Q4 2023 Mercer International Inc Earnings Call

Yes.

Operator: Music Good morning, and welcome to Mercer International's fourth quarter 2023 earnings conference call. On the call today is Juan Carlos Bueno, Mercer's President and Chief Executive Officer, and Richard Short, Mercer's Chief Financial Officer and Secretary. I will now hand the call over to Richard. Good morning, everyone.

[music].

Okay.

Good morning, and welcome to Mercer International's fourth quarter 2023 earnings Conference call.

On the call today is Juan Carlos Porno, Marcia as President and Chief Executive Officer, and Richard Short Marshalls, Chief Financial Officer, and Secretary I will now hand, the call over to Richard.

Thanks, Abigail and good morning, everyone. Thanks for joining us today.

Richard Short: Thanks for joining us today. I will begin by touching on the financial and operating highlights of the fourth quarter. Before turning the call over to Juan Carlos to provide further color on the markets, our operation... Also, for those of you that have joined today's call by telephone... This is a presentation material that we have attached to the investor section of our website. But before turning to our results, I would like to remind you that we will be making forward-looking statements in this morning's conference call. According to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related, which are more fully described in our press release.

Begin by touching on our financial and operating highlights of the fourth quarter before turning the call to Juan Carlos to provide further color into the markets our operations and our strategic initiatives.

Also for those of you that have joined today's call by telephone.

The presentation material that we have attached to 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 would like to call your attention to the risks related to these statements which are more fully described in our press release and the company's financial filings with the Securities and Exchange Commission.

Richard Short: The company's financial filing, This quarter, our EBITDA was $21 million, compared to Q3's EBITDA of $38 million. Higher Pulp Sales Realization.??????????

This quarter, our EBITDA was $21 million compared to Q3 as EBITDA of $38 million.

Higher pulp sales realizations and lower fiber costs were more than offset by the sale of inventory in Q3 that had previously been impaired as.

Richard Short: have previously been impaired, as well as increased major maintenance downtime. For the 2023 fiscal year, we had EBITDA of $17 million, compared to EBITDA of $537 million in 2012. Significantly Weaker Pulp and Lumber Markets, Lower Spot Energy Prices, and Higher Fiber Costs. Our pulp segment contributed quarterly EBITDA of $32 million, and our solid wood segment EBITDA was negative $6 million. You can find additional segment disclosures in our Form 10-K, which can be found on our website, and that Q4, both our NBSK and NBHK sales realizations increased compared to. We had higher prices in all our markets, customers were restocked. In Europe, we are benefiting from a modest... In China, the Q4 average MBSK net price was $748 per ton, up $68, or 10% relative to Q3. In Europe, the NBSK list price averaged $1,245 per tonne in the current quarter, an increase of $85, or 7%. In China, the Q4 average NBHK net price was $643.00, up $113, or about 21%, compared to the Q3 average price.

As well as increased major maintenance downtime in Q4.

And the 2023 fiscal year, we had EBITDA of $17 million compared to EBITDA of $537 million in 2022.

Due to significantly weaker pulp and lumber markets lower spot energy prices and higher fiber costs that impacted the entire industry.

Our pulp segment contributed quarterly EBITDA of $32 million and our solid wood segment EBITDA was negative $6 million.

You can find additional segment disclosures in our Form 10-K, which can be found at our website and that of the SEC.

In Q4, both our N B S K and N B H K sales realizations increased compared to Q3.

At higher prices in all of our markets as customers are restocking and in Europe. We are benefiting from a more modest increased in paper demand.

In China, the Q4 average M. B S. K net price was $748 per ton up $68 or 10% relative to Q3.

European MBS K list price averaged $1245 per tonne and the current quarter, an increase of $85 or 7% from Q3.

In China, the Q4 average N V H K net price was $643 per ton.

$113 or about 21% compared to the Q3 average price.

Richard Short: The North American average Q4 list price was $1,083.00 per ton, up $60, or 6% from... As a consequence, the market price gap between NBSK and NBHK in China narrowed to about $105 per ton in Q4, from $150 per ton. We had increased scheduled maintenance downtime in Q3 when compared to-sorry-increased maintenance downtime in Q4 when compared to. In Q4, we had 23 days of downtime, while in Q3, we had 13 days of downtime. The increased scheduled maintenance negatively impacted EBITDA by about $11 million in Q4, partially offset by the impact of not having any production curtailments in Q4. After adjusting for planned shutdowns and CELGIRS Q3 logistics-related curtailment. Whole production was up approximately 11,000 tons from the total pulp sales volumes in the fourth quarter were $491,000. For our solid wood segments, modest lumber pricing improvements in the U.S. market were more than offset by lower pricing in the European market. Despite the price increases in the U.S., overall lumber demand remains subdued due to high interest rates. Random Links U.S.

The North American average Q4 list price was $1083 per ton up $60 or 6% from Q3.

As a consequence, the market price gap between N B S K and N B, H, K and China narrowed to about $105 per ton in Q4.

From $150 per ton in Q3.

We had increased scheduled maintenance downtime in Q3, when compared sorry increased maintenance downtime in Q4, when compared to Q3.

In Q4, we had 23 days of downtime while in Q3, we had 13 days.

The increased scheduled maintenance negatively impacted EBITDA by about $11 million in Q4, when compared to Q3.

