Q3 2024 Mercer International Inc Earnings Call
Okay.
Speaker Change: Good morning, and welcome to Mercer Internationals third quarter 2024 earnings conference call on the call today is Juan Carlos Ueno, Mercury's, President and Chief Executive Officer, and Richard Short Mercury's, Chief Financial Officer, and Secretary I will now hand, the call over to Richard.
Richard: Thanks, Josh.
Richard Short: Morning, everyone.
Richard Short: Thanks for joining us today I'll begin by touching on our financial and operating highlights for the third quarter before turning the call to Juan Carlos to provide further color into the markets our operations and our strategic initiatives.
Richard Short: Also for those of you that have joined today's call by telephone presentation material that we have attached to the investors section of our website.
Richard Short: But before turning to our results I'd like to remind you that we will be making forward looking statements in this mornings conference call.
Richard Short: According to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Richard Short: 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.
Richard Short: This quarter, our operating EBITDA totaled $50 million compared to Q2's EBITDA of $30 million.
Richard Short: <unk> quarter over quarter results for German by fewer days of planned major maintenance downtime.
Richard Short: We had 20 days in Q3 compared to 37 days in Q2.
Richard Short: The benefit of fewer planned days of downtime in Q3 was partially offset by several unrelated and unplanned events that significantly reduced our pulp production in Q3.
Richard Short: As well as unfavorable foreign exchange movements and weaker hardwood prices.
Speaker Change: One Carlos will have more to say about our unplanned downtime in a moment.
Speaker Change: Our pulp segment contributed quarterly EBITDA of $55 million and our solid wood segment headquartered EBITDA of negative $2 million.
Speaker Change: You can find additional segment disclosures in our Form 10-Q, which can be found both on our website and the sec's.
Speaker Change: The third quarter is typically a period of weaker seasonal demand, but softwood pulp markets remain steady resulting in stable prices.
Speaker Change: Our Q3 softwood pulp sales realizations were $814 per ton compared to $811 per ton in Q2.
Speaker Change: The North American N V S. K list price averaged $1762 per ton in the current quarter, an increase of $65 from Q2.
Speaker Change: The benefit of this increase was largely offset by lower price realizations in China, where the Q3 average M. B S. K net price was $771 per ton down $40 from Q2.
Speaker Change: And in Europe. The M. B S K risk price averaged $1573 per ton in the current quarter, a decrease of $29 per ton from Q2.
Speaker Change: Hardwood prices in China decreased due to new capacity coming online in 2020, 'twenty 'twenty four.
Speaker Change: Which will require some time to be absorbed in the market. Our Q3 hardwood sales realizations were $632 per ton a decrease of $69 from Q2.
Speaker Change: The average price gap in China between softwood and hardwood pulp increased this quarter to about $140.
Speaker Change: The average Q3, net eucalyptus hardwood price at $635 per ton down $100 from Q2.
Speaker Change: The North American N V. H K average Q3 list price was $1467 per ton up $30 from Q2.
Speaker Change: Overall, the weaker hardwood pulp price outlook resulted in us recording a $4 million noncash inventory impairment in Q3 against hardwood fiber inventories at the Peace River mill.
Speaker Change: Today pulp sales volumes in the third quarter when compared to the second quarter increased slightly to 449000 tonnes with roughly 85% of this total being softwood pulp.
Speaker Change: Total production volume in the third quarter was 416000 tonnes.
Speaker Change: Slightly when compared to Q2 is a series of unrelated production upsets in the current quarter negatively impacted production by approximately 71000 tons offsetting the positive impact of fewer days of planned downtime in the current quarter.
Speaker Change: In Q3, we had a total of 20 days of planned annual maintenance downtime at our mills compared to 37 days in Q2.
The current quarter, we estimate the planned downtime adversely impacted our EBITDA by approximately $18 million a decrease from the Q2 impact of about $60 million.
Speaker Change: In Q3, we had no planned downtime, but as previously announced we have incurred 12 days of unplanned downtime in Q4 at our Peace River Mill.
For our solid wood segment realized lumber prices decreased slightly as lower prices in the U S market were mostly offset by higher prices in Europe.
Speaker Change: Overall in Q3 lumber markets remained weak.
Speaker Change: Random lengths U S benchmark for Western SPF number two a better average price was $366 per thousand board feet in Q3.
Compared to $386 in Q2.
