Q2 2022 Mercer International Inc Earnings Call
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Good morning, and welcome to Mercer International's second quarter 2022 earnings conference call on the call today is Juan Carlos <unk>, President and Chief Executive Officer of Mercer International and David Ure.
Senior Vice President Finance, Chief Financial Officer, and Secretary I will now hand, the call over to David who aren't.
Good morning, everyone. Thanks for joining us today to discuss what has been an eventful few months for us I will begin by touching on our financial and operating highlights for the second quarter before turning the call to Juan Carlos to provide further color on the markets a strategy update and of course, our recently announced acquisition.
Juan Carlos was appointed President and CEO effective may one.
I'm delighted to introduce him to you on his first analyst conference call with Mercer as many of you know Juan Carlos is a globally recognized leader in the wood products and biomaterials space and brings to our company leadership qualities that expertise that will help us drive our growth in the years to come we are excited for his appointment.
Also for those of you that have joined today's call by telephone there is a presentation material that we've attached to the investors section of our website.
But before turning to our results I'd like to remind you that in this mornings conference call. We will make forward looking statements and according to the Safe Harbor provisions of the private Securities Litigation Reform Act of $19 95, 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.
This quarter, we achieved EBITDA of approximately $145 million compared to Q1 EBITDA of roughly $155 million. This solid result was principally a consequence of strong demand for all our products leading to sequentially higher pulp and lumber prices along with the Pos.
The impact of a stronger U S dollar being offset by the cost and loss volume associated with our planned major maintenance downtime.
In Europe , the natural gas shortages that are providing us record electricity revenues are also creating conditions for inflationary pressure on energy dependent input costs, such as pulpwood fiber chemicals and to some extent freight.
The quarter results also included a $13 million positive adjustment, reflecting the reversal both the reversal of a payable relating to three years' worth of wastewater effluent fees.
The reversal is a result of German authorities waiving the fees. After we demonstrated certain reductions in affluent load in connection with recent environmental capital expenditures.
After giving consideration to our planned shots at cell Guard Peace River, our mills ran well this quarter when compared to Q1, when we had no scheduled maintenance <unk>.
Going forward into the second half of the year, we will complete a 14 day planned shots at both Rosenthal in Q3 and also stemmed all in Q4.
Our pulp segment contributed quarterly EBITDA of roughly $102 million and our wood products segment contributed record quarterly EBITDA of $49 million you can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC.
Demand for pulp was stable in Q2 and supply constraints pushed prices higher than Q1 in all of our major markets in China. The Q2 average <unk> net price was $1 $8 per tonne up $109 from Q1.
European list prices averaged $1437 per ton in the current quarter compared to $1 $330 per ton in Q1.
The price gap between MBS K in hardwood narrowed this quarter due to strong upward pricing pressure on hardwood with the average Q2 net eucalyptus hardwood price in China at $815 per ton up $147 from Q1.
In total average pulp sales realization movements positively impacted our EBITDA by about $39 million compared to the prior quarter.
Overall, our average lumber realization has also increased in Q2, despite the U S market weakening significantly late in the quarter in part due to strong European prices in the U S. We experienced excellent pricing in the first two months of the quarter before prices decreased significantly in the final month.
The random lengths U S benchmark for Western SPF, <unk> and better averaged $866 per thousand board feet in Q2, which was down $408 from last quarter.
Our average European sales realizations were up approximately $112 per thousand board feet compared to Q1.
Since the end of the quarter U S pricing fell further but appears to have hit a floor and has since been slowly moving up today the benchmark lumber price in the U S is currently $670 per thousand board feet.
Our electricity sales reflect strong generation along with elevated prices in Europe , where prices continue to be in the range of $200 per megawatt hour.
Exports to the grid totaled about 225 gigawatt hours in the quarter, which was up modestly relative to Q1.
We reported consolidated net income of $71 million for the quarter were $1 eight per basic share compared to net income of $89 million or $1 35 per basic share in Q1.
Cash generated in the quarter totaled approximately $84 million compared to cash generated of $65 million in Q1, our strong cash generation. In Q2 was primarily the result of working capital movements in the form of lower accounts receivable balances a consequence of lower.
Sales volumes.
Capital spending in the quarter totaled about $47 million and.
And we remain on target to invest about $175 million to $200 million in our operations. This year Juan Carlos will provide an update on our Capex program in a moment.
At the end of the quarter, our strong liquidity position totaled about $771 million comprised.
