Mercer International Inc.

Q2 2021 Earnings Conference Call

7/30/2021

spk00: Excuse me, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed and hold. Thank you. Thank you. Thank you. good morning and welcome to mercer international second quarter 2021 earnings conference call on the call today is david gandasi president and chief executive officer of mercer international and david ewer senior vice president finance chief financial officer and secretary i will now hand the conference over to david ewer please go ahead good morning everyone before david begins i would like to remind you
spk09: this morning's conference call, we will make certain 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.
spk06: David? Yeah, thanks, Dave, and good morning, everyone. Well, Q2 was a remarkable quarter for us, We advanced key elements of our strategy, growing our annual pulp capacity by 80,000 tons at Stendhal, rebuilding our recovery boiler at Peace River, improving our ESG ratings, and demonstrating the potential of our Frisjau sawmill. We delivered solid operating earnings and executed three large maintenance shots, all while navigating the complexities of a global pandemic, wildfires in Western Canada, and flooding in Germany. Now, despite these challenges, including the current volatility of end product markets, we are very bullish on our future, and I'd like to take a few minutes to step away from the quarterly earnings to discuss why. For many years, we have been pursuing a strategy to create long-term value for stakeholders. We have focused on market pulp building products, clean energy, and chemical extractives because we believe that in the fullness of time, these products produced in modern facilities with a focus on long-term sustainability will outcompete the many weaker players in this space and deliver superior performance. We invest only in large and modern facilities that have the potential to be world leaders. We focus on timber supply, procurement, and logistics in making our investment decisions. We promote a values-based approach to our human resource development that honors health and safety, innovation, boldness, accountability, sustainability, and the pursuit of excellence. We maintain our mills to a very high standard, We look for and execute on high return projects that provide superior returns, not just financially, but environmentally, including resource efficiency. We don't buy junk. We don't pay too much. We have a point of view on the future and are seeking growth in areas where we have a strong commitment and where we feel we have sufficient core competencies to be successful. We do this while remaining true to our commitment to maintaining a strong balance sheet, carrying at times what might appear to be excess liquidity which could ultimately be described as dry powder for those opportunistic ideas that can come at any point in the cycle. We focus hard on sustainability. We know the planet is struggling under the weight of climate change. We believe our assets and activities are part of the solution, and this will become ever more apparent as science and policy converge to fight climate change. We support and promote sustainable forest management practices. We have a track record of going above and beyond when it comes to ecosystem-based management practices, promoting biodiversity and forest health. We also understand how critical it is for us to focus on our people. If you've taken the time to explore our website, you will recognize us as a progressive company working hard to develop our teams to maximize our team members' experiences and engagement with us. Mercer is a truly unique company of exceptional people, and we strive to ensure that every one of our employees is proud to be part of the team. From our website and disclosures, you will also recognize a company committed to transparency regarding important and relevant ESG performance indicators. We understand that we need to continuously improve, and we have a good track record of doing this. I see many of our competitors underperforming in this area, and time is catching up on them. I'll have more to say in a few moments, and I know listeners will be interested to discuss our product market fundamentals. But first, let's give the floor to David Ure to review our financial performance.
spk09: Thanks, David. Our second quarter EBITDA was comparable to Q1, despite the significant plan downtime we took this quarter to facilitate capital projects and annual maintenance. Combined, we took about 16 weeks of plans downtime in the second quarter, which negatively impacted EBITDA by approximately $80 million. In addition, our Q2 operating results were negatively impacted by the effects of a weaker US dollar on our foreign currency denominated operating expenses. More than offsetting these negative impacts were higher prices for our pulp and lumber products with those higher lumber prices driving record earnings for our lumber business. We generated EBITDA in the second quarter of almost $84 million compared to EBITDA of about $82 million in Q1. Our pulp segment, contributed EBITDA of $41 million and our wood product segment contributed record quarterly EBITDA of $46 million. Our wood product segment benefited from strong demand and record U.S. sales prices in Q2. Recently, the U.S. market has weakened significantly and David will speak more about that shortly. And as usual, You can find additional segment disclosures in our Form 10-Q, which can be found on our website for that of the SEC. Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets this quarter. In China, the Q2 average NBSK net price was $962 per ton, up almost $80 from Q1. European list prices averaged $1,288 per ton in the current quarter compared to $1,037 per ton in Q1. And the hardwood price in the US market averaged $1,297 per ton in Q2, which was up $277 compared to the prior quarter. In total, Higher average pulp sales realizations positively impacted EBITDA by about $62 million when compared to the prior quarter. Pulp demand remained steady in the quarter. However, our sales volume was down compared to the previous quarter due to our planned downtime. Our Q2 sales totaled almost 361,000 tons, which was down about 127,000 tons from Q1. In Q2, our mills were down a combined 117 days for capital and annual maintenance work. This is roughly the equivalent of 173,000 tons of production. Our Peace River mill was down 79 days in Q2. The majority of this time related to the rebuild of the mill's recovery boiler and will be covered by insurance. The claim settlement process is ongoing. And while we have recognized about $4 million of business interruption insurance recovery in the current quarter, we currently expect the final business interruption claim to be in excess of $15 million. Our Stendahl mill was down