Speaker Change: Today, the benchmark price for Western SPF number two and better is around $405 per thousand board feet, which represents about a 21% increase from the beginning of Q3.
Speaker Change: For Q4, we are expecting modestly higher lumber prices.
Speaker Change: US and European markets due to stronger demand and reduced supply.
Speaker Change: Lumber production for Q3 was 122 million board feet up 10% from Q2 due to fewer planned maintenance days in Q3.
Speaker Change: Lumber sales volumes were 109 million board feet in Q3 down 7% from Q2 due to the timing of sales.
Speaker Change: Our consolidated electricity sales volume totaled 205 gigawatt hours in the quarter down about 14 gigawatt hours from Q2 due to planned maintenance work at the freeze on the freeze our turbine.
Speaker Change: Pricing in Q3 was flat compared to Q2 at $91 per megawatt hour.
Speaker Change: In Q3, both our pulp and solid wood segments fiber costs were flat compared to Q2, our supply remains stable.
Speaker Change: Production for our solid wood segments mass timber operations were strong in Q3 at 10000 cubic meters.
Speaker Change: We completed two of the largest mass timber projects ever undertaken in the U S.
Speaker Change: Foreign exchange negatively impacted our operating income in Q3 by about $10 million when compared to Q2.
Speaker Change: Primarily caused by the impact of a weakening U S. Dollar on our U S dollar denominated receivables at our Canadian and German Mills.
Speaker Change: We reported a consolidated net loss of $18 million for the headquarter or <unk> 26 per share compared to a net loss of $68 million or $1.01 per share in Q2.
Speaker Change: We consumed about $24 million of cash in Q3 compared to about $11 million in Q2.
Speaker Change: Our net working capital excluding noncash adjustments was higher in Q3 by roughly $36 million and we borrowed an additional $20 million on our revolving credit facilities.
Speaker Change: At the end of Q3, our liquidity position totaled $554 million or $26 million, a decrease from Q2 and comprised $239 million of cash and about $350 million of Undrawn revolvers.
Speaker Change: And then you may have seen in our recent press release, but I wanted to highlight that this week, we have reduced the principal balance of our senior note debt by $100 million.
Speaker Change: We did this by issuing $200 million of additional 2028th senior notes and using the proceeds and cash on hand to redeem our $300 million worth of 2026 senior notes.
Speaker Change: The new 2028 senior notes were issued at a price of 103% of their principal amount for a yield to worst of roughly 11, 6%.
Speaker Change: In completing this transaction we have also extended our maturities on $200 million of our senior notes by two years.
Speaker Change: Finally, our board has approved a quarterly dividend of $7.05 per share for shareholders of record on December 18th for which payments will be made on December 26 2020 for.
That ends my overview of the financial results I'll now turn the call over to Juan Carlos.
Juan Carlos: Thanks Rich.
Juan Carlos: In Q3, our operations resulted in a $20 million EBITDA.
Juan Carlos: Improvement over Q2, however, we had higher expectations.
Juan Carlos: Unplanned unrelated downtime at a couple of our mills significantly reduced <unk> operating results.
Juan Carlos: We estimate that the <unk>.
Juan Carlos: Negative EBITDA impact of this downtime was about $20 million.
Juan Carlos: I will have more to say about this in a moment.
Juan Carlos: I am pleased to note that within our solid wood segment, our mass timber business had another strong quarter generating revenue on margins is consistent with what we accomplished in Q2.
Juan Carlos: With regards to our target of operation, Although our pellet business is still struggling under the weight of a weak European economy.
Juan Carlos: We're beginning to realize certain synergies, which are benefiting our business.
Juan Carlos: When we purchased <unk>, we estimated we would be able to achieve about $60 million annually.
Juan Carlos: At the end of Q3, we had realized almost $5 million of synergies related fiber optimization kind of showing up in our part.
Juan Carlos: And those results and we expect to achieve about $8 million in synergies by the end of the year.
Juan Carlos: One store Guy was number of capacity, it's fully ramped up we expect our synergies to increase and we continue to believe that 16 million borrowers ivano synergies is achievable.
Speaker Change: As rich highlighted we recently completed the refinancing of our 2026 senior notes I am pleased to have this behind US and then we're able to reduce by $100 million. However, we recognize there is more work to do on this front and consequent beat that reduction will be an important focus of ours.
Juan Carlos: Capital allocation strategy going forward.
Juan Carlos: In Q3, we invested roughly $27 million in our operations.
