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.