Mercer International Inc. Q1 2023 Earnings Call

May 5, 2023

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International policies that were published live audience and fundamentally shortly so I appreciate your basis does remain on the line.

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Okay.

Good morning, and welcome to Mercer Internationals first quarter 'twenty.

Three earnings conference call on the call today is one cargos went over this and Chief Executive Officer of Mercer International.

David Your senior.

Senior Vice President Finance, and Chief Financial Officer, and Secretary I will now hand, the call over to David Your please go ahead.

Good morning, everyone. Thanks for joining us today.

I'll begin by touching on our financial and operating highlights for the first quarter before turning the call.

Providing further color on the market.

Capital plan.

Our strategic initiatives.

We're also pleased to have with us today Richard sure.

Most of you know will become CFO .

When I step out.

[music] also for those of you that every one.

Hello.

Presentation materials.

In the investors section of our website.

[music] before turning to our results I would like to remind you that on this morning's call.

We will make forward looking statements.

<unk> seen the harbor.

Private Securities Litigation Reform Act.

85.

Call your attention to the risks related to these statements.

<unk> always described in our press release and in the company's filings with the securities.

[music] this quarter, we achieved an EBITDA of approximately $28 million compared to March.

Non cash inventory impairment.

EBITDA in Q1.

[music] lingering effects.

In our firearms.

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Lower.

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And the economic uncertainty.

All of our mills ran well this quarter with the freeze our sawmill achieving record production.

To see the benefits of our capital upgrades to the mill.

Our pulp segment contributed quarterly EBITDA of $40 million of all our solid one segment.

Negative 7 million [music] remind additional segments.

Yes.

Can be found on our website.

Yes.

Yeah.

In Q1 average N B S K and N B H K list prices were down in all of our markets compared to Q4 overall demand was relatively weak in the current quarter as customers reduced inventory levels in anticipation of lower prices and inflation and economic uncertainty negatively impact.

In paper demand.

European N B S. K list prices averaged $1377 per ton in the current quarter compared to $1442 per ton in Q4.

In China, the Q1 average N B S. K net price was $891 per ton down $29 from $920 per ton in Q4.

So we've seen several times in the past decade, the Chinese market price gap between N B S. K and M. D. HK grew to about $180. This quarter as the hardwood market digests, new eucalyptus hardwood capacity from South America.

Average N b HK pricing was down marginally in the U S, but down 15% in China compared to Q4.

In China, the Q1 average NBA <unk> net price was $710 per ton down $127 from $837 per ton in Q4.

The lower hardwood prices and relatively high chemical and logistics costs.

This resulted in the recording of a $15 million noncash inventory write down in Q1.

Lower pulp prices resulted in a negative impact on EBITDA of about $29 million compared to the fourth quarter. In addition, the weaker U S dollar negatively impacted EBITDA by $8 million compared to Q4.

Our pulp production was strong this quarter up 31000 tons from the fourth quarter, but due to relatively soft demand. Our sales volume was down 29000 tonnes, creating an inventory build that we expect to reverse over the next few months.

<unk>, our mill had a 10 day shut in the first quarter compared to the fourth quarter. When we had a 21 day shut at Stendal mill.

In Q1, the Stendhal mill received almost $8 million for business interruption insurance related to the fire damaged wood yard infrastructure.

These proceeds were principally covering operating losses in the current quarter.

Final repairs to the mill are scheduled to be completed in Q2.

For our solid wood segment lumber pricing was up slightly in the European market, but down in the U S market.

European demand was steady in the first quarter, but pricing continued to decline in the U S market due to the economic uncertainty and rising interest rates the random lengths U S benchmark for Western SPF, <unk> and better averaged $386 per thousand board feet in Q1 compared to $410.

In Q4.

Overall lumber prices negatively impacted EBITDA by approximately $5 million when compared to the fourth quarter.

Today, the benchmark price for Western SPF, two and better two by fours in the U S is $350 per thousand board feet virtually unchanged from the beginning of 2023.

We had record quarterly production at our freeze our old mill as we continue to realize the benefits of the capital improvements to the mill.

Total lumber production was 134 million board feet in the quarter, which is up 17 million board feet from the fourth quarter we.

We also had record lumber sales volumes due in part to the timing of certain vessels that were delayed out of Q4.

Lumber sales volumes were approximately 140 million board feet up 41 million board feet from the prior quarter.

We are making solid progress with the integration of our tour Gal mill, and while economic headwinds and seasonality are negatively impacting pricing for pallets, biofuels lumber, which make it more difficult to quickly obtain our synergies targets. We continue to expect annual synergies from the <unk>.

Action to approach $16 million annually once product pricing turns to more normal levels.

Electricity sales totaled 237 gigawatt hours in the quarter, which is up 15 gigawatt hours from Q4 due to our strong production in the current quarter and the absence of the planned maintenance shut at Stendal in Q4.

Pricing in Q1 fell to about $130 per megawatt hour due to the implementation of the German energy price cap, which came into effect at the end of 2022.

We currently expect that the energy price cap will not be renewed when it is scheduled to expire in June due to reduced energy supply concerns in Europe .

We reported a consolidated net loss of $31 million for the quarter or <unk> 46 per share compared to net income of $20 million or <unk> 30 per share in Q4.

After removing the impact of the noncash inventory charge. The net loss is about <unk> 29 per share.

We used about $53 million of cash in Q1 compared to using about $8 million in Q4.

The increased cash usage was due to lower EBITDA and a significant buildup of inventory in our Canadian Mills, we increased our log inventory at our peace River mill to prepare for the startup of the new Wood room, which was completed in Q1 and it sell Gar, we opportunity Opportunistically built some wood.

Inventory to secure our operating position through the summer.

Our pulp finished goods inventory also grew modestly in the quarter as we tried to manage our sales process and the backdrop of falling prices. We expect this working capital build to reverse considerably beginning in Q2.

Capital spending was about $33 million in Q1 and included costs to complete the peace River Wardroom, which started operating late in the quarter.

We expect to see the benefits from this project in the form of lower fiber costs for the mill beginning in Q2.

Looking ahead, we have moderated our expected capex spend to be between 150 at $180 million in 2023.

At the end of the quarter, our liquidity position totaled about $556 million comprised of $301 million of cash and $255 million of Undrawn revolvers.

