Q4 2024 Mercer International Inc Earnings Call
Speaker Change: Good morning and welcome to Mercer International's fourth quarter 2024 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.
Speaker Change: Thanks, Dede. Good morning, everyone. Thanks for joining us today. I will begin by touching on the 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.
Speaker Change: Also, for those of you that have joined today's call by telephone, there is presentation material that has been attached to the investor section of our website.
Speaker Change: But before turning to our results, I'd like to remind you that we will be making forward-looking statements in this morning's conference call.
Speaker Change: 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 to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.
Speaker Change: This quarter, our operating EBITDA totaled $99 million, compared to Q3's EBITDA of $50 million.
Speaker Change: The improved quarter-over-quarter results were driven by no days of planned major maintenance downtime compared to 20 days in Q3.
Speaker Change: The positive impact of a strong dollar and higher MBSK sales volumes. These positive impacts were partially offset by modestly lower pulp pricing.
Speaker Change: I am pleased to note that in Q4, we successfully redeemed our $300 million 2026 senior notes with proceeds from the issuance of $200 million of additional 2028 senior notes and $100 million of cash on hand, which represents a first step in our leverage reduction initiative.
Driven by Stronger Pulp Markets
Speaker Change: Lower production costs due to easing of inflation pressures and cost reduction initiatives.
Speaker Change: Our pulp segment contributed an EBITDA of $106 million in Q4, and our solid wood segment had quarterly EBITDA of negative $5 million. You can find additional segment disclosures in our Form 10-K, which can be found both on our website and the SEC's.
Speaker Change: Our Q4 softwood pulp sales realizations were $794 per ton, compared to $814 per ton in Q3.
Speaker Change: In China, the MBSK net price was $767 per ton in Q4, which was relatively flat compared to Q3.
Speaker Change: In Q4, the North American MBSK list price averaged $1,687 per ton, and the European MBSK list price averaged $1,500 per ton, both down about $75 from Q3.
Speaker Change: Hardwood prices in China decreased in the fourth quarter as the market continued to absorb the new capacity which came online earlier in the year.
Speaker Change: Our Q4 hardwood sales realizations were $578 per ton, a decrease of $54 from Q3. We believe MBHK prices reached the floor in Q4 and in early 2025 we are already starting to see modest price increases.
Speaker Change: The average price gap in China between softwood and hardwood pulp increased this quarter to about $220, with the average Q4 net eucalyptus hardwood price at $548 per ton, down $87 from Q3.
Speaker Change: The North American MVHK average Q4 list price was $1,298 per ton, down $169 from Q3.
Speaker Change: Overall, the weak hardwood pulp market resulted in us recording a $5 million non-cash impairment in Q4 against hardwood inventories at the Peace River Mill.
Speaker Change: When compared to the third quarter, total MBSK pulp sales volumes in the fourth quarter increased by 29,000 tons to 405,000 tons. This increase was mostly offset by lower sales of MBHK pulp.
Speaker Change: Total production volume in the fourth quarter was 467,000 tons, up 51,000 tons when compared to Q3, driven by stronger production and no planned maintenance downtime compared to 20 days in the third quarter.
Speaker Change: In the first quarter of 2025, we'll have 21 days of planned maintenance downtime at our Selgar Mill.
Speaker Change: For our solid wood segment, realized lumber prices modestly increased in the fourth quarter compared to the third quarter, driven by higher prices in the U.S. market.
Speaker Change: Overall, Q4 lumber markets remained weak. The Random Lengths U.S. benchmark for Western SPF No. 2 Embedder average price was $435 per thousand board feet in Q4, compared to $366 in Q3.
Speaker Change: Today, that benchmark for Western SPF Number 2 Embedder is around $488 per thousand bore feet, which represents about a 20% increase from the beginning of the fourth quarter.
Speaker Change: For the first quarter of 2025, we are expecting modestly higher lumber prices in both the U.S. and Europe due to limited supply and increased demand.
Speaker Change: Lumber sales volumes were up 14% quarter over quarter, to 124 million board feet due to the timing of sales, while lumber production for the fourth quarter was 150 million board feet, down 6% from the third quarter due to planned downtime over the winter holidays.
Speaker Change: Our consolidated electricity sales volume totaled 241 gigawatt-hours in the quarter, up 36 gigawatt-hours from the third quarter due to higher production at our pulp mills and the planned maintenance work in Q3 on the Friesau turbine.
Speaker Change: Pricing in Q4 increased 20% to $109 per MWh as a result of higher spot pricing in Germany.
Speaker Change: In the fourth quarter, our pulp fiber costs were flat compared to the third quarter as supply remained stable. For our solid wood segment, per unit fiber cost increased in Q4 due to reduced supply.
Speaker Change: Production for our solid wood segments mass timber operations decreased in the fourth quarter to 6,000 cubic meters from 10,000 cubic meters in the third quarter as we completed two large mass timber projects in Q3.
Speaker Change: Foreign exchange positively impacted our operating income in Q4 by about $26 million when compared to Q3, primarily caused by the impact of a stronger U.S. dollar on our U.S. denominated receivables at our Canadian and German mills.
Speaker Change: We reported a consolidated net income of $17 million for the fourth quarter, or $0.25 per share, compared to a net loss of $18 million, or $0.26 per share, in the third quarter.