a total of 26 days, which is longer than the mill's regular maintenance downtime. The extra time was needed to finalize the installation of two new batch digesters that will add 80,000 tons of incremental capacity. Our lumber realizations also increased considerably during the quarter, particularly in the U.S. The random lengths U.S. benchmark for Western SPF 2 and better averaged over $1,342 per thousand board feet in Q2, which is up $370 from last quarter. U.S. lumber prices rose steadily through the quarter, and it was the largest contributor to our Q2 average lumber sales realization. increasing to $789 per thousand board feet from $622 per thousand in Q1. The benchmark lumber price is currently $490 per thousand board feet. Our wood products business continues to perform extremely well. We sold about 109 million board feet of lumber in the quarter, similar to the strong level of Q1. Our electricity sales totaled roughly 152 gigawatt hours in the quarter, which was down relative to Q1 due to lower production related to our planned downtime. Our Caribou Mill joint venture, which is accounted for using the equity method, contributed another 17 gigawatt hours to this total. We reported net income of $21 million for the quarter, or $0.32 per share compared to a net income of $6 million or $0.09 per share in Q1. The increase in income reflects the absence of the Q1 $30 million or $0.46 per share loss in the early extinguishment of debt as a result of the senior note refinancing. Cash used in the quarter totaled approximately $11 million compared to cash generated of $34 million in Q1. Our cash usage in Q2 was primarily the result of our ambitious CapEx spending and the repayment of our revolving credit facilities, which were partially offset by working capital movements in the form of higher accounts payable balances. We invested $62 million of capital in our mills this quarter, and we remain on course to invest between $150 and $185 million in our mills this year. David will provide an update on our CapEx progress shortly. Our strong results and solid cash flow have led to a modestly improved liquidity position at the end of the quarter, totaling about $695 million, comprised of $385 million of cash and $310 million of undrawn revolvers. after paying down $42 million of short-term debt in the quarter. Our strong liquidity position will support the planned seasonal growth in working capital, along with the remainder of our ambitious 2021 capital spending program. As I noted, we completed 172 117 days of planned capital and maintenance downtimes in our mills in Q2, and this compares to a total of 27 days of planned maintenance in Q1 in our Selgar mill. The impact of the Q2 planned downtime, including lower production and higher direct costs, reduced Q2 EBITDA by almost $50 million when compared to Q1. As a reminder, Our competitors who report their results under IFRS are permitted to capitalize the direct costs of their annual maintenance shuts while we expense our costs in the period of shut completion. And as you will note it in our press release, our board has approved a quarterly dividend of six and a half cents per share for shareholders of record on September 29th, 2021, for which payment will be made on October 6th, 2021. With that, it ends my overview of financial results, and I'll turn the call back to David.
spk06: Thanks, Dave. I'm encouraged by the global rollout of COVID-19 vaccines and the positive effect this is having on global economic activity. Unfortunately, though, there remains uncertainty about the impact of the COVID-19 variants and the increases in infection rates. And as a result, we remain focused on our protocols to ensure the safety of our employees, contractors, and the ongoing operation of our mills. I'm pleased with all that we accomplished this quarter. As I said earlier, we've added 80,000 tons of NBSK pulp production at our Stendhal mill. We rebuilt Peace River's recovery boiler, effectively giving the mill a new boiler. Combined, we completed 117 days of capital and major maintenance work, and we successfully completed all this work without allowing COVID-19 into our mills. Overall, our mills ran well, but our significant level of planned downtime resulted in lower than normal production levels, which was the drag on our results, obviously. However, strong demand for our products and related price increases when compared to Q1 more than offset the impact of our planned downtime, with our lumber business leading the way with record quarterly earnings. Both softwood and hardwood pulp prices rose steadily and significantly through the quarter. Favorable supply-demand fundamentals, including low paper producer inventories, unusually high pulp producer downtime, much of which was unplanned, logistical challenges due to the global shortage of containers that has limited the volume of pulp into China, and a relatively strong Chinese currency all factored into favorable supply-demand dynamics during Q2. Late in the quarter, pulp prices began to retreat in China, primarily due to speculative forces, But the supply-demand factors that created have created a soft landing. While in Europe, we successfully implemented a $40 price increase, taking the list price to $13.40 per ton. Overall, we feel pulp prices globally will trade in a narrow band through the traditional slow summer months. Supporting our views are the May pulp statistics, which continue to reflect good demand for both MBSK and hardwood. The hardwood market statistics highlight a tight market, and the MBSK inventory statistics reflect a balanced market after factoring in shipping delays caused by limited container availability. In addition, we're seeing more indicators reflecting growing global economic activity and supporting analysts' predictions for significant GDP growth in 2021, which will support the demand for all commodities, including pulp and lumber. We also believe government economic support will help fuel this growth, and as a result, we are optimistic that steady economic growth and strong market fundamentals along with a weaker U.S. dollar, will continue to support pulp prices. A wood products business once again achieved record operating results due to the strong U.S. market pricing. The European lumber market also experienced upper pricing pressure in the quarter. Recently, U.S. lumber prices underwent a significant correction, bringing the framing lumber composite benchmark down by roughly 70%. This decline was likely due to the record high prices beginning to have a negative impact on the do-it-yourself lumber demand and fears that this negative outlook could spread to the housing market. Higher COVID-19 infection rates in certain parts of the U.S. also created negative sentiment. U.S. lumber pricing appears to have hit a floor due to recent BC