Juan Carlos: As previously announced our planned 2020 for capital spending is expected to be between 95 on $120 million.
Juan Carlos: You will recall that last quarter, we restarted in both our talk how lumber expansion project and the Spokane sort of in line project.
Juan Carlos: So these projects will provide significant value added and we're originally contemplated as part of our investment strategy for each of these mills.
Looking ahead to 2025, we expect to target our capex spend similar to the 2024 range.
Juan Carlos: We will continue to prioritize maintaining the business environmental and safety related Capex.
Juan Carlos: Turning to the pulp market softwood continues to hold strong.
Juan Carlos: We believe that demand for softwood will remain steady in the mid term, which when combined with reduced supply will create upward pricing pressure in most markets late Q4 or early Q1 in 2025, Conversely, hardwood pricing weakened in the quarter and appears to have landed at a floor price of around 500.
Juan Carlos: Third $50 in China.
Juan Carlos: The permanent closure of NBS Cade Nielsen as two years.
Juan Carlos: Temporary curtailments happening today due to reduced library in certain regions, along with unplanned downtime are all create tightness in the NBA SK supply demand dynamics.
Juan Carlos: Looking forward, we believe that the significant differences in the supply demand fundamentals for both softwood and hardwood pulp will drive the price difference between these two rates to levels well beyond historical norms.
Juan Carlos: Currently the net price difference in China is about $230 a ton.
Juan Carlos: Historically this price difference is closer to $100 per ton.
Juan Carlos: We believe this larger than historical price difference will be with us well into 2025 I'm.
Juan Carlos: As a reminder, softwood sales volume represent roughly 85% of our annual pulp volumes.
Juan Carlos: Rich normally that we lost approximately 71000 tons of pulp production in Q3 due to unplanned downtime.
The lost opportunity for us given where pulp prices are today.
Juan Carlos: I think it is important to note that.
Juan Carlos: The downtime was spread across our peace River, Stendal, and SOCAR Mills and was all unrelated.
Juan Carlos: <unk>, we lost about a week of production due to our suppliers are when you're selling new pub cutover equipment.
Juan Carlos: We have recently completed the root cause analysis for peace river's digestion issues, which concluded the unplanned downtime was related to the mechanical failure of a hydraulic motor that ultimately led to the digester being plugged.
Juan Carlos: Our mills are largely and complicated facilities and maintenance downtime is a reality, but it was unfortunate that this all happened in the same quarter.
Juan Carlos: As always our teams are applying the learnings from these incidents as we move forward to avoid them from repeating themselves.
Juan Carlos: We do not have any major maintenance planned during the fourth quarter.
Speaker Change: But we have already incurred in 12 days of unplanned downtime in Q4 related to peace river's digesters repairs.
Speaker Change: We have not finalized.
Speaker Change: Our full 2025 planned maintenance schedule, but we do expect <unk> got to take a 17 day shut in Q1 2025 that will include the final tie ins for their wooden project.
Speaker Change: As previously mentioned our solid wood segment results benefited from strong mass timber sales in Q3 as we completed two very large projects reach was referring to earlier.
Speaker Change: The strong margin realized in Q3 highlights the potential of this business. Despite operating on just one shift.
Speaker Change: And despite mass timber as good results. Our overall solid wood segment was held back due to the impact of weak lumber and panel prices.
Speaker Change: In Q3, we saw some small pockets of lumber price improvement in Europe, while the U S market weakened slightly high interest rates globally continue to weigh on housing starts and construction in general.
Speaker Change: We expect Q4 lumber pricing to moderately improve in the U S.
Speaker Change: As we believe the recently announced lumber production curtailments are starting to create some pricing pension.
Speaker Change: Similarly, we expect modest upward pricing pressure in the European market.
Speaker Change: Any meaningful long term improvement in either the European or U S markets will be dependent on improved economic conditions, which will which we.
Speaker Change: Expect will be led by near term interest rate reductions that will end up fueling a recovery in the construction industry in the latter part of 2025.
Speaker Change: We continue to believe that low lumber inventories the large number of sawmill curtailments relatively low housing stock potential wood shortages created by Canadian Forest fires.
Speaker Change: And homeowners demographics are still very strong fundamentals for the construction industry and this will put sustained positive pressure on the supply demand balance of this business in the midterm.
Speaker Change: In Q3, 43% of our lumber sales volume was sold in the U S. As we continue to optimize our mix of products in target markets to current conditions.
Speaker Change: Today, our mass timber order files.