And as you have seen from our press release today, Our board has approved a quarterly dividend of $7 <unk> per share for shareholders of record on June 28, 2023 for which payment will be made on July six.

That ends my overview of the financial results I'll turn the call now to Juan Carlos.

Thanks, Dave.

Let me start by saying that I'm very pleased with the strong performance of our mills as we exceeded our production targets for the quarter yet.

Yet our operating results were negative negatively affected by a number of external factors the.

The most impactful was finished product pricing.

Two Q4 pricing for most of our products was down on average pulp pricing was down about 5%, while lumber prices down about 15% in the U S.

And although fiber prices peaked in Q1, and we are coming down for the quarter, our pulp mill costs on average were considerably higher than Q4.

However, our first quarter results also reflected some positives most notably our recent investments in our pre sell mill allows them to achieve record production and sales volumes this quarter.

I am also excited with the progress, we're making in developing our mass timber business.

Our order book is filling rapidly and we continue to bid on numerous mass timber projects as production ramps up in Q2, we expect to realize a noticeable increase in CLC revenue.

In addition, as some of you may be aware.

We have the stocking horse bidder for the bankrupt structure Lam assets. This process may end up in an auction. So the outcome is unclear today, but I will say that regardless of the outcome. We will continue to invest in the growth of this very profitable mass timber business.

I am satisfied with the progress we have made on integrating our <unk> sawmill and I applaud, our targa employees for being open to changing how they do things, especially around safety.

Despite the current market dynamics that are limiting our synergies I believe that in the fullness of time this asset will add significant shareholder value.

Softwood pulp prices were steady through most of Q1, but fell off about $50 per ton on average late in the quarter.

During this same period hardwood prices in China fell roughly $185 per ton.

Subsequent to the end of the quarter pulp prices in China have continued to weaken.

Markets were put under additional pressure by a number of factors, including Chinese buyers holding off new orders mid March while speculating on lower pulp prices and Russian producers accepting deep discounts with a backdrop of higher supply of hardwood as new capacities are starting to reach the market.

Looking forward, we expect pulp pricing to continue to be under pressure in Q2 on the softwood side, we feel that prices will begin to firm late in Q2, as Chinese buyers and traders take advantage of low prices to refill their inventories and the impact of reduced supply is felt as producers had into the maintenance season.

History tells us that producers will contain global consider extending their maintenance shuts during times of weaker pulp prices.

On the hardwood side, we also see buyers re entering the market to refill inventories, but the new supply will create an extended headwind as the market absorbs this new supply.

At these low prices, we expect Asian integrated hardwood production took retail which will help support prices.

However, we expect the gap between hardwood and softwood prices to continue to grow beyond the current $180 per ton level.

As a result of these market pressures, we will be extending our peace River mill annual maintenance. This quarter from 13 days to 29 days. This will allow us to reduce the cost of the shop by allowing us to reduce overtime hours and reduce the work done by contractors.

In addition to the 29 days, our Peace River mill will be down in Q2, our 2023 annual net maintenance schedule in fluids Stendal, having a short three day shut down and Cariboo being down for the entire month of May now in Q2.

In total we expect our Q2 annual maintenance downtime to reduce production by about 55000 tons.

We're also Intel will be down for 14 days in Q3, reducing production by about 14000 tons.

<unk> will have another short three day shuts and <unk>, we have 26 day major maintenance in Q4 were roughly 41000 tons of production in total.

Our first quarter lumber results reflected mixed markets with the U S market down compared to Q4 and the European markets up slightly.

The negative market sentiment in the U S continues to be the result of uncertainty created by rising mortgage rates and uncertain economic indicators that.

The U S lumber market prices have been range bound for Q1 and into the second quarter. Despite.

Despite some positive announcements around housing starts and growing optimism from homebuilders lumber prices remained low due to general economic uncertainty.

We continue to believe that low lumber channel inventories.

Large number of sawmill curtailments relatively low housing stock and constructive own homeowner demographics will put positive pressure on the supply demand fundamentals of this market and meet the mid term.

We will continue to match our mix of lumber products and customers to current market conditions in Q1, our lumber sales volumes were roughly evenly split between the U S and the European markets.

We continue to see improvements in our logistics channels and modest decreases in our freight costs.

In Q4, we saw pulpwood prices peak. These high cost inventory was utilized in Q1, which pushed our fiber costs up in the first quarter.

The high pulpwood costs were mainly driven by demand from the energy sector. As users were looking for cheaper forms of energy, but the energy sector demand will have significantly decrease and we expect fiber cost to come down noticeably in the second quarter.

In Western Canada, we expect the impact of our new Peace River Mills Wood room, and increased log harvesting levels to bring our fiber costs down in the second quarter.

Looking ahead in light of lower product pricing and uncertain market conditions, we have made the put and decision to reduce our planned capex slightly to between $150 million to $180 million in 2023.

We have retained all high value projects delaying only those that were discretionary.

Our Capex spend includes the completion of the circle wood room as well as the lignin development Center and the extraction pilot plant, which is a large step towards being able to begin commercialization of lignin.

We will also do the majority of our $27 million expansion project at our Spokane mass timber plant and investment that will allow this state of the art facility to fully utilize a more varied raw material mix add <unk> to our product portfolio and increase finger joined production.

This is a first step in what will ultimately be an expansion of CLC capacity in anticipation of our efforts to steadily increase our order book for mass timber products.

We will also complete upgrades at our new <unk> mill to increased lumber production and debottleneck certain elements of our shipping pallet and heating pellet plants.

As our world becomes more sensitive to reducing carbon emissions, we believe that products like lignin mass timber green energy extracted lumber and pulp are all products that will play increasingly important roles in displacing carbon intensive products products like concrete and steel for construction plastic packaging fossil fuels.

<unk> and synthetic fragrances and flavors, even synthetic textiles.

We're committed to our 2030 carbon reduction targets and believe our products form part of the climate change solutions in.

In fact, we believe that in the fullness of time demand for our low carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions to.

To that end going forward, we will see us looking to grow these areas of our business. We remain bullish on the long term value of pulp.

But to bring more balance to our business solid wood and extract this will grow more quickly.

I encourage you to look at our website for more details. We're so confident in our ability to meet these targets that we converted our German revolving credit facility to our sustainability linked loan, making us part of a small group of wood product producers willing to invest in carbon emission reduction targets in favor of modest reductions in our cost of borrowing.

