Mercer International Inc.

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until then, your lines will again be placed on music hold. Thank you for your patience. Music Thank you. Good morning and welcome to Mercer International's first quarter 2021 earnings conference call. On the call today is David Gandassi, President and Chief Executive Officer of Mercer International, and David Yor, Senior Vice President, Finance, Chief Financial Officer, and Secretary. I will now hand the call over to David Yor. Please go ahead.

Good morning, everyone. I'll begin by reviewing the first quarter's financial highlights. And following my remarks, I'll pass the call to David, who will comment on our ongoing response to the COVID-19 pandemic, market conditions, operational performance, progress on our strategic initiatives, along with our outlook for the second quarter of 2021. Please note that in this morning's conference call, we will make forward-looking statements. And 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. Our first quarter EBITDA improved considerably compared to Q4. The increase was primarily due to improved pulp and lumber pricing with average pulp list prices up over $150 per ton in all markets and lumber prices in the U.S. hitting new highs in the quarter. The positive impact of higher product prices was partially offset by the impact of a larger annual maintenance program in Q1 when compared to Q4. We generated EBITDA in the first quarter of about $82 million, compared to EBITDA of about $49.5 million in Q4. Our pulp segment contributed EBITDA of $52.3 million, and our wood product segment contributed record quarterly EBITDA of $31.7 million. Our wood product segment continues to benefit from strong demand and increasing sales prices in all markets and relatively low saw log prices. As usual, you can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets this quarter. The Q1 average NBSK net price was $883 per ton, up $246 from Q4. European list prices averaged $1,037 per ton in the current quarter, compared to $880 per ton in Q4. And the average Q1 net eucalyptus hardwood price in China was $692 per ton, up $212 from Q4. The hardwood list price in the U.S. averaged $1,020 per ton in Q1, which was up over $150 compared to the prior quarter. In total, our average pulp sales realizations were up over $80 per ton this quarter, positively impacting EBITDA by about $40 million compared to the prior quarter. Pulp demand remained strong in the quarter, However, our sales volume was down compared to the previous quarter due to our annual maintenance shut at Selgar compared to record sales volumes in Q4. Our Q1 sales totaled about 488,000 tons, which was down about 75,000 tons from that at Q4. Our lumber realizations continued. also increased considerably during the quarter, particularly in the U.S. The Random Links U.S. benchmark for Western SPF 2 and better averaged about $970 per thousand board feet in Q1, which was up over $270 from last quarter. U.S. lumber prices rose steadily through the quarter. The benchmark lumber price is currently over $1,300 per thousand board feet. Our Q1 average lumber sales realization was $622 per thousand board feet, up $155 compared to Q4. Our wood product segment continues to perform well. We sold about 108 million board feet of lumber in the quarter, which was up over 4 million board feet from our sales volumes in Q4. Our electricity sales totaled 217 gigawatt hours in the quarter, which was down relative to Q4, primarily due to the lower production of our Selgar mill as a result of our annual maintenance downtime. Our Caribou pulp mill joint venture, which is accounted for using the equity method, contributed another eight gigawatt hours to this total. We reported net income of almost $6 million for the quarter, or nine cents per share compared to a net loss of $13 million or 20 cents per share in Q4. The increase in income reflects our stronger EBITDA and was partially offset by the recognition of a $30 million or 46 cents per share loss on the early extinguishment of debt as a result of our senior note refinancing. Cash generated in the quarter totaled almost $34 million compared to $16 million in Q4. The principal contributor to the increase was the modest top-up of the new senior note issue as we took advantage of the strong debt market to prepare for an increased CapEx program, which David will speak to momentarily. Our cash flow from operations was otherwise flat as our stronger EBITDA was offset by increased working capital. Our strong results in prudent cash flow management in 2020 have left us with a solid liquidity position at the end of this quarter, totaling about $672 million, comprised of $395 million of cash and $277 million of undrawn revolvers. This liquidity will support the seasonal growth in working capital along with the bulk of our ambitious 2021 capital spending program in the next two quarters. In Q1, we completed 27 days of planned maintenance downtime at our Selgar mill. We originally intended to limit the shut to 20 days of maintenance this quarter, but elected to extend the shut to complete additional work to address some elements that were revealed upon inspections. This compares to a total of 16 days of planned maintenance in Q4 at our Rosenthal and Peace River mills. The impact of the Q1 maintenance, including lower production and higher direct costs, reduced Q1 EBITDA by almost $16 million compared to Q4. As a reminder, our competitors that report their results under IFRS are permitted to capitalize the direct costs of their annual maintenance shuts while we expense ours as costs in the period of the shut completion. And while we noted this as a subsequent event in February, I will remind our listeners that in January, we issued $875 million of senior notes that bear interest at 5% and 1.8% per year and will mature in 2029. The net proceeds from this offering were used to redeem both of our outstanding 6.5% 2024 senior notes and our seven and three eighths percent 2025 senior notes with the remainder being used for general corporate purposes. The transaction extends our earliest senior note maturity to 2026 and lowers our annual interest cost by about $12 million per year. And as you have seen from our press release, our board has approved a quarterly dividend of six and a half cents per share for shareholders of record on June 30th, 2021, for which payment will be made on July 7th, 2021. That ends my overview of the financial results. I'll now turn the call over to David.