Speaker Change: $33 million and we continue to receive many inbound project inquiries and art.
Speaker Change: Finding developers are taking their projects to the point of being ready to execute once the interest rate environment improves.
Speaker Change: Economic stability will meaningfully improve the short term demand for mass timber.
Speaker Change: We remain confident that the environmental economic and aesthetic benefits of mass timber will allow this building product to grow in popularity.
Speaker Change: Similar pace to what we have seen in Europe.
Speaker Change: We are well positioned to take advantage of that market growth as we have roughly 35% of north American mass timber production capacity.
Speaker Change: Broad range of product offerings, and a large geographic footprint that gives us competitive access to the entire north American market.
Speaker Change: Shipping pallets remained weak due to the overhang on the European economy, and particularly in Germany.
Speaker Change: Once the economy begins to show signs of recovery, we expect pilot prices to return to normal levels, allowing this asset to deliver significant shareholder value to.
To date pallets are selling for about $11 a pilot on average the historical average price for pellets is around 13 to $14, which would make torque out highly profitable even without incremental lumber capacity.
Speaker Change: Keating pallet heating pellet prices were up slightly in Q3 due to expected seasonality in this market.
Speaker Change: Expect demand and prices to increase modestly in Q4 as customers build winter stocks.
As a reminder, we have restarted its strategic and high return Capex projects at both storage and Spokane Mills Doghouse project will increase the volume of dimensional lumber available for the U S market by about 240000 cubic meters annually with upgrades to the log in feed system and the <unk>.
Speaker Change: <unk> have more planning capacity.
Speaker Change: It was envisioned as part of our original investment thesis is to increase the mill's value added product mix and maximize potential synergies.
Speaker Change: I also wanted to remind you our Spokane project was originally envisioned as part of our investment strategy for this mill.
Speaker Change: This project is focused on the mills were in feed and sorting processes.
Speaker Change: Once this project is complete in mid 2025, and we will be able to source lower cost feedstock and process it into higher quality land stock ultimately this will significantly reduce that mineral fiber costs.
In Q3.
Speaker Change: Overall pulp fiber costs were flat from Q2.
Speaker Change: In Germany, a steady supply of sawmill chips get fiber costs constant and in Canada Peace river's wood room, and our server wood strategy are.
Speaker Change: Also kept our fiber costs in check.
Speaker Change: Looking ahead, we expect our fiber costs to remain stable for our pulp business and with a slight increase in our solid wood business in Q4.
Speaker Change: I am pleased with new lignin construction pilot plant ramp up our development and expected commercialization of this product is going according to plan and I expect to share our vision for this product in the near future. We are excited about the future prospects of this product as a sustainable alternative to fossil fuel based products such as adhesives.
Speaker Change: And battery.
We elements among many others.
Speaker Change: We believe this product will be the foundation for a profitable business segments with strong growth potential.
Speaker Change: Fundamentals of this business are aligned perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with the secular economy, while adding shareholder value.
As the world becomes more demanding about 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.
Like concrete and steel for construction, where plastics for packaging.
Speaker Change: Furthermore, the potential demand for sustainable fossil fuels substitutes is very significantly and that has the potential to be transformative to the wood products industry.
We remain committed to our 2030 carbon reduction targets and believe our product form part of the climate change solutions. In fact, we believe that in the fullness of time.
Speaker Change: For our low carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions.
Speaker Change: 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.
Speaker Change: In closing I am pleased that the softwood pulp markets remain strong.
Speaker Change: Our recent operational challenges were unrelated and as a result of those operational challenges are behind us.
Speaker Change: We are expecting strong operating results from the pulp segment in Q4 and into 2025, which will leave us well positioned to take advantage of steady pulp pricing.
Speaker Change: Regarding our solid wood segment, we expect weak economic conditions to continue to keep pressure on demand for pilots in Europe.
Speaker Change: However, we are seeing signs that caused us to be cautiously optimistic about lumber demand and pricing in Q4 and into 2025.
Speaker Change: Finally, we will remain focused on our cost saving initiatives and will continue to manage our cash and liquidity prudently, while looking for debt reduction opportunities.
Speaker Change: Thanks for listening and I will now turn the call back to the operator for questions. Thank you.
Speaker Change: Thank you as a reminder to ask a question. Please press star one 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 Sean Stewart with TD Cowen You May proceed.
Thanks, Good morning.
Sean Stewart: First question is on your deleveraging targets.