sawmill curtailment announcements, with more expected due to the heavy wildfire activity and high stumpage fees. We see some pricing upside as well due to the reduced BC supply, low inventory levels and a strong US housing market. The European lumber market has shown steady price increases through the year and remains strong today and we expect this to continue even if some European producers reduce their exports to the US. We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can. In Q2, 39% of our lumber sales volumes were in the US market with the majority of the remainder of our sales in the European market. Looking forward, we have taken down our turbine generator at Rosenthal for maintenance following a service interruption which has damaged some parts of the equipment. The timeline for returning the generator to service could be as long as 100 days. We've therefore decided to conduct what would have been a required maintenance haul in 2022 this year. This will save 37 days from next year. During this time, Rosenthal will need to purchase all of their electricity needs There will be an insurance component of this, but that's not determined at this time. The wood product segment achieved another strong production result, producing almost 117 million board feet of lumber, which was comparable to Q1. In Germany, our wood costs, particularly for pulpwood, remain at historically low levels due to the abundance of beetle damaged wood, and we expect this pulp plug supply dynamic to continue well into the fall. We are seeing soil log cost inflation early in Q3, but we expect prices to begin to moderate again due to early indications of heavy spruce beetle activity this summer. In Western Canada, pulpwood supply remains steady and price changes have been modest in our fibre baskets. However, this year is shaping up to be another significant forest fire year, which could potentially have negative impacts on both supply and prices of fibre. We will be monitoring this situation closely. Today, there are no direct forest fire threats facing our operations, but the fires are negatively impacting rail logistics in the region. This will slow down our ability to get pulp to market as we use less efficient and ultimately more expensive alternatives. In addition, the logistical challenges could impair our ability to move raw materials to our mills. And for those of you following weather news in Germany, you will know that the problem there is not fire, but water. While the floods that have been severely impacting many regions of Western Germany have restricted some logistics channels, Our operations for the moment have not been impacted. The majority of our heavy 2021 maintenance program is now behind us. I'd like to remind listeners that we have had major maintenance at Selgar, Stendhal, and Peace River in the first half of the year. This is a bit unusual to have this much maintenance lumped together, but was the result of a number of reasons, including my migration to 18-month annual revisions versus 12 months previously, and also due to the necessary timing for the Peace River boiler rebuild. Our remaining 2021 major maintenance schedule is as follows. In Q3, Rosenthal has a 15-day shut planned, Caribou will take a 16-day shut, and our Friseau sawmill will take its traditional summer rolling department maintenance outages. In Q4, Stendhal has a two-day mini-shut planned, and Suggar will also take a four-day mini-shut. While the majority of our annual maintenance work is complete, significant capital expenditures to grow the company are ongoing. We're using our well-managed liquidity and strong balance sheet to continue to pursue the growth aspect of our strategic plan, and more specifically the objective of adding shareholder value by growing the company in areas where we have core competencies. We have commenced the construction of two new woodrooms, one at our Peace River mill and one at Selgar. These projects will allow us to transform our supply chains, increase our capacity, and significantly 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 of these projects will be between $65 and $70 million. These projects are also eligible for a number of carbon reduction grants that could exceed $20 million. And even without the carbon reduction grants, these projects will create significant shareholder value. We expect the projects to be largely complete by mid-2022. We continue to advance the engineering and permitting process for our stand-all sawmill. The initial plan for the mill contemplates a 400 million board foot capacity with a product lineup and flexibility of our free gel mill, but we expect to build the mill in such a way that will allow for incremental capacity increases in the future. Inflation and delivery of key equipment timelines are now becoming considerable. We are seeing delays in the delivery of sawmill equipment along with the potential for higher costs, particularly for steel, concrete and electrical installations. We remain committed to the project, however, we will continue to consider the timing as this development work progresses. In addition, you will have likely seen the court filing about our stocking horse bid for Katerra's Spokane, Washington cross-laminated timber plant. We have agreed to a stocking horse bid price of $50 million and a draft asset purchase agreement. Strategically, we feel this asset will be a material addition to our growing company and has the scale to be the first step of a significant pillar in our building products competency particularly considering the expected growth and demand for mass timber construction. The facility will no doubt garner interest from other parties and we are in no way assured of success. We'll have more to report on this as the process progresses. Excluding our bid for the CLP plant and depending on the speed of certain construction prerequisites and deposits, we expect total capital expenditures to be in between $150 and $185 million in 2021. Our strong financial position that we vigorously protected during the pandemic gives us significant financial flexibility as we put our sites back into growth. I remain confident that the effective execution of our strategy will continue to bring us success. We remain focused on our world-class assets and our modern sustainable operations will continue to serve us well as we continue to focus on optimizing our fiber handling and logistics and controlling our costs. So this completes our prepared remarks, but if I could take a moment to remind listeners, COVID-19 mutations continue to be a significant risk. I encourage everyone to get the vaccine and continue to keep your friends and family and colleagues and neighbors safe. This pandemic is not over yet. Thanks for listening, and I'll turn the call back to the operator for questions. Thank you.