Thanks, Dave. Good morning, everyone. As you all know, COVID-19 continues to be a critical global health risk. National vaccine programs are making progress, but getting them rolled out quickly continues to be a challenge. This continues to be a significant concern for us as we manage through our heaviest major maintenance quarter. We remain focused on our protocols to ensure the safety of our employees, contractors and the ongoing operation of our mills. I would like to once again thank our employees for continuing their efforts to keep themselves, their families and our colleagues safe. Overall, our mills all ran well, but the main driver of our results this quarter was strong product demand. Strong demand in all our markets drove significant pulp price increases and sustained the record high lumber prices that we've been seeing. Both softwood and hardwood pulp prices rose steadily and significantly through the quarter. A number of factors have aligned to create favorable supply-demand fundamentals, including low paper producer inventories, unusually high pulp producer downtime, much of which has been unplanned, a global shortage of containers that has limited the volume of pulp into China, and a relatively strong Chinese currency. In addition, on the demand side, we're seeing paper producers successfully implementing price increases. This upward pricing pressure was originally focused in China, but ultimately pushed prices up in Europe and North America as well. The pandemic continues to negatively impact global economic activity, but we're seeing indicators of future growth, and assuming vaccine rollouts are successful, global GDP is expected to rebound significantly in 2021. Governmental economic support is also expected to help fuel this growth, As a result, we are optimistic that steady economic growth and strong market fundamentals along with the weak U.S. dollar will continue to support pulp prices. Adding to the positive pulp market fundamentals, we expect that aging pulp production assets will continue to have unplanned downtime and transportation limitations that are creating supply constraints may not be resolved for several quarters. March pulp market statistics reflect strong demand for both MBSK and hardwood. The hardwood statistics highlight a very tight market and the NBSK inventory statistics reflect a slightly heavier producer inventory level. But this indicator is lagging what we're seeing on the ground. We believe the extra days of NBSK inventory are the result of tons put aside by producers in advance of their Q2 maintenance outages, combined with pulp stuck in the supply chain due to COVID related logistics challenges. Our wood products business once again achieved record operating results due to the strong U.S. market pricing, which is now also pushing prices up in other markets. The European lumber market experienced modest upward pricing pressure in the quarter, while the U.S. market remains at historically high levels. The strong lumber prices in the U.S., despite some volatility, continue to be driven by a solid housing market and steady home renovation related demand. This strong demand has been combined with a reduced supply of lumber due in part to reduced allowable annual cuts in regions such as Western Canada and pandemic-related production logistics challenges to create a strong seller's market. The U.S. market supply demand dynamics are expected to remain favorable for the near term as the largest American home building companies continue to predict strong sales this year due to low home inventory levels in many areas of the U.S. and what are widely expected to be sustained low borrowing costs. We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can. In Q1, 44% of our lumber sales volumes were in the US market with the majority of the remainder of our sales in the European market. We expect the European lumber market to remain steady with some modest upside as certain European lumber manufacturers move inventory to the US market. Despite this, we expect the US market to stay strong. Our mills ran well this quarter in spite of the pandemic related challenges. Including our Caribou joint venture, we produced 478,000 tons of pulp, down 46,000 tons from Q4. The decrease was primarily due to Celgar's planned maintenance shut. Excluding the Caribou mill, our pulp mills produced 519 gigawatt hours of power, down 49 gigawatts from Q4, again due to the maintenance of Celgar. Finally, while the Celgar shut was completed without incident, we struggled to restart the mill in April due to a number of unfortunate issues. While the mill is running well now, it took us a better part of two weeks after the shut to return the mill to full production, resulting in an even tighter order book than existed prior to the shut. Our wood product segment achieved another production record as we continue to commission and optimize our new production equipment, producing almost 118 million board feet of lumber, which is up 6 million board feet compared to Q4. In Germany, our wood costs, particularly for pulpwood, remain at historically low levels due to the abundance of beetle-damaged wood, While we expect this pulp log supply dynamic to last well into 2021, we are seeing early indications that modest wood cost inflation will come later in the year. The situation for saw logs is more current and we will begin to purchase more expensive but higher quality logs as early as Q2. In Western Canada, pulpwood supply remains steady and prices are modest due to sawmills running full out to take advantage of the strong U.S. market. Overall, we expect fiber prices to increase only modestly in Q2. We have a significant annual maintenance program planned for 2021, the majority of which is happening right now. All of our major maintenance shuts carry significant risk as a result of the pandemic and the large number of contractors required in the mills. We have developed strict safety protocols to mitigate these risks, so we are confident this maintenance can be completed safely and effectively. Our remaining 2021 major maintenance schedule is as follows. In this quarter, Stendhal is taking its 18-month shut, which will last 21 days. We should be coming out of that this weekend. Caribou will take an 11-day shut and Peace River will take a 63-day shut. You'll recall that this extended shut to rebuild the recovery boiler was deferred from last year due to the inability of contractors being able to guarantee the availability of skilled trains people during the pandemic. As a reminder, the costs associated with the recovery boiler rebuild will be reimbursed by insurance proceeds. In Q3, Rosenthal has a 15-day shut planned and Selgar will take a four-day mini shut. In Q4, Stendhal has a two-day mini shut planned. And so while the majority of our annual major maintenance work will be behind us in the next couple of months, capital expenditures to grow the company are now ramping up. As Dave mentioned, after a full year of carefully managing CapEx to protect our liquidity in response to the pandemic, reducing our expenditures to some core high-return projects, The strength of our balance sheet liquidity and our markets are allowing us to pivot back to our strategic plan, and more specifically, the objective of adding shareholder value by growing the company in areas where we have core competencies. To summarize some of the project-related work that has been ongoing during the pandemic, we are continuing the Stendhal pulp mill expansion, a roughly $60 million project that will increase our pulp production by 80,000 tons and power production by about 70 gigawatt hours. At Frigio, We're also in the process of commissioning the A4 sorter component of the phase two expansion project. The new planer, sorter and kilns that have been ramping up over the past few quarters are now being optimized. Production is approaching half a billion board feet and improved grade outturn from profile optimization and product sorting is pushing average realizations higher. We've also commenced new projects that combined with the projects I just noted will create significant value over the next couple of years. We have commenced the construction of a centralized wood room at our Peace River pulp mill and an expanding expansion of the wood room at Sogar. The projects will allow us to transform our supply chain, increase our capacity and reduce the cost to produce our own wood chips. The projects will also allow us to accept alternative forms of lower quality wood that were previously left in the forest. The total cost for these projects will be about $50 million and we are eligible for a number of carbon reduction grants that could exceed $20 million. We expect the projects to be largely completed by mid-2022. In addition, we have advanced the engineering and permitting process for our Stendhal sawmill. The initial plan for the mill contemplates a 400 million board foot capacity with the product line up and flexibility of our Frisjau mill, but we expect to build the mill in such a way that will allow for incremental capacity increases in the future. We expect construction costs to be between $200 and $250 million and subject to board approval, could commence foundational construction before year's end. We're now entering the more sensitive permitting, wood supply, and equipment procurement process, and we'll have much more to say on the timing at our Q2 call in July. All in, and depending on the speed of certain construction prerequisites and deposits, we expect total capital expenditures to be between $175 and $200 million in 2021. I remain confident that the effective execution of our strategy will continue to bring us success We will remain focused on our world-class assets, and our sustainable operations will continue to serve us well as we focus on optimizing our fiber handling and logistics and controlling our costs. This completes our prepared remarks, but if I can take a moment to remind listeners that COVID-19 and its various variants and mutations remain a significant risk to us all. I encourage everyone to get the vaccine when it is available and keep your families, friends, and colleagues safe. Thanks for listening, and I'll turn the call back to the operator for questions.