Which was partially offset by the impact of not having any production curtailments in Q4 relative to Q3.

After adjusting for planned shot and <unk> Q3 logistics related curtailment.

Pulp production was up approximately 11000 tons from the third quarter.

Total pulp sales volumes in the fourth quarter were 491000 tonnes, which was flat compared to the third quarter.

For our solid wood segment modest lumber pricing improvements in the U S market were more than offset by lower pricing in the European market.

Despite the price increases in the U S. Overall lumber demand remained subdued due to high interest rates.

Richard Short: Benchmark for Western SPF No. 2 Embedder was $422 per thousand boards at the end of Q4, paired to $407 at the end of... Today, that benchmark is around $428. We are expecting a modest increase in U.S. lumber prices in the near term, driven by increased house building activity and a Low Housing Inventory Level. In the European market, we are expecting prices to remain flat as demand remains steady. Lumber production was 112 million board feet in the quarter, up almost 20% from Q3 due to less scheduled annual maintenance. Lumber sales volumes were also approximately $112 million, essentially flat compared to the prior quarter. Electricity sales totaled 252 gigawatt hours. It's about the same as... Pricing in Q4 decreased to about $98 per megawatt hour from $113, lower spot prices in both Germany. For more information, please visit www.hamirpatel.com.

The random lengths U S benchmark for Western SPF number two and better was $422 per thousand board feet at the end of Q4 compared to $407 at the end of Q3.

Today that benchmark is around $428.

We are expecting a modest increase in U S lumber prices in the near term driven by increased house building activity and low housing inventory levels.

For the European market, we are expecting prices to remain flat as demand remains weak.

Lumber production was 112 million board feet in the quarter up almost 20% from Q3 due to less scheduled annual maintenance work.

Lumber sales volumes were also approximately 112 million board feet, which was essentially flat compared to the prior quarter.

Electricity sales totaled 252 gigawatt hours in the quarter, which was about the same as Q3.

Pricing in Q4 decreased to about $98 per megawatt hour from $113 in Q3 due to lower spot prices in both Germany and Canada.

In Q4, our pulp and solid wood segments had lower fiber costs in Q3 as supply remains stable and a solid wood segment benefited from the availability of lower cost beetle damaged wood in Germany.

Richard Short: Supply remains stable. The Solid Wood Segment benefited from the availability of lower cost, damaged wood. We currently expect beetle-damaged wood to be abundant into 2024, but strong demand for this fiber will likely keep prices from falling. Our solid wood segment continues to ramp up its mass timber operations, resulting in a modest positive EBITDA. However, revenues decreased to $15 million in Q4 from $19 million due to the timing of projects.

We currently expect beetle damaged wood to be abundant into 2024, a strong demand for this fiber will likely keep prices from falling significantly.

Our solid wood segment continues to ramp up its mass timber operations, resulting in a modest positive EBITDA contribution in Q4.

Revenues decreased to $15 million in Q4 from $19 million in Q3 due to the timing of projects.

Richard Short: This business has grown its order book to almost $100 million. We expect to fulfill the majority of these orders over the course of the coming year. In the fourth quarter, we made the strategic decision to pursue the sale of our sandalwood, which resulted in the net assets for this business being valued at estimated fair market value, a recording of a non-cash impairment of roughly $34 million, or 51 cents per share.

This business has grown its order book to almost $100 million.

And we expect to fulfill this the majority of these orders over the course of the coming year.

Into the fourth quarter, we made in the fourth quarter, we made the strategic decision to pursue the sale of our sandalwood business, which resulted in the net net assets for this business being valued at estimated fair market value and the recording of a noncash impairment of roughly $34 million or 51 per share.

Richard Short: Juan Carlos will have more to say on this shortly. We reported a consolidated net loss of $87 million for the fourth quarter, $1.31 per share, compared to a net loss of $26 million, or $0.39 per share, in Q3. For the full year, we are reporting a consolidated net loss of $242 million, or $3.65 per share, compared to net income of $247 million, or $3.74 per basic share.

Juan Carlos will have more to say on this shortly.

We reported a consolidated net loss of $87 million for the fourth quarter $1 31 per share compared to a net loss of $26 million or 39 cents per share in Q3.

For the full year, we are reporting a consolidated net loss of $242 million or $3 65 per share.

Compared to net income of $247 million or $3 74 per basic share in 2022.

Juan Carlos Bueno: It consumed about $30 million of cash in Q4 compared to usage of about $70 million, after adjusting for the $200 million senior note offering. The improved cash usage was driven by a smaller increase in working capital and reduced capital. The fourth quarter working capital increase was primarily the result of increased receivables due to higher... We invested about $26 million of capital in our... We currently expect capital spending to be between $75 and $100 million. At the end of Q4, our liquidity position totaled $610 million, comprised of $314 million of cash and about $296 million of undrawn revolvers. Finally, as you would have noted from our press release, our board has approved a quarterly dividend of 7.5 cents per share for Shareholders of Record on March 27, for which payment will be made on April 4th, and so on and so forth. Thank you. Thank you. That concludes my overview of the financial results. I will now turn the call over to Juan Cardo.

We consumed about 30 $30 million of cash in Q4 compared to a usage of about $70 million. After adjusting for the 200 million senior note offering in Q3.

The improved cash usage was driven by a smaller increase in working capital and reduced capex.