spk00: Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone number. Again, that's star 1 on your telephone. Please stand by while we compile the Q&A roster. Your first question comes from the line of Hamir Patel from CIBC Capital Markets. Your line is open.
spk03: Hi, good morning. David, you referenced kind of rising inflation for the, you know, sawmill projects under consideration. So for Stendhal... Do you have a sense as to maybe what that updated build cost would be if you go forward? I know we had a recent greenfield announcement in the U.S. and it looks like, at least in the U.S., that that project was around $750,000. I don't know if that's a similar benchmark that you're seeing in Europe.
spk06: Yeah, I think $650,000 to $750,000 could be the zip code. There's options to stage things, you know, build the mill in phases. There's, you know, I don't want to build something that doesn't have all of the appropriate bells and whistles. We know how important that is to get the grade profile out. So we're working our way through all the final quotes and adjusting scope as we can. You know, there's It may be there's a slight delay in pulling the trigger on this, you know, we're not going to not going to do something crazy, obviously, but it's it's really remarkable how how rapidly you know the cost of steel and and and and Just in general has gone up. I don't think it'll stay where it is, but For the moment, it's, it's really been really remarkable increase so So we're just going to monitor it. We're doing the work and we'll be in a position to make decisions. But again, I think it'd be prudent to take a really cautious approach to it.
spk03: Sure enough. And given the escalation on the greenfield side, has that maybe increased your appetite for considering buying an existing sawmill? And have you seen maybe the pipeline of opportunities improve as lumber prices have come off?
spk06: Yeah, it certainly, you know, factors into our thinking, Hinder, absolutely. Having said that, you know, we just don't want to buy junk. And everything that we've looked at has been pretty expensive and hasn't really been at a scale, at least in North America, hasn't been at a scale that would make sense for us, from our strategic point of view. There are still a few targets in Europe that we continue to monitor and And you're right with, you know, changing conditions, those could come back into focus and make more sense for us. So they're also on the table for consideration.
spk03: Fair enough. And just the last question for me, David, with the capacity increase now at Stendhal and then just given the sort of cycle of the various shuts, what level of production would you be targeting for 2022?
spk06: Well, Ned, I've shut some things like that. I could just refer to my report here. Just give me a second. Unless David has it open. Yeah, I'm sorry, Javier. I don't have that just easily handy. That's all right.
spk03: I'll follow up after.
spk06: Yeah.
spk03: Okay, that's everything I had. Thanks.
spk00: Great. And your next question comes from the line of Sean Stewart from TV Securities. Your line is open.
spk05: Thanks. Good morning, guys. David, I wanted to revisit MBSK markets in Europe. It looks like you got about half the proposed June price hike. And I'm trying to gauge your thoughts on the ability to hold prices through the summer as things are corrected in China and to a lesser extent North America. Do you think the industry will have an ability to tread water through the summer in Europe as other regions weaken?