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And finally as Dave noted Richard short will assume the CFO role effective June 1st as most of you know Richard is a seasoned industry leader and has been with us for over 15 years.

They will remain with us for a few more months to finish some transition activities and is available of course with rich and I at any time should you need further information.

We are listening and I will now turn the call back to the operator for questions. Thank you.

Thank you if you would like to ask a question or make a comment simply press the star key.

Did you have one on your telephone keypad also if you are using a speaker phone. We ask that you. Please make sure. Your mute function is turned back to allow your signal to reach our equipment.

Ken Please.

Star one at this time, we will pause for a brief moment.

And we will finish chips Shan Shan Stewart at TD Securities.

Okay.

Hi, Sean do you have a question.

Sorry, I apologize guys.

Yeah, I'll start with wood products.

Can you give us an idea of how much the losses. This quarter were split between three DAU in.

And the <unk> facility, and then I guess more specific to free though you're still shipping half year your volumes in the U S.

Can you give us an idea of the rationale of continuing at that pace with prices, where they are freight rates where they are.

Any intention to pull.

Pull back on.

On volumes into that market.

I guess, starting with the mix of the wood products mix.

They're all well.

But between <unk> free so they were they were similar it wasn't one driving it wasn't one driving the result over another they were they were broadly in alignment for different reasons of course, but broadly in alignment so not not really an outlier there.

In terms of the the 50% I'd say, that's a little bit higher than our target we had.

The shipments there were quite a bit higher than normal we had a little bit of a backlog and vessels that came from Q4 and ended up in Q1, So I don't think so.

I think you should think of 50% as being indicative of what we're what we're going to do there and in the future.

Okay.

Thanks for that.

And then.

Dave just comments on overall comfort with liquidity and leverage.

And I guess, particularly with respect to your interest in structure Lam and I appreciate that.

Engineered wood products mass timber is going to be a growth focus for the company but.

Youre funding constraints will arguably increases pulp prices are capitulating here.

Just overall thoughts on comfort with your balance sheet at this point in the cycle.

Yes, it's hard to see it at the moment, but.

Maybe I'll just talk about the B is the liquidity at the moment, we think is quite.

Quite sufficient $300 billion of cash we've got a lot of working capital at the moment, that's going to unwind itself quite quickly. So we're coming out of Q1 is our always our largest inventory quarter for wood. So that'll start unwinding itself and materialize into cash quickly. We've got we held.

Back on so pulp sales in Q1 that will come out will be unwound here.

In Q2, so there is a working capital element.

The other thing that is happening in the background, where we've we've just passed the peak of some of our most important costs at our cost structure. So for example, the pulpwood costs.

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We peaked during Q1 and we're now seeing considerable reductions in wood costs will have a noticeable improvement in wood costs in Q2, and we're seeing the same thing with chemicals. So most of our chemicals or derivatives of electricity or gas, which ran really hard in Q4.

And now they're starting to come back.

It's not coming back as quickly as the revenue from our.

Electricity, but theyre coming back very quickly we see the same thing we purchase a little bit of gas on the market as well and thats coming down very quickly. So these these are inputs that.

Most of these inputs went up by 50% or more.

Over the last year and now they are backing off.

Backing off very very quickly. So we're looking ahead to that.

We also have.

You've heard us talk a little bit about our mass timber business and we got our first big order. We believe that that's the beginning of more to come and so we're preparing for for that.

And.

And in terms of the leverage yes, we know the leverage is going to be a little bit higher than our target here for a while but I see that as more having to do with the depressed EBITDA at the moment than the than the value of the debt that we have in place.

So I think to get.

Just to get right to the number of your question. This is a place that we're pretty comfortable.

We've got working capital coming we're trimming back our Capex or Juan Carlos say, we're going to have modest moderate the capex for 2023, but still push ahead with the high return projects and prepare ourselves that we can.

We can participate if the structure Lamb transaction goes to an auction we can participate in that.

And just one follow up there.

For pulpwood cost in chemicals can you give us an idea of what kind of declines you might expect to see in the second quarter.

Yes, so when we talk about the declines were principally talking about Europe , because that's where the big inflation was getting a little bit of inflation in Canada, but nothing like we had in Europe .

We're probably expecting somewhere in the range of 10% to 15% reduction in Q2 from Q1.

And probably similar similar for chemicals.

And those two elements are warm as you know form probably 90% of our cost structure.

Okay. Thanks, very much for that data that's all I have.

Okay.

And next we'll hear from Paul Quinn of RBC, Okay.

Okay.

Yes, thanks very much good morning.

Chinese MBS K praises are 891 in Q1 average down I think it was 29 Bucks from Q4.

Fair prices in April there and what do you expect for the for Q.

Q2 <unk> average.

Prices right now are a bit north of 700 around 700.

One for softwood.

So so yes, the big decline has happened in April more than it did in May and.

And we believe it's very close to the to the floor.

We expect that floor to be hit during this quarter.

Okay. Thanks for that and just could you help me understand the process around the stocking horse bids restructure lanvin.

What that process is and what do you expect on the timing side.

The stalking horse.

Stocking horse process with structured.

It gives us.

Kind of the initial bid priority for for this project.

You know, we did $60 million.

U S dollars for it.

By may 25th or May 27th.

The actual auction would would commence.

For those parties that would be interested in.

And acquiring this asset for anybody to outbid us they would have to probably a bit of at least <unk>.

62, 9% or $63 million for it.

And from then onwards, the auction the auction goes very quickly every I believe every.

Auction and.

<unk> bid would have to be probably I think it's 500000 higher than the previous one 1 million.

Higher than the previous one.

And that goes that goes fairly quickly so it's.

On may 27th we should know the results of the of the bidding process.

Okay. That's great. Thanks for that and then just just on that last summer.

Existing facility.

Great to hear that the order file is.

I think I heard you describe it as very profitable business, but I suspect that's a common thing.

Okay.

Citation and that in the future is that we expect to breakeven this year.

Oh, yes, yes, absolutely yes.

I think it's going to be positive this year already it is positive.

We see that growing very well the second quarter will be positive without a doubt.

And we continue to see very good momentum on projects and that we have been bidding for.

And more similar projects to the one we won that were that were already in.