Comprised of $495 million of cash and $276 million of Undrawn revolvers, our quarter end liquidity position will support our recently announced acquisition of Holtz industry Tour Gal, along with our planned working capital movements in 2022 high return capital to <unk>.
Lending program.
In connection with the <unk> acquisition, we have obtained at bank commitment debt for our German revolver that will expanded from 200 million euros to $300 million euros, we can draw up to $100 million euros from this facility upon closing of the <unk>.
Transaction.
And as most of you have noted from our press release, our board has approved a quarterly dividend of $7.05 per share for shareholders of record on September 28, 2022 for which payment will be made on October 5th.
That ends my overview of the financial results I'll now turn the call over to Juan Carlos.
Thanks, Dave.
Our strong Q2 operating results were driven by increased pulp and lumber pricing continued strong energy pricing in a rising U S. Dollar we completed a varian bitches ambitious maintenance program at both <unk> and Peace River and as Dave mentioned, while we have experienced considerable inflation in natural gas chemicals and fiber.
In recent months, we continued to achieve record levels of electricity revenues that are helping to offset cost inflation.
We have had a tough start to Q3 with a recent wood fire woodyard fire at Stendal.
We are today on the way to recovery and I'll speak more to this in a moment.
But before I speak about the fire and our <unk> acquisition.
I'll make a few comments about current market conditions on our capital expenditure program.
In terms of pulp markets global pulp supply demand fundamentals remain tight through Q2.
And as a result relative to Q1 average pulp prices were up in all markets.
Chinese demand continues to be negatively impacted by pandemic conditions, but we're beginning to see improvements as lockdowns are becoming less frequent and shipping channels slowly begin to recover.
In other markets demand has been steady and logistic bottlenecks and supply disruptions in certain regions continued to create extremely tight conditions and.
In addition, we are in the middle of the traditional major maintenance season, and unplanned downtime, including our Stendal mill fire continue to put upward pricing pressure on all markets.
For lumber market pricing has been mixed but on average they were higher in the quarter when compared to Q1.
While housing starts have begun to diminish homebuilder sentiment remains positive and we believe the mid term backdrop for U S. Lumber pricing conditions remains positive with relatively low housing inventory strong housing expectations supported by recent statistics and constructive home owner demo.
Graphics today market volatility as a result of rising borrowing costs construction constraints from a flexible supply chain labor and home construction supply shortages and inconsistent lumber supply from Canada.
We expect European lumber prices will moderate in Q3, while the U S market hit a floor early in July and has since been modestly strengthening.
We will continue to optimize our mix of lumber products and customers in Q2, 46% of our lumber sales volumes were in the U S market with the majority of the remainder of our Europe of our sales in the European market.
We believe our logistics strategy is give us a competitive advantage. However, we experienced some freight cost increases in Q2.
This is primarily the result of higher fuel costs.
Increased you're obsessed trucking along with higher warehousing costs in North America due to the limited availability of railcars.
Railways are struggling with labor shortages caused by the pandemic, we're seeing improvements, but the lack of railcar availability will likely persist in the near term as the railroad railway continues to work through its shipping backlogs and labor issues.
In Germany, we continued to see strong demand for both pulpwood and saw logs.
Each of the increased demand for pulp logs is being driven by pellet manufacturers.
Russia is where in the Ukraine is behind European energy concerns and is pushing energy prices up and creating more demand for wood based heating solutions.
Currently solid demand and supply appear to be imbalanced, but we're expecting upward pricing pressure for pulpwood in Q3.
In Western Canada as expected increased harvesting activity has helped ease pricing pressure.
As a result, we expect modest downward pricing pressure in Q3.
We havent, we havent aggressive Capex program in 2022.
The majority of these investments are focused on high return projects that will drive new product development, ESG advances productivity improvements and input cost reductions.
Two of the larger projects, the new wood rooms at <unk> and Peace River are progressing but have begun to slip project schedules due to delays in delivery of key pieces of equipment.
These projects will generate high returns for us and have considerable carbon reduction attributes. So we remain committed to them and we will be pushing hard to have them Commission. This winter.
We're making good progress on investments in our German wood procurement infrastructure that will add to our competitive advantage and the new sorter at our freestyle mill is on schedule and we will maximize the benefit of our new planer by allowing for even greater great differentiation.
And while most of the Stendal 740 pulp expansion project was completed in the spring and running as expected we will complete the final element some modest modifications to the pulp machine wrapping line in the fourth quarter.