spk06: Yeah, that's a great question. And the way I'm thinking about it and some of my colleagues here in Mercer, you know, putting you know some time into thinking about what what's the same and what's different about the last two cycles you know the 2017-18 cycle where we had peak prices and the current cycle so one of them is the differences here is you know at the end of 2017-18 cycle you know pulp stocks are very high whereas today stocks are well balanced At the end of 2018, the global economy was cooling off considerably, particularly in China. There was the trade conflict with the US going on and so on. And today, in 2021, all major regions are expected to grow and grow strongly. And there's a very different sentiment in the market today. Paper inventories in 2018 were very high, particularly in China. Today, those are at normal levels. George Malavasic, Considerable over capacity in the European printing and writing sector in 2018 has been really offset in 2021 through massive coaches of paper capacity primary in 2020 George Malavasic, Back in 2018 remember Susanna, the market leader. George Malavasic, Just completed a merger with Maria pretty busy with themselves. And I mean, you know, most would say they misjudged the market created some of the problem we had to work through in terms of inventory overhang. And I think another important factor, particularly as your question relates to Europe, is ocean freight challenges favor the European paper producers of 2021. By that I mean paper imports into Europe are very limited. So the paper producers are busy and they're profitable. They've been successful raising prices more or less across the board. And so it's a much stronger market without much influence coming in from Europe. you know, paper producers in China, for example, that they would have previously been competing with. And then finally, I think another big difference is the dissolving in the fluff markets this year are pretty strong, unlike in 2018. So there's really no swing tonnage coming into the paper grade side. So there's a lot of differences. And generally, you know, just the tone of our customers in Europe tells us that, you know, we're going to trade at a pretty narrow band here through the summer and, you know, I'm optimistic about the back half of the year.
spk05: Thanks for that detail. That's really helpful. I also wanted to follow up on your comments with respect to the CLT asset you're bidding on. Help me understand, I guess that opportunity, have you been looking at other engineered wood opportunities or is it as a result of the Katerra bankruptcy that this one fell into your lap potentially? And how do you weigh the appetite for this type of expansion versus sawmills in North America because you have kicked the tires on opportunities on that front as well?
spk06: Well, I'm really bullish on mass timber. It's been a sort of a current steady area of business for Europeans. It's growing very rapidly in North America. Whether you're at the FPAC table or COFI or listening to the Premier or the Prime Minister talking here in Canada, mass timber is something that's really supported. It's a green building product. It's got a much lower carbon footprint to steel and cement. We all think there's a tremendous tremendous growth opportunity here so we've been we've been really focused on the value add space for time and as i've spoken about in the past we've got a we've got an empty hall coming at free shell and you know the opportunity there would be to take the the lower profile uh material and and put it into this ulp or glulam or something like that do some finger joining and so on and uh So we've been really looking for opportunities in that area. So we understand the business, I think, pretty well. We've done a lot of work in it. And the Katerra thing is an opportunistic situation, clearly. It's a big plant. It's really big. So we always say we don't want to be a small fish in a big pond. We'd rather be a big fish in a smaller pond. But if there's really good growth, market dynamics and we can establish ourselves as leaders and use that as a platform for further growth in that area, that's kind of what we dream about. It's going to be competitive. I mean, I'd be shocked if others don't show up. So that means there will be an option and, you know, as we were with the K1, we'll need to be disciplined and not overreach. It's still a growing market, CLT, so if we don't get this one, we'll possibly find other value added products we can go into. So we'll see. It's a cool opportunity. It's a very well-invested plant with equipment that we know. It looks a lot like a sawmill except it just doesn't have timber. But all the sorting and planing and continuous kiln drying and all that kind of stuff, it's all the same equipment we run in Europe, basically.
spk05: Thanks for that detail. I appreciate it. That's all I have, guys.
spk00: And your next question comes from the line of Marcus Campo from RBC Capital Markets. Your line is open.
spk02: Good morning, guys, and thanks for taking my questions. Maybe starting with Paul Pierre, there's quite a bit of hardwood capacity coming online over the next few quarters. How do you think that will impact the market? And can you remind us how you think about the relationship between hardwood and softwood pull prices?
spk06: Yeah, that's a great question. Yeah. It's, um, yeah. So between Oroco and UPM and a bit of Bracehill, there's, um, yeah, there's, there's hardwood coming. It's, uh, it'll, it'll, hardwood's going to struggle a bit or at least has the potential to, it really depends on the discipline of the producers in my mind. And, um, you know, one of the, There's a couple of angles in the whole thing. And they're adding capacity because they believe, and I think they're right, that the demand for fiber, virgin fiber, is growing significantly. Hardwood right now is growing at more than a million tons a year every year and has been doing that consistently. You may remember three or four years, three years ago, we thought, you know, again, big lump of capacity was going to destroy the market. Well, it didn't until we had a behavior issue that really kind of got in the way. But the, so it's going to be bumpy and it's going to, it's going to wind its way through. I mean, I, I think, you know, we do have some hardwood pulp and Mercer and, you know, our, our opportunity with our wood room and possibly some other, you know, aspen extraction material product opportunities that we have up in Peace River. You know, I think we can get our cost structure down to where we can really compete on the hardwood side and we've got softwood swing capacity up there as well. So that mill still a great mill and will be a contributor in the next couple of years. But for a couple of years, hardwood will be the drag generally on virgin fiber. I think the demand for virgin fiber is going to be strong enough, and particularly for softwoods, that the gap between the two grades will widen and kind of end up at a delta that's probably something we've never really experienced for prolonged periods of time before. I've seen the difference at 200 in previous cycles. Recently, we've seen it as high as 220. Today, we're down below the 200 level, but I could see that being the case for some extended period of time. I don't think it's going to be a ball and chain on soffit. Soffit's too small a market and it's too important to so many different paper grades that it will trade based on its own supply-demand dynamic. It'll become a niche pulp trade that way, and hardwood will be the big benchmark grade. And the way to be successful in the hardwood space is you've got to be a low-cost producer, a high-quality producer, and the consolidation of the hardwood producers should exert some discipline into the market that allows everybody to make reasonable margins.