Speaker Change: We consumed about $54 million of cash in Q4 compared to about $24 million in Q3. Our net working capital, excluding non-cash adjustments, was lower in Q4 by roughly $25 million, and we used $100 million of cash to redeem our 2026 senior notes.
Speaker Change: In Q4, we were paid $10 million of our revolving credit facilities.
Speaker Change: In 2024, we invested a total of $84 million of capital in our facilities. Looking ahead, we currently expect capital spending to be between $100 and $120 million in 2025.
Speaker Change: At the end of Q4, our liquidity position totaled $489 million dollars, a $66 million dollar decrease from Q3, and comprised $185 million dollars of cash and about $304 million dollars of undrawn revolvers.
Speaker Change: Finally, our board has approved a quarterly dividend of seven and a half cents per share for shareholders of record on March 26 for which payment will be made on April 2nd, 2025.
Speaker Change: That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.
Thanks, Rich.
Juan Carlos: Let me begin by saying that I'm pleased with our Q4 operating results. Our EBITDA of almost $100 million highlights the strength of the softwood pulp market and the cash-generating potential for pulp assets.
Juan Carlos: Looking ahead, we are carrying positive pot price momentum into 2025. However, we're also dealing with the uncertainty of tariffs. As we have run several scenarios, we believe we would be able to mitigate the majority of the impacts on our businesses.
Juan Carlos: In the meantime, we maintain an open and continuous dialogue with our customers, as well as with government officials and our industry associations.
Juan Carlos: We're prepared to take swift action redirecting products to other geographies if necessary and adjusting our operations accordingly depending on the scenario that actually plays out. We might see some wood cost inflation on our circle mill due to the negative impact that tariffs could have on the Canadian sawmilling industry.
Juan Carlos: To give our main tariff exposure some context, on average we sell about 200,000 tons of pulp into the U.S. annually. About two-thirds of this volume is softwood pulp.
Juan Carlos: We also export from Germany about 200 million board feet of lumber to the U.S.
Juan Carlos: In contrast, our main import from the U.S. into Canada is woodchips for our Celgar pot mill, but it's worth noticing that these are being exempted from the counter-tariffs initially proposed by Canada.
Celgar imports about 40% of wood chips
Juan Carlos: Turning to the POP markets, softwood pricing is expected to remain strong. We continue to believe that demand for softwood will be steady in the midterm, which when combined with reduced supply will create some upwards pricing pressure in most markets in the first half of 2025.
Juan Carlos: Looking forward, we believe that the significant contrast between the supply demand fundamentals for softwood and hardwood pulp will drive the price difference between these two grades to levels well beyond historical norms. Currently the net price gap in China is about $220 a tonne while historically this spread is closer to $100 we expect.
Juan Carlos: This wider price differential to persist well into 2025 as a reminder, softwood represents roughly 85% of our annual pulp sales volume.
This large price differential between softwood and hardwood will inevitably bring up the topic of substitution.
Juan Carlos: Based on conversations we have had with customers as well as our own research. We believe that most of the potential substitution has already been implemented.
That only marginal amount would still be possible.
Juan Carlos: You will recall that in Q3, we lost approximately 71000 tons of pulp production due to unplanned downtime.
Juan Carlos: Our production was significantly better in Q4, despite losing 18000 tonnes at Peace River is a carryover from the digester issue from Q3.
Juan Carlos: While I am pleased with our production this quarter, we continued to put strong emphasis on improving further the reliability of our assets across all businesses.
Juan Carlos: We look forward to targa, increasing their planned their planed lumber production as we make good progress on our lumber expansion project.
Juan Carlos: In Q4, our overall pulp fiber costs were flat from Q3 in Germany, a steady supply of sawmill chips get fiber cost constant while in Canada costs were steady thanks to our peace river's wood room as well as our fiber sourcing strategy in <unk>.
Juan Carlos: Looking ahead, we expect our fiber cost to remain stable for.
Juan Carlos: All business and with about a 10% increase in our solid wood business in Q1.
Juan Carlos: Our solid wood segment continues to be held back by a weak European economy, and the impact of higher interest rates on the construction industry. Despite some modest.
Juan Carlos: Price improvements in the U S lumber market.
Juan Carlos: As a result, our solid wood segment posted a negative EBITDA of $5 million.
Juan Carlos: As I look back on our mass timber business in 2024 it.
Juan Carlos: It was clear for the potential of this business is when our facilities were running full but only on one shift we saw meaningful profitability, which of course will only increase when do we see some recovery in construction and we transition to two full shifts.
Juan Carlos: We expect that the construction market in general will start will be it will still be challenging in 2025, although we're observing significant pent up demand for projects that are just waiting for a positive market signals in order to be released which will unleash significant growth for mass timber.
Juan Carlos: Such we are highly confident that this business being a growth engine for Mercer.
Juan Carlos: Today, our mass timber order files sits at about $36 million were receiving an increasing amount of inbound project inquiries on our finding developers thinking their projects to the point of being ready to execute once the interest rate environment improves.
Juan Carlos: We remain confident in the environmental economic speed of construction advantages and aesthetic benefits of mass timber will allow this building products to grow in popularity at a pace similar to what happened in Europe.