In keeping with our carbon reduction strategy, we're developing a lignin development center that will include a lignin extraction pilot plant.
The pilot plant will employ a leading edge technology that will allow us to look at commercializing derivatives of lignin.
We also commenced construction on a $27 million expansion project at our Spokane mass timber plant, which I expect will be our first phase of investment as we look to grow this business.
This phase one project will allow this state of the art facility to fully utilize a more varied raw material mix and increased finger joined production.
This is a first step in what will ultimately be an expansion of CLC capacity, a preparatory step, we're making while we steadily increase our order book for mass timber elements, which we expect to materialize in sales in 2023.
We remain satisfied with the pace of the ramp up of this business, which we expect will continue for several more quarters.
And now a quick update understandable fire.
As most of you know we took the Stendal mill down July one due to a fire in our woodyard, specifically the automated inventory and reclaim bunker.
The fire was quickly and safely extinguished it is taking us a number of weeks to assess the damage and determined the best approach to safely return the mill to full production.
It now appears that there is considerable damage to certain overhead conveyor systems that will take several months to repair.
However, we have developed a temporary solution to bypass the damage elements of the system and restarted earlier this week on a reduced production level.
Over the next few weeks, we expect to optimize this temporary process with an objective of returning the mill two is close to full capacity as possible.
We're also currently working with suppliers to plan a permanent repair how far a fully automated system.
Our property damage and loss business damages are covered by insurance subject to normal deductibles and we'd be settled in due course.
As we think about climate change and the rapid shifts occurring regarding carbon products like lignin mass timber green energy extractive lumber and pulp are all products that will play increasingly important roles in displacing plastics in carbon intensive products.
Products like concrete and steel for construction.
Packaging fossil fuel generated electricity and synthetic fragrances and flavors, even synthetic textiles, all products that are releasing carbon or ending up in our oceans on our food chain.
As you may have seen from our recent press release, we are pleased to have published our 2021 sustainability report.
The report highlights not only our ESG performance and midterm objectives.
But why we believe that our low carbon low pollution products are part of a solution to the global carbon challenge facing our generation.
Finally, I am excited about the potential of our recently announced acquisition pulse industry Targa.
This acquisition will be accurate to immediately and it advances our long term strategy of growing our business in solid wood products and diversifying our revenue streams.
We have entered into an agreement to acquire all the outstanding shares for 270 million euros, including working capital that we're estimating to be about 43 million euros.
This facility has an annual lumber production capacity of about 410 million board feet. In addition that will push our total number.
Capacity to almost 1 billion board feet.
Most of the Argyle production today is being used as feedstock for highly automated pilot plant the plant as the world's largest producer of European pilot associated or E Mail wood pellets with the ability to produce 17 million pallets annually.
In addition, the facility can produce up to 150000 metric tons of wood pellets.
85000 metric tons of wood Briquettes.
136000 million board feet of mill lumber products, and 90 gigawatts hours of electricity.
The synergies of the business with our existing pulp mills and saw mill are compelling and we estimate to be in the range of $16 million annually.
Most of which will be in place within six to 12 months of closing.
The synergies arise from our intent to optimize lumber production, drawing planing and grading between targa on freestyle.
On the input cost side, we see opportunities to optimize woodchip in residual deliveries between dargo russophile and freestyle.
According to the sellers.
Generated 68 million euros of adjusted EBITDA in 2021 on sales of 227 million euros.
For the three months ended in March 2022 that business had already generated 22 million euros of EBITDA.
This acquisition is subject to a customary governmental competition review before we will be able to close on the purchase which we expect to occur in about two months.
We will have more to say about this business when we close in late Q3 or early Q4.
Thanks for listening and I will now turn the call back to the operator for questions. Thank you.
Thank you.
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And we will take our first question. Please.
Please go ahead.
Hi.
Thanks for taking my questions. This morning.
<unk> acquisition do you guys have any idea on how much capital spend as planned for any upgrades to the saw mill. After you close the deal.
In terms of.
Capital expenditure at <unk>, we're working based on the plan that they had already put in place. So we're following their capex plan as is.
And obviously, we'll be looking at expanding all the potential synergies that we see already that we have already identified as part of that acquisition.
So we will continue on the plan that they have set up for ourselves and obviously, we will keep on looking for opportunities to even go beyond that.
As we develop that mill further.