The fourth quarter working capital increase was primarily the result of increased receivables due to higher pulp prices.

In Q4, we invested about $26 million of capital in our Mills looking ahead. We currently expect capital spending to be between 75 and $100 million in 2024.

At the end of Q4, our liquidity position totaled $610 million comprised of $314 million of cash and about $296 million of Undrawn revolvers.

Finally, as you would have noted from our press release, our board has approved a quarterly dividend of seven and a half cents per share for shareholders of record on March 27th.

Which payment will be made on April 4th 2024.

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

Juan Carlos Bueno: Thanks, Rich. Our Q4 results were positively impacted by improved pulp pricing, lower fiber costs, and a modest contribution from our mass timber business. In addition, all our mail went very well this quarter.

Thanks Rich.

Our Q4 results were positively impacted by improved pulp pricing lower fiber costs and a modest contribution from our mass timber business.

In addition, all of our mills ran very well this quarter. However results were lower compared to Q3 due to the impact of noncash items in Q3 that didn't recur and incremental major maintenance compared to Q3.

Juan Carlos Bueno: However, results were lower compared to Q3 due to the impact of non-cash items in Q3 that didn't recur and incremental major maintenance compared to Q3. Overall, even though demand remains weak, we saw small improvements in most of our markets in Q4. The one notable exception was the European lumber market, which took a step back after some positive momentum in Q3. Generally speaking, our market dynamics remain unchanged with lower producer inventories and weaker than normal demand. These challenging market conditions led us to keep a tight handle on CapEx. We closed the year with capital expenditures of roughly $136 million compared to an original target of $200 million at the beginning of the year.

Overall, even though demand remains weak we saw small improvements in most of our markets in Q4.

The one notable exception was the European lumber market.

That took a step back up to some positive momentum in Q3.

Generally speaking our market dynamics remain unchanged with lower producer inventories and weaker than normal demand.

These challenging market conditions have led us to keep a tight handle on capex, we close the year with capital expenditures of roughly $136 million compared to an original target of $200 million at the beginning of the year.

Juan Carlos Bueno: Looking ahead to 2024, we're currently targeting between $75 and $100 million in CAPEX, as Rich mentioned before. This is essentially a maintenance budget for the business. However, we will be monitoring our operating results and could green light additional high-return projects should the market continue to improve as the year progresses. We will also continue to manage our working capital and costs closely. While we're expecting 2024 to be a significant improvement over 23, we believe the recovery will be gradual. Overall, pulp markets remain weak, but we are seeing some upward pricing pressure in Europe at the moment as a result of a slight uptick in demand. Well, in China, the lunar year holiday has, as expected, limited buying activity.

Looking ahead to 2024, we're currently targeting between 75 and $100 million of Capex as we switch mentioned before.

This is essentially a maintenance of business budget how's.

However, we will be monitoring our operating results and good Green light additional high return projects to market continue to improve as the year progresses.

We will also continue to manage our working capital and costs closely while we're expecting 2024 to be a significant improvement over 2003.

We believe the recovery will be gradual.

Overall pulp markets remain weak, but we are seeing some upward pricing pressure in Europe at the moment. That's a result of a slight uptick in demand.

In China, the lunar year holiday has as expected limited buying activity.

Juan Carlos Bueno: Looking ahead to 2024, we believe that the roughly 1 million tons of softwood production that has been either permanently or indefinitely shuttered will put upward pressure on prices. However, we don't see prices moving significantly until demand noticeably improves. On the demand side, European paper producers have increased production on slightly higher paper demand, but they have continued to run at lower than normal rates as their economy remains weak. Similarly, in China, the government is pushing for and pursuing measured economic stimulus steps, but weak economic conditions continue.

Looking ahead to 2024, we believe that the roughly 1 million tons of softwood production that has been either permanent or indefinitely shuttered will be put upward pressures.

However, we don't see prices moving significantly until demand noticeably improves.

On the demand side European paper producers have increased production on slightly higher paper demand.

We've continued to run at lower than normal rates as the economy remains weak.

Similarly in China, the government is pushing and pursuing measured economic stimulus steps by the weak economic conditions continue.

Juan Carlos Bueno: Looking forward, we expect pulp prices to continue to slowly increase globally as we do supply chain support modest price improvement. Our mills ran very well in the quarter; when comparing Q3 to Q4, remember that Selgar took a 26-day curtailment as a result of the British Columbia port strike in Q3, and Rosenthal took a 13-day major maintenance shut, while in Q4, Selgar took a major maintenance shut totaling 22 days, and Stendhal took one day for maintenance. Looking forward into 2024, we have no maintenance shuts scheduled for Q1. And we're expecting a normal maintenance year, with the exception of Celgar, which has moved to an 18-month major maintenance schedule. In Q2 of 2024, Peace River will have a 16-day maintenance shut, and Stenda will take a 14-day shut, which together this downtime equals roughly 56,000 tons. In Q3 of 2024, Rosenthal will take a 14-day maintenance shot, and Selgar will take a short four-day mini shot, which amounts to combined about 20,000 tons. Moving on to our solid wood segment, our fourth quarter reflected improved lumber and mass timber results. The U.S. market was up slightly, on average, while the European market was down compared to Q3.

Looking forward, we expect pulp prices to continue to slowly increase globally as reduced supply chain supports modest price improvements.

