composite benchmark down by roughly 70.
70%.
This decline was likely due to the record high prices beginning to have a negative impact on the do it yourself lumber demand and fears that this negative outlook could spread to the housing market.
Higher COVID-19 infection rates in certain parts of the U S also created negative sentiment.
U S lumbar pricing appears to have hit a floor during a recent BC sawmill.
No curtailment announcements with more expected due to the heavy wildfire activity in high stumpage fees.
We see some pricing upside as well due to the reduced PC supply low inventory levels and a strong U S housing market.
The European lumber market has shown steady price increases through the year and remains strong today and we expect this to continue even.
European producers reduce their exports to the U S.
We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can in.
In Q2.39 per cent of our lumber sales volumes were in the U S market with the majority of the remainder of our sales in the European market.
Looking forward.
Even if we have taken down our turbine generator at Rosenthal from maintenance following a service interruption, which was damaged in parts of the equipment.
The timeline for returning to generated a service could be as long as 100 days and we've therefore decided to conduct but would have been required maintenance. All in 2022. This year. This will save 37 days from next year.
During this time Rosenthal will need to purchase all of the electricity needs.
There will be an insurance component of best but that's not determined at this time.
Our wood products segment achieved another strong production result, producing almost 117 million book through the bundle, which was comparable to Q1.
In Germany, our wood costs, particularly for pulpwood.
And at historically low levels due to the abundance of beetle damaged wood and we expect this pulp log supply dynamic to continue well into the fall.
We're seeing solid profit.
Seeing solid cost inflation early in Q3, but we expect prices to begin to moderate again due to early indications of heavy spruce beetle activity. This summer.
Western Canada pulpwood supply remains steady and price changes have been modest in our fiber baskets. However, this year is shaping up to be another significant forest fire year, which could potentially have negative impacts from both supply and prices of fiber, we will be monitoring the situation closely.
Today, there are no direct forest fire threats facing our.
The operations, but the fires are negatively impacting rail logistics in the region. This will slow down our ability to get pulp to market as we used a sufficient not more expensive alternatives.
In addition, the list logistical challenges could impair our ability to move raw materials to our mills and.
For those of you following weather news in Germany, you will know that the problem there is not fire.
Here the water while.
While the floods that had been severely impacting many regions in western Germany have restricted some logistics channels our operations for the moment have not been impacted.
The majority of our heavy 2021 maintenance program is now behind us I'd like to remind listeners that we have had.
Major maintenance at silver standard.
In Peace River in the first half of the year. This is a bit unusual to have this much maintenance lumped together.
So it was a result of a number of reasons, including our migration to 18 months annual revisions versus 12 months previously.
And also due to the necessary timing for the peace River boiler rebuild.
Our remaining 2021 major maintenance schedule is.
And all of those in Q3 Rosenthal has a 15 day shut plan.
Cariboo will take a 16 day shutdown a free show something that will take us traditional summer Rolling Department maintenance outages in Q4 standard has a 2 day many shut plant in southern will also take a 4 day many shot.
While the majority of our annual maintenance work is complete.
A significant capital spend expenditures to grow the company or ongoing.
Using our well managed liquidity and strong balance sheet to continue to pursue the growth aspect of our strategic plan and more specifically the objective of adding shareholder value by growing the company in areas, where we have core competencies.
We have commenced the construction of 2 new wood rooms, when other peace River pulp mill.
Cigna saga.
These projects will allow us to transform our supply chains increase our capacity and significantly reduce the cost to produce our own wood chips the <unk>.
<unk> will also allow us to accept alternative forms of lower quality wood previously left in the forest.
The total cost of these projects will be between $65 million to $70 million.
These projects are also eligible for a number of carbon reduction grants that could exceed $20 million.
Even without the carbon reduction grabs these projects will create significant shareholder value. We expect the projects to be largely complete by mid 2022.
We continue to advance the engineering and permitting process for our stendhal sawmill finish.
The initial.
And for the milk contemplates, a 400 million board foot capacity with our product lineup and flexibility of our future mill, but we expect to build the mill in such a way that will allow for incremental capacity increases in the future.
Inflation and delivery of key equipment timelines are now becoming considerable we're seeing delays in the delivery of sawmill equipment, along with the potential for.
The higher costs, particularly for steel concrete and electrical installations.
