Q3 2023 Mercer International Inc Earnings Call
Good morning, and welcome to Mercer Internationals third quarter 2023 earnings conference call on the call today is Juan Carlos widow, Mercury's, President and Chief Executive Officer, and Richard Short Mercury's, Chief Financial Officer, and Secretary I will now hand, the call over.
Richard.
Good morning, everyone. Thanks for joining us today.
I will begin by touching on our financial and operating highlights for the third quarter before turning the call over to Juan Carlos to provide further color into the markets our operations and our strategic initiatives.
Also for those of you that have joined the call.
On a by telephone there is a presentation material that we have attached in the investors section of our website.
Before turning to our results I would like to remind you that we will be making forward looking statements in this mornings conference call.
According to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 I.
I'd like to call your attention to the risks related to these statements.
Which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.
This quarter, our EBITDA was $38 million composed of Q2s.
Pair to Q2's negative EBITDA of $69 million this significant improvement over the prior quarter was due to lower fiber and other production costs.
Inventory impairment reversal and fewer days of scheduled annual maintenance downtime, partially offset by lower pulp sales realizations.
Our pulp segment contributed quarterly EBITDA of $49 million.
And our solid wood segment EBITDA was negative $7 million.
You can find additional segment disclosures in our Form 10-Q, which can be found on our website.
C C.
In Q3, our pulp segment had significantly lower fiber costs in Q2.
As a reminder, Q2 results included a $51 million inventory impairment primarily for hardwood inventory.
At the end of Q3, only about $9 million of this impairment remains against our closing inventory.
Yeah.
Our solid wood segment also had lower per unit fiber costs in Q3, when compared to Q2 due to the availability of lower cost beetle damaged wood in Germany.
We currently expect beetle damaged wood to be available into 2024.
In Q3, both our N B S K and N V H K sales realizations decreased compared to Q2.
As modestly higher prices in China, driven by low customer inventory levels.
Were more than offset by lower prices in Europe, and North America due to weak paper demand.
Late in the quarter, we started to see similar restocking efforts in both Europe, and North America, which created modest upward pricing pressure.
In China, Q3 average M. B S. K net price was $680 per ton.
$12 relative to Q2.
It is worth noting that pulp prices in China are up about $100 a ton compared to their low point this year.
European MBS keyless prices averaged $1160 per ton in the current quarter, a decrease of $87 per ton from Q2.
The market price gap between M. B S K and N B HK in China now to about $150 per ton in Q3 from $185 per ton in Q2.
In China. The Q3 average <unk> net price was $530 per ton up $47 compared to the average of Q2.
The North American average Q3, this price was $1023 per ton down 250, $254 or about 20% from Q2.
All of our mills ran well this quarter and we had less scheduled downtime in Q3 when compared to Q2.
In Q3, we had a total of 39 days of downtime at our Mills, which consisted of 13 days for planned maintenance in 2006 days for logistics related curtailment. While in Q2, we had 60 days of downtime at our mills, which consisted of 25 days for planned maintenance and 35 days for market curtailment.
The lower scheduled maintenance downtime positively impacted EBITDA by about $10 million in Q3, when compared to Q2.
Yeah.
After adjusting for planned shots and curtailments pulp production was down approximately 12000 tons from the second quarter.
Total pulp sales volumes in the third quarter were about 487000 tons down about 9% from the second quarter due to the timing of sales.
For our solid wood segment modest lumber pricing improvements in the U S market were offset by lower pricing in the European market.
Despite the price increases in the U S. Overall lumber demand remains weak due to high interest rates.
The random lengths U S benchmark for Western SPF number two and better was $407 per thousand board feet at the end of Q3 compared to $380 at the end of Q2 today the benchmark is around $377.
We are not anticipating significant improvements to lumber pricing in the near term due to high interest rates and the seasonal slowdown in construction activity.
Lumber production was about 90 to 94 million board feet in the quarter down almost 23% from Q2 due to scheduled annual maintenance work completed in Q3.
Lumber sales volumes were approximately 115 million board feet down 14% from the prior quarter.
Electricity sales totaled 254 gigawatt hours in the quarter, which is modestly up from Q2 due to fewer days of scheduled downtime in Q3 <unk>.