Our mills ran very well in the quarter when comparing Q3 to Q4 remember that saga took a 26 day curtailment as a result of the British Columbia Port strike in Q3, and Rosenthal took a 13 day major maintenance shut in Q4, So GARP took a major may.

Shut totaling 22 days and stem, though took one day for maintenance.

Looking forward into 2024, we have no maintenance shuts are scheduled for Q1.

And we're expecting a normal maintenance here with the exception of cell guard that has moved to an 18 months major maintenance scheduled.

In Q2 of 2020 for Peace River will have a 16 day maintenance shut at Stendal take a 14 day shut which combine this downtime equals to roughly 56000 tons.

In Q3 of 2020 for Wilsons I will take a 14 day maintenance shut in.

<unk> will take a short four day, many shut which amounts combined to about 20000 tons.

Okay.

Moving onto our solid wood segment.

Our fourth quarter reflected improved lumber and mass timber results.

The U S market was up slightly on average while the European market was down compared to Q3.

Juan Carlos Bueno: Although high interest rates continue to weigh on housing starts and construction in general, we are expecting U.S. lumber pricing to improve slightly as we move into spring building. We're expecting the European lumber market to remain weak in the first half of 2024. We continue to believe that low lumber channel inventories, the large number of sawmill curtailments, relatively low housing supply, wood shortages created by recent Canadian forest fires, and homeowner 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. In Q4, 39% of our lumber sales volumes were sold in the U.S. market, with the remainder sold in the European and other markets. The integration of Torgau continues to progress well.

Although high interest rates continued to weigh on housing starts and construction in general we are expecting U S lumber pricing to improve slightly as we move into the spring building season.

We're expecting the European lumber market to remain weak in the first half of 2024.

We continue to believe that low lumber channel inventories the large number of sawmill curtailments relatively low housing stock, which shortages created by recent Canadian forest fires and homeowner demographics are still very strong fundamentals for the construction industry and this will put positive pressure on the <unk>.

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.

In Q4, 39% of our lumber sales volumes were sold in the U S market with a remainder so in the European and other markets.

The integration of <unk> continues to progress well shipping pallets remain weak on the back of a weak European economy overall.

Juan Carlos Bueno: Shipping pallets remain weak on the back of a weak European economy overall. Heating pellet prices were down in Q4 due to warm winter weather. Once the European economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value. In addition, the integration of the recently acquired mass timber assets continues to progress as planned. We now have roughly 35% of North American mass timber production capacity, a broader range of product offerings, and a much larger geographic footprint that gives us competitive access to the entire North American market. We continue to see strong customer interest in our mass timber products, which has allowed us to build a significant order file. At the end of December, our order file totaled almost $100 million.

Heating pellet prices were down in Q4 due to warm winter weather.

Once the European economy begins to show signs of recovery, we expect prices to return to normal levels.

Allowing this asset to deliver significant shareholder value.

In addition, the integration of the recently acquired mass timber assets continues to progress as planned we now have roughly 35% of North American mass timber production capacity, a broader range of product offerings and a much larger geographic footprint that gives us competitive access to the entire north American market.

We continued to see strong customer interest in our mass timber products, which has allowed us to build a significant order file.

At the end of December our order file totaled almost $100 million.

Juan Carlos Bueno: In addition, our mass timber business contributed a modest positive EBDA in Q4 as planned. We expect EBDA for this business to grow in 2024 as we continue to ramp up. Moving on to costs of fiber, overall, we experienced a decrease in pulpwood prices in Q4.

In addition, our mass timber business contributed a modest positive EBITDA in Q4 as planned.

We expect EBITDA for this business to grow in 2024, as we continued to ramp up.

Moving onto cost of fiber overall, we experienced a decrease in pulpwood prices in Q4.

Juan Carlos Bueno: In Germany, a steady supply of sawmill chips resulted in cost decreases while work done at our Canadian mills, including the ramp-up of Peace Rivers Woodroom and the renegotiation of contracts in Selgar, pushed our fiber costs down in Q4. Looking ahead, we expect further modest declines in pulpwood and saw log costs at our mills in early 2024. In Q4, as Rich mentioned before, we made the decision to sell our sandalwood business in Australia. We believe that in the fullness of time, this business will be a positive cash flow generator. It no longer fits our strategic direction.

In Germany, a steady supply of sawmill chips resulted in cost decreases while work done on our Canadian mills, including the ramp up of peace river's wood room, and the renegotiation of contracts and settle got pushed our fiber costs down in Q4.

Looking ahead, we expect further modest declines in pulpwood and solid cost at our mills in early 2024.

In Q4 as rich mentioned it before we made the decision to sell our sandalwood business in Australia.

Although we believe that improvements of time this business will be a positive cash flow generator.

It no longer fits our strategic direction our.

Juan Carlos Bueno: A process is underway to sell this business, and we hope to have more to say about this in the coming months. Our new lignin extraction plant, pilot plant, continues its ramp-up as planned. As a reminder, this new lignin pilot plant is a large step towards Mercer being able to begin commercializing 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 name only a few.

Our process is under way to sell this business and we hope to have more to say about this in the coming months.

Our new lignin extraction plant.

Pilot plant continues its ramp up as planned as a reminder, this new lignin pilot plant is a large step towards Mercer being able to begin commercializing lignin. We're excited about the future prospects of this product as a sustainable alternative to fossil.