We remain committed to the project. However, we will continue to consider the timing as this development work progresses.
In addition, you have likely seen the court filing about our stalking horse bid for terrorists Spokane, Washington Cross laminated timber plant.
We have agreed.
Moving to a stalking horse bid price of $50 million.
A draft asset purchase agreement.
Strategically we feel this asset would be a material addition to our growing company and has the scale to be the first step of a significant pillar in our building products competency, particularly considering the expected growth in demand from mass timber construction.
The facility will.
Well no doubt garner interest from other parties and we are in no way assured of success, we'll have more to report on this as the process progresses.
Excluding our bid for the <unk> plant and depending on the speed of certain construction prerequisite in deposits. We expect total capital expenditures to be between 150 and $185 million.
2021.
Our strong financial position that we vigorously protected during the pandemic gives us significant financial flexibility as we put our sites back into growth.
I'm confident that the effective execution of our strategy will continue to bring US success, we remain focused on our world class assets and our modern sustainable operations.
And continue to serve us well as we continue to focus on optimizing our fiber handling and logistics and controlling our costs.
So this completes our prepared remarks, but if I could take a moment to remind listeners COVID-19 mutations continue to be a significant risk.
Everyone to get the vaccine will continue to keep your friends and family and colleagues at Nabors.
<unk> with this pandemic is not over yet thanks.
Thanks for listening I'll now turn the call back to the operator for questions. Thank.
Thank you.
Thank you and as a reminder to ask a question you will need to press star 1 on your telephone.
That's part 1 on your telephone please standby.
Safely compile the Q&A roster.
Your first question comes from the line of Javier.
The capital markets. Your line is open.
Hi, good morning.
David you referenced kind of rising inflation for the.
Well, you know sawmill projects under consideration so for Stendal David.
You have a sense as to maybe what that updated build.
Build cost would be if you go forward I know, we had a recent greenfield announcement in the U S and it looks like at least in the U S. At that project was around 751000.
I don't know if that's it.
Similar benchmark that Youre seeing in Europe.
Yes, I think so.
$50 to 750 could be could be the Zip code.
You know, there's there's options to stage things build build the mill in phases.
There is.
I don't want to build something.
Something that doesn't have all of the appropriate bells and whistles, we know how important that is to get the grade profile out so.
We're working our way through all the final quotes and.
And adjusting scope as we can.
Is it.
And maybe there's a slight delay in pulling the trigger on this.
We're not going to not going to do something crazy, obviously, but it's it's really remarkable how how rapidly.
The cost of steel and.
And.
Just equipment in general has gone up I don't think it will stay where it is but.
For the moment, it's really been really.
Really the Mark.
It will increase so.
So we're just going to monitor were going to get and we're doing the work and we'll be in a position to make decisions, but but again I think.
Be prudent to take.
A very cautious approach to it.
Sure enough there and given the escalation on the Greenfield side of that maybe <unk>.
Creased your appetite for considering buying buying an existing sawmill and.
Have you seen maybe the pipeline of opportunities improve as lumber prices have come off yeah. It certainly it certainly factors into our thinking hinder absolutely.
Having said that we.
1 of my joke.
And everything that we've looked at it.
Been pretty expensive and it hasn't really been at a scale at least in North America has been at a scale that would make sense for us.
From from our strategic point of view there.
There are still a few targets in Europe that we continue to monitor.
And.
And youre right with changing conditions, those could come back into focus and make more sense for us. So they are also on the table for consideration.
Okay Fair enough and just a last question from me David would be.
Capacity increase now at Stendal.
Just given the sort of cycle.
Just the various shuts what what level of production would you be targeting for 2022.
Ah well net of all of shops and things like that I can.
I reported here.
Unless David has it opened.
Yeah.
Yeah.
Michael.
Yeah.
Yeah sure it heavier I don't have that just.
Easily handy, but Oh I'm sorry.
I'll follow up after.
Okay. That's that's everything I had thanks.
Great.
And your.
Next question comes from the line of Sean Stewart from TD Securities. Your line is open.
Thanks, Good morning, guys.
David I wanted to.
Revisit N V S K markets in Europe.
It looks like you've got about half the proposed June price hike.
And I'm trying to gauge your thoughts on the ability to hold prices through the summer as things corrected in China and to a lesser extent in North America.