Juan Carlos: We are well positioned to take advantage of that market growth as we have roughly 30% of North American cross laminated timber production capacity, a broad range of product offerings, including design and installation services and a large geographic footprint, giving us competitive access to the entire north American market.
Juan Carlos: We have positioned ourselves to be a one stop shop for mass timber installations.
Juan Carlos: We expect Q1 lumber pricing to moderately improve in the U S.
Juan Carlos: As we believe the recently announced lumber production curtailments are starting to create some pricing tension and potential targets with one will only exacerbate this trend.
Juan Carlos: Similarly, we expect modest upward pricing pressure in the European market, primarily due to increasing solid prices. However, any meaningful long term improvement in either the European or U S markets will be dependent on improved economic conditions and lower interest rates.
Juan Carlos: The very cost competitive setup, we havent freeze out gives us the flexibility to have a strong presence in Europe as well as the U S.
Juan Carlos: And the very high quality demand in the Japanese market.
Juan Carlos: In Q4 in particular, 38% of our lumber volume was sold in the U S. As we continued to optimize our mix of products in target markets to current conditions.
Juan Carlos: We continue to believe that low lumber inventories the large number of sawmill curtailments reduced allowable cut limits relatively low housing stock potential wood shortages created by Canadian Forest fires in homeowners demographics are still very strong fundamentals for the construction industry and this will put sustained positive pressure on the.
Juan Carlos: <unk> demand balance of this business in the midterm.
Juan Carlos: Shipping pallets.
Juan Carlos: Remain weak due to the overhang of the European economy, particularly in Germany.
Juan Carlos: Once the economy begins to show signs of recovery, we expect pilot prices to recover towards more historical levels, allowing target to deliver significant shareholder value.
Juan Carlos: Heating pellet prices were up slightly in Q4 due to expected seasonality in this market, we expect demand and prices to be steady in Q1 as cooler European temperatures take hold.
Juan Carlos: As part of our objective to keep all of our pulp mills running reliably we're planning for major maintenance shutdowns for all of them throughout the year. Our current schedule is the following in.
Juan Carlos: In Q1, <unk> is down for a longer than usual 21 days to allow for the completion of their wood group project.
Juan Carlos: In Q2 Peace River will be down for 18 days and Stendal will take us three day shut.
Juan Carlos: In Q3, Rosenthal will be down for two weeks and safeguard will take four days and in Q4 Stendal will be down for 18 days in total that is 78 days of planned downtime compared to <unk> 57 in 2020 for that.
Juan Carlos: The difference being <unk> as we did not take a major shut in 2024, given that we're running the mill on an 18 month maintenance cycle.
We expect to spend between 101 hundred $20 million on capital projects in 2025. This.
Juan Carlos: <unk> capital budget is heavily weighted to maintenance environmental and safety projects, but we will complete the targa lumber expansion project as well as salad bars Woodrow.
Juan Carlos: Both projects will provide significant value add.
Juan Carlos: Through increased lumber output and fiber cost optimization, respectively.
<unk> project will increase the volume of dimensional lumber available for the U S market by about 240000 cubic meters annually.
Juan Carlos: With upgrades to the log in feed system and the addition of more planning capacity.
Juan Carlos: We expect to reach a little bit over 100000 cubic meters already in 2025.
Juan Carlos: This was envisioned as part of our original investment thesis to increase the mill's value added product mix and maximize potential synergies.
Juan Carlos: I also want to remind you our Spokane project was originally envisioned as part of our investment strategy for this facility and its focus on award in feed and finger jointing processes, whilst the Spokane project is completed in mid 2025. The facility, we will see a reduction in the wood costs through reduced waste.
Juan Carlos: I am pleased with the performance of our new lignin extraction pilot plant at Rosenthal, our product development is going according to plan. We're excited by the future prospects of this product as a sustainable alternative to fossil fuel based products like adhesives and advanced battery elements.
Juan Carlos: We believe this product can be the foundation for a profitable business segment with strong growth potential.
Juan Carlos: The fundamentals of this business aligns perfectly with our strategy of which involves expanding into green chemicals and products that are compatible with our circular carbon economy, while adding shareholder value.
Juan Carlos: As the world becomes more demanding about reducing carbon emissions, we believe that products like lignin mass timber REIT energy lumber and pulp will play increasingly important roles and displacing carbon intensive products.
Juan Carlos: Products like concrete and steel for construction or plastic packaging.
Juan Carlos: Furthermore, the potential demand for sustainable fossil fuels substitutes.
Juan Carlos: Is very significant and has the potential to be transformative to the wood products industry.
Juan Carlos: We remain committed to our 2030 carbon reduction targets and believe our products form part of the climate change solutions. In fact, we believe that demand for low carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions.
Juan Carlos: We remain bullish on the long term value of pulp and are committed to better balance our company through growth in our lumber and mass timbers businesses.
Juan Carlos: In summary.
Juan Carlos: I am pleased to note that the softwood pulp market remains strong and that we are well positioned to take advantage of it.
Juan Carlos: We believe the weak construction market will keep our wood products business is under pressure during the year.
Juan Carlos: But we will navigate through the uncertainty that potential trade wars may bring and are confident that we have sound mitigation strategies.
I'll finish by saying that during 2025, our absolute priority will be on reducing our leverage through a combination of strategic projects that include aggressive cost reduction programs reliability of our mills operational rationalization and prudent capital management.