Ladies and gentlemen, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. Again, that is star one to ask a question. And we'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Amir Patel with CIBC Capital Markets.

Hi, good morning. Dave, could you speak to how lumber prices and some of your European markets in Japan today how the returns would compare to what you would get in the U S. Yeah, sure.

Good morning. Yeah. They're not, well, Europe is, is, is not what the U S margins are, but, but they're improving and, and, and they've been, I mean, they've been much, I mean, they've really, really moved compared to what would be normally the case. Like Europe's usually, you know, pretty flat and moves up, you know, 5% to 10% or down 5% to 10%. But we've seen some really big moves in that market, and it's continuing to tighten. Japan lagged a little bit, but J-grades are really starting to improve as well. Great margins in that market. You know, we're not a huge J-grade producer just yet. We're working on our J-grade program as we speak with all the new equipment. But, yeah, that is going to be – important market for us. As I've said before, it could be up to, we're hoping to be up to about 10% of our volume could find that. It's way into that market.

Great. Thanks, Dave. And, you know, in Germany, I saw some trade reports about sort of changes in the, I guess, characterized as an allowable cut. But what, you know, what are you seeing in terms of long-term fiber availability in Germany? And can you just remind us maybe how much of that

forest is privately owned yeah in sort of in general terms you could think of it's you know roughly 50 percent is state or federally owned and 50 would be privately owned and um and and and you know the the beetle is i mean it's a really regional sort of a thing it really depends on where you are you know if you're down in the black forest that's one thing if you're up north and around uh standall it's predominantly a pine forest so it's a totally different situation but um We've been studying the long-term expectations. We've run quite a few different consultants through all the data. Our feeling is that this beetlewood is going to continue to support lower prices until the bark beetle really resolves itself. In the fullness of time, there will have been areas where there's been heavier harvesting than would otherwise have occurred, so there will be lower volumes available in some regions and other regions not impacted. For us, we're feeling very comfortable with the situation at Frijal and with timber supply up in the north in the Stendhal region. There are a number of smaller sawmillers, uh, around it, you know, have not continued to reinvest and are not, not world-class mills that, uh, you know, struggle with the dry beetlewood. They don't, they don't produce a planed or kiln dried product. They're usually producing a green product. So it's, it's not all good for everybody in Germany, um, with the situation, but, but with our mills, they are, our Frisian mill, it runs really well with beetle kill. So, um, I know I'm kind of wandering around the topic. I don't have a lot of data to be specific by region and tenure, but there's lots of timber there for us for the future in our view.