Fueled based products such as in adhesives, and advanced battery elements to name only a few.

Juan Carlos Bueno: This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a circular carbon economy as the world becomes more sensitive to reducing carbon emissions. We believe that products like lignin, mass timber, green energy, lumber, and pulp will play increasingly important roles in displacing carbon-intensive products, such as concrete and steel for construction or plastic for packaging. Furthermore, the potential demand for sustainable fossil fuel substitutes is very significant and has the potential to be transformative for the wood products industry.

This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with the circular carbon economy.

As the world becomes more sensitive to reducing carbon emissions, we believe that products like knickman mass timber green energy lumber and pulp will play increasingly important roles and displacing carbon intensive products.

Alex like concrete and steel for construction of plastic packaging.

Furthermore, the potential demand for sustainable fossil fuels substitutes is very significant and has the potential to be transformative to the wood products industry.

Operator: We're committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, we believe that, in the fullness of time, demand for 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 balancing our company through faster growth in our lumber and mass timber business. In closing, we're happy to have 2023 behind us. Although we continue to predict a slow recovery in 2024, we do expect a much stronger financial result. We will remain focused on our cost reduction, CAPEX, and working capital initiatives while we navigate this period of relatively low pulp and lumber prices.

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 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 bolt on or committed to better balance our company through faster growth in our lumber and <unk> businesses.

In closing, we're happy to have 2023 behind us.

Although we continue to predict a slow recovery in 2024, we do expect a much stronger financial results. We will remain focused on our cost reduction capex and working capital initiatives, while we navigate this period of relatively low pulp and lumber prices. We will continue to work on rebalancing our assets in line with the execution of our strategic plan.

Operator: We will 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. Thank you. At this time, we'll conduct the question and answer session. To ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced.

We will 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.

Thank you at this time, we will conduct a question and answer session to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Operator: To withdraw your question, please press star 1 1 again. One moment for our first question. Our first question comes from Hamir Patel with CIBC Capital Markets. Your line is open. Hi, good morning.

One moment for our first question.

Okay.

Our first question comes from Samir Patel with CIBC capital markets. Your line is open.

Juan Carlos Bueno: One Carlos, could you comment on how you would see wood costs and fiber availability trending across your European fiber baskets for both pulpwood and saw logs in the coming years, just as the effects of the spruce beetle play out? Of course, thank you. Good question because this is obviously a very significant element of our cost structure and there's some important developments on that end. We know that calamity wood in Germany is obviously a very significant factor that we're already seeing some of the benefits of it in the later part of 2023 and we're still seeing some of those benefits in 2024. So we are expecting a continuous decrease, a slight decrease in the cost of fiber overall, both for pulp and lumber.

Hi, good morning.

Juan Carlos could you comment on how you would see wood costs.

And fiber availability trending across your European fiber baskets for both pulpwood and saw logs in coming years, just as the effects of the spruce beetle play out.

Of course thank.

Thank you. Good question because this is this is obviously a very significant element of our cost structure and there is some important developments on that and we know the calamity wood and Germany is obviously, a very significant factor that we've already seen some of the benefits of it in the later part of 2023.

Hi.

And were seeing still some of those benefits in 2024. So we are we are expecting.

Continued decrease slight decrease on on the cost of fiber overall.

Both for for pulp and lumber it is important to say, though that obviously this calamity wood, especially in Germany has created.

Juan Carlos Bueno: It is important to say though that obviously, this calamity wood, especially in Germany, has created quite a significant amount of buzz and demand. So even though there's plenty of it, there's also an uptick in demand as people obviously prefer to go for this lower priced wood. So we don't necessarily expect prices to collapse, but yes, there's a positive trend for us with lower prices coming overall. So in that sense, I think it's positive what we see in the months to come. But I'm cautious as to how big that drop will be. Great, thanks. That's helpful.

Quite a significant amount of buzz and demand. So so even though theres plenty of it there's also.

An uptick in demand as people, obviously prefer to go for this lower priced wood.

So we don't expect necessarily prices to collapse, but yes, there is a.

There is a positive.

For us with lower prices.

Overall, so so in that sense I think it's positive what we see coming in the months to come.

But I am cautious as to how big that drop will be.

Juan Carlos Bueno: And just want to ask on the lumber side, what impact you would expect the, you know, Red Sea disruptions to have on European lumber exports and, you know, whether you think some some of that wood gets perhaps redirected to the US. In the case of the Red Sea, the impacts that we're seeing right now, Hamir, are more on the pulse side than on the lumber side. In our lumber business, when we don't ship to the U.S., we're usually focusing on the European market to a large extent. So then the impact is much more limited.

Okay, great. Thanks, that's helpful and just wanted to ask about.

On the lumber side.

What impact you would expect the Reds.

Wed see disruptions to have on European lumber exports.

Whether you think some of that more of that would get perhaps redirected to to the U S.

In the case of the Red Sea the impacts that we're seeing right now.

More on the pulp side than on the lumber side.

As in our lumber business when we don't ship to the U S. We are usually focusing on the European market to a large extent.

So then the impact is much more limited in the case of pulp we do have.