Juan Carlos: Thanks for listening and now I will return the call back to the operator.
Juan Carlos: Thank you.
Speaker Change: 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 please.
Juan Carlos: Please standby, while we compile the Q&A roster.
Speaker Change: And our first question comes from Sean Stewart of TD Cowen Your line is open.
Sean Stewart: Thanks, Good morning, congratulations on a much improved result.
Speaker Change: A couple of questions I wanted to dig into.
Sean Stewart: First on pulp.
Sean Stewart: Pulp costs and I appreciate that.
Sean Stewart: Better productivity and the currency tailwind wonder.
Sean Stewart: I'm wondering if you can do a little more on packing is of input cost trends this quarter as well it would appear to us that even adjusting for currency and.
Sean Stewart: In the maintenance schedule.
Sean Stewart: There was some tailwind there as well can you give us a bit more detail between Europe and.
Sean Stewart: And Canada any trends you might have seen there.
Sean Stewart: Yeah, absolutely up and shall I appreciate the question.
Sean Stewart: When we look at cost obviously, we have to talk about fiber.
Sean Stewart: <unk>.
Sean Stewart: The evolution that we got into from 23% to 24, what I would say positive for bulk not so much for lumber.
Sean Stewart: Pub in general one year versus the other we see our pumps coming down about 5% both in our Canadian mills as well as in the German mills.
Sean Stewart: <unk> about 5% increase was seen and increase our in our lumber mills now into 2014 to 25, what we believe is going to happen is that our Canadian pulp mills will still have a little bit of a tailwind.
Sean Stewart: And this is absent of tariffs because we know that tariffs may have an impact on on saw milling industry and that was obviously on on the amount of Av.
Sean Stewart: Chips that will be available. So if that does happen I think we will see an uptick rather than the decline in fiber prices.
Sean Stewart: We're looking at.
Sean Stewart: In the German case, we believe that our prices for fiber will be going up we.
Our estimate is about 6% throughout the year and in about 10% for lumber and this is on the back of the Germany harvesting less than they've done before and.
Sean Stewart: And therefore, a little bit less availability of wood overall, so that is the major driver for fiber when we look at chemicals and other things, we don't see dramatic changes so.
Sean Stewart: So it's basically a fiber driven economic.
Sean Stewart: Yes.
Sean Stewart: That said, that's great detail I appreciate that.
Sean Stewart: Question on your European business, which.
Sean Stewart: Continues to struggle and you referenced some of the factors there.
Sean Stewart: We're hearing reports.
Sean Stewart: The capacity coming out.
Sean Stewart: The European market on the lumber side more in Scandinavia, and in Germany, but.
Sean Stewart: Any sense that.
Sean Stewart: Conditions are theres any tension apparent in that market headed into early 2025 and.
Sean Stewart: Your ability to improve margins.
Sean Stewart: Those operations with <unk>.
Sean Stewart: Conservative Capex budget.
Sean Stewart: Absolutely.
Sean Stewart: Two things I'll make two distinctions between freeze on tour Gal, because they are very different assets.
Sean Stewart: Free cell, we have the benefit as I mentioned.
Sean Stewart: Earlier.
Sean Stewart: Having an incredibly competitive and efficient and large sawmill.
Sean Stewart: And by that effect.
Sean Stewart: We're able to navigate through difficult price conditions are difficult difficult market conditions. So the mills stays afloat and runs on profit regularly.
Sean Stewart: In the case of <unk>. It is different because it's still up to now very much dependent on pallets and only starting this year, we will see a relief of that with lumber beginning to pile up.
Sean Stewart: And obviously is as weak as we gain traction and we gain volume.
Sean Stewart: Obviously, our costs are fixed costs will be diluted further so.
Sean Stewart: So in time, we do see that Targa will become much more resilient.
Sean Stewart: It won't be the same size of freeze out, but it will be still since it's a very large sawmill.
Sean Stewart: With a combination of pallets.
Sean Stewart: It has a good way through obviously, the fact that pilot remains.
Sean Stewart: As they are.
Sean Stewart: It doesn't help but that's why we're putting so much emphasis and driving hard.
Sean Stewart: The increase of lumber production.
Sean Stewart: So those those two assays will navigate through it fiber cost as I said before it is not going to help.
Sean Stewart: It's not going to help because we do believe that fiber costs will go up in Europe in 2025.
Sean Stewart: But again as I said, I think <unk> always resilient enough the quantities that we're able to produce allow us to play in markets that are very demanding like Japan.
Sean Stewart: We are anywhere between 10 to even 12 or in some cases, 50% of our sales can go to that market. So that gives us a very good breathing space in terms of a very very healthy margins and we see evolution. So prices in different markets that are going into right direction. In the UK is working is recovering very well actually it's one of the.
Sean Stewart: Hotspots in Europe, right now in terms of seeing some sort of recovery, especially in the construction industry and we've taken advantage of that.
Sean Stewart: And in the case of <unk>.
Sean Stewart: Of the U S.
Sean Stewart: All very familiar with it there is obviously some recovery there are prices, but again, we have this lingering thing around carriers on how that may happen.
Sean Stewart: Applies only to Canada Canadian lumber into the U S and not yet to Europe, obviously, we will benefit from it.