Okay, great. Thanks, David. And just a last question for me. In British Columbia, the premier recently made some remarks that got a lot of media attention about long-term potential changes to how tenure is owned or controlled in the province. you know, what, what impact do you expect that to have on, on Mercer and the BC pulp industry?

Yeah, it's hard to know. You know, for us, you know, we've got the half interest in Caribou, which is our partners are West Fraser, a massive sawmilling company in that region. So I'm sure those, you know, they've taken the restructuring hits, you know, with the reduction of the AC. So I, I think that situation will be stable. Selgar in the southeast corner of the province is in a green forest with lots of sawmillers around us. I wouldn't imagine there would be much change down there. 60-65% of our raw material comes in in the form of sawmill residual chips from sawmills around us, Interfor, Kolesnikov. at cove um and the rest is the residual harvest of you know pulp heavy log stands or or or you know the the knockdown from from solid log harvesting and that and and that that material is becoming more and more available in our view i think the province has done a lot of good things around ensuring that material comes out of the bush and we've talked about this on previous calls it's a It's really happening. The harvesters pay either way. If they bring it out, they pay stumpage. If they don't bring it out, they pay stumpage. They can recover a few bucks. The cost of the stumpage on this stuff that is not a saw log is being reviewed and adjusted. I think the province is on the right track there. I think for us in British Columbia, we're in a pretty good situation. We're we're comfortable with the situation. The wood room project is going to be a real game changer from a cost perspective. So really what we're doing there is what we've been doing is receiving these pulp logs at remote satellite yards and kind of like receiving stations, if you like, in different regions and then chipping them up with mobile shippers and shipping them to the pulp mill. This is kind of a standard procedure for pulp mills in British Columbia and what we're doing is, um, we're, we're going to put in a different type of debarking system in it and, uh, a line that can handle and, you know, the smaller, uh, shorter and sort of tangled material that comes in from the by-product or harvest bycatch, we call it, and, uh, and, and process it and it ships and bark for us. And, and so it, it just streamlines all of the logistics and, um, rather than having trailer loads of chips coming at the mill, we've got trailer loads of pulp wood coming in. And it's a really significant cost saving on the raw material processing and handling. So we're pretty excited about that.

Great. Thanks, David. That's all I had.

Okay.

Thanks, Samir.

Your next question comes from the line of Sean Stewart with TD Securities.

Thank you. Good morning. A couple of questions. David, you gave several of the puts and takes in pulp markets right now. And I guess I'm hoping you can gauge how much of the current market momentum is shipping constraints versus overall solid demand. And I suppose what I'm looking at is if I'm looking at days of supply for softwood pulp and the and then made the high 30-day range, given shipping constraints, is that closer to what we'd normally think of as 30 days in a normal environment? Any context you can give on that element and how much attention is added to markets?

Yeah, sure. We've been watching that and thinking about it quite a bit. I think the software inventories could be maybe eight days higher than what you would normally expect in a really tight market. But if you reflect on the amount of second quarter maintenance that's being done and you think about producers like ourselves, we put pulp away to be able to service our contract volumes. This is particularly true in, you know, North American and European customers. So you've got that issue and then you've got, you know, Scandinavian mills that are finding it really difficult to get their pulp to China. If you can't get containers, your next option is you have to reserve some brake bulk. You don't ship hundreds of tons on brake bulk like you do in containers. You need to put 15,000 tons or 20,000 tons aside and ship it all in one big chunk. It shouldn't be a surprise that the producer inventories are higher than what would otherwise be considered to be a tight market, but on the ground, it's a tight market and oh my gosh, it is really tight. We're, we're sold out. We can't think of supplying spot tons to anybody. We're just trying to keep up with the commitments that we've made on contracts. So that's how I see that on the hardwood side. It's really low. And then when you think about, you know, all the new capacity in the, southern hemisphere and how long that supply chain is to get to its natural markets, you would expect a growing sort of normal inventory level, and yet it's been shrinking and shrinking. So that market's super tight. There's just no question about it in my mind. That's an indication that consumption is really moving along.

And on the softwood side, Do you expect the Kevian restart to impact things at all? Is it enough volume?

No, it's not very big. It's 300,000 tons. I'm not worried about that. Got it. I mean, the puts and takes in our business fall exceed that every quarter anyway, right?

Yeah. Yeah, I hear you. Dave, on the Peace River shut, I'm hoping you can help us with a little bit of guidance on the Q2 EBITDA impact and I guess specifically around the insurance coverage you have there. Does that offset the full impact this quarter or is there a timing lag on how that will flow through?

Yeah, so the insurance is designed to cover the majority. Obviously, there's two elements to it. There's property and there's the business interruption, which is what I think you're referring to. And the insurance is designed to cover... The vast majority of the business interruption. And it's pretty efficient. And generally, we can expect that the timing will be, because we've been talking to the insurers. So as you might imagine, we've been talking to them regularly about our schedule. They know the work we're doing work right now. They know the business interruption is happening right now. And we're expecting that for accounting purposes, we'll probably see that offset in Q2. Sometimes with these programs, there is a little bit of a time lag if we're still settling the final invoices or final determination on exactly which sales we lost and exactly what the BI should be. But in general, it's pretty efficient. And the fact that, um, um, this shot is how, as David had mentioned, we're into this shot right now, the two, the two month shut is happening right now. So we'll sort of have June. We'll be, uh, returning the mill to production. So we'll have a month to, to work with the insurers to try to dial in that, uh, uh, dial in that claim. So my expectation is that you won't, if all goes well, it'll be pretty seamless, but we might have some of the proceeds. It might be a little bit bumpy from Q2 to Q3, but our expectation is we'll try to limit that for sure.