Okay, great. Thank you and just a quick follow up in Europe . How do you think the natural gas shortages are going to impact industry wide production over HQ for your paper customers and then also for Mercer as well and I'll leave it there.
Yes naturally.
One of the biggest concerns that everybody has right now are precisely those gas shortages in Europe , and what we may see in the coming weeks and months with this conflict with Russia, and how that will develop.
From our own perspective.
We're very well equipped to deal with such shortages only.
One of our equipment.
Consuming natural gas, but we've.
<unk> made the adjustment necessary for those equipments or that equipment to be able to take other types of fuel.
In event of a shortage. However, we are realized that for.
Customers in our paper business as well as even some chemical suppliers.
May have considerable issues when it comes to gas gas shortages. So we're obviously in the lookout for those.
While we remain.
We are cautious about the environment, we realize that this is obviously an important risk that we are facing the industry going forward.
Great. Thank you so much.
Yes.
And we will take our next question.
Please go ahead.
Hello can you hear me.
<unk>.
Yes cash is are you.
Yes, sorry, I wasn't sure if it was being thank you ladies and gentlemen.
We hear you loud and clear.
Excellent.
Couple of questions from me.
Just back.
Also production.
Basically around how.
How much percentage of the protections utilization going forward.
Actual pilots versus the commodity lumber.
Basically after that.
Thanks Jorge.
Well, obviously, we want to make sure that we optimize the.
<unk> production capability that <unk> offers.
That is that has been our intent.
As we were looking into this project.
They run a very significant pallet of operation as we mentioned before with $17 million.
<unk>.
But one of the things that we want to make sure that we optimize the log use.
Usage in that facility. So that is precisely some of the synergies that we are wanting to explore how much more lumber we can extract out of out of it at a higher premium versus the pilot business. So so that will be part of the work that we will be conducting as we initiate operations there.
Oh, great. Thanks for that just reading between the lines. It's conceivable that the majority of the production will be focused on lumber versus power.
It's too early to say that that would be it would be switch to more lumber than pallet.
Again since pallet is such a significant component of it.
That would not necessarily be a quick transition to make but again. The thing is how do we optimize value from that facility and we will get to that point as we take ownership of.
The facility.
Gotcha.
Thank you Scott.
So perhaps this next question.
Anyway.
Do you have any sense of how much of the production you expect will eventually.
Sure.
Ladies.
Hi.
Yes, it will really depend on how much we.
How much is Juan Carlos was saying how much of that volume, we shift into dimension lumber or market lumber and away from from pallets, but I'd say a considerable volume if we do switch considerable volume will go to free cell because it frees all youll remember, we've got the tremendous sorting capacity.
There, we've got a brand new planer, we've got the grading capability of the automated grading in the grade stamps. So I think it's reasonable to expect that have a pretty large portion of that that number will end up going through free though.
So as we also have unused planar capability at free so that obviously will give us the opportunity to transfer that to <unk>. So that we can do planning and <unk> as well. So so that's part of the synergies that we see given where we are with <unk>.
Gotcha.
So that color. So just switching gears now maybe.
You mentioned I believe I don't know, if I misheard that $27 million for the chat.
Okay.
Fantastic.
Maybe just confirm that that's the.
Alright, great.
I'm not sure how that will be spent or when will that will be spent.
Potentially.
Thank you Michelle.
Okay.
Yes, you're correct that is the amount that was approved recently and it is already being spent its equipment that is already being ordered.
And that's as I mentioned when I was talking about it is that's the first phase of.
A project that would allow us to expand our CLC capacity expand our <unk> capacity in and give us more capacity also in terms of finger jointing. So it will allow us to actually make a broader and stronger portfolio out of the Spokane facility.
In terms of timing.
That obviously, we're looking at equipment being manufactured and delivered to US for this first phase equipment that will be ready next year.
And obviously, we will get into the second phase.
As with prior to before the year closes so that we can get this this fall.
Array of benefits in the coming years.
Okay, So that Juan Carlos.
And then just on spend all intend to run that around 80% in the near term.
And then what's the timeline for getting that back to full capacity over time lines or is it next year.
If you have any sense of why.
On your expected business interruption insurance proceeds and.
And capital proceeds as well that would be helpful.
And in Stendal, we've obviously as we mentioned before the <unk>.
Team has done an excellent job in getting that mill up and running again.
It's important to reiterate that the.
Damages, we're limited only to the woodyard there was no effect at all at the mill facility as such.