Sean Stewart: Even if we have.
Sean Stewart: A better pulp operating environment next year versus the challenges you had in 2024, it still looks like your free cash flow prospects are.
Sean Stewart: Fairly modest.
Speaker Change: I guess the question is around broader deleveraging targets and if free cash flow isn't a strong contributor any thoughts on noncore asset sales that might be advanced to accelerate that that balance sheet transition.
Any broader comments on deleveraging targets.
Speaker Change: Thank you Sean Yes says is as you.
You will point out.
Speaker Change: Focus that we have is naturally on debt reduction in the medium term.
Speaker Change: We believe that we have.
Speaker Change: <unk> Foundation for improved EBITDAR on next year as well as the following year again. This is on the back of what we believe is a solid foundation for especially for soften as we mentioned the call it 85% of our sales are in softwood.
Speaker Change: So while hardwood might still be under pressure, we believe that the foundations for for softwood are strong and therefore, our expectations for when improved performance on softwood is there.
Speaker Change: For next year and following them.
Speaker Change: As far as.
Speaker Change: As asset sales we're proceeding.
Speaker Change: As we announced earlier, we're proceeding with the with the sale process of Sentinel and we're making good progress on that end.
Speaker Change: So obviously that that would be an additional source of cash.
Speaker Change: Well to conclude that transaction.
Speaker Change: But we're making good progress on that end and obviously, we always keep a look on on making sure that we keep up with the right balance of our of our portfolio of assets overall.
Speaker Change: I don't know rich if you want to complement anything that I missed.
Richard Short: No I think that summarizes it.
Speaker Change: Is it quite well among hurdles.
Speaker Change: Okay.
Speaker Change: Rich maybe just a follow on I mean is there a target whether it's net debt to cap or net.
Speaker Change: Net debt to EBITDA on a normalized environment that you guys are.
Sean Stewart: Or are looking towards a long term objective, yes, Sean I think the phone.
Richard Short: Most of the time, obviously this is not going to happen overnight, but we want to get to about two five times net debt.
Sean Stewart: And as Juan Carlos said, we have expectations for EBITDA growth and we think there'll be opportunities for us.
Sean Stewart: Just debt reduction as we go forward as well.
Speaker Change: Okay. Thanks for that.
Speaker Change: Second question.
Speaker Change: Juan Carlos around the.
Speaker Change: U S election.
Speaker Change: From Florida, when do you have any thoughts on the blanket import tariffs that administration would be proposing.
Speaker Change: And how that might affect your strategy for European lumber shipments to the U S and potentially I guess Canadian pulp shipments into the U S as well.
Speaker Change: Yes that is obviously.
Speaker Change: Situations that we will be monitoring closely.
Speaker Change: We don't know obviously nobody knows yet how.
Speaker Change: How.
Speaker Change: Dramatic those tariffs will be and if they will actually be put in place if trump wins.
A lot of ifs in that in that sentence.
Speaker Change: But obviously if they were.
Tariffs exerted on lumber we know that.
Speaker Change: Part of what we do is destined to the U S. Now we have had.
Speaker Change: The possibility of supplying different markets.
Speaker Change: And we we vary the amount of lumber that goes into the U S. Depending on how price conditions flow.
Speaker Change: I think this quarter, we said about 43% went to it.
Speaker Change: In a different quarter it had been about 60% so it fluctuates quarter by quarter and this is all depending on the conditions that we see in other markets. Now. It is it's important to say that we are seeing improvements in Europe.
Speaker Change: We're seeing significant improvements in the U K market.
We are shifting volumes towards that market more recently than what we've done before with.
Speaker Change: With regular shipments far exceeding what we have done previously so there are certain markets that are posing very interesting for us and that gives us the opportunity then.
Speaker Change: Not to be so dependent on the U S.
Speaker Change: But obviously back to your point.
Speaker Change: If there were tariffs obviously this would put us a bit more of a strain into that but again given some of the other markets that we've developed we believe that theres ways to grow around it without that being a significant impact on our results on one and on the other end.
Speaker Change: It's very important to remind ourselves that.
Speaker Change: We do believe and I guess everybody is under the same line of thought.
Speaker Change: Interest rates continue to come down and I think everybody's expectations, regardless of Trump or Harris being in power.
Speaker Change: Obviously the fed.
Speaker Change: Dictates.
Speaker Change: By their own accord.
Speaker Change: But the expectation that interest rates will continue to go down.