Operator: In the case of PULC, we do have a bit more of an impact, even though that impact is now translated into probably a small uptick in the actual logistic cost. But it's still very relatively small, relatively small at this time. And obviously, added transit time, which if you put it from the flip side, it means more titan supply into China, which is not at all bad. It creates this sentiment of a little bit more titans in the market if there's delays in shipments. So really, the impact so far is very small, and we hope it stays this way. Fair enough. Thanks for wanting to call us. I'll turn it over to you.

More of an impact.

Even though that impact is now translated in probably a small uptick in the actual logistic costs.

It is very relative still relatively small at this time.

And obviously added transit time, which if you put it in from a former flipside it means.

More tightened supply into China, which is not all bad it creates this.

Intimate.

A little bit more tightness in the market if there is delays in shipments.

So really the impact so far is it's very small.

We hope it stays this way so obviously.

Okay.

Fair enough. Thanks, Robert one call us all that I'll turn it over.

Operator: One moment for our next question. Our next question comes from Richard Stevens with Amundi USA. Your line is open. Hi, and thanks for taking my question. I had two questions, just one more housekeeping.

One moment for our next question.

Our next question comes from Richard Stevens with Monday USA. Your line is open.

Hi, and thanks for taking my question I had two questions just one more housekeeping.

Richard Short: I think you mentioned that the revolver availability was $296 million. My sense is that there are no covenant limitations on that availability. Is that correct? That's correct. Generally, there's a cap on the Canadian revolver, but we factored that in. Got it. Okay. And the next question I had was more from a historical perspective. Obviously, you're at the bottom of the cycle at the moment. Typically, how long do these cycles last?

I think you mentioned that.

The revolver availability was $296 million my sense is that there are no covenant limitations on that availability is that correct.

Okay.

Thats correct generally there is there is a cap on the Canadian revolver, but but we factored that in to that number.

Got it Okay and the next question I had was more from a historical perspective, obviously youre at the bottom of the cycle at the moment.

Typically how long do these cycles last have you seen in the past I know there was a bit of a one I want to say going back to maybe 2018 19, and maybe some earlier in the decade, there, but typically when you go through these cycles. You know you mentioned, there's been over 1 billion tons of capacity.

Juan Carlos Bueno: Have you seen in the past? I know there was a bit of one, I want to say, going back to maybe 2018-19 and maybe some earlier in the decade there. But typically, when you go through these cycles, you mentioned there's been over a million tons of capacity that's been shut in. How long, typically, does the cycle last?

It's been shut in and how long typically does the cycle last how many quarters.

Juan Carlos Bueno: How many quarters, just to get a sense? Normally, when we look at cycles, these pop cycles, they can easily have four years, three years in duration, and in some cases, a bit more than that. So it really, we don't, it's not a mathematical equation behind them, obviously, but yeah, there's a few years behind them. So that's why when we think about what the future holds for us, I think we're looking into a recovery, partial recovery in 24, a much healthier 25 and 26. That's a little bit of what we have in our plans. And when we look at some of the analysts' projections, particularly for bulk, we see the same thing. Everybody is projecting, almost in a very coherent way, pricing picking up in the next few years. So, yeah. Got it. Okay, that's very helpful. That's all I had.

To get a sense here.

Normally when we look at the cycles. These pulp cycles. They can easily have four years three years in duration or in some cases, one piece is a bit more than that.

It really don't matter.

Mathematical equation behind them, obviously, but.

But yes, there is a there's a few years behind them. So that's why when we think about what the future holds for us.

Think we're looking into.

Recovery, partially recovering 24.

Healthier 'twenty five 'twenty six.

A bit of what we have.

Our plans and when we look at some of the analysts' projections, particularly for bulk we see we see the same thing.

Body projecting yes.

Almost in Korea, and a very coherent way pricing picking up in the next few years. So yes.

Got it okay. That's very helpful. That's all I had thank you.

Operator: Thank you. One moment for our next question. Our next question comes from Kasia Taraski-Opetek with TD Securities. Your line is open. Hey there, good morning everyone.

One moment our next question.

Our next question comes from Kasha Jurafsky with.

With TD Securities. Your line is open.

Hey, there good morning, everyone a couple questions maybe.

Operator: A couple of questions. Maybe starting with pulp markets, it seems like pulp mill inventories are decently balanced at this point. Can you speak to where buyer inventories are, talking about China and Europe? Yeah, I think the situation on inventories is quite balanced, probably more to our favor at this time of year. In terms of producer inventories, when you look at the recently revealed statistics that show 40 days on average for softwood, that's in good levels, relatively low levels, and appropriate. When you think about customer inventories, we believe that the situation in China is a bit more uncertain. There might be more inventory there, and actually, as they came into the New Year celebration, obviously, they were stacking up with inventory prior to that.

Maybe starting with pulp markets. It seems like pulp mill inventories are decently balanced at this point can you speak to your aware.

Buyer inventories are talking about China and Europe.

Okay.

Yeah, I think the situation on inventories is quite balanced probably more to our favor in this time of the year.

In terms of producer inventories.

When you look at the recently revealed statistics that show 40 days on average for softwood.

That's that's in good levels are relatively low levels and proper when you think about customer.

Inventory, we believe that the situation in China is a bit more uncertain.

There might be more inventory, there and actually as they came into the new year celebration. Obviously, there were stacking up with inventory prior to that we saw very big swing so product in the last quarter of the year into China.