In that regard we've done the changes and the necessary temporary solutions to make sure that we can fit chip.
Chips to the mill.
When we're running the mill right now between 50% capacity, we look into ramping it up probably to 60 later this month and ultimately going to 80% in getting as close as possible to full capacity. So it's a slow process, it's not something that happens overnight, but the team is committed and we're doing.
<unk> things in a proper way.
So yes, we expect.
By the end of this quarter, we will be at least around 80% capacity.
Running on the mill.
That's really helpful detail. Thank you very much for that.
Any sense or line of business interruption insurance proceeds Mike Hello.
Yes, it's probably several months away cashless or if you might imagine we will want to be.
To the extent that we don't get to 100%, even if we only get to 95% there'll be a business interruption claim there so.
It'll take us several months as Juan Carlos was saying two to correct to reconstruct the automated reclaim.
So we'll wait until after that's complete before we do the full final the full final insurance claims. So I think we're talking <unk>.
Several months.
Perfect. Thank you both for all that detail.
Helpful Go ahead.
Alrighty.
Thank you.
Thanks.
Yes.
As a reminder, its star one to ask a question.
Take our next question from Roger Spitz with Bank of America. Please go ahead.
Yes.
Good morning.
Couple of.
Several questions on hit.
First is <unk>.
Palace, particularly seasonal business or at least the scale of them in Europe , or perhaps you can comment the Q1 2002.
EBITDA of $22 million is clearly well above the.
2021, 68 on a run rate basis.
Okay.
Yes.
<unk> has done a very good job over the past.
A few years to improve their operations, obviously, they've enjoyed also very favorable market conditions like most of us in the lumber industry have faced.
In terms of their pallet business. They remain the largest European pellet producer. So there is still in high demand.
With the prices in Russia and Ukraine.
Which is are also sources of pellet manufacturing, obviously that constrained supply from that angle. So so there is still some <unk>.
<unk>, if I can put it that way.
As we look into the pallet business itself and the demand for them going forward.
So so.
In general terms, I would say that the prospects for the pellet business.
Our positive and.
In the short and medium term.
And do you have a sense of and.
In Europe , what the split is between wood pallets and plastic pallets and if there has been a trend.
Trend of a shift from one of the substrate to the other substrates I don't know if I use plastic pallets over there like they do over here, but I presume naidoo.
We know most of it is the email pellets that that were working it that's the majority of the European market.
Much more than the last six months.
Okay. So that's not really a risk factor there.
So you're going to refinance this $100 million euros.
<unk>.
Expanded facility over their bank facility over there with the other say $180 million.
Plus.
Dollars.
Come from cash or do you have any other thoughts on how you might want to finance that either short term immediately at closing are.
Our term some of that out.
No you've got that exactly right Roger that's our intent to see the balance would be cash.
Okay.
Perfect and then lastly.
I am sure you use.
Green liquid the fire, but you do by natural gas.
Finally for your lime operations.
How much nat gas or you're purchasing in Germany, and and do you hedge that are and if you do.
How are your hedges working over there.
Yes.
We haven't typically.
Disclosed how much gas, we're purchasing but I can tell you that we are we do buy forward to the extent that we can so we're well into <unk>.
Year and a half out.
For a large portion of the gas that we purchased in Europe . So while we're we're not getting the the spot prices that you see out in the market today, we are because we're not fully bought out we are seeing.
Fair bit of inflation on gas.
But it's not nearly.
Just to give you a sense, it's not nearly the same as the electricity benefits that we're gaining on the top line. The revenue the gas is a pretty small.
Pretty small component of our total energy profile.
Okay that was my next question perfect.
Thank you Dave I appreciate it very much thank you.
Youre welcome.
And we will take our next question from Andrew <unk> with Credit Suisse. Please go ahead.
Thanks, Good morning.
Juan Carlos since you've been on board, it's been obviously, a pretty busy for you, but maybe if you could give us a public view on how you think of the future business mix for Mercer and just the company positioning.
Absolutely. Thanks for the question Yeah, it's been it's been almost three months with a lot of things happening at Mercer.
A lot of moving parts, but all in all very much in the right direction, when we look into our future growth prospects.
When we see the situation.
Our lumber business growing via ATM.
Acquisition that sets us in a very different trajectory to growth.
So we see.
Very bright future in that regard the investment that we just announced also in Spokane that allows us to increase tremendously our potential out of the CMT facility in the U S.
For a very high growth market.