And production phase.

We have others lined up of similar size that are progressing very well. So that's why we're very very confident about our ability to achieve very good growth results with cross laminated timber and we see this mass timber business.

As you will set us up not only as a profitable business, but the big advantage that it brings is the growth that this industry's having overall in the construction business. When you look at the rates at which it has been growing.

In the U S or in North America is north of 15% over the past 15 over the past five years and it is expected to keep on growing at more than 15% for the next five years. So so we have on it.

Very significant organic growth behind us.

And the fact that we're sitting on probably one of the most modern facilities in the U S.

With high productivity indexes, obviously, it gives us high confidence in what we can deliver and structure them would be a tremendous complement to that.

With their blue line capacity on top of what we already have in CMT and Spokane.

That obviously round set up very nicely with two very new facilities and very large capacities.

So it's clearly a growth engine for us.

Okay, and just so we understand the structure of Lam.

Yes.

If youre successful bolus of project what is the problem with that with that company that they ran into trouble that they buy.

Going through bankruptcy.

They had they had some operational issues.

That.

Basically forced them out of our business on some of the deals that they had contracted.

And that basically those businesses were turned down and that put them into into dire Straits. So.

It was performance issues.

That got them into trouble.

I guess, you guys feel confident that you'd be able to get around those performance issues.

Absolutely absolutely because they were they were more mistakes than than actual issues with our facilities or the structure itself.

So there were.

Production mistakes that.

That that Shouldnt have been committed obviously.

And we trust that are the management team that we have.

At Spokane.

Leaders that we have the knowledge of the team that we have built within Mercer gives us very high confidence that we will be able to take over this asset.

And run it under the standards that we're running our Philippine Spokane.

With the highest quality and delivering those projects on a timely basis.

On budget.

Great to hear thanks, very much best of luck.

Well.

And next we'll hear from Amir Patel of CIBC capital markets.

Good morning.

One Carlos with pulp.

Pulp prices coming off as much as they have where do you think the cost curve is for Canadian softwood pulp capacity.

Okay.

Hum.

I think obviously with prices at this level.

There are several mills that can be.

Having very very difficult times, and making a profit.

I think when it comes to softwood.

We still believe even with these prices we are managing.

Through these rough times.

The way that we have set up sell guard.

Allows us that possibility.

In <unk>, we've we've improved tremendously our position from a wood cost perspective.

That brings US also some relief going forward from a cost perspective, knowing that we will be able to source.

Wood from the U S south of the border.

And Thats something that is probably unique to sell a car.

Especially for those mills that RMB see that suffer so much from the curtailments of saw mills.

And actually.

Access to chips.

At good prices, what we have and celebrate the capacity to look for different baskets.

That other mills would not be able to.

To reach.

At least at a competitive basis. So so we see that as a positive development for <unk>.

That we can continue to develop the mills stronger from a wood perspective and also once we have the wood room.

Already by the end of the year.

That will give us even more.

Benefit on the on the cost side.

That would room benefit we've seen it already in peace River.

That is helping very much our situation in peace River going forward.

So as we once we finish this up.

The maintenance shutdown period in Peace River.

We'll begin with softwood campaigns, and and running the wood room and getting the benefits out of it so.

So I think thats a bit of where we are obviously the situation is complicated in a quarter, where as I said before I think we're going to reach bottom prices in Q2 four for softwood at least.

But I think we can navigate through those with the assets that we have.

Okay, great. Thanks, that's helpful and just a question for Dave.

Leave you referenced.

Pellet prices.

Coming off year over year do you have a.

Census to what.

Kind of maybe the level of price declines you've seen there in Europe and have prices start to stabilize yet or are you still expecting further declines from here.

What our teams are telling us that they are there they are still falling during the quarter during quarter, one, but they are starting to stabilize now.

But they've come off probably a 40% to 50% in the last six months.

Okay.

It was that much and how they run up quite a bit.

The prior year or two or is that.

They did in the in 2022, they were they were very quite high levels.

Yes.

Okay fair enough.

If this is all on the back of a mirror of this.

Obviously economic uncertainty.

So we do believe that as as conditions improve gradually.

The.

Congress will begin reactivating and we will see obviously.

This market rebounding.

Fairly quickly once once conditions stabilize.

Yes fair enough.

Thanks, That's all I had I'll turn it over.

And again, if you would like to ask a question on Rich's comments press Star one.

Jim.

We'll now hear from Richard Stevens.

Monte.

Hi, just a couple of follow ups, if I could I appreciate the comments regarding the pulpwood costs coming down chemical costs.

One of the things you mentioned in terms of.

Cash generation was the increase in working capital. If you look at your free cash flow burn most of it was related to an inventory drag in Q1 can you just quantify how we should expect that to work out through the course of the year I mean by definition you would kind of think that maybe Q2 becomes a little more of a free.

Cash flow breakeven period, you guys are at least positive cash from operations is that fair to say.

Well.

If we talk about the inventory or the.

The inventory build I'd say roughly roughly half of it is pulp inventory.

I'm generalizing here, a little bit, but roughly half of it is pulp inventory and half of it is wood inventory in front of the mills and the wood inventory is higher it's generally quite high at this time of the year. This is a typical quarter, where we build wood inventory.

The peak a lot of our harvesting in buying activity as happens in the winter and then we consume it during during the summer when we don't have access to to the sites.

So it's relatively high the other thing about our wood inventory at the moment is that we've built quite a bit of inventory at our peace River mill in preparation to start up the new wood room, so that new route what room that we built.

Very high capacity wood room.

We wanted to make sure we had a lot of wood in front of that when we started it up and we started up a couple of weeks ago, now and so a little bit unusually high wood because of that in preparation for the boardroom on.

On the pulp side.

It doesn't have that seasonal impact that we have with wood, but we did have relatively high inventories of pulp and the principal reason for that was.

When the reductions in pulp first started to materialize, we were trying to manage them and not trying to we're trying to manage the pricing and make sure that we worked damaging the price by introducing too much pulp to the market and holding back a little bit on sales.

But that that pulp mills that pulpwood.

<unk> itself very quickly here in Q2, so if you ask about the timing how this will unwind I think you can expect that.

Pulp inventory so half of the build will come out very quickly into Q2, the wood inventory. The other half will will take longer than that because its wood that is intended to supply that build through the summer you.