The other way of thinking about it, I guess, is the Q2 expense hit should really be limited to spend all with respect to the downtime program this quarter.

Right, yeah.

Well, except that, no, I just corrected a little bit, Dave. You know, there is a regular maintenance component to the Peace River shot. So if you would have otherwise had a 14-day or 12- or 14-day shot, that'll be major maintenance in the quarter.

Okay, okay. That's all I have. Thanks very much, guys.

Your next question comes from the line of Sam McGovern with Credit Suisse.

Hey, guys. Thanks for taking my questions. As you roll through the remainder of the year, as you generate the cash flow, how do you think about the priority uses for that cash? You've got, obviously, the five and a half to 2026 that become callable later this year. Would you look to target that? Would you use a small amount of revolver that you could pay down? Would you look at M&A? How do you think about where you focus your priorities?

Yeah, so thanks, Sam. You know, we've got a balanced capital allocation strategy. We're a growth-oriented company. We've got a number of really exciting projects in front of us. I really kind of pulled the covers off the Stendhal sawmill today. We've got more like that in the hopper. And we also, so we want to grow. We also, you know, would like to delever to some extent. So as we generate free cash flow, we'll be balancing our allocations to deliver when and if and how it makes sense to do that. And that's kind of the direction, a balance of those two priorities is really how we're thinking about our capital allocation right now. Along with not getting ourselves pregnant, recognizing the volatility of world these days. We also want to be conservative. We don't want to get too far ahead of ourselves and approving too much capital and having the bottom fall out of the global markets for a year or something. So we are doing this in a very safe way. We don't want to ever risk the company, but we do want to aggressively grow. So that's kind of how we're balancing things.

Okay, great. Thanks so much. I'll pass it along.

Your next question comes from the line of Andrew Cusk with Credit Suisse.

Thanks. Good morning. David, you mentioned a little bit in your prepared comments and it's also in the notes on the grants you've received in relation to GHG reductions and really other related activities. Could you maybe give a bit of a glimpse in the investment potential you have for that and the interplay with your carbon taxes as they exist in Canada? And how do you see this as helping reduce costs in a longer term basis?

Yeah, sure. So for Celigar, you know, the capital for the modernization of the wood room is about 21 million. And we have an IFIT grant of four and a half million, so a net 16, call it, with a cost saving roughly of about a $15 million EBITDA impact from just lower transportation and processing costs and better yield by putting wood through a big electric modern chipper as opposed to grinding it up with a diesel-fired mobile chipper out in the bush. These diesel chippers run about 300 liters of diesel an hour, and we've got about six of them running at any point in time in And you get a better chip on the centralized wood room. You get much more whitewood recovery. And so there's a carbon calculation in that that ties into these grant applications. For Peace River, we're rebuilding. The mill had a wood room way back when under the Daishawa days, but it was dismantled 10 years ago or something like that. They went to the satellite yard strategy. We've analyzed this, and with new equipment innovations, our project's going to be close to $45 million. We have IFIT money of about $8.5 million, and we have SIEE money, which is a carbon grant of about $5.5 million. So net $32 million, and the cost savings are about $20 million a year. and what we're doing there is instead of harvesting aspen and bringing full tree lengths into a satellite yard, storing it there, putting it down, picking it up, putting it through mobile chippers and moving the chips to the mill, we'll be using these 10 axle logging trucks that are approved in Alberta now. They're massive trucks and we'll do everything cut to length. So we'll cut the trees to roughly 20 foot lengths We'll get about close to 40% more wood on one haul. We'll bring that all the way into the mill instead of stopping at the satellite yard and we'll be processing it at the mill. Again, much better recovery of wood from everything we handle. We don't have to handle it twice. We turn off all the costs of all this remote satellite yard and so on and so forth and end up with a better chip and about an 8% better yield of palpable chips for the same amount of trees that we're harvesting. So there's grant money for that. We have an outstanding application for some additional grants through Alberta. We won't know if we're successful. We've been shortlisted. We won't know if we're successful until June, but we're hopeful there might be a little bit more there. These are projects that the the provinces and the federal government of Canada are very excited about. We've been very successful with our grant applications because of the innovation aspects and the carbon aspects of these projects. That's very helpful.

Sorry.