Those are all very significant prospects for our business and in the meantime, we continue to obviously invest in our pumping facilities and make sure that we can extract more value from them, but beyond that I think the other important component of this whole thing is how we started investing stronger and our future in inova.
<unk>.
The initial investment in the pilot facility for lignin in raw Synthol is one of the important steps to that direction.
And that is something where we will see ourselves spur.
Spending more and more time as we start to envision a part of the potential market opportunities that we will have in that space and the investments that should be then happening to make sure that we have the right capacity to take advantage of source of such market possibilities.
And also even beyond lignin.
We were going to look at that from a wood chemistry perspective, everything that we.
We'll be able to extract from our natural resources.
To make sure that we can come up with higher value added products that will have a positive impact from my invent the environmental point of view. So that's those are kind of the big drivers for the business.
While we continue to put a very strong emphasis on all the sustainability aspect that.
But we are working so hard on.
Were highlighted in the sustainability report so.
I guess in a nutshell, that's where we're working on them and Thats, where our focus is.
That's very helpful for color and context, and I guess, maybe just reinforcing that if you think about just the diversity of operations that have been built up and continue to build do you feel that you've got a greater diversity of cash flows and maybe more stability of cash flows, but still leaving that upside potential on some of the more cyclical businesses.
Yes, and obviously one of the benefits of expanding this lumber business.
A little bit of the counter cyclicality that we see with pulp prices.
So we managed to ease a little bit of the peaks, the low and high peaks that.
Pulp businesses so.
Accustomed to.
I think that makes that curve a lot more soft on the edges and allows us to have a much more.
Steady.
Level of profitability as we move forward I think that's an important part of the equation to make sure that we.
Reduce that volatility that.
But we know the pulp business subject to so so that's a big part of it and obviously keeping an eye on the future because when we look at these other markets that we will be exploring with lignin and so forth. Those are obviously driven by very different elements, depending on them and us and uses that will be identified.
For them. So, it's all about diversification and making sure that we can run.
Better the different ways that we see in the in the microeconomic aspects.
Yes.
Appreciate that if I could sneak one more in and it's really for for David on on fiber costs and just how you think about where you are now in Germany and just the outlook.
And I asked the question kind of in part because if you think of the energy balance that exists in Europe .
Europe right now and if we look back in the past.
There was a point in time when the pellet market took off and there is some pressure on fiber pricing that just if you could just give us maybe a view on where you are now in the outlook that you have.
Yes, no you're right on Andrew you might remember back in 2013, we had a similar.
Similar not award in Ukraine, obviously, but similar escalation in energy costs and that impact of the pellet cost the heating pellet costs and heating pellets are a competitor to our pulpwood cost. So as you would expect we've over the last two quarters, we've seen considerable inflation on our pulpwood costs.
So much on the <unk> split on the pulp pulpwood cost.
At the moment, we're seeing modest some from some further modest inflation in Q3, but it's we don't believe it'll be to the same rate that we experienced in Q1, and Q2, which is really when the gas price.
Went up so quickly.
And then if I can just sort of sneak this one in I know I'm sneaking in more questions, but I guess you have freeze out this time in your operational setup is just different than it was back in say 13.
Absolutely and I think.
Like I was saying the saw log cost is has been it went up considerably last year in 2021, but in the recent couple of quarters. The increases have been modest and of course it pointed.
Pointed out that gives us quite a big advantage, we're producing a lot of wood chips, a lot of residual wood chip side of that sawmill, which are going just down the road to Rosenthal. So we're much less exposed to the the pulpwood. The pulpwood cost that we would have been say five years ago.
Exactly right.
Okay. That's great. Thank you very much.
Yes, and I'll just add Andrew.
This is one of the the compelling synergies of the <unk> acquisition as well. So you can imagine. This is this is a saw mill that today, we're not we're not getting any of those residuals from that bill but in the future. We'll start directing those wood chips in particular, those wood chips, it's about 100 miles down the road, we will start to.
<unk> those wood chips to the Rosenthal pulp mill. So this is building on a on a on a synergy that we started with the freeze our mill and we we plan on continuing with the <unk> mill and two and to add to it and it gives us also a possibility too.
The other way around saw dust from our operation.
And the different mills, and then sent back to <unk> as you obviously have a big.
Pellet.
And <unk> business going on so so we have full use of every single aspect of that that's the whole point of optimizing the operations when we look at.
Our four units in Germany, being so close.
