Mercer International Inc.

Good morning and welcome to Mercer International's fourth quarter 2021 earnings conference call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International, and David Jura, Senior Vice President Finance, Chief Financial Officer and Secretary. I will now hand the call over to David Jura.

Good morning, everyone. I would like to remind you 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. We achieved record EBITDA on Q4 on strong pulp and lumber sales volumes, high energy sales prices, a much lighter scheduled maintenance program when compared to Q3, and the settlement of the business interruption insurance claim associated with the repair of our Peace River recovery boiler in mid-2021. These positive impacts were partially offset by lower pulp realizations in all markets. Our Rosenthal pulp mill ran the entire quarter without the benefits of its turbine generator, which had the impact of lowering our EBITDA by about $30 million at today's electricity prices. However, I'm happy to report that the turbine is being repaired and it returned to service in mid-January. We also experienced modestly higher fibre prices in both Canada and Germany. In addition, our freight costs were up at our Canadian operations due to the increased use of trucking and higher warehousing costs due to extreme weather and COVID-related supply chain slowdowns. Our Peace River Mill recovery boiler damage insurance claim was settled in late December, which allowed us to record it in Q4. The total Q4 EBITDA impact was about $32 million. We are pleased to have this claim behind us and that our 2021 fiscal year includes both the loss associated with the downtime needed to repair the boiler and the insurance proceeds meant to compensate us for that lost income. We were generated record EBITDA in the fourth quarter of almost $165 million compared to EBITDA of about $148 million in Q3. Our pulp segment contributed record quarterly EBITDA of roughly $143 million and our wood product segment contributed total quarterly EBITDA of almost $24 million. You can find additional segment disclosures in our Form 10-K which can be found on our website and that of the SEC. For the full year, we also generated record EBITDA totaling almost $479 million, exceeding our previous record by well over $100 million. And this was achieved despite our Rosenthal turbine being down for almost six months, which negatively impacted EBITDA by over $40 million. On average, softwood and hardwood pulp prices in Q4 were lower than Q3 in all of our major markets. In China, the Q4 average NBSK net price was $723 per ton, down $109 from Q3. European list prices averaged $1,302 per ton in the current quarter, compared to $1,345 per ton in Q3. NBSK remains at a considerable premium to hardwood with the average Q4 net eucalyptus hardwood price in China at $562 per ton, down $61 from Q3. In total, average pulp sales realization movements negatively impacted EBITDA by just over $30 million compared to the prior quarter. Pulp demand was strong in the quarter, and our modestly higher overall production led to higher sales volumes compared to the previous quarter. Our Q4 sales totaled almost 516,000 tons, which is up about 68,000 tons from Q3. We did not take any planned downtime in Q4, while in Q3 our mills were down a combined 44 days for capital and annual maintenance work. This is roughly the equivalent of 43,000 tons of production. The impact of no planned downtime in Q4 compared to Q3's maintenance downtime included higher production and lower direct costs, benefited Q4 EBITDA by almost $15 million. Our lumber realizations were also mixed this quarter compared to Q3. The Random Links US benchmark for Western SPF 2 and better averaged $711 per thousand board feet in Q4, which was up $217 per thousand from the last quarter. Our average European sales realizations were down approximately $44 per thousand board feet compared to Q3. The benchmark lumber price in the US is currently $1,275 per thousand. Our wood products business continues to perform well. We sold about 104 million board feet of lumber in the quarter, which is up slightly compared to our Q3 sales volume. Our electricity sales totaled roughly 207 gigawatt hours in the quarter, which was up relative to Q3 due to less planned downtime. However, our sales volumes were held back due to the absence of generation at Rosenthal for the entire quarter. Our Caribou pulp mill joint venture, which is accounted for using the equity method, contributed another 16 gigawatt hours to this total. We reported net income of $74.5 million for the quarter, or $1.13 per basic share, compared to net income of $69 million, or $1.05 per share in Q3. For the full year 2021, we reported record net income of $171 million or $2.59 for basic share compared to a net loss of $17.2 million or 26 cents per share in 2020. Cash generated in the quarter totaled approximately $7 million compared to cash used of $46 million in Q3. Our cash generation in Q4 was primarily the result of strong EBITDA being offset by working capital movements, primarily in the form of higher accounts receivable and to a lesser extent, higher inventory balances. Our higher accounts receivable balance is principally the result of timing of sales late in the quarter, along with the recognition of the Peace River insurance claim, receipt of which did not occur until January. Higher inventory was due to finished goods increases in North America due to logistics restrictions and higher priced raw materials combined with relatively high seasonal inventory levels. We expect the majority of this working capital build to reverse itself in Q1. We invested almost $34 million of capital in our mills this quarter, which put our total capital investment in 2021 at $159 million. In addition, in 2021, we completed the $51 million acquisition of Mercer Mass Timber, our cross-laminated timber production facility located in Spokane, Washington. David will provide updates on this business and our CapEx program shortly. At the end of the quarter, our liquidity position totaled about $631 million, comprised of $346 million of cash and $285 million of undrawn revolvers. Our strong liquidity position will support our planned working capital movements, along with our ambitious 2022 high return capital spending program. In January, we entered into a new 160 million Canadian dollar revolving credit facility for our Canadian operations. This new syndicated facility has a five-year term and replaces the two $60 million Canadian facilities for our Selgar and Peace River Mills. This will be a lower cost facility secured by working capital and gives our Canadian operations significantly more financial flexibility. In addition, we have commenced discussions with our property insurer on a business interruption claim for our Rosenthal turbine downtime and expect settlement sometime in the second half of 2022. And we are pleased to highlight that our board has approved a 15% quarterly dividend increase, which will increase it to seven and a half cents per share for shareholders of record on March 30th, 2022, for which payment will be made on April 6th, 2022. That ends my overview of the financial results, and I'll now turn the call over to David.