Yeah, I was just maybe going to mention a couple other things. In Alberta, there's an offset program. It's called the TEER program. And so we generate... uh, credits that are, uh, confirmable that they get audited and like a compliance based credit system. And we are selling these credits to, to other industry players who, who need carbon offsets. Basically they traded a site pre site, a site discount to the carbon cost. So we've got about $6 million of credits. We're in the process of selling, uh, for past years. And those numbers will grow, particularly with the woodroom at Peace River will earn additional credits on that. So there'll be a revenue stream unless things change going into the future, which would be quite noticeable. And then as far as, you know, at Selgar, there's, you know, the provincial government is very interested in renewable natural gas and, you know, Peter Bates- fuel switching and and carbon reduction and all these kinds of things. So as we're finding a real shift in in government's attitude towards supporting and providing incentives to to do some of these Peter Bates- future looking projects. So we're, we're all over that right now. A lot of it's, you know, sort of working that in the kitchen trying to imagine how to do things that meet the needs of government and how they can be really economically beneficial and contribute to our sustainability in the long term. So it's an exciting time, actually. There's a lot of opportunity for us to participate in these programs. Same thing in Europe. There's going to be massive amounts of money for the right kind of projects as governments really wrap their heads around how to get to carbon neutral in 2030 to 2050. So great time to be innovative and to be a growth company. If you figure out the right types of projects, it can be quite creative.

Well, it's quite encouraging given the numbers and just the extent of what you're doing. And then I guess maybe just on the offsets to build upon that, given your power generation is basically waste heat related, you know, Do you have qualification for your green power or carbon offsets from that? And then when you think about, you know, the expansion of not just the pulp mill standoff, but the power side of it, do you get an uplift as it relates to either carbon reduction or some offset benefit?

Well, you know, there's the, I'm not sure how to answer that exactly. The, the, the carbon offsets really come, you know, like there's the each program is going to be different, but, but, like the tier program is, is, is kind of like a, there's a benchmark of what your emissions would be. The intensity would be for what it is you produce compared to your peers. And if you're on, on the wrong side of that equation, you have to buy carbon credits. And if you're on the right side of that, then you have, you have excess credits, which you can have audited and sell them into a complaint in a compliance grade offset program. Um, in, um, I think what's coming globally in time is going to be really focusing on the scope one fossil carbon in industries. As an industry, the pulp industry, we're pretty low already. The only natural gas that Mercer burns is in our lime kilns and a little bit in our either recovery boiler or power boilers during startup conditions or in upset conditions. It's still profitable in some cases to burn a bit of natural gas through the power that we sell. There's always limits on how much you can do, but that still exists. Over time, that will tighten up and carbon will become more expensive. And so we'll be decarbonizing the fossil carbon components by switching fuels from burning natural gas in the land count to possibly producing a syngas or extracting lignin and blowing that into the kiln as a fuel source as opposed to the natural gas and get away from the carbon costs and doing things. And these are the type of programs I'm sure that there will be support for. And you don't do them too soon. You do it when it makes economic sense to do it. And our view is we want to be an early mover because there won't be incentives for everybody, but certainly those that are out in front of everything and have shovel-ready projects will be the ones that get the support and are going to be able to make the changes.

I appreciate the call. Thank you.

You're welcome.

Again, ladies and gentlemen, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. Again, that is star one to ask a question. Your next question comes from the line of Andrew Shapiro with Longdale Capital.

Hi, thank you. I think you clarified the question I had regarding the timing of the Peace River boiler rebuild reimbursement, how that's going to flow. It sounds, and just if you can quickly clarify, any timing differences in all of that and the flows of it regarding the reimbursable amounts is not going to be a capitalized flow through. It's going to go through the income statement. Is that correct?

Yeah, for the business interruption, Andrew, yeah, it'll go where it'll be matched into the P&L. To the extent that it's covering costs or covering lost revenue, it'll go to the P&L. To the extent that it's covering property, it'll go to the balance sheet.