Do you think the industry will have an ability to tread.
Through the summer in Europe, as well as other regions weaken.
Yeah, that's a great question.
And the way I'm thinking about it.
You know some of my colleagues share in Mercer.
And putting some time into thinking about what.
What's the same and what's different about the last 2 cycles.
The 2017.18 cycle, where.
Where we had peak prices.
And the current cycle so.
1 of them is are the differences here as you know at the end of 2017 routine cycle pulp stocks are very high whereas today talks are well balanced.
Hum.
At the end of 2018, the global economy was cooling off considerably, particularly in China. There was the trade conflict with the U S going on and so on.
And today in 2021, all major regions are expected to grow and grow strongly.
There's a very different sentiment in the market today.
Our paper inventories of 2018.
Very high, particularly in China today, those are at normal levels.
Suitable overcapacity in the European printing and writing sector. In 2018 has been really offset in 2020 ones from NASA coaches of paper capacity primarily in 2020.
Back in 2018, New member says I know the market leader.
<unk> just completed a merger with Korea pretty busy with themselves.
Let's say they misjudged the markets created some of the problem, we had to work through in terms of inventory overhang.
And I think another important factor, particularly as your question relates to Europe as you know ocean freight challenges favor the European paper producers in.
2021.
And by that I mean like paper imports.
Into Europe are very limited so the paper producers are busy and they're profitable.
They've been successful.
Amazing prices.
More or less across the board and so it's a it's a much stronger market without much influence coming.
Coming in from.
Okay from producers in China for example, but that they would have previously been competing with.
And then finally I think another big difference is the dissolving in the Submarkets this year pretty strong unlike in 2018.
So there's really no swing tonnage coming into the paper grade side.
There's a lot of differences and.
And generally just the tone of our customers in Europe tells us that we're going to trade at a pretty narrow band here through the summer and and I'm.
I'm optimistic about the back half of the year.
Yeah.
Thanks for that detail, that's that's really helpful.
I also wanted to follow up on.
And your comments with respect to the C. L T asset you're bidding on.
Help me understand.
I guess that opportunity have you been looking at other.
Engineered wood opportunities or is it as a result of the tariff bankruptcy that this 1.
Fell under.
Into your lap potentially and how do you weigh that the appetite for this type of expansion versus saw mills in North America, because you have kicked the tires on opportunities on that front as well.
Mhm.
Well I'm.
I'm I'm really bullish on on mass timber.
Yes.
Ben.
Sure.
Current steady.
Our area of business for Europeans.
It's growing very rapidly in North America.
But here at the table or coffee or listening to the premier of the Prime ministers talking here in Canada.
Mass timber is something Thats really supported its a green building product. It's it's got a much lower carbon footprint to steel and cement and.
We don't think there's a tremendous a tremendous growth opportunity here. So we've been we've been really focused on the value add space per time and as I've spoken about in the past we've got a we've got.
Your whole coming from shell and you know.
Opportunity there would be to take the.
The lower profile material and put it into to see low P or Google home or something like that you should think of joining and so on.
And.
So we believe.
Looking for looking for opportunities in that area.
And empty.
We understand the business I think pretty well we've done a lot of work in it.
And the <unk> thing is an opportunistic situation clearly, it's a big plant.
It's really big.
So I always.
Say, we don't want to be a small fish in a big pond, we'd rather be a big fee.
Area smaller pond, but if theres really good growth market dynamics, and we can establish ourselves as leaders.
And use that as a platform for further growth in that area that that's kind of what the dream about.
It's going to be competitive.
Shocked if there if others don't show up so that means there will be an auction in.
As we were with the with the K, 1 they need to be discipline them.
Non overreach.
Still a growing market and <unk>. So if we don't get this 1 well.
Possibly find other other value added products, we can go too low.
So we'll see.
So that's a cool opportunity so it's a very.
Fisher at all well invested plant.
Equipment, we know you know it looks a lot like a sawmill, except that just doesn't cut timber.
But all the sorting and planning and continuous kiln drying and all that kind of stuff. That's all the same equipment running in Europe.
So.
Okay, Thanks for that detail.
I appreciate it that's all I have cash yeah.
And your next question comes from the line of Martha sample from RBC capital markets. Your line is open.