Juan Carlos Bueno: We saw very big swings of product in the last quarter of the year into China in preparation for the New Year. So obviously, there's a lot of expectations about what will happen demand-wise. Question For The Viewers: What Are The Signs Of COVID-19?

In preparation for the for the new year, So obviously theres a lot of expectations on what will happened demand wise.

One stat.

New year celebration is past us.

Juan Carlos Bueno: ones that the New Year celebration is past us, and how demand will pick up from that point onwards. What we do see is an important demand uptick in Europe, and this again is coming from a very, very low level. So, when we think about our customers that are running their paper machines, they're running better than they were running before, but again, coming from very low levels.

And how demand will pick up from that point onwards.

What we do see as an important demand uptick in in Europe, and this again is coming from a very very low level.

So when you think about our customers that are running their paper machines. They are running at better.

Better better than they were running before but again coming from very low levels. So it's far from being what the market traditionally is.

Juan Carlos Bueno: So, it's far from being what the market traditionally is, and that's why we think there's a very significant upside. If paper, if the European economy comes back, and paper comes back, that would be a very significant factor in what we would believe to be then a much stronger price recovery. Because again, as you say, the tightness in supply is there.

That's why we think there's a very significant upside.

Pay per view.

European economy comes back and paper comes back that would be a very significant okay.

Factor in what we would believe to be then a much stronger price recovery because again as you well said.

Juan Carlos Bueno: There are so many mills that have closed down, so much capacity, almost a million tons of capacity of software that has been shut down, that there's not a whole lot of supply out there to cope with an incremental demand. So, it won't take a whole lot for this thing to actually move into a much stronger price schedule for us. But again, we need Europe to wake up strongly and China to come back after the new year in a better situation. Okay, thanks for that. And how much? What are your freight costs right now for delivering lumber from Europe to the eastern seaboard? $4,000 per 4,000. Um, it's probably around a hundred dollars.

The tightness in supply is there there's so many mills that have closed down.

So much capacity almost 1 million tons of capacity of software that has been shot.

But theres not a whole lot of supply out there to cope with an incremental an incremental demand. So it won't take a whole lot to for this thing to actually.

Move into a much stronger price schedule for us.

But again, we need Europe too.

To wake up strongly and in China to come back after the new year in a better situation.

Okay. Thanks for that and how much what are your freight costs right now for delivering lumber from Europe to the eastern Seaboard.

For the first half.

Sure.

That's a good question Catherine it's probably around $100.

Richard Short: A hundred, okay. And Richard, that includes land over land transportation as well? Um, yes, that would be all. Okay, great. One last question. Just switching gears to the mass timber markets, you indicated, you know, you're expecting us to trend favorably going forward over the next year. Any numbers you can put around that?

1000 board feet.

100, Okay, and Richard that includes the land overland transportation as well.

Yes that would be all in okay.

Great.

One last question just switching gears to the mass timber markets you indicated.

You're expecting it to trend favorably going forward over the next year any.

Any numbers you can put around that maybe a cadence for how you expect the revenue to grow from here and then any potential EBITDA contribution that you would expect.

Juan Carlos Bueno: Maybe a cadence for how you expect the revenue to grow from here and then any potential EBITDA contributions that you would expect? Yeah, on Mass Timber, we're, as I said, and Richard as well, very excited about how this business is progressing. The order book is a great indicator of that.

Yes.

<unk> timber.

<unk> said and Richard as well, we're very excited about this business is progressing.

The order book is so it's a great.

Juan Carlos Bueno: If you think about where our order book was in Q3, we had $54 million of projects locked in that we would then start executing from that point onwards. In Q4, we not only executed part of those $56 million projects, but we closed with 100 million or almost 100 million projects in the order book. That gives us very strong confidence to believe that if we close this year with about $60 million in sales, next year you will be at least twice that amount. And when we look at our capacity with the sites that we have, we know that by building up gradually and continuing to run those mills in a way that we can add more shifts later down as time progresses, this is a business that, just with our setup, could provide us with sales of at least So the assets that we have provide us with that growth trend for us to work on. Margin wise, this is meant to be, obviously, this is not a commodity business; this is more of a specialties business.

Indicator of it.

If you think about where our order book was in Q3, we had $54 million.

Projects locked in that we would then start executing from that point onwards in Q4.

We have not only executed part of those $56 million projects, but we close with $100 million almost 100 million of projects and the order book that gives us very strong confidence to believe that if we close this year with about 60 plus million dollars in sales next year, you would be at least twice that.

Mt.

When we look at our capacity with the sites that we have we know that by building up gradually and continuing to ramp up those mills.

The way that we can add more shifts later down as time progresses.

This is a business that just with our setup could provide us sales of at least $500 million.

A few years down the road. So the assets that we have provide us for that growth trend for us to work on.

Margin wise. This is this is meant to be obviously this is not a commodity business is more of a specialty business.

Juan Carlos Bueno: And we look at EBDR margins of around 20, 25% in the long run. So that's what we expect of this business going forward. Okay, and just a quick follow up. So your order book right now is 100 million, and I appreciate it takes a while to actually lock in the order. What is the size of the sales that you're going after right now that you haven't locked in yet that you're pursuing? What potential order book size would that be?

And we look at EBITDA margins around 22025% in the long run.

So that's what we expect of this business going forward.