You could expect that to unwind over probably the next two quarters.

Got it.

Got it okay. That's helpful.

And then just to follow up on the stalking horse bid the $60 million.

I'm, assuming that's not included in your Capex plan.

Is that fair.

Correct that is not included.

As we mentioned that is not yet a done deal.

So when we when we regrouped and looked at our Capex spending and adjusted it to 150 to 180.

That is not including the $60 million.

Or above that.

We would be willing to pay for a structure that.

Got it and then final question for me you mentioned earlier.

In terms of the bonds are trading levels that were out there post quarter end have you guys considered or have you been active and potentially repurchasing the bonds in the open market at a pretty steep discount this morning.

No we've been watching that and I think perhaps in different different circumstances that would be something we'd be considering but you can imagine.

Worried up we're in a period, where we've got some uncertainty on how long the pulp prices are going to stay low.

And so we're preparing ourselves for if it could go.

This last for longer than a few months and then also making sure that we've got enough dry powder for something like like the structure of Lam that we're hoping to complete on so it just didn't seem like the right time to.

I think the prices of the bonds are attractive, but just not not the right time.

Got it okay. That's it for me thank you.

And at this time there are no further questions I will turn the call back over to Juan Carlos and additional or closing comments.

Okay. Thank you operator, and thanks to all of you for joining our call rich, Dave and I are available to talk more at any time, so don't hesitate to call one of US otherwise we look forward to speaking to you again on our next earnings call in July Bye for now.

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Good morning, and welcome to Mercer Internationals first quarter 2023 earnings conference call on the call today is Glenn <unk>.

As Chief Executive Officer of Mercer International.

With David <unk>, Senior Vice President Finance, and Chief Financial Officer and Secretary.

I'll now pass the call over to David Miller. Please go ahead.

Good morning, everyone. Thanks for joining us today I.

I will begin by touching on our financial and operating highlights for the first quarter before turning the call to Juan Carlos to provide further color on the market for capital plan levels, our strategic initiatives.

Also pleased to have with US today, Richard sure. Most of you know will become the company's CFO when I step out in June .

Also for those of you that have joined today's call by telephone there is a presentation materials amicus attached to the investors section of our website.

Before turning to our results I would like to remind you that during this mornings call. We will make forward looking statements and according to the Safe Harbor provisions of the private Securities Litigation Reform Act of 995.

Call your attention to the risks related to these statements which are more fully described in our press release and in the Companys filings with the Securities and Exchange Commission.

This quarter, we achieved an EBITDA of approximately $28 million compared to Q4 2019.

After adjusting for a $58 million non cash inventory impairment to EBITDA is between $133 million.

The decrease in Q1 from Q4.

Armed with lingering effects and inflation in our fiber and chemical costs.

Combining Paul.

Our pricing overall.

Recently, rising interest rates and economic uncertainty.

All of our mills ran well in this quarter with the freeze outs saw mill achieving record production, we continue to see the benefits of our capital upgrades to the mill.

Our pulp segment contributed quarterly EBITDA of $40 million.

Our solid <unk> segment, EBITDA was negative $7 million.

Find additional segment disclosures in our Form 10-Q, which can be found on our website and the SEC.

In Q1 average <unk> and NV HK list prices were down in all of our markets compared to Q4 overall demand was relatively weak in the current quarter as customers reduced inventory levels in anticipation of lower prices and inflation and economic on <unk>.

Certainty negatively impacted paper demand.

European MBS K list prices averaged $1377 per ton in the current quarter compared to $1442 per ton in Q4.

In China. The Q1 average <unk> net price was $891 per ton down $29 from $920 per ton in Q4.

As we've seen several times in the past decade, the Chinese market price gap between <unk> and <unk> grew to about $180. This quarter as the hardwood market digests, new eucalyptus hardwood capacity from South America.

Average <unk> pricing was down marginally in the U S, but down 15% in China compared to Q4.

In China. The Q1 average <unk> net price was $710 per ton down $127 from $837 per ton in Q4.

The lower hardwood prices and relatively high chemical and logistics costs.

It resulted in the recording of a $15 million noncash inventory write down in Q1.

<unk>, our mill had a 10 day shut in in the first quarter compared to the fourth quarter. When we had a 21 day shut the Stendhal mill.

In Q1, the Stendhal mill received almost $8 million for business interruption insurance related to the fire damage woodyard infrastructure.

These proceeds were principally covering operating losses in the current quarter.

A final repairs to the mill are scheduled to be completed in Q2.

For our solid wood segment lumber pricing was up slightly in the European market, but down in the U S market.

In Q4.

Overall lumber prices negatively impacted EBITDA by approximately $5 million when compared to the fourth quarter.

Today, the benchmark price for Western SPF, two and better to buy forwards in the U S is $350 per thousand board feet virtually unchanged from the beginning of 2023.

We had record quarterly production at our freeze our old mill as we continue to realize the benefits of the capital improvements to the mill.

Total lumber production was 134 million board feet in the quarter, which is up 17 million board feet from the fourth quarter we.

We also had record lumber sales volumes due in part to the timing of certain vessels that were delayed out of Q4.

Lumber sales volumes were approximately 140 million board feet up 41 million board feet from the prior quarter.

Action to approach $16 million annually once product pricing turns to more normal levels.

Pricing in Q1 fell to about 132.

Dollars per megawatt hour due to the implementation of the German energy price cap, which came into effect at the end of 2022.

We currently expect that the energy price cap will not be renewed when it is scheduled to expire in June due to reduced energy supply concerns in Europe .

We reported a consolidated net loss of $31 million for the quarter or <unk> 46 per share compared to net income of $20 million or <unk> 30 per share in Q4 <unk>.

After removing the impact of the noncash inventory charge. The net loss is about 29 per share.

We used about $53 million of cash in Q1 compared to using about $8 million in Q4.

The increased cash usage was due to lower EBITDA and a significant buildup of inventory in our Canadian Mills, we increased our log inventory at our peace River mill to prepare for the startup of the new Wood room, which was completed in Q1 and its Sagar, we opportunity opportunistically built some.

Inventory to secure our operating position through the summer.

Capital spending was about $33 million in Q1 and included costs to complete the Peace River Wood room, which started operating late in the quarter, we expect to see the benefits from this project in the form of lower fiber costs for the mill beginning in Q2.