Okay. Thank you.
We will take our next question from Jeff Gates with Gates Capital Management. Please go ahead.
Yes. This is Joe.
I'm wondering are there any other new businesses beyond what you mentioned.
That would get you into any more specialty products in the commodity products that youre in and then secondly.
Once upon a time this company paid amongst higher dividends as a percent of assets.
Equity cap.
And I'm wondering if you adopt.
Considering any changes in dividend policy going forward.
So Jeff Let me, let me address the first part of your question I'll leave the second one for Dave.
We're obviously continuing to look for opportunities to diversify our business and to make sure that we can capture higher value.
For products that come out of our forestry assets.
So that's that's a permanent.
Way of operating for US obviously, our focus right now is on making sure that we extract the highest value book value possible of the recent acquisitions and Spokane CMT and now obviously.
Obviously will be a driving force for us and we have differentiated products there that where we believe that we can extract a significant amount of value.
That's why we've decided to make that investment in Spokane and in this phase one that I talked about in and soon to have a phase III two complimented.
Because it's all about having higher value products specialty.
The products that can position us very very well in that spectrum. So so we will continue but in the meantime, we will always continue to look for other opportunities that may arise in and time them properly.
It's obviously important that we that we do this in order.
So that we can capture the synergies we can capture the value we can concentrate our resources.
And then when the time is right move on to the next possibility of.
Keep on growing our business.
Solid way.
And maybe just a couple of comments about the dividend, yes, you are right.
In the past we've had.
Considerably higher dividend did youll remember that we dropped it down modestly when.
At the beginning of the pandemic.
And I can tell you that the board. This is a topic at our quarterly board meetings. It's a heavy topic that is discussed and debated within our board and the general discussion is it's always a.
Balanced between.
Capex the Capex program that we have underway M&A opportunities that we may have in the in the funnel and of course, some return to shareholders and at the moment. The board is viewing the acquisition the M&A acquisition in the high return Capex, particularly at Spokane at the moment.
And finishing off the other projects that we have at Peace River and <unk>. The board is viewing those as better returns for shareholders at the moment.
But I think the board got to be careful not to get a whole head of our board here, but.
They have an interest in watching the dividend and they have an interest in increasing the dividend over time, but at the moment they want us to focus on on the acquisition and finishing off this high high return Capex.
And then <unk>.
Question is.
I think pro forma youll be around 900 net debt in your equities 1 billion won.
And I'm just kind of wondering.
I know you have leverage ratios et cetera, but there's also.
Considerations.
By investors when they look at your <unk>.
Your cost of capital and how.
How much is that analysis.
You are cyclical so.
As you guys given any thought over time too.
I'm wondering are somewhat lower leverage.
In terms of net debt versus your.
Your equity cap.
That might give you a more optimal cost of capital.
And a better equity cost of capital.
Yes, yes, that's something we consider and I think if you went back historically and you don't have to go back too far to see that we were we used to carry much more leverage when compared to the EBITDA generation of the company and I think youll see going forward that will be we'll be targeting lower level.
So.
At the moment, we're below two on.
On a net on a net debt basis.
We think once we get to the <unk>.
Operation under our wings that will that will be reduced further so I think you could see us targeting we'll start talking about targets that are lower than we've had in the past so.
I think yes.
We understand what youre, saying and don't disagree with it.
We'd like to have there is times that we would take that leverage a little bit higher if we came across a really great great acquisition or great opportunity, but.
But mid cycle long term the goal is to push the leverage a little bit lower.
Okay. Thank you.
We'll take our next question from Paul Quinn with RBC capital markets. Please go ahead.
Yes, thank you very much.
Good morning, guys.
A question for Juan Carlos you've been at Mercer here for a little bit maybe you could just take a high level overview of what you're seeing on the pulp side as well as wood products what you like.
It needs to be.
Rethought or maybe some issues around.
Absolutely.
It's been up.
Great few months getting to know our operations I have been around all our facilities.
In Germany, and Canada, and the U S.
And one thing that strikes.
<unk> from the get go is that we have a very good facilities overall.
Our mills are well positioned they're highly competitive.
The teams in place.
Our working on the right projects to make sure that we extract more and more value from them.
And we have a pipeline of projects that have been identified.
By the local teams that will allow us to extract much more value from from all of these facilities.
Absolutely so.
It's a very good platform to grow from.
A very solid platform in Germany, very well positioned and taken advantage of the synergies.