Speaker Change: We believe are important element that will favor construction overall.
Speaker Change: Lumber.
Speaker Change: NAND will should rise if construction rebounds.
Speaker Change: Everybody is expecting that to rebound I think the the lack of housing.
Speaker Change: <unk>.
The.
Speaker Change: The aging the aging of the housing.
Speaker Change: Offer.
Speaker Change: Critical elements that give us confidence that with construction rebounding.
Speaker Change: We will have far better lumber prices that we've had so.
Speaker Change: So far this year or last year, so even with tariffs. So I think there's expectations that lumber prices will be higher as we move on.
Speaker Change: So we're confident that there's good days ahead of us I know the tires again, we will see a lot of ifs in that in that equation.
Speaker Change: That's great context much appreciate it that's all I have.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Matthew <unk> with RBC capital markets. You May proceed.
Speaker Change: Good morning, Thanks for taking my questions.
Matthew <unk>: With elevated interest rates weighing on construction activity are you seeing a more competitive environment for mass timber projects and more broadly what is your sense of how north American supply demand balance in that space evolves over the next couple of years.
Speaker Change: Yeah, Matthew very important question.
Speaker Change: Mass timber is a product that has proven to be competitive to concrete and steel.
Speaker Change: And obviously, it's gaining traction.
Speaker Change: Wouldn't say little by little because the growth year over year is in excess of 20% as the overall market.
Speaker Change: And we do believe that that growth will continue to carry forward at that pace in the next five years, so having a business that grows 20% on average every year.
Is for US a very strong foundation for for growth given the capacity that we've been able to acquire.
Speaker Change: Now.
Speaker Change: A lot of this growth obviously comes from the.
Speaker Change: The knowledge.
That little by little.
Speaker Change: <unk> has been able to two.
Speaker Change: To attract.
Speaker Change: From different people that have been having the opportunity to work with us as it is a technology that is not widely.
Speaker Change: Used across the entire state.
Speaker Change: States of North America, or around the U S or Canada.
Speaker Change: There are certain regions that are more prone to it and there are certain regions for example in the U S.
Speaker Change: Although the eastern border and the western border of the U S have much more penetration on projects and little by little we see that in the in the states.
Speaker Change: None of the coastal states there are increasing amount of projects now what's holding back still some of these projects are the interest rates.
Speaker Change: Mentioned in the call earlier that the order book is at $33 million and we have an increasing amount of interest in projects and when we say that is because this is higher than the interest that we've seen in previous months. So as we as the quarters advance we end up.
Speaker Change: Participating in more quotations for more and more projects. So we know that is somewhat because that is growing and the only thing that is stopping it from from really booming even though it's growing significantly is the fact that developers are waiting for interest rates to come further down so that they can secure a better financing for their.
Speaker Change: Thanks.
So that's why we do believe that 25 is it going to be.
Kind of almost a repeat of up 24.
Speaker Change: But 26.
Speaker Change: Once construction really really comes through end of 'twenty. Five we believe that 26 is going to be an extremely busy year for mass timber projects that.
Speaker Change: The demand capacity is is well served in the U S. As we said we have 35% capacity and we are and we're just using one shift of our capacity. So we have we have a lot more that we can deliver of mass timber projects than what we do today.
Speaker Change: Last year, we invoiced $60 million this year, we're going to invoice about $100 million in mass timber projects and.
Speaker Change: And these three assets running at three shifts can well deliver above $500 million. So in terms of capacity.
Speaker Change: There is there is plenty that we know that we can provide.
Speaker Change: In the case of other companies in this space that have been in this market for longer obviously, there there is space for growth is much more limited than ours.
But again with the market growing at 20% per year.
Speaker Change: That's a significant opportunity for growth for us.
Speaker Change: Thanks, that's great commentary, if I could just maybe follow up on that.
Speaker Change: What do you think the tipping point is in terms of rate relief, what do we what do we really need to see until some of those projects that have been developed and are waiting for better financing conditions to start moving forward.
Speaker Change: I think if if mortgages rates are now.
Speaker Change: Between 6% and 7% or around those those lines I think once they come down to a four ish or when people see that theres really.
Speaker Change: A clear reduction in maybe not back to the very low historical levels, but but yes very attractive reductions.
Speaker Change: I think that's when things will start moving.
So thats why we believed and Theres always a lag even if interest rates come down.
Construction will always have a lag.