spk02: Thanks. That's helpful. Maybe going back to the CLT side, are you able to help us understand what kind of profitability that you think a CLT plant like the one in Spokane could generate under normal market conditions? And what have been some of the key challenges with that facility and where could you help address those problems?
spk06: Sure. CLT is, I mean its largest input cost is wood, obviously, and so when somebody bids on a project, they take the wood cost, they calculate what the cost to convert that wood into panels is, and then they add a margin, and how much margin they add is a function of what they think the customer is willing to pay, and that comes into comparing what you're producing and providing to other building products and also who you might be bidding against to get the job. So it really depends on a whole number of factors. The Katerra business model before the bankruptcy was really an integrated model. So they had the engineers and architects, project ownership, they ran the projects, they underwrote the risk of the projects, they produced the raw material, the CLP for the projects, And that's a very different business model to the way Mercer would run that mill. Like we would be marketing, we would be building products for project owners. And we would be competing with others who would have similar facilities who might be in the geographic area that we're working in. Given its scale, as you get it wrapped up, it would be a low-cost producer. It would be, like I say, a big fish in a smaller pond and lots of growth potential. We could imagine plugging on a glulam line and running a lot of finger-joining material through it and doing all sorts of stuff. It has the potential to produce a really nice nice steady margin, I think. What that will be will take time to determine. But as I say, the business is really raw material cost plus conversion cost and then what the market will bear based on competition and value to the buyers. Yeah, that makes sense.
spk02: Maybe I'll sneak in one more. With lower North American lumber prices, Do you expect to sell more lumber in the European market or is that sales mix going to remain steady sending lumber over to the United States?
spk06: Yeah, so I've talked about this before. So we're really committed to a number of markets. So we've done very well in the U.S. We've got a tremendous customer base and we're going to honor that and supply them through thick and through thin. So I would expect our U.S. supply to range between 25% to 40% of free shelves availability. The European market, which has traditionally been much less volatile, serves us well through thick and through thin. At the current moment, it's really strong. It's held up. It hasn't fallen the way the U.S. market has. Having said all that, the U.S. market is still very profitable for us. The European market is profitable for us. And with all the new bells and whistles at Freetown, we're really ramping up our J-grade business as well. And J-grade, for those who follow lumber, in Japan is very high. Tremendous margins on that product. So we're pushing out as much of that as we can. And I expect we'll just continue to move in this direction. We're core of Europe. 25% to 40% in the U.S. and as much J-grade as we can get through thick and thin. Hopefully, somewhere between 8% and 10% of the free gel could be J-grade in the fullness of time.
spk02: Great. Very helpful. Good luck with the current quarter. Thank you.
spk00: And we have your next question coming from the line of Roger Speets from Bank of America. Your line is open.
spk08: Thank you. And maybe you said this, but regarding the remaining Peace River BI insurance proceeds, did you give the timing on expected receipt?
spk06: Do you want to cover that, Dave?
spk09: Yeah. Yeah, we didn't. But we would expect that it would be something that would be settled out in the next two quarters.
spk08: Got it. Okay. Can you give any insight into cash taxes given the material difference in your numbers this year versus last year?
spk09: Yeah, I think for guidance, or I guess for building models, you could probably count on our cash taxes being in the range of 15% to 20% of pre-tax income.
spk08: Okay, great. Thank you very much.
spk00: Thank you. And your next question comes from the line of Andrew Shapiro from Lawndale Capital. Your line is open.
spk07: Hi, thank you. A few follow-ups here and then a question. Regarding the stocking horse bid at Katerra, With the auction set for Monday, how does this bankruptcy court and this particular bankruptcy case, how do you see it proceeding in terms of the timing of the determination of, we'll call it the winner of the auction? Would there then be an additional breakup fee protection all the way through the reorg vote, et cetera, and when you think that all takes place. I don't know how complex a case this is and if this is just one small asset sale that is going to have the gavel bang down long before the overall restructuring is done or what.
spk06: Yeah, hi, Andrew. Yeah, it's going to be a very rapid close is what we've been told. So the auction will be Monday, and I think they're hoping to close within a week of that or less. So we'll either own an asset or we'll have a break fee right away.