Net having pulp mills close to saw mills.
Give us.
This is obviously something that strikes firsthand.
Something that gives you a tremendous competitive advantage.
Something that obviously was the reasoning behind the <unk> acquisition as we saw that as something that was really really strategically important and also even more considering.
Fiber supply shortages in future future years that we need to make sure that we are properly prepared for those and this gives us that strength of dealing with with any fiber shortages that might come.
In the out years. So that's also very looking forward into making sure that we have a sustainable business of sustainable fiber supply.
So thats very well organized in the way the company has been set up.
In Canada.
I think we have we have two assets.
That has a tremendous potential for growth.
There is a lot of work in progress you see.
Two wood room Capex projects that are being run right now are strategic for us not only from a <unk>.
Profitability perspective, but also from an environmental perspective.
Those are very positive additions and.
And we continue to see even more potential opportunities to improve our businesses there.
The facility.
In the U S in Spokane.
<unk> is a top notch facility that's the state of the.
Facility right there.
The possibilities are just tremendous.
And that's why we've decided to invest further in it.
And make sure that we have a much more complete and a different portfolio because once we're able to have lula.
Lula there together with C L.
Puts us almost in a unique situation.
When you look at what other companies.
<unk> are able to offer.
That type of combined.
Product portfolio out of one facility. So so it's all accurate in that sense that we believe that there is a lot of value to be extracted from those.
And not to say.
Enough about the future possibilities. This lignin plant that we're putting in Russia until this pilot plant.
That's just the beginning and remember this is a pilot facility only so this is not going to be.
The endpoint for us, but just the starting point.
And proving that that capability proving that production ability would allow us to see where else we would be able to.
Go in a more commercial stage, which such type of extraction possibilities not only in <unk>, but in some of the other mills. So I think there's tremendous opportunities here that we will be looking forward to and I think thats. Thanks to the fact that we have good assets to work with.
Okay great.
Great. Thanks for that overview, and then maybe just talking about that.
Your pilot facility.
Hi, Brian .
Few names that have gone down.
The biomass product.
<unk>.
Five or 10 years.
Never really seen any kind of.
Metrics coming out of those investments that are over the cost of capital. What do you think now is different or are we at a point, an inflection where where these products are actually going to be very commercial.
Side or or is it more of a diversification strategy for.
Mercury.
Well breaking ground on some of those.
Innovation is obviously.
Lengthy process.
And while everybody expects to see returns very very quickly when it comes to innovation those things take time, so the companies that have invested in lignin or other.
My products are obviously.
<unk> had been working on it for several years and I think those results. We will soon be much more visible as those markets are fully developed these are new products that end up substituting fossil based products. So it's not only the fact that you have to manage to produce a high quality product, but also the fact that you need to.
Substitute an incumbent.
In those spaces, so that obviously it takes time to develop.
Once that ground is broken I think we'll see a significant.
Increase of volumes in this business will in fact grow.
To a much higher degree than what it is right now Bob I agree with you that right now it's.
<unk> not seen clearly in a lot of talk but very little numbers to show by in any significant way by any of the companies that have been playing in this before.
But I think thats part of our absolute normal process. When it comes to these kind of innovations you need to break ground and then once you. Once those markets are settled then once those products are well known and accepted.
And then just Steve the market opportunities just opens up.
Okay, and just finally, who do you consider a best in class company around.
That's correct.
Can you repeat that again, sorry, you didn't get the question.
Who do you consider as best in class.
In terms of a biomass.
Company Besides mercury.
You mean biomaterials Paul.
Sure.
So while there is I mean.
Hi.
I don't know how to answer that question I think there is there is.
There is different types of approaches by different companies and I Wouldnt single out any one in particular.
I think there is.
Some are trying the lignin route somewhat trying other specialty fibers out.
Other types of cellulose products.
I wouldn't be able to single out one in particular to be honest with you I think everybody is trying a different route and some are also joining the lignin run.
But.
We'll see how that develops over time.
Okay Fair enough best of luck guys. Thanks.
It appears there are no additional questions at this time I'd like to turn the conference back to Juan Carlos Brito for any additional or closing remarks.
Okay. Thank you operator, and thanks to all of us for joining our call Dave.
Dave and I are available to talk more at anytime. So please don't hesitate to call. It one of US otherwise we look forward to speaking to you again on our next earnings call in October micro now.
This concludes today's call. Thank you for your participation you may now disconnect.
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