Pricing in Q3 increased to about $113 per megawatt hour from $106 in Q2 due to modestly higher prices in both Germany and Canada.
Our mass timber business continues to ramp up operations, resulting in revenue of $19 million in Q3 compared to <unk> 14. In Q2. This business also has a growing order book that we expect to fulfill over the coming months.
All in all we reported a consolidated net loss of $26 million for the third quarter or <unk> 39 per share.
Compared to a net loss of $98 million or $1 48 per share in Q2.
Cash generated in the quarter totaled $130 million compared to cash used of $87 million in Q2.
In Q3 cash generated from the senior note offering in positive EBITDA was offset by a higher net working capital balance primarily due to the timing of tax and interest payments.
Despite a reduction in inventory levels.
Looking ahead, we expect a modest working capital reduction in Q4 due to further restrictions sorry further reductions in finished goods and raw material inventories.
In Q3, we invested about $37 million of capital in our mills.
And looking ahead, we currently expect capital spending to be about $140 million in 2023.
In September we took important steps to enhance mercury's liquidity position to ensure strong liquidity through the business cycle.
These steps included completing a private offering for $200 million of senior notes due in 2028.
As well as increasing the availability of our Germany revolving credit facility by about 70 million euros to $307 million euros.
The new 2028 senior notes carrying interest rate of 12, 875%.
At the end of Q3, our liquidity position totaled $648 million comprised of $344 million of cash and about $305 million of Undrawn revolvers.
And as you would have noted from our press release, our board has approved a quarterly dividend of <unk>, seven and a half cents per share for shareholders of record on December 20th.
The payment will be made on December 28.
That ends my overview of the financial results I'll now turn the call over to Juan Carlos.
Thank you rich.
Good morning, everybody.
Financially Q3 was significantly better than our second quarter, our production costs, including fiber all trended down this quarter.
Lower cost combined with modest price increases in some of our markets led to a significantly improved EBITDA result.
And although the markets, where we operate are still at historically low levels of pricing and have relatively weaker demand than expected.
Seeing some selective modest recovery, but varying by geography.
As a result of uncertain market conditions, we have taken proactive actions throughout this year to reduce our planned capex as we had already signaled in the previous quarter and now expect to land at around $140 million for the full year.
At the same time, we continued our focus on cost saving measures and aggressively managing our inventories during this third quarter and we will continue this financial discipline, while our markets remain weak.
I am pleased with our efforts to increase our liquidity this quarter.
Our $200 million senior note private placement and the 70 million Euro increase through our German revolving credit facility leave us well positioned to continue to execute our strategic plan through this business cycle.
We recognize that these <unk>.
2028, senior notes come with a high cost at $12 87, 5%.
But given the depth and uncertainty around this down cycle in our markets. We felt it prudent to ensure Mercer has strong liquidity through this cycle.
It's also important to note that the investments we have made in our solid wood segment over the last year, namely the acquisition of Targa and structure them were primarily done with our own cash.
And in the fullness of time. These investments are expected to provide returns well in excess of the cost of these new notes.
Overall pulp markets remain weak, but all markets appear to have hit their floors with modest price increases implemented in either Q3 or early Q4.
For N B S. K. These increases appear to be the result of paper producer restocking.
A reaction that is likely due to the realization that softwood pulp supply is down roughly 1 million tons on an annualized basis between mill closures conversions and curtailments.
Most of these funds are permanently removed from the market, which will positively impact pulp markets when demand begins to improve.
On the demand side European paper producers continued to run at reduced capacity rates.
As the European economy remains weak.
<unk> continues to deal with the effects stemming from the Ukraine Maher.
Similarly in China. The government is pursuing measured economic stimulus steps, but weak economic growth continues in lights up significant risks faced by the real estate industry.
Looking forward, we expect pulp prices to continue to slowly increase in Europe, and North America in Q4.
As reduced supply supports modest price improvements.
As a result of the logistical issues created by the recent British Columbia Port strike, we were forced to take a temporary 26 day curtailment at ourselves our mail during the month of August.
This was not a decision we made lightly but was necessary to manage the finished goods inventory at the mill.
And we use this time to renegotiate our fiber supply contracts and are now seeing the benefits of it as our wood costs have come down and this is already visible in our results.