Looking ahead, we have moderated our expected capex spend to be between 150 at $180 million in Q2.

23.

At the end of the quarter, our liquidity position totaled about $556 million comprised of $301 million of cash and $255 million of Undrawn revolvers.

And as you have seen from our press release today, Our board has approved a quarterly dividend of $7 five per share for shareholders of record on June 28, 2023 for which payment will be made on July six.

That ends my overview of the financial results I'll turn the call now to Juan Carlos.

Thanks, Dave let.

Let me start by saying that I'm very pleased with the strong performance of our mills as we exceeded our production targets for the quarter.

Yet our operating results were negative.

<unk> affected by a number of external factors.

Impactful was finished product pricing compared to Q4 pricing for most of our products was down on average pulp pricing was down about 5%, while lumber prices down about 15% in the U S.

Although fiber prices peaked in Q1, and we're coming down for the quarter, our pulp mill costs on average were considerably higher than Q4.

However, our first quarter results also reflected some positives most notably our recent investments in our pre sell mill allows them to achieve record production and sales volumes this quarter.

I am also excited with the progress we're making in developing our mass timber business. Our order book is filling rapidly and we continue to bid on numerous mass timber projects as production ramps up in Q2, we expect to realize a noticeable increase in CLC revenue.

In addition, as some of you may be aware, we have the stocking horse bidder for the bankrupt structured assets. This process may end up in an auction. So the outcome is unclear today, but I will say that regardless of the outcome. We will continue to invest in the growth of this very profitable mass timber business.

I am satisfied with the progress we have made on integrating our <unk> sawmill and I applaud our torque I'll call employees for being open to changing how they do things, especially around safety.

Despite the current market dynamics that are limiting our synergies I believe that in the fullness of time this asset will add significant shareholder value.

Softwood pulp prices were steady through most of Q1, but fell off about $50 per ton on average late in the quarter.

During this same period hardwood prices in China fell roughly $185 per ton.

Subsequent to the end of the quarter pulp prices in China have continued to weaken.

And the impact of reduced supply is felt as producers had into the maintenance season.

History tells us that producers will continue we will consider extending their maintenance shuts during times of weaker pulp prices.

On the hardwood side, we also see buyers re entering the market to refill inventories, but the new supply will create an extended headwind as the market absorbs this new supply.

At these low prices, we expect Asian integrated hardwood production took retail which will help support prices.

However, we expect the gap between hardwood and softwood prices to continue to grow beyond the current $180 per ton level.

As a result of these market pressures, we will be extending our peace River mill annual maintenance. This quarter from 13 days to 29 days. This will allow us to reduce the cost of the shut by allowing us to reduce overtime hours and reduce the work done by contractors.

In addition to the 29 days, our Peace River mill will be down in Q2, our 2023 annual net maintenance schedule includes stendal, having a short three day shut down and Cariboo being down for the entire month of May now in Q2.

In total we expect our Q2 annual maintenance downtime to reduce production by about 55000 tons.

<unk> will be down for 14 days in Q3, reducing production by about 14000 tons.

And though we will have another short three day shut and saga, we have 26 day major maintenance in Q4.

Roughly 41000 tons of production in total.

Our first quarter lumber results reflected mixed markets with the U S market down compared to Q4 and the European market up slightly.

The negative market sentiment in the U S continues to be the result of uncertainty created by rising mortgage rates and uncertain economic indicators that.

The U S lumber market prices have been range bound through Q1 and into the second quarter.

Despite some positive announcements around housing starts and growing optimism from homebuilders.

<unk> prices remained low due to general economic uncertainty, we continue to believe that low lumber channel inventories. The large number of sawmill curtailments relatively low housing stock and constructive own homeowner demographics will put positive pressure on the supply demand fundamentals of this mark.

And met the midterm.

We will continue to match, our mix of lumber products and customers to current market conditions.

In Q1, our lumber sales volumes were roughly evenly split between the U S and the European markets.

We continue to see improvements in our logistics channels and modest decreases in our freight costs.

In Q4, we saw pulpwood prices peak. These high cost inventory was utilized in Q1, which pushed our fiber costs up in the first quarter.

Hi, pulpwood costs were mainly driven by demand from the energy sector. As users were looking for cheaper forms of energy, but the energy sector demand will have significantly decrease and we expect fiber cost to come down noticeably in the second quarter.

In Western Canada, we expect the impact of our new Peace River Mills Wood room, and increased log harvesting levels to bring our fiber costs down in the second quarter.

We have retained all high value projects delaying only those that were discretionary.

We will also do the majority of the $27 million expansion project at our Spokane mass timber plant and investment that will allow this state of the art facility to fully utilize a more varied raw material mix add blew them to our product portfolio and increased finger joined production.

This is a first step in what will ultimately be an expansion of CLC capacity in anticipation of our efforts to steadily increase our order book for mass timber products.

We will also complete upgrades at our new <unk> mill to increased lumber production and debottleneck certain elements of our shipping pallet and heating pellet plants.

Products like concrete and steel for construction plastic packaging fossil fuels generated electricity and synthetic fragrances and flavors, even synthetic textiles.

We're committed to our 2030 carbon reduction targets and believe our products form part of the climate change solutions. In fact, we believe that in the fullness of time demand for our low carbon products will dramatically increase the world looks for solutions to reduce its carbon emissions.

And going forward, we will see us looking to grow these areas of our business.

We remain bullish on the long term value of pulp.

But to bring more balance to our business solid wood and extract this will grow more quickly.

And finally as Dave noted Richard short will assume the CFO role effective June 1st as most of you know rich is a seasoned industry leader and has been with us for over 15 years.

They will remain with us for a few more months to finish some transition activities and is available of course with rich and I at any time should you need further information.

Thanks for listening and I will now turn the call back to the operator for questions. Thank you.

Thank you if you would like to ask a question.

Can you comment simply press the star key power brands.

The digital one on your telephone keypad also if you are using a speaker phone. We ask that you. Please make sure. Your mute function is turned back to allow your signal to reach our equipment.

So again please.

Star one at this time, we will pause for baseball niche.

And we will finish chips Shan Shan Stewart at TD Securities.

Okay.

Hi, Sean do you have a question.

Sorry apologies guys.

Yes, I'll start with wood products.