spk07: Okay, so it's kind of a separate 363 sale outside of the rest of the restructuring process. Correct. Okay, excellent. kind of along these lines, which is, again, the use of pulp in a variety of other uses than the standard Mercer business line. You have a joint venture with Resolute in performance biofilaments. And can you remind me what percentage Mercer has of the joint venture, and more importantly, I think the last that we might have heard about this was that the Quebec plant, the initial initial plant in Quebec is under construction. And maybe it has now been completed and they anticipated making I think products production and sales commercially here in 2021. What's the status of all of that?
spk06: Yeah. Yeah, well, so Performance Biofilaments is a joint venture that we have with Resolute Forest Products. And, you know, both companies are very interested in the technology. We have access to all the patents and everything through our membership and FP Innovations. And we decided that let's work on, let's co-develop applications versus competing with each other in the market. And so we put our resources together and Performance Biofilaments hired the team and I think somebody used the word, it's an incubation hub, if you like, of products for the future. Filaments provide paper makers value either through strength or different properties that can manipulate the surface features of filaments. you know, goes into nonwovens, it can go into cement, it can go into drilling, there's all kinds of applications. And so performance biofilaments is all about working with end users, industries and companies that can benefit from biofilaments and helping them develop applications for it. And then, you know, the vision is that we would have the exclusive capacity to provide a material, like a chemical material if you want to call it that, that creates value for them for whatever their application is. Our partners in Resolute felt strongly enough that they are building a plant and that plant will provide material to performance biofilaments. It will also provide material to operations in the paper space that they operate. and I think they're pretty excited about it. I can't talk too much about it. It's really their project anyway, so I'll leave it at that. But we continue to – I wouldn't say plug away is the wrong word. We still feel there's lots of potential in high performance strengthening agents for papermakers and other special applications. So we just let these things take time.
spk07: Is the plant's construction completed?
spk06: I can't talk. I don't know the exact status of it. Andrew, Mercer doesn't have any ownership of the plant itself.
spk07: Oh, you don't have anything of the plant. Your ownership is the venture that provides raw material to the plant.
spk06: We're on the application side with them, yeah.
spk07: Okay. And then lastly, in light of... The persistence of the pandemic, I think things are going to continue virtual for quite a while, perhaps in the investment conference side and all that. What are the company's plans for virtual or in-person IR activities in the coming months and quarters?
spk06: Dave, do you want to cover that off?
spk09: Yeah, we'll be participating. These are all virtual conferences. But we'll be participating in the Jeffries Industrial Conference next week.
spk06: Okay, Dave, we've got a little... We've got TV coming up, and we'll participate in all the bank... I think there's a BAA conference coming, so we'll participate in the bank virtual conferences, and we're pretty active with shareholders on a daily basis anyway. I won't be making a tour into New York or Boston or down your way in the next few months, but I really do look forward to being able to travel again and getting out and seeing everybody. But for now, Google or Zoom is what it's going to be for the next few months, I'm afraid.
spk07: Okay, great. Thank you very much. You're welcome.
spk00: Thank you. And again, to ask a question, you'll need to press star 1. on your telephone. Again, that's star one on your telephone keypad. Your next question comes from the line of DeForest Hinman. Your line is open.
spk04: Hi, thanks for taking my questions. Can you give us an update in terms of your thoughts on the production capacity of FreeSAL? I know you have the Bob Whitefield, Summer holidays with with the maintenance, but I know we've been adding a lot of equipment there. Has it changed your thoughts in terms of, you know, what can that facility do from a production perspective.
spk06: Bob Whitefield, You know, great question. Well, it's a minute. It's everything we thought it would be and and it really depends on how you run it and how you staff and what it's going to produce. So maybe the to give you the guidance that I think you need for your models before. So for the third quarter. We've got our summer maintenance. Sawmills are a little different than pulp mills. We kind of rotate through departments. So we'll work on the log line for a while, work on one of the saw lines, get it back, work on the other saw line, work on sorters, work on dryers, work on cleaner, that kind of thing. And we can also double shift some of these lines. So when one is down, we can work hard on the other. to produce products. So our production target for the third quarter, despite having all this maintenance, is about 123 to 124 million board feet of lumber is what we'll produce in the three months.
spk04: Okay, that's helpful. In a quarter where we don't have to do something like that, has it step functioned higher?
spk06: Yeah, it has. I mean, we're running it at around the 500 to 550 million board foot rate is our plan. We could go up significantly. We could get up to the 750 if we want to put more shifts on. Difficult to do and not always the best thing for the equipment. So it's kind of like you want to run like a boat. You want your motor running at a good rate, but you don't want to be pushing it too hard all the time. So our focus is on really... fine-tuning all of the, you know, the optimal or the optical grading, you know, the THD scanners and things like that so we get the maximum value out of the profile. And, you know, retune up the precision edge trimming and getting a J-grade grading as crisp as it can be. And, you know, running at the 500 to 500 million, 50 million board foot is just kind of the optimal place for us to be for the next year. call it six or nine months. And so that's what you can expect for now.