Sean Stewart: If it is applied also in Europe as well as in Canada.
Sean Stewart: Thing that will keep us apart from each other is the fact that on top of the very unfortunate 25% tariffs that are being announced we.
Sean Stewart: We know that Canadian has these anti dumping duties.
Sean Stewart: That are right now around 15% and that are expected to grow to 30%.
Sean Stewart: By the by the third quarter, So Canadian lumber will still be in a very difficult position competitive wise and even if European tyrese are matched.
Sean Stewart: Europe will still have an advantage from that point of view.
Speaker Change: That's great detail really appreciate it thanks very much that's all I have.
Sean Stewart: Thank you.
Sean Stewart: Okay.
Speaker Change: Our next question comes from Matthew Mckellar of RBC capital markets. Your line is open.
Matthew Mckellar: Good morning, Thanks, very much for taking my questions I'd like to just follow up on Sean's question on the outlook for fiber costs in Germany.
Speaker Change: Commentary on 2025 is certainly helpful. If.
Speaker Change: If we take a slightly longer term perspective, where do you expect your fiber costs in the country to trend over the next two or three years, because that trying to get better and 26% 27.
Speaker Change: When we when we've recently done some work looking at fiber availability.
Speaker Change: 10 years out.
Speaker Change: And we our conclusion is that there will be enough fiber to source.
Speaker Change: To feed our males or the market in general.
Speaker Change: Assuming that there is no closures that everything happens is as it is not right now.
Speaker Change: The amount of wood to be harvested the amount of forests and that are available we will.
Speaker Change: Still remain there.
Speaker Change: The only difference that we're seeing in the longer run is a reduction of some species versus others. So we're seeing less availability of spruce, while other species remain still very resilient. So that is in the longer term. That's what we see we don't see necessarily a.
Speaker Change: <unk> in fiber overall, we see a shift of some species versus other as the more predominant element out there in at least in a 10 year timeframe.
Speaker Change: Okay. Thanks, that's helpful.
Speaker Change: And next I was just wondering if you could provide a bit more color around how you are managing your manufactured products business right now given this lack of CA.
Speaker Change: You described the outlook is muted should we assume no revenue growth in 2025, if we don't see relief on interest rates and we're expecting flat results Stephen generates given the conditions you're seeing today.
And then are the steel tariffs at all helpful medium term electro mass timber demand from a comparative cost perspective.
Speaker Change: Absolutely that's a good question.
Speaker Change: On mass timber what do we see for 2025 is that most likely we will end up with roughly the same.
Speaker Change: Im going to say $100 million in sales for that business.
Speaker Change: As we did in 2024.
Speaker Change: The main difference there is in 2024, we had some a couple of very very large and significant projects.
Speaker Change: And those very large projects.
Speaker Change: One of which and this was publicly announced Walmart.
Speaker Change: When you add the Walmart campus at some of the other two major projects that we worked on that was about 65, almost 70% of our sales.
Speaker Change: In 2025.
Speaker Change: That those big Big projects are not there we are.
Only one and that we're going to be finishing in the first quarter and then the remainder of the year is going to be fighting for this smaller projects. The projects that are out there you see our order book is at 36 million.
Speaker Change: And that is comprised of many smaller projects.
Speaker Change: So feeding feeding.
Speaker Change: Our factories with smaller projects, obviously, it takes a bit more time.
Speaker Change: It is not as efficient from a cost fixed from a fixed cost perspective, and thats why we believe that even though we might be able to achieve the same result, as last year with a bunch of.
Speaker Change: A very significant load of new projects, but smaller ones.
Speaker Change: Obviously, the profitability will not be the same because we're just filling in the facilities now when it comes to mass to tariffs and this is very important to your question.
Speaker Change: The fact that we have three facilities scattered in different geographies is plays to our advantage immensely.
When you look at Con way in Arkansas.
Speaker Change: We source.
Speaker Change: Southern yellow pine and we started the U S market comment.
Speaker Change: With both <unk> and <unk>. So we're good no impact on tariffs whatsoever.
Speaker Change: He comes to Spokane in Washington.
Speaker Change: Shifting to source wood from the U S. Instead of sourcing from Canada, we have both options will start sourcing from the U S. If necessary.
Speaker Change: And that is already set up so that we can serve the U S market from Spokane without any impacts on tariffs.
Speaker Change: And what we will do is on the Canadian asset on Okay. Lamb, we will dedicated towards the Canadian market, they can produce <unk> and Sidoti.
Speaker Change: So we will be able to serve the two markets independently independently without having to be concerned about tyrese is shifting products from one country to another.
Speaker Change: Great. That's helpful. Thanks, very much I'll turn it back.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Samir Patel of CIBC capital markets. Your line is open.
Samir Patel: Hi, good morning.
Speaker Change: One cross could you help us.
Your stand how those returns on lumber sales within Europe.
Speaker Change: Compares to North America now it seems like we've had a.
Speaker Change: For their movement and domestic prices here, but I'm curious what you're seeing on the continent.
Speaker Change: Yes, Hi mirror on on our pricing in Europe, it's still evolving positively on the back of the U K.
Speaker Change: And as I mentioned before that's probably the market that has that has seen.
Speaker Change: A much more.