Speaker Change: At the time that you actually see the the impact and that's why we believe that we are expecting and expect them to see that more in the second half of 'twenty five.
Speaker Change: Then earlier.
Speaker Change: Okay. Thanks, very much I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Cole Hathorn with Jefferies. You May proceed.
Cole Hathorn: Good morning, Thanks for taking my question I, just like to follow up on your commentary around it.
Cole Hathorn: We're seeing a bit of an uptick in European lumber markets, because there's a bit of a divergence between some of the Nordic players that are calling forward, but a stability and then store Enzo as well similar to you that's probably it.
Or similar footprint in Germany, calling about an uptick in demand and pricing. So just wanting to know.
Cole Hathorn: Are you seeing some regional differences there and what's driving the strength is the first one and then the second is on.
Cole Hathorn: On the fiber costs that you're seeing.
Speaker Change: Could you give a little bit more color on.
Speaker Change: Regionally what are you seeing in your.
Speaker Change: You're kind of feedstock to your pulp mills as well as your <unk>.
Speaker Change: So mills from <unk>.
Speaker Change: Cost perspective in Europe, rather than.
Then Canada. Please thank you.
Speaker Change: Absolutely coal.
Speaker Change: As far as the first question the uptick that we see in demand is basically coming from the UK. So that is the market that that where we have seen.
Speaker Change: A pretty good recovery and and good signs.
Speaker Change: Indicate that that could be sustained for a longer period of time. So that as that is precisely to your point that is the market, where we serve and kind of where we have.
Products that fit very nicely.
Speaker Change: Isaly into there.
Speaker Change: Quality demands.
Speaker Change: As far as.
Speaker Change: The fiber costs in our different mills.
Speaker Change: We see obviously, there's there's differences when we look at how the market is behaving in Canada versus Germany.
Speaker Change: On average on average our.
Speaker Change: Fiber costs in both regions have been relatively flat this quarter versus last quarter.
Speaker Change: There's different dynamics behind them, but overall.
Speaker Change: Average prices.
Speaker Change: In the case of Canada, one thing that we're benefiting from.
Speaker Change: In the case of Peace River. The fact that we have our wood room running and in the case of cell guard. The fact that we are a.
A little bit escaping from the situation in BC due to the strategy of the implant that we implemented about a year ago on sourcing ourselves from the U S.
Speaker Change: We've been able to.
Speaker Change: Closed long term contracts with U S suppliers of Av.
Speaker Change: Wood for us.
We are we're being able to bring across the border. Thanks to the fact that <unk> is so close to the U S border.
Speaker Change: And by doing so we have been able to reduce the amount of.
Speaker Change: The highest cost wood chips that we were acquiring from BC.
Speaker Change: So that's the way that we balanced out the fact that even though in BC.
Speaker Change: Wood costs are higher.
Speaker Change: And they are higher because they're more sawmills being closed and we hear this in the news very frequently unfortunately, well in our case.
Speaker Change: This opportunity that we have in the U S to counterbalance those <unk>.
Speaker Change: Increases in fiber are paying off very nicely in the case of Europe, it's a different dynamic.
Speaker Change: In there I think the strength that we have in Mercer holds the.
Speaker Change: The company that we have established as the Myer and it's actually the biggest buyer of wood in Germany overall.
Speaker Change: And how we have structure.
Speaker Change: Mercer holes to make sure that we have very very competitive logistics to bring wood into our mills from not only from Germany, but from neighbor countries or further out from other countries around Europe, I think that spin.
A key factor in us being able to hold.
Speaker Change: Prices for fiber.
Speaker Change: Just very flat when compared to.
Speaker Change: What we saw last quarter and this is on the back of obviously overall increased fiber prices in Europe.
Speaker Change: Because without Russian fiber being presence, obviously theres been some inflationary.
Speaker Change: Aspects that have impacted especially the scandinavians.
Speaker Change: More than anything else, but obviously, if there is a ripple effect on the rest of Europe I think.
Speaker Change: That again.
Speaker Change: The way that we're structure in Germany, the way that Mercer holds has been set up.
Speaker Change: Has been the key way of us not being impacted by by what others are suffering much more dearly.
Speaker Change: Thank you and maybe I'll just follow up on that point because.
Speaker Change: The steep cost curve that we're seeing in Europe.
Speaker Change: Europe with.
Speaker Change: UPN mid to fiber taking downtime do you said that's fiber costs in your like relatively better cost position mills in softwood, all you're really seeing that benefit and with.