Got it. Okay. And then regarding the new large construction projects, sawmill in particular, when is your current expectations of that – a large enterprise to begin operations and start generating a payback? Sawmill equipment suppliers today are on a two-year lead time. It's really become quite competitive to order equipment. So that's why we're in this early. You can get in the lineup early without really any kind of material deposits until you get closer to the window. But it's all about getting in line. So we're two years from starting to receive equipment. And then a year bolting all that together, I guess, would be the general term. So we're really three years out before you're going to. Okay, and then once it starts operations, you obviously have a projection of why we're making this investment in terms of incremental cash flows and all of that. What is the payback rate that you guys were using or anticipating for such a large investment to get a feel for what we think our incremental return should be for this? Yeah. Well, um, we think about, we think about an investment like that, you know, a number of ways. Um, but if we, if we look at trend pricing and we think about the synergies with the pulp mill, um, that's a better than three year payback on that capital potentially. And, um, and in peak, in peak pricing, it'll be better. And then trough pricing, it'll be worse, obviously, but, but there's a, there's a tremendous synergy there. Um, If you can imagine, every log that's sitting in front of the pulp mill, that's going to be going through a scanner and it's going to say, well, hey, that's not really a pulp log, that's a saw log. That's a pulp log, that's a pulp log. Oh, this one's a saw log. So we're going to be harvesting saw logs out of a pulp log wall of wood, if you like. And there is just a really strong maturing timber supply in and around the Stendhal region. So we'll be... the main sawmill in the region, enjoying that. And basically what you're doing is you're providing the lowest cost chip to the pulp mill, displacing its highest cost fiber, the stuff that you would have been bringing in from the Baltics or places like that. So it's a bit like Freeshell in that way. In addition to the EBITDA from the sawmill, there's a real benefit to the pulp mill. Now, is there an anticipation by supplanting, let's say, the wood brought in from the Baltics and all that, that we will then develop an excess of all those rail cars and all the other logistics that this company has built up? No, no, we're going to be using all that equipment. In fact, we're continuing to strengthen and expand our logistics. We're, you know, current focus is to develop more wood terminals throughout Germany. So these are, you know, procuring sections of land on rail tracks that were previously industrial of some sort where you can put wood down that's gathered in the region. So when harvesters are working in a region, they can put wood down at the terminal and then we'll just load up our trains as we need to. And so we'll have inventory all over the place. It's all about controlling the timber logistics. You don't have to own the trees if you control the logistics. So we'll be fully utilizing our fleet of modern round-wood rail cars, we also have a new fleet of modern chip rail cars as well, and they'll all be fully utilized. Now, this is a very big project, you know, hundreds of millions, and it is also one that you've just discussed is there's a long line to get into. The company is recently wonderfully refinanced and for far lower cost and gone out eight years on a great chunk of the company's debt. So that's kind of behind us. But you have this very large investment that has a long line. Where does that fit into? The idea that capital allocation is obviously best to be put into high return projects. when you, you, you, um, when the board members kind of decide where are we going to allocate capital, uh, you got high return project, you want to put it there, but, but also we're balancing the issue of when does the dividend start going back up again and towards former levels, but also, you know, depending on the stock price, when it's, it makes sense to be buying back and retiring shares. Does such a long waiting line for such a large project put those two other capital allocation decisions on a longer term hold or is there a more, a nearer term time horizon for when these other capital allocation items for returning shareholder value can take an equal seat at the table? Yeah, I think the latter, for sure. I mean, there's lots of tools available these days for projects like the Stendhal Sawmill. We don't have to keep cash on the balance sheet all the way through three years to make that happen. We can get committed project financing, for example. We can continue to think about opportunities to deliver. We can think about growing a dividend under the right conditions and, you know, balancing our capital allocation strategy. There's lots of different moves that we can make in this kind of economy that will continue to support shareholder value. And that's what we're all about. So we'll be thinking about all those things. Okay. So it's not off the table for that time horizon. This is a nearer term consideration now that the debt issue, and not that it was a bad issue, but now that the debt's been really put in a fine position and the company has really enhanced its cash flows for the foreseeable future. Yeah. We just have to do things in the right order, Andrew, but there's lots of opportunities. We're not stuck in the mud here from a liquidity point of view. Once we get commitments, get a board approval, get the financing in place, then we can take that liquidity and do the things we need to with it. Okay. And is there any update on the status of the – the biofilaments venture and the timing of cash flows? Yeah, it's, it's still a, it's still an R and D project at this stage. So, um, no, no, no, we, we, we've got some small sales and lots of trials going on, but it's, it's not developing into, um, a commercial product. No big newsworthy thing yet.

Okay.

And then on, uh, uh, fentanyl, um, I think you said before the time period for the first harvest is around the end of 2022 and I can't imagine there be a shift or change in that. But what are the metrics? Is it premature or because pricing and costs are volatile or not? What are some of the metrics that will be involved in terms of acres, you know, tons of trees that are annually harvesting? the pounds of oil that are tons of oil that would be generated on an annual basis around when might you be expected to provide an estimate kind of of the quantity of oil to be produced in the potential price range, just so we can get a feel for, cause this is going to become an annuity, another like recurring revenue stream, just like our power generation, if not even more sustainable. Yeah. Yeah, I guess maybe that's when we start seeing the EBITDA rolling in and once we really start noticing it, then I'll be able to start talking about it without giving too much future-looking guidance. The timing is still into ramping up harvesting next year in 2022 and then 2023. For four or five years, it'll be fairly heavy. and we'll be starting to see the EBITDA that we can talk about. It's not like a pulp mill. This is not a huge investment, but $9, $10, $11 million of EBITDA in those years would be quite certainly expected. That gives the handle of the scope. I know it's small for the company, but hey, that's incremental and sustainable cash flow that, you know, it would be viewed by the board or others when one's thinking of dividend policy or anything else. So, you know, it's nice. Okay, I think that's all my questions. Thank you. Okay, thank you, Andrew.

Your next question comes from the line of DeForest Hinman with Walt Housen and Company.

Hey, thanks for taking the questions. just a couple followups on the sawmill project at Stendhal. Uh, can you give us, uh, any color in terms of what the, you know, longer term, uh, pricing realization would, uh, that you're using to get that three year, uh, payback would be.

Yeah, I don't, of course I shouldn't really run through the economics of everything. Uh, on a call like this, um, I mean, if you look at Frijou is a good example of what this mill is going to look like and how it's going to operate. You know, this mill did 31 million in the last quarter, Frijou, under peak pricing and under trend conditions, it would be in a 15% of the margin or so type of situation. So, yeah. I don't know what more I can say at this stage.

Okay, that's fair. I understand. I think in the past there was a discussion of making a separate subsidiary for the Stendahl sawmill. Is that still the thought process around how that would be set up from a corporate structure?

Yeah, it'll be part of Mercer Timber Products, that division, be managed by by our managing director, Carissa Murforth, sitting on land right adjacent to the boat mill. We purchased the land and that's what the technical design, that's where it sits. How we put the subsidiary versus division and all the blocks together, is still a bit complicated. It ties into EEG laws and other things in Germany, so we're still working our way through that.