Speaker Change: Clear improvement.
Speaker Change: And.
Speaker Change: Similar to what we've seen in the U S also but it's but it's been more consistent along the year, we see in the case of the U S. It's kind of a dip.
Speaker Change: Depending on which week you are talking about you don't know if its going to be up or down right. Now it's been up for the last few weeks, but in the UK. It's been consistently upwards and that is I think is what makes it more attractive to us.
Speaker Change: That's why even when you compare.
Speaker Change: The amount of or the percentage of lumber that we sold to the U S. We actually at the low end right now 38% in the quarter.
Speaker Change: When we've been at much higher levels before I think it was <unk> 41 in the previous quarter and even at some point in time, we were about 50 55 I think in 2023, so we do play.
Speaker Change: With those numbers as we see that things play out better for us and the other one that I wouldn't as card because it has shown some good penetration for us and we've been able to capture that we've got quality has to Japanese market, we are selling more to Japan right now that we've sold before.
So we're very pleased with with how that is progressing.
Speaker Change: Okay, great maybe hear enough numbers to that.
Speaker Change: In Europe pricing is up probably 2% to 5%.
Speaker Change: And then in the U S. As we put in the comments, it's getting close to 20% in the last month or so.
Okay, great. Thanks, Rich I appreciate that detail and then just following up on the <unk>.
Speaker Change: <unk> tariff discussion you mentioned I think in your prepared remarks that Sagar sources, 40% of its chips.
Speaker Change: The U S. If tariffs do come in in the counter tariffs don't end up actually exempting <unk>.
Speaker Change: <unk> from the U S would you still be able to find.
Speaker Change: Fiber with NBC at an acceptable cost or wood Sagar likely then have to reduce its operating rate.
Speaker Change: We don't see Sagar needing to reduce operating.
Speaker Change: Rates because there is plenty of wood that we can source from the U S. We have now secured two long term contracts with the U S and we have for the suppliers that are providing us on a spot basis.
Speaker Change: So we feel very comfortable with our sourcing capability from the U S.
Speaker Change: I would say in 2023.
Speaker Change: We're.
Speaker Change: Trying to reach 30% in 2024, we finish about 40%.
Speaker Change: And we know that we can go further.
Speaker Change: We need to do that.
Now, obviously, we've right now, especially with.
With exchange rates it is more favorable for us to source from Canada.
Speaker Change: So we will obviously keep a good balance on how much we can bring from Canada and what is more convenient for us from that perspective.
Speaker Change: But I don't see any risk of curtailments or fiber scar city or fiber availability, because we have that outlet.
Speaker Change: In absence of that outlet.
Speaker Change: I would be concerned I think for many.
Speaker Change: Pulp mills in BC that do not have that outlet.
Speaker Change: The lingering tariffs and the impact that that May have I think is it.
Speaker Change: Is is an issue that is of high concern sawmill enclosures.
Speaker Change: Wouldn't be discarded in that scenario with 25% tires on top of the antidumping duties that are going to jump.
Speaker Change: Or double to between 15% to 30%. It is just unsustainable for many sawmills in BC. So.
Speaker Change: I think the situation may be very critical from that point of view again for saga.
Speaker Change: Based on the way that we have things set up I think we're far better off than others.
Speaker Change: Okay, No I appreciate that but I guess one growth if the if there are tariffs in the Cana tariffs counteract tariffs do not actually end up exempting.
Speaker Change: <unk>.
Speaker Change: Chips coming from the U S to Canada.
That situation would you still be buying chips from the U S.
Speaker Change: Ah.
Speaker Change: We would need to we will need to balance that out.
Speaker Change: Obviously.
Speaker Change: We would need to calculate.
Speaker Change: What would be the end result of running with those <unk>.
Speaker Change: <unk> costs in our in our wood basket.
Speaker Change: Having said that when you look at the amount and this is very technical but the actual code on which our chips fall into.
Speaker Change: Is a very small percentage of the entire gamut of codes.
Speaker Change: Say it another way.
Speaker Change: What was not exempted in the counter <unk> is the vast majority of the lumber products.
Speaker Change: So anything that that you think about from lumber going the other way everything is would be including the counter tariffs.
Speaker Change: There is a few small codes that are used for other purposes. Those are the ones that are exempted when you look at what we import.
Speaker Change: Into into Canada from the U S.
Speaker Change: I think as half of all of the imports of Canada.
Speaker Change: From the U S. That's how much we are.
Speaker Change: There is very few imports, it's a very small code in the midst of a much larger pile that candidates targeting it wouldn't make a whole lot of sense of targeting have very small code that has no meeting meaningful impact whatsoever.
Speaker Change: Because it's really nothing in the context of what candidate strength to do up imposing come to tariffs.
Speaker Change: Okay.
Speaker Change: Fair enough that makes that makes sense.
Speaker Change: So I had I'll turn it over thanks.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from Sandy Burns of Stifel. Nicholas Your line is now open.
Sandy Burns: Hi, good morning, and congrats on a good quarter.
Just wanted to kind of follow up with the downtime schedule for the first quarter I guess was the company planning this pretty far in advance. So you built up your inventories in anticipation of it. So we should expect to see especially MBS K Sam.
Sandy Burns: Sales.
Sandy Burns: Much higher than the production for the quarter.