Our mills ran very well in the quarter, although the logistics related curtailment at <unk>, resulting from this port issue negatively impacted pulp production relatively to the second quarter.
Our scheduled maintenance was down from 25 days or roughly 25000 tonnes. In Q2 2013 days in Q3, all concentrated in a very well executed shot at Rosenthal, reducing 30000 tons of production as planned.
Now for this fourth quarter, our annual maintenance schedule includes stendal, taking a short three day shut that will include all the final repairs to the woodyard conveyor systems that was damaged by the fire in Q3 of last year.
And so gar, taking a major 26 day maintenance in Q4 or roughly 41000 tons of production in total.
Moving to our solid wood segment, our third quarter results reflected mixed markets, particularly in lumber with the U S market being up slightly on average while the European markets was down compared to Q2.
High interest rates continue to weigh on housing starts which are expected to keep lumber prices range bound through Q4.
We continue to believe that low lumber channel inventories the large number of sawmill curtailments relatively low housing stock.
Wood shortages created by recent Canadian Forest fires and constructive homeowners demographics are still very strong fundamentals for the construction industry and this will put positive pressure on the supply demand balance of this business in the midterm.
We will continue to optimize our mix of lumber products and customers to current market conditions as.
As such in Q3 slightly less than half of our lumber sales volumes were sold in the U S. Substituting volumes that otherwise would be destined for Europe and other markets.
Integration of <unk> continues to progress well.
Although shipping pallet markets remain weak on the back of a weak European economy overall, while heating pellets prices were up roughly 20% due to seasonal demand relative to Q2.
Once the European economy begins to show signs of recovery, we expect pellet prices to return to normal levels, allowing this asset to deliver significant shareholder value through the sale of pallets and increased lumber sales.
In addition, the integration of the structural amount that's continuous to progress as planned.
We now have roughly 35% up north American mass timber production capacity, a broader range of product offerings and a much larger geographic footprint, which cases competitive access to the entire north American market.
We continue to see strong customer interest in our mass timber products, which has made our order file is stronger and including now several large marquee projects that we're very proud of.
Moving on to cost of fiber overall, we experienced decrease in pulpwood prices in Q3.
In Germany, a steady supply of sawmill chips resulted in cost decreases but work done at our Canadian mills, including the ramp up of peace river's wood room, and the renegotiation of consciousness Sagar push our fiber costs down in Q3.
Looking ahead, we expect further modest declines in pulpwood costs at all of our mills in Q4.
Our new lignin extraction pilot plant continues its ramp up as planned as a reminder, this new lignin plant is a large step towards mercer being able to begin commercialization of lignin.
We're excited about the future prospects of this product as a sustainable alternative to fossil fuel based products such as in adhesives and advanced battery elements to only name a few.
This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a secular carbon economy.
As the world becomes more sensitive to reducing carbon emissions, we believe that policy like lignin mass timber green energy lumber and pulp will play increasingly important roles in the spacing carbon intensive products.
Alex like concrete and steel for construction of plastic packaging.
Furthermore, the potential demand for sustainable path to appeal substitutes is very significant and has the potential to be transformative to the wood products industry.
We are 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.
We remain bullish on the long term value of pulp and are committed to better balance our company through faster growth in our lumber and mass timber businesses.
In closing looking forward to Q4, we will remain focused on our cost reduction capex and working capital initiatives, while we navigate this period of low pulp and lumber prices.
We'll continue to work on rebalancing our assets in line with the execution of our strategic plan and we'll continue to manage our cash and liquidity prudently.
Thanks for listening and I will now turn the call back to the operator for questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Our first question comes from Samir Patel with CIBC you May proceed.
Hi, good morning.
Juan Carlos.
Longer would you expect to benefit from the cheaper beetle wood in Europe.
Longer term, how do you think about the risks to fiber availability just given how <unk> played out in British Columbia.
Yep. Thank you.
Very important issue and one that we're following very closely for obvious reasons.
We believe that they are.
Beetle infestation would support lower prices for wood throughout most of 2024.
And that's what we've dialed that into our estimates already thinking about what next year will look like so I don't know not only Q4, but a large majority of of 2024 should be benefiting by the impact of <unk>.
Beetle infestation.
Having said that obviously, we monitor very closely.
How the whole access to wood or fiber on Europe has progressed.
And this is something that we keep on.