Can you give us an idea of how much the losses this quarter were split between <unk> and <unk>.

And the <unk> facility, and then I guess more specific to free though you're still shipping half year your volumes in the U S.

Can you give us an idea of the rationale of continuing at that pace with prices, where they are freight rates, where they are and.

Any intention to pull.

Pull back on.

On volumes into that market.

I guess, starting with the mix of the wood products mix.

They're all well.

Between <unk> freezer. They were there were similar it wasn't one driving it wasn't one driving the result over another they were they were broadly in alignment for different reasons of course, but broadly in alignment so not not really an outlier there.

In terms of the the 50% I would say thats, a little bit higher than our target we had.

The shipments there were quite a bit higher than normal we had a little bit of a backlog in vessels that came from Q4 and ended up in Q1, So I don't think so.

I think you should think of 50% as being indicative of what we're what we're going to do there in the future.

Okay.

Thanks for that.

And then.

Dave just comments on overall comfort with liquidity and leverage.

And I guess, particularly with respect to your interest in structure Lam and I appreciate that.

Engineered wood products mass timber is going to be a growth focus for the company but.

Youre funding constraints will arguably increases pulp prices are capitulating here.

Just overall thoughts on comfort with your balance sheet at this point in the cycle.

Yes, it's hard to see it at the moment, but.

Maybe I'll just talk about the maybe the liquidity at the moment, we think is quite.

Back on some pulp sales in Q1 that will come out will be unwound here in.

In Q2, so there is a working capital element.

The other thing that is happening in the background, where we've we've just passed the peak of some of our most important costs in our cost structure. So for example, the pulpwood costs.

Have.

We peaked during Q1 and we're now seeing considerable reductions in wood costs.

We will have a noticeable improvement in wood costs in Q2, and we're seeing the same thing with chemicals. So most of our chemicals or derivatives of electricity or gas, which ran really hard in Q4, and now that <unk> starting to come back.

Not not coming back as quickly as the revenue from our.

Electricity, but theyre coming back very quickly and we see the same thing we purchase a little bit of gas on the market as well and Thats coming down very quickly. So these these are inputs that.

Sure.

Most of these inputs went up by 50% or more.

Over the last year and now they are backing off.

Backing off very very quickly. So we're looking ahead to that.

We also have.

You've heard us talk a little bit about our mass timber business and we got our first big order, we believe that thats, the beginning of more to come and we're preparing for for that.

And.

And in terms of the leverage we know the leverage is going to be a little bit higher than our target here for a while but I see that as more having to do with the depressed EBITDA at the moment than the than the value of the debt that we have in place.

So I think to get.

Just to get right to the number of your question. This is a place that we're pretty comfortable.

We've got working capital coming we're trimming back at our Capex you heard Juan Carlos say, we're going to have modest moderate the capex for 2023, but still push ahead with the high return projects and prepare ourselves that we can.

We can participate if the structure Lamb transaction goes to an auction we can participate in that.

And just one follow up there.

For pulpwood cost in chemicals can you give us an idea of what kind of declines you might expect to see in the second quarter.

We're probably expecting somewhere in the range of 10% to 15% reduction in Q2 from Q1.

And probably similar similar for chemicals.

And those two elements are warm as you know form probably 90% of our cost structure.

Okay. Thanks, very much for that data that's all I have.

Okay.

And next we'll hear from Paul Quinn of RBC capital markets.

Okay.

Yes. Thank you very much good morning.

Chinese MBS prices or <unk> 91 in Q1 average down I think it was 29 Bucks from Q4.

Fair prices in April there.

What do you expect for the.

Q2 <unk> average.

Prices right now are a bit north of 700 around $700 a ton for softwood.

So yes, the big decline has happened in April more than it did in May and.

And we believe it's very close to the to the floor.

We expect that floor to be hit during this quarter.

Okay. Thanks for that and just could you help me understand the process around the stocking horse bids restructure lab.

What that process is and what do you expect on the timing side.

The stocking and.

Stocking horse process with structured.

It gives us.

Kind of.

The initial bid priority for for this project.

As you know we did $60 million.

U S dollars for it.

By may 25th or May 27th.

The actual auction would would commence.

For those parties that would be interested in.

In acquiring this asset for anybody to our betas, they would have to probably a bit at least.

62, 9% or $63 million at Ford.

And from then onwards, the auction the auction goes very quickly every I believe every.

Auction and.

<unk> bid would have to be probably I think it's 500000 higher than the previous one or $1 million.

Higher than the previous one.

And that goes that goes fairly quickly so.

On may 27th we should know the results of the of the bidding process.

Okay. That's great. Thanks for that and then just.

On the vascular.

Existing facility.

Great to hear that the order file is growing I think I heard you describe it as very profitable business, but I suspect that's the common theme.

That's your expectation in that in the future is that we expect to breakeven this year.

Oh, yes, yes, absolutely yes.

I think it's going to be positive this year already it is positive.

We see that growing very well the second quarter will be positive without a doubt.

And we continue to see very good momentum on projects and that we have been bidding for.

And more similar projects to the one we won that were that were already in.

And production phase.

We have others lined up of similar size that are progressing very well. So that's why we're very very confident about our ability to achieve very good growth results.

Cross laminated timber and we see this mass timber business.

As you will set us up not only as a profitable business, but the big advantage that it brings.

Is the growth that this industry's having overall in the construction business. When you look at at the rates at which it has been growing.

In the U S or in North America is north of 15% over the past 15 over the past five years and is expected to keep on growing at more than 15% for the next five years. So so we have a very significant organic growth behind us.

And the fact that we're sitting on probably one of the most modern facilities in the U S.

With high productivity indexes, obviously, it gives us high confidence in what we can deliver and structure them would be a tremendous complement to that.

With their blue line capacity on top of what we already have in CMT and Spokane.

That obviously round set up very nicely with two very new facilities and very large capacities.

So.

It's clearly up.

Both engine for us.

Okay, and just so we understand.

This structure Lam.

Yes.

If youre successful bolus of project, what's the problem with that with that company that they ran into some trouble.

Through bankruptcy.

They had they had some operational issues.

<unk>.

Basically forced them out of our business on some of the deals that they had contracted.

And that basically those businesses were turned down and that put them into into dire Straits. So it was performance issues that that got them into trouble.