spk04: Okay, great. I don't think anyone asked this, but I think it's important on the Stendahl digester project. Can you give us an indication of how the mill's performing with the new assets in July?
spk06: Yeah, July was a little bit bumpy, but I'm pleased to say it's running really well now. So the issues that we had at Stendahl, well, a couple of things. I think the capital investment project was executed very well and I'm really proud of the team. One of the areas where we struggled a little bit is these big mills have what we call DCS systems. These are the digital monitoring systems that, you know, all the loops that you use to control the equipment. Well, one of the vendors... the DCS team virtually couldn't make it because of COVID. And, um, so we, so we really had to support the DCS development work from our Rosenthal. No, we, they're both Valmet systems. And, um, and, and so we got through it and, and that it took a little longer than we expected. Um, but it was really, uh, you know, some very specific reasons. The, um, equipment's all what we expected it's installed properly it's all up and running now and it's just a matter of fine tuning and when you when you when you put new digester capacity in and then as uh for listeners we we also increase the sprint capacity on the dryer and we improve the washing capacity on the on the bleach plant so it's what we're doing right now is just fine tuning everything finding those little bottlenecks and cleaning those up and just Ramping up to the 740,000 ton annual rate and will be at that rate within another three or four weeks is our view and So very successful project and and also, you know, very accretive, you know, considering the level of government support that we had for the capital is with some of the cheapest times we've ever built in Mercer, to be honest, so
spk04: I guess that's, I'm not aware of that. Is there a grant involved with that? Or was it something else?
spk06: Yes, there was. So we have these wastewater fee offset programs in Germany. So if you put money into equipment that allows you to provide some environmental benefit or resource efficiency benefits, you avoid having to pay the wastewater fee. The capital kind of displaces the fee. So what we were able to do is negotiate six years Russell Kaney-O' relief from wastewater by by putting in this equipment which gives us a lower environmental impact intensity and and a big chunk of that comes from the washing the new washing equipment that we put in Russell Kaney-O' So, so we're avoiding 24 million euros of wastewater fees, which is six years worth on a project that had a capital cost of about 45 nine
spk04: Okay, perfect. Just kind of aside, but just monitoring the Shanghai exchange. You know, there's a there's a forward curve. Now there's a lot of volume. It seems like a real Futures market. Is there any possibility that we could use that and enter into forward a few for futures contracts and actually deliver the tonnage. Is that feasible.
spk06: Yeah, I think that's a growing market and both financial and physical opportunities there. Most of our investors like us to stay open. They don't want us to be taking speculative bets. They want to play the pulp market. So I'm not really anticipating participating there. It's becoming a factor in pulp pricing, though, and so we're having to monitor it pretty closely. I think what it has the potential to do is create a little more volatility in pulp pricing. When prices are going up, they may go up a little faster and higher. Similarly, when sentiment turns and speculators get involved when pulp prices are coming down, it might push it down a little harder and a little further. That's just my view. I'm not anticipating DeForest taking big positions in that market to try to smooth out earnings or any of those kind of things.
spk04: Okay, very helpful. And then last question, just on the CLT facility. Did you envision that facility, you know, as is? Or do you see that, you know, you mentioned earlier, you know, it looks like a sawmill. You know, is it possible that that is, you know, could just be run as a sawmill? It's kind of a semi-turnkey asset that you'd be able to, you know, move on relatively quickly through this bankruptcy proceedings.
spk06: Well, yeah, we have lots of ideas about optimization and innovation in that facility. I don't want to talk about those too openly just at the moment because we may not get it. But, you know, we won't be putting a saw line in front of it. It buys timber packages from others and sorts through that and uses the material to produce and evaluate its products. So there's, you know, there's a lot of capacity in that facility. It's got a very big building. and the bottleneck is the press. So, you know, additional incremental volumes of CLP or other products are very possible without a lot of that other associated expense. Like if you were to do a greenfield glulam, you would be needing to put all the departments in place. This is, frankly, just presses the bottleneck. So there's lots of potential for us.
spk04: And just so I understand, I haven't gone through all the documentation within that bankruptcy proceeding, but is it just the physical asset you're bidding on, or is there a supply contract on the wood side that you just mentioned? That's one of the things you have to consider.
spk06: No supply contracts, no liabilities, minimal workforce, no marketing. I mean, it's a startup, but the asset is there.
spk04: Okay. Thank you.
spk00: Thank you. And there are no further questions. I would now like to hand the call back to Mr. David Gandossi. Please go ahead.
spk06: Okay. Thank you, Patricia, and thank you all for joining our call. And as always, Dave and I are very happy to talk to you anytime, so don't hesitate to reach out. I look forward to speaking with you. And otherwise, we'll look forward to our third quarter earnings call. Thanks again. Bye for now.
spk00: And this concludes today's conference call. Thank you all for participating. You may now disconnect.
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