In a rate of one of the things that we take.
Take advantage of as our Mercer holds entity.
Laos is to supply wood from all around Europe in a very efficient way, so where we keep on putting a lot of emphasis on making sure that we maintain that differentiator from our side on fiber supply, while we monitor the evolution of these beetle infestation.
Yes.
Fair enough Thanks, Juan Carlos.
Last question I had for rich how are you thinking about capex for <unk>.
For 2024, and what are the larger growth projects that you would expect to advance next year.
Yes, so I think we're still going to have a pretty subdued capex plan for next year. So it's not a lot of strategic initiatives.
And I think we're going to sort of see how the year plays out but it'll be on the lower end probably.
And the 100 million neighborhood I think at this point.
Great.
Thats, all I had I'll turn it over thanks.
Thank you.
One moment for questions.
Our next question comes from Sean Stewart with TD Securities You May proceed.
Thank you good morning.
Juan Carlos you mentioned.
The restocking efforts that are happening in pulp in China.
And I guess I'm wondering your assessment of how much of this is just inventory arbitrage in and buying aggressively at the bottom versus actual consumption.
It feels like paper markets in China are necessarily strong so be interested in your perspective on the sustainability of.
Price momentum, we're seeing right now.
Thank you Sean Yes, what you say is absolutely correct.
Say theres, a little bit of both I wouldn't attribute.
So only one of these factors I think that there is some increase in consumption in China.
From just on the sake of the new plants that have been put up both in tissue and paper that are obviously demanding pulp.
What I see the weakness, though is in the actual market for those products from that point onwards, so while pulp might be consumed.
The marketing of those paper products I think is.
We'll take longer than than it usually does on the other side of the spectrum and backed as you started your question.
Do believe that there is a lot of arbitrage.
Inventory going on.
And that's why we remain cautious about.
Any increases right now out of China, we see that in Europe and in North America things are picking up. So there are obviously lower than China right now so they have still space to pick up along the quarter.
But I wouldn't be overly optimistic.
China prices developing much stronger until we really see some demand kicking in now having said that since the N. B SK supply equation is in our view so tight with so many curtailments happening in so many closures of different mills, we do believe that.
If there is a.
We action from a demand side, particularly.
Particularly in Europe that has been very dormant.
Or even North America, we could see that that could be a catalyst for our wheel recovery in prices.
As everybody knows it's not clearly in the picture Nowadays when Europe or North America would would start picking up strong momentum so well have to see where we're very cautious about pricing for the next few quarters.
Thanks for that detail that's helpful.
Second question. It does seem like tour Gao as an ongoing drag on on results.
The results of the wood products segment.
You touched on pallet market.
Any thoughts on.
Repositioning of the product mix, which is something you talked to that before does that take a back seat until you have.
Clarity on.
Our balance sheet improvement for the company.
How has your thinking evolved with respect to changing the product mix at <unk>.
Yes, very important matter when you look at <unk> what are the things that we are doing since pellet prices are very depressed.
Historically based on the fact that Europe is very little is moving in Europe right now from an economic perspective on.
Things are very very slow based on that what we've done since we have <unk>.
<unk> installed to produce pallets, we have rearranged our product portfolio and have changed a little bit more in the type of pilots that we're able to produce and which markets. We can serve them into open new markets for some of them.
And go for the higher value markets for us So that's a little bit.
What we've done behind the scenes on the pallet market.
And we've kind of made changes throughout the sales organization that we had or the tornado had.
Prior to our acquisition. So that's been one change from our end would be existing footprint now on the other hand, we have started some of the transformation projects and target.
So that we can significantly take advantage of the capacity that the mill can offer from a lumber perspective, some of those projects, we've kind of put on the back burner for the time being we know that once we start them.
They will soon be into fruition.
So we're cautiously as you well said, we're cautiously looking at how the market develops how our cash flow and our liquidity evolves. So that we can trigger the continuation and finalize those transformative projects for torque out plays out, which would which would give us the advantage obviously.
A much larger production of lumber.
It wouldn't make a whole lot of sense to produce a whole lot of lumber in that right now.
Current prices, but we do want to be ready when the prices pick up.
And therefore us having a larger capacity to produce higher volumes of lumber by them.
That's great I appreciate the detail that's all I have.
Thank you.