Good morning, guys and thanks for taking my questions.
Hmm.
Maybe starting with pulp here, there's quite a bit of hardwood capacity coming online over the next few quarters.
How do you think that will impact the market and can you remind us how you think about the relationship between hardwood and softwood pulp prices.
Yeah, that's a great question, yes, it's.
Yeah, so between our local and U P M and.
He had been a break so there's some there's hard wood coming it's a it'll it'll hardwood is going to struggle a bit or at least has the potential to it really depends on the discipline of the producers and buy more.
And.
What are they.
A couple of angles, and the whole thing and they're there.
They're at.
<unk> capacity, because they believe in and I think the right that the demand for fiber.
<unk> fiber is growing significantly of hardwood right now it's growing at more than a million tons a year every year.
And has been doing that consistently.
You may remember 3 or 4 years 3 years ago, we thought.
Again, they don't pick.
It was going to destroy the market while it didn't.
Until until we had a behavior issue that really kind of got in the way.
But the so it's going to be lumpy and it's going to it's going to wind its way through I mean, I I think we do have some hard wood pulp and Mercer and our.
Our opportunity with our wood room and possibly some other.
Capacity.
Aspen extraction material product opportunities that we have up in peace River I think we can get our cost structure down to where we can really compete on the hardwood side and they've got softwood swing capacity up there as well so that mill still still a great Mellon and will be will be a contributor in the next couple of years.
Or a couple of years.
Hardwood will be the drag generally on Virgin Virgin fiber.
I think.
I think the demand for Virgin fiber is going to be strong enough.
And particularly for softwood that the GAAP between the 2 grades will widen and kind of.
And up at.
At a delta that's probably something we've never really experienced for prolonged periods of time before.
I've seen the difference at 200.
In previous cycles.
Recently, we have seen it as high as 220.
Today, we're down below the 200 level.
But but.
But I can I could see that being the case for some extended period of time.
I don't think it's going to I don't think it's gonna be a ball and chain on shop itself. It's 2 smaller market is too important to so many different paper grades and it will it will trade based on its own supply demand dynamic.
Become a niche pulp.
But threep that way and hard wood will be the big benchmark grade and the way to be successful in the hardwood spaces, you got to be a low cost producer.
Quality producer and.
And the consolidation of the hardwood producers should should exert some discipline into the market that allows everybody to VITAS.
Okay.
Thanks, that's helpful maybe going back to the C. L. T side are you able to help us understand what kind of profitability that you think a C. L. T plants like the 1 in Spokane could generate under normal market conditions and what have been some of the key challenges with.
And where could you help address those problems.
No assurance well see.
C. L. T is I mean, its largest input cost is wood, obviously and so when somebody bids on a on a project.
They take the wood cost the cash.
What was the cost.
Convert that wood into panels is and then they add a day out of margin.
And how much margin. They they add is a function of what they think the customer is willing to pay and that.
It comes into comparing what you're producing and providing to other building products and also who you might be bidding against to get the job. So it really.
Depends on a whole number of factors.
The previous the Terra business model before the bankruptcy was was really an integrated model. So they they were they had the engineers and architects project ownership. They ran the projects they underwrote the risk.
<unk> of the projects.
They produce the raw material the C L T.
For the projects.
And that's a very different business model to the way much I wouldn't run that now like we would be.
Marketing, we think building products for project owners so now.
We'd be competing with others, who would have similar facilities, who might be in the geographic area that we're working in.
Given its scale as you get it ramped up it would be it would be a low cost producer it would be.
Like I say, a big fish in a smaller pond.
And.
And lots of growth potential like we could imagine plugging on a glue landline and running.
We're running a lot of things are driving material through it.
I'm doing all sorts of stuff so.
You know it has the potential to produce a really nice nice steady margin I think.
But that will be will take time to determine them, but but as I say the business. The business is really raw material cost plus plus conversion cost.
And then what the market will bear it.
Just on competition and add value to the virus.
Okay.
Yeah.
Yeah.
Maybe I'll sneak in 1 more with lower North American lumber prices.
Do you expect to sell more lumber in the European market or is that sales in Mexico to remain steady ascending bloom brokerage channel.
The United States.
Yeah. So.
<unk> talked about this before.
That makes that are really committed to.