Okay, very helpful. And this is going way back, but originally when the Stendhal Mill was built, I believe there was some government-backed financing. There was also some government grants involved. Is anything like that still available as we're evaluating the project financing for that facility?

There may be some incentives available. It's certainly not like there were when we built the Stendhal Greenfield pulp mill. Just refresh the memory on that one. We received about 276 million euros, I think, out of a billion spend. For the sawmill, you know, there will be, Germany is still pretty proactive when it comes to rail costs. So I think there's about $10 million of rail costs in the whole thing. Probably 50% of that will be covered by government subsidies. Whether we can tap into some of these new funds for carbon funds or restart the economy funds. There's a number of programs developing. We'll be monitoring those very closely to see if we can participate. But at this stage, I can't say that we're we have any kind of line of sight on what that level of support might be.

Okay. And you may or may not be able to answer the separate topic, but on the price realizations, you know, very meaningfully announced higher prices in Europe from some of your competitors. Is there going to be abnormal discounts relative to those price announcements or more along the lines of historical levels of discounts to the list.

Yeah. So, so quick answer is the discount doesn't change during the year. Um, so these prices are increases or increases in the structure of all of the contracts that the company has with, with customers. So no change to discounts at all. Um, you're right. I, I, I am expecting, um, price announcements very shortly in Europe. Um, I think everybody is, this is announced April for May business, probably up a hundred bucks. Um, and, uh, it, you know, when you, when you have this kind of condition, if it continues, you know, what we'll be doing is we'll be like, these are the type of conditions that, that theoretically would allow us to reduce the discount when we get into those negotiations in November and December of this year. Uh, it's too far away to tell, but, um, you wouldn't have pulp prices increasing and discounts widening. They would be the other way around. Okay, maybe this is just really... This is the seller's market right now. So we're not going to give up anymore on discounts.

That's helpful. I mean, can you, can you, as a, as investors, can you just help us just hypothetically is, is the math working out with pricing realizations? I know you have some more downtime than normal, but is the pulp business, is it just where pricing is now? Is it making over a million bucks of EBITDA a day? I mean, is that a realistic number or is it much higher than that?

A million a day. Uh, Yeah, I don't have that in my head, Devoris. I know what our forecasts for the quarterly are of the year. But, yeah, I shouldn't comment on that openly like this. We don't give guidance, right?

Okay. I'll just work on the math myself. Thanks for taking the questions. You're welcome.

Your next question comes from the line of Austin Nelson with AIG.

Hi, thanks for taking the question. Actually, it's essentially a followup on the last question. So just looking at where the indexes are on the pulp side versus the realizations you reported in the quarter, um, I guess I'm just trying to understand, um, the mix between the discounts on contract and then just timing of sales in the quarter versus the downtime that you took. like is it reasonable for us to expect that the realizations were lower than what we, you know, can see in the indexes because it was earlier in the quarter and the downtime was later in the quarter. And then, you know, given your commentary about nominations going out that you would expect to be up pretty meaningfully that, you know, as you come out of the big shuts in 2Q and, that realization should be better because you're just producing more pulp in the second half at what, at least right now, look like will be even higher prices?

Okay, well, maybe to start, so when you talk about the indexes, I presume you're looking at RecyList or those kinds of indexes and you're seeing like the top line price announcements, you know, up 100 bucks or whatever it is. And the realizations are some lesser percentage of that. So there's two things in there. One, you know, there is a structural industry discount off of list that, you know, for Europe and for North American could be in the high 30%, you know, percent range for starters. So that's a structural, we all live in that world. You know, the discounts that the producers provide are, you know, they're within a percentage of each other. Like it's, like it's a structural, it's a discount. So that's one factor. And then the other piece is that, you know, the announcements I'd say is most of Europe is this way is that when you announce a price increase, it's for the following month. So it's, you know, you'll see, you'll see the announcement, but it's for orders that'll be taken and written in the following month. So there's always that little bit of lag. And in this, in the first quarter we've had, You know, like in the U.S. market, we were, you know, January to February, up $115. February to March, up $120. You know, same thing in Europe. You know, January to February, up about $70. February to March, up about $90. April for May, going to be up about $100. So there's a lag effect. So if you're looking at the quarterly results, you have to sort of blend forward, if you like. So I think that might be what's going on in your model if you're seeing realizations that are lower than what you would have otherwise expected based on the index. Okay. I don't know if that helps you or not, Austin.

No, that's very helpful. I guess the way to think about it then is that, you know, all else being equal on production, which isn't going to be the case in 2Q, but all else being equal, if we're in an up cycle, you should, because of the lag effect, you should kind of keep doing better Until, and then as the cycle turns, you'll actually be ahead of the downturn and kind of chasing it back down. Okay. That answers my question. Thank you very much. You're welcome.

Again, ladies and gentlemen, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. There are no further questions at this time. I would like to turn the call back over to David Gandossi for any additional or closing remarks.

Okay. Yeah. Thank you, Samantha. And thanks to all of you for joining the call. And as always, Dave and I are available to talk more at any time. So don't hesitate to reach out to us. It'd be great to hear from you. So look forward to speaking to you again on our next earnings call in July. Yeah. Bye for now.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.