Sandy Burns: <unk>, it's Richard here, So we'll see us sales stay flat. So youre correct. We saw some inventory buildup at the end of the year in anticipation of the shot but of course you lose the production during that three week outage. So you won't see an increase in sales so they'll come down a little.
Sandy Burns: Bits, but we've tried to plan and just making sure our customers have.
The volumes they need during that outage and to your point Sandy obviously this was planned.
Speaker Change: The shutdown has been planned for a long time, we actually know since already last year early in the year that the only times, where we could be able to finish the wood room would be in the maintenance shop.
Speaker Change: So we knew that the downtime the maintenance downtime would have to be extended next.
Speaker Change: The next time, we had it so so yes this was coming all along.
Speaker Change: Right right.
Speaker Change: You're saying you think.
Sales volumes will probably still be down from the fourth quarter.
Speaker Change: It's kind of a help demand of correct playing out yes, it's modestly down yet for.
Speaker Change: For that mill.
Speaker Change: Okay.
Speaker Change: And then my second question would be yes.
Speaker Change: A lot of questions about the tariffs and you did make the comment that there could be positive impacts and opportunities could you elaborate on that a little bit what you're thinking could be a positive for the company if they do all play out.
Speaker Change: As harsha absolute worst case.
Speaker Change: Yeah, it's all scenario planning here, but.
Speaker Change: So anything can change.
Speaker Change: But let's talk about pulp for a minute.
Speaker Change: I mentioned about 200000 tons of pulp.
Speaker Change: Traveled styles.
Speaker Change: And two thirds of that is softwood when.
Speaker Change: When you think about softwood.
Speaker Change: <unk> does not produce softwood the U S imports.
Speaker Change: All of their softwood.
Either Canada, or Europe, and its about 80% in Canada, and 20% from Europe. So the U S doesn't have any options when it comes to software.
Speaker Change: It is it is a very delicate situation for them and I can only assume that the Paris will be passed on.
Speaker Change: And customers in the U S and customers in the U S for tissue products and kitchen towels, and all of that will end up.
The ore carrying the burden of the tariffs when it comes to hardwood.
Speaker Change: In that case, it's different because hardwood can be sourced from other places we have hardwood coming from peace River into the U S.
Speaker Change: And we know that that hardwood can be substituted by Brazilian ecolab to us.
Speaker Change: So in that case, our plan is to shift towards Asia.
Speaker Change: Right now when we do the math of selling down south or shipping to Asia with container rates. The way. They are costs are very equivalent so that we don't lose much or anything at all by just shifting from one geography to another again its a smaller volume because most of it is softwood.
Speaker Change: But but there would be some impact there that we would just shift to another geography. So that's that's that's pulp in itself.
Speaker Change: And that is regardless of what happens in other geographies or our tires in other geographies Thats just reality for us.
Speaker Change: Now when it comes to lumber than we do have the variability of what happens in other geographies because if it's only Canadians that are impacted and we benefit in Europe.
Speaker Change: Then all of a sudden we're much more competitive coming into the U S. So that's where a positive spin would come from however.
Speaker Change: Because we know all these later announcements and we don't know if its by April theyre going to do something.
Speaker Change: On Europe on cars and other products. If lumber is or is not going to be included because it was kind of a comment that was thrown out there by president Trump.
Speaker Change: We don't know if thats going to be the case again if it is the case then you would say it's a level playing field as we have to date, because Canada Canadians would have and you would have the same the same effect. So there is in terms of competitiveness no major change. However, again Canadians are going to go through a review of the antidumping in August.
Speaker Change: Or maybe September and that and they will double so so it will not be again up level, a level, playing field and again Europe will be better positioned.
Speaker Change: Then Canadian counterparts.
Speaker Change: So that's where some of the positives may still remain but obviously, it's a situation that I guess, none of us would.
Speaker Change: Like any of this to play out.
Speaker Change: This is a disruptor.
Speaker Change: Commerce I think that the end of the day, it's the end users that aren't going to be paying the bill.
Speaker Change: U S needs the lumber for construction right now more than ever with everything that they have to do in California in terms of rebuilding it.
Speaker Change: The worst moment to be talking about tariffs and additional cost into the U S.
Speaker Change: But im afraid thats whats going to happen.
Speaker Change: Alright.
Speaker Change: Okay, great. Thank you good luck.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you have a question. Please press star one line.
Speaker Change: And our next question comes from coal.
Speaker Change: Of Jefferies. Your line is open.
Coal: Good morning, Thanks for taking my question, just a bit of a follow up or clarification question on the fiber costs in Germany, we're seeing quite a bit of a divergence in the Nordic players between solar costs and if it can be pulpwood and wood chips when you're talking about.
Fiber cost inflation are you.
Coal: Predominantly talking about the sole logs.
For your lumber operations or are you also talking about.
Coal: Related wood chips and kind of pulpwood into.
Coal: Yeah.
Coal: <unk> side I'm, just wondering if it's just two logs or both pulpwood and saw logs and then secondly.
Coal: The European packaging players have talked about.
Coal: <unk> mentioned some of their order books.
Coal: And I'm just wondering are you seeing anything on the pellet side of your business any kind of green shoots there. Thank you.
Coal: Thank you Paul so in terms of the fiber cost.