You know a number of markets. So we've we've done very well in the U S. We've got a tremendous customer base and we were going to honor that and supply them.
Just thinking through it then so.
I would expect our U S supply to range between 25 to 40 per cent of.
Free shows availability.
The European market, which has traditionally been much less volatile serves us well through thick and thin.
At the current moment, it's really strong like it's it's held up like it hasn't it hasn't fallen away the U S market has.
Having said all that the U S market is still very profitable for us.
European markets are profitable for us and with all the new bells and whistles that free shower, we're really ramping up our J grade business as well, so we're and J grade for those who follow lumber.
As is in Japan is very high.
Tremendous margins on that.
We're pushing that as much of that as we can.
And.
I don't expect I.
I expect we will just continue to Jim moving this direction.
Core of Europe, 25% to 40% of the U S and as much take rate as we can get to pick and choose them hopefully hopefully somewhere between 8 and.
10% of free shell could be J grade.
Most of the time.
Great very helpful and good luck with current quarter. Thank you.
Sure.
And we have your next question coming from the line of Roger Spitz from Bank of America. Your line is open.
Thank you and maybe you said this but regarding the remaining piece trip or B I insurance proceeds did you give the timing on expected receipt.
Do you want to cover that day, yes, we didn't book.
We would expect that it would be something that would.
Settled out in the next in the next 2 quarters.
Got it okay.
And.
Can you give any insight into cash taxes given.
Material difference and.
Your numbers this year versus last year.
Yeah.
Yeah, I think for for a guide I'm, sorry, I guess for building.
Building models.
Could probably count on our cash taxes being in the range of 15 to.
15% to 20% of pre tax income.
Okay.
Great. Thank you very much.
1 of them.
Thank you and your next question comes from the line of Andrew Shapiro from Lawndale Capital. Your line is open.
Hi, Thank you a few quick.
You follow ups here and then the question rich.
Regarding the stalking horse bid couture.
With the auction set for Monday.
How does this bankruptcy court and this particular bankruptcy case, how do you see it proceed.
Feeding in terms of the cash.
<unk> of the determination.
We'll call it the winner of the auction wood. There then be an additional breakup fee protection all the way.
Through the reorder vote et cetera, and when do you think that all takes place I don't know how complex.
So.
Our case this is and if this is just 1 small asset sale that is going to have the gamble Bang down long before the overall restructuring is done or what.
Yeah.
Yeah, Hi, and yeah, it's going to be a very rapid closes what we've been told so the auction.
Complex in day in and I think they're hoping to close within a week of that more or less so.
So, we'll either on an asset or or will have a breakthrough.
Okay. So it's kind of a it's a separate 363 sale outside of the rest of the restructuring process.
Correct.
Okay excellent.
<unk>.
Kind of along these lines, which is.
Again.
You use a pulp and in a variety of other uses than your standard Mercer business line you have the joint venture with resolute in.
Performance by a couple of minutes.
And can you remind me what percentage Mercer has all of the joint venture and more importantly.
I think the last that we might have heard about this was that the Quebec plant.
The initial low initial plant in Quebec.
<unk> is under construction and maybe it has now been completed and the anticipated, making I think products production and sales commercially here in 2021, what's the status of all of that.
Yeah.
Yeah.
So performance biofilm as a joint venture that we have with with Resolute forest products and.
Both companies were very interested in the technology, we have access to all the patents and everything to our membership and innovations.
And we decided that let's.
Work on let's call develop applications versus competing with each other in the market and so.
We put our put our resources together.
And performance milestone events I heard the team.
I think somebody used the word <unk> hub, if you like of.
Products for the future and settlements provide paper makers value either through <unk>.
Strain or different different properties that can you kind of.
Together.
Manipulate the surface.
The surface.
Features of elements.
It goes into non woven it can go into.
I meant it could go into drilling much at all just all kinds of applications and so performance book.
<unk> is all about.
We.
Working with end users.
Industries and companies that can benefit from from <unk> and helping them develop applications for it and then.
The vision is that we would have the exclusive.
Our capacity to provide a material like a chemical material if you want to call it that.
It creates value for them.
But whatever the application is.
You know our partners and resolute felt strongly enough.
Building, a plant and that plant will.
Provide material to performance by all elements that will also.
Provide material too.
Operations in the paper space that they operate and.