I guess, you guys feel confident that you'd be able to get around those performance issues.

Absolutely I guess it is absolutely because they were they were more mistakes than than actual issues with facility and sort of the structure itself.

So there were there were production mistakes that.

That that Shouldnt have been committed obviously.

And we trust that are the management team that we have.

At Spokane, the leaders that we have the knowledge of the team that we have built within Mercer gives us very high confidence that we will be able to take over this asset and run it under the standards that were running our <unk> with.

With the highest quality and delivering those projects on a timely basis and on budget.

Great. Thanks, very much best of luck.

Well.

And next we'll hear from <unk> Patel of CIBC capital markets.

Good morning.

One Carlos with the.

Pulp prices coming off as much as they have where do you think the cost curve is for Canadian softwood pulp capacity.

Hum.

I think obviously with prices at this level.

There are several mills that can be.

Having very very difficult times, and making a profit.

I think when it comes to softwood.

We still believe even with these prices we are managing.

Through these rough times.

The way that we have set up sell guard.

Allows us that possibility.

In <unk>, we've we've improved tremendously our position from a wood cost perspective.

That brings US also some relief going forward from a cost perspective, knowing that we will be able to source.

Wood from the U S south of the border.

And Thats something that is probably unique to sell a car.

Especially for those mills that RMB see that suffered so much from the curtailments of saw mills.

And actually what.

Access to chips at good prices, what we have and celebrates their capacity to look for different baskets.

That other mills would not be able to.

To reach.

At least at a competitive basis. So so we see that as a positive development for <unk>.

That we can continue to develop the mill stronger from a wood perspective and also once we have the wood room.

Ready by the end of the year.

That will give us even more.

Benefit on the on the cost side that would room benefit we've seen it already in peace River.

And that is helping very much our situation in peace River going forward.

So as we once we finish this.

Maintenance shutdown period in Peace River.

We will begin with the softwood campaigns and and running the wood room and getting the benefits out of it so.

So I think thats.

Got a bit of where we are obviously the situation is complicated in a quarter, where as I said before I think we're going to reach bottom pricing in Q2 four for softwood at least.

But I think we can navigate through those with the assets that we have.

Okay, great. Thanks, that's helpful and just a question for Dave.

I believe you referenced step pellet prices.

Coming off year over year do you have a.

Census to what.

Kind of maybe the level of price declines you've seen there in Europe and have prices start to stabilize yet or are you still expecting further declines from here.

What our teams are telling us that they are there.

Falling during the quarter during quarter, one, but they are starting to stabilize now.

But they've come off probably a 40% to 50% in the last six months.

Okay.

Yes, it really is as it was that.

And have they run up quite a bit.

Kind of the prior year or two or is that.

They did in the in 2022, they were they were very quite high levels.

Yes.

Okay fair enough.

This is all on the back of a mirror of this obviously economic uncertainty.

We do believe that as conditions improve gradually.

On the call.

Commerce will begin reactivating and we will see obviously.

This market rebounding.

Fairly quickly once once conditions stabilize.

Yes fair enough.

That's all I had I'll turn it over.

And again, if you would like to ask a question I'll make a comment press star one is time.

We'll now hear from Richard Stevens.

Monte.

Hi.

A couple of follow ups, if I could I appreciate the comments regarding the pulpwood costs coming down chemical costs.

One of the things you mentioned in terms of.

Cash.

<unk> was the increase in working capital if you look at your free cash flow burn most of it was related to an inventory drag in Q1 can you just quantify how we should expect that to work out through the course of the year I mean by definition you would kind of think that maybe Q2 becomes a little more of a free cash flow breakeven period.

You guys are at least positive cash from operations is that fair to say.

Okay.

If we talk about the inventory or the.

The inventory build I'd say roughly roughly half of it is pulp inventory.

The peak a lot of our harvesting in buying activity as happens in the winter and then we consume it during during the summer when we don't have access to to the sites.

High capacity Wood room, we wanted to make sure we had a lot of wood in front of that when we started it up and we started it up.

A couple of weeks ago, now and so a little bit unusually high wood because of that in preparation for the boardroom on.

On the pulp side.

It's it doesn't have that seasonal impact that we have with wood, but we did have relatively high inventories of pulp.

And the principal reason for that was when the.

The reductions in pulp first started to materialize, we were trying to manage them and not trying to we're trying to manage the pricing and make sure that we werent damaging the price by introducing too much pulp to the market and holding back a little bit on sales.

But that that pulp mills that pulp will relieve itself very quickly here in Q2. So if you ask about the timing how this will unwind I think you could expect that.

The pulp inventory so half of the build will come out very quickly into Q2, the wood inventory. The other half will will take longer than that because it would that is intended to supply that build through the summer.

You can expect that to unwind over probably the next two quarters.

Got it.

Got it okay. That's helpful.

And then just to follow up on the stalking horse bid the $60 million.

Im assuming thats not included in your Capex plan.

Is that fair.

Correct that is not included.

As we mentioned that is not yet a done deal.

So when we when we regrouped and looked at our Capex spending and adjusted it to 150 to 180 that is not including the $60 million.

Or above that that we would be willing to pay for structure them.

Got it and then final question for me you mentioned earlier.

In terms of the bonds are trading levels that were out there post quarter end.

Have you guys considered or have you been active and potentially repurchasing the bonds.

In the open market.

Steep discount this morning.

No we've been watching that and I think perhaps in different different circumstances that would be something we'd be considering but you can imagine.

So worried up we're in a period, where we've got some uncertainty on how long the pulp prices are going to stay low.

And so preparing ourselves for it could go.

This last for longer than a few months and then also making sure that we've got enough dry powder for something like like the structure of Lam that we're hoping to to complete on so it just didn't seem like the right time to.

The prices of the bonds are attractive, but just not not the right time.

Got it okay. That's it for me.

Thank you.

And at this time there are no further questions I will turn the call back over to Juan Carlos any additional or closing comments.

Okay. Thank you operator and thank.

Thanks to all of you for joining our call rich, Dave and I are available to talk more at anytime so don't hesitate to call one of us.

Otherwise, we look forward to speaking to you again on our next earnings call in July Bye for now.

And that does conclude today's call. Thank you all for your participation you may now disconnect.

Mercer International Inc. Q1 2023 Earnings Call

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