Coal: It is we see a higher inflation, let's put it that way or higher increase in costs of.
Coal: <unk> saw milling logs than we see on pulp logs.
Coal: So in essence, what we see is maybe about 10% increase in solvency milling.
Coal: Costs versus about five or 6% in pulp.
Coal: So again, we see a bit more of effect.
Coal: On the saw logs that we see on the pulp logs.
Coal: And to your point on on pallets, we still don't see.
Coal: Any significant.
Coal: Demand in terms of a shift in demand.
Coal: We are following through.
Coal: With the news that you mentioned, but it hasn't materialized in a way that is really moving the needle demand wise. There is justice and just to give you a little bit of context on this.
Coal: Targa has capacity to produce 17 million pallets in a year.
Coal: We're running the mill, producing only 10 million pallets in a year.
Coal: Many other competitors, whether theyre in Poland, and Ukraine, which are probably one of the geographies that debt that we compete with the most.
Coal: We're also running their mills at lower capacity.
Coal: So there is there is plenty of capacity that would be out there once the market comes back I think the the major issue that is keeping.
Coal: This down is the German economy, and by the Germany economy, I mean, the automakers, that's probably one that fuels, a tremendous but a tremendous amount of volume and.
Coal: And usage of ballots and Thats still subdued so so that's a little bit of the dynamics, we haven't seen from a packaging side enough.
Coal: Enough momentum to really make.
Coal: Dent on the overall numbers.
Coal: And then.
Speaker Change: Maybe while we're still on that is there any other end markets. Besides autos that would.
Speaker Change: Really move the needle for that the pellets business and then I wanted to ask on on softwood pulp we've seen Susanna raise prices consecutively for the last three three months in there trying to get something in March.
Speaker Change: We've seen softwood pulp moves up in Europe, but it's effectively to covert the discounts increase in discounts.
Speaker Change: Do you think the.
Speaker Change: The gap narrows first before.
Speaker Change: Softwood can move higher or how do you think the softwood price dynamic might play out from here if hardwood prices are rising thank you.
Speaker Change: Okay.
Speaker Change: Absolutely well, we see actually in between Q4 and Q1, we see that both fibers. When you look at China, both fibers have come up by about $50. So China <unk>. It was around 770, and we believe that it's going to end the quarter.
Speaker Change: <unk> around <unk> around <unk>.
Speaker Change: We're already around 800.
Speaker Change: NV HK we finished.
Speaker Change: Around $5 75.
Speaker Change: On our estimates is that it's going to be around $6 35, or so so again, another roughly $50 im talking our prices. So we do feel that both will go up both are in fact going up as you will point out the Sino has made announcement on hardwood.
Speaker Change: We have made announcements for the months of February and we made announcements for the month of March.
Speaker Change: So we do see that.
Speaker Change: That those prices will come up.
Speaker Change: And that gap between the two fibers will maintain will be maintained.
Speaker Change: The dynamics for as I was mentioning earlier at the beginning of the call. The dynamics for softwood are still very positive towards us.
Speaker Change: Because supply is just not there.
Speaker Change: And even if demand doesn't change because demand I mean demand for softwood peaked in 2019 and from that point onwards, it's been basically mute if it goes if it goes down it goes down by 1% and that said it doesn't really move.
Speaker Change: But the supply situation is has changed dramatically over the last two years now with this tariff situation that we are that is lingering behind us.
Speaker Change: I can only imagine a scenario if those tariffs do come through.
Speaker Change: We know that the burden on saw mills in Canada is going to be tremendous.
Speaker Change: And its sawmill closures.
Speaker Change: The norm.
Speaker Change: Then there is no other solution, but for other pulp mills to follow suit.
Speaker Change: So again the situation here is still very dramatic.
Speaker Change: And that would keep softwood on a high end.
Speaker Change: Versus versus hardwood no doubt hardwood will go through the through the effects of yes, higher capacities and bigger mills being setup and whatnot.
Speaker Change: Went through that wave and throughout 2024 and now they are catching up a little bit now that everybody's going into maintenance season.
Speaker Change: So it's always going to be up.
Speaker Change: Tough balance between that additional capacity when demand is picking up but not as much.
Speaker Change: But I think that gap between those two fibers will remain in 2025, the fundamentals are therefore to be remade.
Speaker Change: I'm sorry, your first question I forgot what it was.
Speaker Change: Related pattern.
Speaker Change: It was just on.
Speaker Change: On pallets, if there's any other big set to drive that might come back to help besides autos. Thank you.
Speaker Change: Yes, perfect chemical chemical business chemical industries, another one that that moves quite a bit.
Speaker Change: So that when you look at the buyer BSF all of those major companies.
Speaker Change: Those that will be another big indicator.
Speaker Change: And whenever you hear news about monitoring those companies you see here layoffs, you see changes you see I mean.
Speaker Change: We're still struggling.
Speaker Change: Thank you.
Speaker Change: Thank you I'm showing no further questions at this time I would like to turn it back to Juan Carlos <unk> for closing remarks.
Speaker Change: Okay. Thank you Debbie and thanks to all of you for joining our call rich and I are available to talk more at any time, so don't hesitate to call one of us.
Speaker Change: Otherwise, we look forward to speaking to you again, our next earning call in May bye for now.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.