Okay, and just a quick follow up so your order book right now with $100 million and appreciate it takes a while to actually lock in the order what is the size.

<unk>.

The sales that you are going after right now that you havent locked in yet.

Kristina what protects the order book size without.

Juan Carlos Bueno: No, what we want to do is, for example, for this year, we're very confident that as quarters progress, our order book will continue to increase. But we keep on executing on projects, so that reduces the order book. At the same time, we lock in three-year projects, and that makes it continuously grow. When I'm talking that we have $100 or close to $100 million in the order book, not all of that is for 2024. So some of those projects are already looking into 2025. So you have locked in projects that will already go beyond one year. So that's the way this thing works. You have quite a bit of lead time in some cases, and it's all tied up to the individual schedules of these projects.

No what we want to do is for example for for this year.

We're very confident that as quarters progress our order book will continue to increase we keep on executing on projects. So that reduces the order book at the same time, we lock and freeze your projects that makes it continuous to grow.

When I am talking that we have 100 or close to a $100 million in order book not all of that into 2024. So some of those projects are already looking into 2025. So you have locked in projects that will already go beyond the one year.

So that's the way. This thing works you have you have quite a bit of lead time.

Some cases, and it's all tied up to the individual schedule. So these projects. So we will continue to grow.

Juan Carlos Bueno: So we will continue to grow. We will bring more projects into 2024. That will allow us, as I said, to double our revenue this year versus 2023 and, for sure, keep up with the pace that this industry is showing overall. When you look at the Mastenburg industry in North America, it's growing at more than 20% a year, as a matter of fact.

We will bring more projects into 2024 and that will allow us as I said to double our.

Our revenue this year versus 2023.

And for sure keep on the pace.

That this industry is showing overall when you look at the mass timber.

Industry in the in North America, it's growing at more than 20% a year.

Juan Carlos Bueno: So this is a very significant growth engine for us. Obviously, we intend to ride that wave and make investments in our facilities to make sure they're even more and more cost competitive, so we can take full advantage of those opportunities ahead. Okay, awesome. Thanks, everyone. That's all I had.

Matter of fact, so so this is a very significant growth engine for us and obviously, we intend to ride that wave and and do investments in our facilities to make sure they're even more and more cost competitive. So we can take full advantage of those opportunities ahead of us.

Yeah.

Okay awesome. Thanks, everyone. That's all ahead have a great weekend.

Operator: Have a great weekend. As a reminder, to ask a question, you will need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Thanks.

As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Operator: Our next question comes from Sam McGovern with UBS. Your line is open. Bye guys, sale. Simon, as it comes to that, obviously, we have some interesting growth projects that we're given all the unrest that we went through in 2023, a lot of projects that we kind of put on hold, and we're very eager to bring them back in. So, that is obviously part of the equation.

Our next question.

Comes from Sam Mcgovern with UBS. Your line is open.

Hey, guys. Good morning, with regard to the sale of the sandalwood business any any plans in terms of what youre doing with the cash that comes in is it just reinvest in the business and increase liquidity or or is there anything else that you're planning to do with that.

Finally, as it comes to that.

Obviously, we have some interesting.

Both projects that were given all the unrest that we went through in 2023, a lot of projects that we kind of put on hold.

And we're very eager to to bring them back in.

So that is obviously part of the equation.

Juan Carlos Bueno: As the year progresses, and we see what we believe to be an improvement overall in how market prices behave, obviously, this will be something that we will be keeping an eye on so that we can bring some more of these CAPEX projects to fruition. The Sandalwood sale process will obviously add to that picture, so we see ourselves looking into that and what other potential projects we can put forward that can have a good and quick return for our company. And we have quite a bit lined up. There are so many things that we want to do in Torgal, to increase our lumber production there with a very quick payback, and obviously, mass timber to increase the competitiveness over there.

We see the year progresses, and we see what we believe to be.

An improvement overall in.

How the market prices behave.

Obviously this will be something that we will keep be keeping an eye on so that we can bring some of them or more of these capex projects to fruition.

The sandalwood sale process will obviously add to the picture.

So we see ourselves looking into.

What other potential projects, we can take forward that can have a good.

Quickly turn for our company and we have quite a bit lined up there's so many things that we want to do in <unk>.

To increase our our lumber production there with a very quick payback.

And obviously mass timber to increase the competitiveness over there. So yes, there's plenty of things that we can work on it if we have a hold.

Juan Carlos Bueno: So yeah, there's plenty of things that we can work on if we have hold additional cash in hand. Thank you. That concludes the question and answer session. At this time, I would like to turn the call back to Juan Carlos for closing remarks. Okay, thank you, Abigail. And thanks to all of you for joining our call. Rich and I are available to talk more at any time, so please don't hesitate to call any one of us. Otherwise, we look forward to speaking to you again on our next earnings call in May. Bye for now. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect, www.microsoft.com.ca, ?? ?? ?? ??

Holding additional cash on hand.

Awesome. Thank you very much I'll pass it on.

Thank you that concludes the question and answer session. At this time I would like to turn the call back to Juan Carlos <unk> for closing remarks.

Okay. Thank you Abigail.

Thanks to all of you for joining our call rich and I are available to talk more at any time. So please don't hesitate to call any one of US otherwise we look forward to speaking to you again on our next earnings call in May micro now.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Yeah.

Okay.

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