One moment for questions.
Our next question comes from Matthew <unk> with RBC you May proceed.
Hi, Good morning, Thanks for taking my questions I would like to stick with the pallet market to start with.
Should we be looking just to a general economic recovery in Europe, as we think about what could kind of caused the recovery in the pilot markets or.
Given the tour guys one of the larger facilities in Europe. It is likely EBIT of negative <unk>.
Alex have finite lives.
Could that market begin to tighten even absent broader economic recovery.
Uh huh.
Matthew we do believe that this is very much linked to Europe, Europe's economy, not not moving when you think about pallets. It's all about commerce, it's all about shipping products here and there.
And basically when you look at Germany, overall, Germany being one of the most important economies in Europe is probably the one that has suffered the most.
It's actually going under a recession.
So we.
We do believe that that only when we see.
Recovery from an economic perspective.
Overall in Europe, we will see an immediate.
Move towards a higher use of pallets, and therefore with higher demand, we would expect higher prices. So that's really what we're what we believe we are up against.
And that's where all our kind of our chips are based on that premise.
We believe holds very true.
Okay. Thanks for that maybe switching over to <unk>.
Manufactured products and mass timber.
Are you able to talk about whether your EBIT positive at this point and then how should we think about a reasonable target for 2020 for revenues in that business, just given what youre seeing in terms of kind of inbound inquiries and backlog in that business at present.
Yes.
The business as we mentioned in the.
The call has been progressing pretty well since we acquired structural Lam.
The interest and the level of inquiries.
Multiplied significantly.
Putting a lot of pressure on our teams to be able to deliver on all the design work that is required for this business prior to being able to close any deals.
As such we're seeing a very significant growth not only we already saw it in Q3 versus Q2, but also when you back to your question when we look at next year.
We most likely would be at least twice in terms of revenue as we have as we will close in Q4. So.
So we.
We're thinking that for next year, we should be around $120 million plus.
In terms of sales.
Again twice of what we will finish by the end of this year and we're very very close to being breakeven now.
So we're again very confident that it will be a positive contributor overall very soon to our company.
Yes.
Great. That's helpful. Thanks for that.
Last one to close.
Like to ask about just the dividend here and the level of commitment when it comes to maintaining its configured.
Do you think youre getting credit for the dividend do you viewed as something you'd like to maintain just given the broader company focused on.
Optimizing liquidity and cost of debt.
I wanted to ask do you want me to take that one.
Yes.
Rich.
Yes, Amit.
I think it's probably fair to say the board is very committed to the dividend through the cycle.
Every quarter, they look at our leverage our balance sheet metrics.
And our capital allocation plans.
And.
So this was a big discussion for sure but.
We're projecting modestly improved improving financial results as we go through the rest of this year and into 2024. So they they are very committed to the dividend. We just didn't think now's the time to be changing it.
Okay. Thanks, very much that's all for me I'll turn it back.
Thank you.
And as a reminder to ask a question. Please press star one on your telephone.
Our next question comes from Sam Mcgovern with UBS you May proceed.
Hey, guys. Good morning. Following the recent bond deal you guys have lots of liquidity, how do you think about what a normalized level would be and can you also discuss possible uses for the excess liquidity one's earnings return to a more normalized level.
Okay. So.
I would say, probably we've probably averaged about $500 million.
Liquidity over the last.
Probably two years.
<unk>.
We've always like to have dry powder as we used to say.
Just because we have been able to use that debt.
That liquidity to invest.
Invest in things like <unk>, and our mass timber businesses, so like to have that available and especially given the volatility in our in our industry.
So I would probably say thats, our targets, but as we sort of come out of this down cycle.
Juan Carlos mentioned earlier <unk> was a big area of focus for us for some value add investments there and our mass timber business as well there are some things we want to do there too.
To lower our costs at our Spokane mill.
And a little bit more efficiency at the Conway plant as well so.
I think those would be the the main areas of focus as we as we move forward.
Great. Thanks, so much I'll pass it on.
Thank you and I'd now like to turn the call back over to Juan Carlos window for any closing remarks.
Thank you very much operator, and thank you all for joining our call rich and I are available to talk more at any time, so don't hesitate to call either one of US otherwise we look forward to speaking to you again on our next earnings call in February by for now.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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