And I think they are pretty excited about it I can't talk too much about it right.
Their project in Italy.
So I'll leave it at that but.
We continue to.
No I wouldn't say plug away is the wrong word I mean, we can.
We still feel.
There's lots of potential.
In high performance.
Strengthening agents per paper makers and other special applications.
So either.
Take time so.
Is the plant construction completed.
Okay.
I can't talk I don't know the exact status of it Andrew Mercer It doesn't really have any ownership of the plant itself.
If anything of the plant.
Ownership is the venture that provides raw materials to the plant.
We're on the application side with them.
Okay.
And then.
Lastly.
Okay.
In light of.
The persistence of the pandemic I think things are going to continue virtual for.
Quite a while or perhaps in the investment conference side and all that what are the company's plans for virtual or in person IR activities in the coming months and quarters.
Yeah, David do you want to cover that off.
Yeah, Yeah. It will be we'll be participating in these are all virtual conferences.
But we will be participating in the Jefferies industrial corporate 6 week.
Yeah.
Pardon me.
Ooh.
Okay David.
Got.
Look at TD coming up and.
Well, we'll participate.
The bank I think it was the Bofa conference coming so we'll participate in the bank virtual conferences and.
We were pretty active with shareholders on a daily basis anyway.
I won't be.
Making a tour in New York, or Boston or down your way.
In the next few months, but I really do look forward to being able to travel again and getting out and seeing everybody but for.
For now.
Google or zoom is what it's going to be for the next few months I'm afraid.
Okay great.
Thank you very much.
Welcome.
Sure.
Thank you and again to ask a question you will need to press star 1 on your telephone again Thats star 1 on your telephone keypad.
Your next question comes from the line of Deforest Hinman.
Peter Your line is open.
Hi, Thanks for taking my questions.
Questions.
Can you give us an update in terms of your thoughts on production.
Capacity of pre Salt I know youll have the.
Summer holidays, with the maintenance, but I know you've been adding.
Equipment, there has it changed.
Thoughts in terms of what can that.
Facility do from a production perspective.
Yeah, Great question, well, it's a I mean, it's everything we thought it would be and it really depends on how you run it in how you staff it but it's going to produce so maybe the chicken.
A lot of your the guidance that I think you need for your models before so for the third quarter, we've got our summer maintenance.
Some of those are a little different in pulp mills, we can do we kind of rotate.
Through department, so that we will work on the lock volume for awhile.
From 1 of the sidelines.
Get it back with work on the other side.
<unk> work on Sorters work on dryers work on cleaner.
That kind of thing. So we can also double shifts some of these lines. So when when 1 is down we can work hard on the other.
To produce products. So so so our production target for the.
For the third quarter.
So having all of this maintenance.
It is about $123.124 million board feet of lumber.
It will produce.
3 months.
Okay. That's helpful.
In a quarter, where we don't have to do something like that is it step function higher.
Yeah.
Has it been.
We're running at around a 500 to 550 million board foot.
Our rate is our plan, we could go up significantly we could get up to the 750, if we wanted to put more shifts on <unk>.
Difficult to do and not.
Not always the best thing for the equipment side, you guys kind of like you want to run like a boat you want.
Your motor running at a good rate, but you don't want to be pushing it too hard all the time.
Our focus is on really fine tuning all of the the optimal or the optical grading the Phd scanners and things like that so we get the maximum value out of the profile.
And read.
The precision edge trimming in.
Getting a J grade.
Greeting is as crisp as it can be an and.
Running at the 500 to 550 million board foot is just kind of optimal.
Place for us to be for the for the next call it 6 or 9 months and.
So that's what you can expect for now.
Okay great.
I think I'm going to ask this but I think it's important to understand all our digester project.
Can you give us an indication of how the mill's performing with the new assets.
In July.
Yeah.
July was a little bit bumpy, but I'm pleased to say, it's running really well.
Sure.
So the issues that we had at Stendal.
Thanks.
Think the the capital investment project was executed very well and.
Really proud of the team.
Yeah.
1 of the areas, where we struggled a little bit as these are these big mills have what we called Dcs system or the digital monitoring systems and all the loops that you used to control of equipment or 1 of the vendors.
Dcs team virtually could make it because of COVID-19.
And.
So we really had to support the Dcs development work from our Rosenthal and Theyre, both Val net systems.