Speaker Change: With the commercial downtime that these.
Speaker Change: Your competitors have taken.
Speaker Change: Recently are you seeing kind of increased incoming bid.
Better order books.
Speaker Change: Because of your relative cost position and people are a bit nervous or not really at that stage of arts am I reading too much into that.
Speaker Change: We have for the vast majority of our European business is all under contracted volumes.
Speaker Change: And most of those contracted volumes with pretty large companies in.
Speaker Change: Whether it's in tissue about 50% of what we do is in tissue.
Speaker Change: About 30% goes to specialties and I would say about the other 20%.
Printing and writing.
Speaker Change: So most of that volume is already contracted and our mills are running flat out. So there's everything that we produce is being sold the inventory levels that we're managing.
Speaker Change: Very very small we believe that in both German mills, we're going to end up the year with not more than 15 days of inventory, which is very very low.
Speaker Change: So again the demand is there and what we benefit from is not that we benefit from with these issues that you relate to us.
Speaker Change: Others have taken curtailments or downtime or have had issues.
Speaker Change: Not necessary that we see that impacting our volumes per se, what we see this as impacting pulp prices softwood pulp prices overall.
Speaker Change: The amount of of curtailments the amount of permanent closures that we've seen both in Canada and in Finland in recent times in recent times I'm not going more than a year away in the last 12 months. Those are very significant closures of capacity that is not there anymore.
Speaker Change: And Thats what keeping.
Speaker Change: Softwood prices at at Bay.
Speaker Change: What's keeping softwood prices from going down and Thats why we see this gap of more than $200 between hardwood and softwood.
Speaker Change: So it's precisely those issues that you relate to that are helping.
Speaker Change: <unk> maintained a very healthy price.
Speaker Change: Overall, and Thats, where we see the benefit and the price that we see because again, our mills are running flat out.
Speaker Change: Thank you.
Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone.
Speaker Change: Okay.
Speaker Change: Our next question comes from CJ Baldoni with principal you May proceed.
CJ Baldoni: Hello. Thank you for taking my question I'm, just wondering on what the implications might be to the extent that there is a strike.
Speaker Change: B C port it looks like up 72 hour strike notice was.
Given by some of the longshoremen there.
Yes C J, we've been following since yesterday.
Speaker Change: <unk> that came out.
Speaker Change: From from visa.
Speaker Change: From our reports and obviously any strike disruption.
Speaker Change: What we do.
Speaker Change: The way that we've tackled this and as we prepare to already since July when there was.
Speaker Change: A risk of a strike.
I think it was in the month of August.
We took measures to make sure that if there was any strike, we would not necessarily suffering any consequences from it.
Speaker Change: So in terms of.
Speaker Change: Arranging.
Speaker Change: Alternative logistics for our inbounds in terms of raw materials.
Speaker Change: Those were properly assessed the same thing around outbound logistics and having plan BS already lined up in case, we have issues around those those same issues.
Those were put in motion. So I think we're very well prepared and when we did that we did that thinking that the strike back then in August.
Speaker Change: We were planning for maybe a three week.
Speaker Change: End of extension so again.
Speaker Change: We're conservative conservatively, earning or keeping.
Speaker Change: Contingency plans for for these events.
Speaker Change: Let's see what this one and tangles.
Speaker Change: Hopefully since these disruptions are so big for the economy as a whole.
Speaker Change: I would assume they will be short lived.
Speaker Change: The government will end up intervening, but anyway. The important thing is at least from our end we were prepared as needed.
Speaker Change: Great. Okay. Thank you that's all that I have.
Speaker Change: Yeah.
Speaker Change: Thank you I would now like to turn the call back over to Juan Carlos for any closing remarks.
Juan Carlos: Okay. Thank you Josh and thanks to you all for joining our call rich 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 February Bye for now.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
Juan Carlos: Okay.
Juan Carlos: Okay.
Juan Carlos: [music].
Juan Carlos: Okay.
Juan Carlos: Okay.
Juan Carlos: Yes.
Juan Carlos: [music].
Juan Carlos: Yeah.
Juan Carlos: [music].
Juan Carlos: Okay.
Juan Carlos: [music].
Juan Carlos: Okay.
Juan Carlos: Okay.
Juan Carlos: [music].
Juan Carlos: Yeah.
Juan Carlos: [music].
Juan Carlos: <unk>.
Juan Carlos: [music].