And.
And so we got through it and that it took a little longer than we expected.
But it was really.
Some very specific reasons.
The the.
The equipment is all what we expected its installed properly, it's all up and running now and it's just a matter of fine tuning and when you.
When you when you put new digester capacity and then.
For listeners we also incur.
Increase the sprint capacity on the dryer and we improve the Washington capacity on that.
On the bleach plant so.
It's we're doing right now is just.
Fine tuning everything finding those little bottlenecks from cleaning those up and just.
Ramping up to the 740000 ton annual rate and.
We'll be at that rate within another 3 or 4 weeks is our view and.
Very successful project and also very accretive.
Considering the level of government support that we had put the capital in there with some of the cheapest tons, we've ever built and Mercer to be honest right. So.
I guess, that's I'm not aware of that is there a grant involved with that or was it.
So yes, there was yes. So we have these wastewater fee offset programs in Germany. So if you put if you. If you if you put money into equipment that allows you to.
Provide some environmental benefit from a resource efficiency benefits.
You avoid having to pay the wastewater fee the capital kind of displaced.
So what.
What we were able to do us negotiate 6 years.
<unk> relief from wastewater.
By putting in this equipment, which gives us a lower environmental impact intensity and a big chunk of that comes from the Washington, Washington equipment that we put in.
So we're avoiding <unk>.
A few million euros of wastewater fees, which is 6 years worth on a project that had a capital cost of about $45 million.
Okay perfect.
Kind of a side, but just monitoring the Shanghai exchange.
You know, there's just there's a forward curve now theres a lot of volume it seems like a real.
<unk> market is there any possibility that we could use that and enter into forward.
For our futures contracts and actually deliver.
Is that feasible.
Yeah, I think that's a growing market and both financial and physical opportunities.
<unk> is there.
Are most of our investors like us to stay open.
I want us to be taking speculative that say they want to play the pulp market. So.
So I'm not really anticipating.
Participating there we find it's becoming a factor in pulp pricing, though and so we're having to monitor it.
Pretty closely.
I think when it has the potential to do is create.
A little more volatility in pulp pricing. So when prices are going up they may go up a little faster and higher.
Similarly, when when when sentiment terms and speculators get involved when pulp prices are coming down it might push it down a little harder a little further.
That's that's just my view.
But yeah, no I'm not a non anticipating to force, taking taking big positions in that market.
You know to try to smooth out earnings or any of those kinds of things.
Okay very helpful. And then last question just on the a C. L T facility.
Did you envision that facility.
You know as is or do you see that I know you mentioned earlier you know it looks like a sawmill.
Is it is it possible that that could just be run as a sawmill, it's kind of a semi turnkey asset.
That.
A table too low.
Move on relatively quickly through this bankruptcy proceeding.
Well, we have from lots of ideas about optimization and innovation and that facility I don't want to talk about those 2 openly just at the moment, because we may not get it but.
We won't be putting us all lining up.
It buys it buys timber packages from others.
And sorting through that and and and gives us a material to produce them a value added products. So there's.
There is there's a lot of capacity in that facility. That's got a very big building and and the bottleneck is the press.
No.
I'm proud of it.
Additional incremental volumes of CLC or other products are very profitable without a lot of that other associated expenses like if you were to do a greenfield glue them you wood.
You would be.
Moving to put all.
All the departments in place versus.
Frankly.
Just first.
It actually was from lots of potential for us in the future and just so I understand I haven't gone through all the documentation with a net a bankruptcy proceeding but is it just the physical asset you're bidding on or is there a supply contract on the wood side.
You just mentioned that's 1 of the things you have supplied cover that note.
No supply contracts.
No no liabilities.
Minimal workforce.
No marketing I mean, its startup, but but it's the asset was there some okay. Thank you.
Yeah.
Thank you and there are no further questions.
The bottom now like to hand, the call back to Mr. David Gandossy. Please go ahead.
Okay. Thank you Patricia and thank you all for joining our call and as always David and I are happy to talk to you anytime so don't hesitate to reach out and look forward to speaking with you.
And otherwise, we'll look forward to our third quarter earnings call.
Thanks.
Bye for now.
Yes.
Yeah.
Yeah.
And this concludes today's conference call. Thank you all for participating you may now disconnect.
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