Thanks, Dave. Good morning, everyone. Let me begin by saying how pleased I am with our overall operating results this quarter. We benefited from our global operating footprint. The strong European market conditions helped mitigate the impact of supply chain restrictions that we experienced at our Canadian operations. And while our strategic core focus to maintain only world-class assets keeps our costs and carbon impact low in normal times, in times of high energy prices like we are experiencing at the moment in Europe, our net energy export position is a tremendous differentiator for us. In Q4, our operations generally ran well, and the year ends with a number of operating records, including record quarterly EBITDA. We will also remember 2021 as being a year of considerable evolution as a company with the addition of mass timber and engineered wood products and steady expansions of lumber capacity. And while we continue to diversify our products, we also remain committed to our legacy as our Stendhal pulp expansion will attest. These results reflect the hard work of our team during the period under often challenging operating conditions, along with the benefits of our recent investments. Again, our mills generally ran well this quarter and strong production combined with overall steady demand for products with key drivers behind our record Q4 results. In fact, our results would have been even better, but for the complete absence of power generation at the Rosenthal to conduct turbine repairs. While the lengthy downtime was unfortunate, we took the opportunity to pull 84 days of planned turbine maintenance from 2022 into 2021. and this decision will reduce our insurance claim for the period, but we also expect it will result in a net benefit to the mill, given that electricity prices in Germany are much higher today than they were back in 2021. While still relatively strong, average bolt prices fell modestly in Q4 as negative sentiment in parts of the market caused by fears of new eucalyptus hardwood capacity, a general negative economic outlook, and logistics restrictions for paper products that made it challenging to ship product economically all started to weigh on the markets. However, the sentiment seems to have shifted in the early days of Q1 due to supply chain restrictions for pulp producers in Western Canada, along with the labor dispute affecting MBSK production in Finland. These supply side restrictions have created upward pricing pressure, and most pulp makers have been able to implement some modest price increases. In addition, we believe that low consumer inventory levels, heavy pulp producer maintenance levels, and new hardwood supply Coming to market more slowly than anticipated will create average pricing conditions that are sequentially higher in Q1 and possibly Q2. Lumber markets, like pulp, are relatively strong but variable. Average lumber pricing in both Europe and the U.S. weakened modestly during the quarter, though U.S. pricing has shown considerable strength since late in Q4. While the midterm backdrop for U.S. pricing conditions remains solid with relatively low housing inventory, low boring costs, as well as strong homeowner demographics, the dimension lumber market is currently characterized by short-term weather events, inflexible supply chains, along with labor and home construction supply shortages. Add to this the sometimes inconsistent supply from Canada, and you have the market that we are currently witnessing, which is long-term growth with intermittent volatility. Looking ahead, Positive homebuilder sentiment remains despite the expectation that mortgage rates will rise in 2022, which is consistent with our view that we will continue to see strong lumber demand based on expected steady U.S. home construction. The variability of European pricing is much less pronounced. As expected, prices in the European market have moderated, following a trend that has developed over the past few years of European market changes generally lagging those of the U.S. Consistent with that trend, after reaching a modest trough in Q4, we are seeing pricing in Europe now recovering in early 2022 as European producers, despite the small numbers, begin to direct some production to the strengthening US market. We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can. In Q4, 46% of our lumber sales volumes were in the US market, with the majority of the remainder of our sales in the European market. Although we feel our logistics strategies put us at a competitive advantage to many of our competitors, we experienced some freight cost increases in Q4. This primarily came in the form of increased use of trucking and higher warehousing costs in North America caused by extreme weather and pandemic related shipping delays, which has reduced the availability of rail cars. These delays forced us to take our caribou mill down for three weeks in December and at times slow production modestly at Selgar and the Peace River Mills in December and into early 2022. We expect the situation to begin to ease once temperatures begin to moderate. Looking forward, our turbine generator at Rosenthal was put back into service in mid-January. We are pleased to once again have our mill producing its own electricity and selling surplus production into a very strong German electricity market. Having the turbine down for almost six months negatively impacted our annual operating results by approximately $41 million. And having a world-class energy balance has never been more important. I'm sure that most of our listeners are aware of the steep rise in European energy prices over the last few quarters. This affects our business in a few ways. First, we are net electricity sellers. In the last year, the grey market energy price has on average more than tripled in price. As a result, you can expect our revenues to grow in Q1 relative to Q4 now that the Rosenthal turbine is back online. Further, we believe that the conditions that are giving rise to the current power prices are not likely to abate in the near term. Dermany remains on pace to just decommission its remaining nuclear power plants and the perceived natural gas supply threat, this tension between Russia and the westbound, do not seem to offer an opportunity for a quick retreat of power prices. And while fossil fuels have become a relatively small source of energy for us, limited to our land kilns, we are impacted by higher gas prices, which have increased dramatically. And we are expecting a knock-on effect of high gas prices in the coming months, as we expect that many Central European households will turn to alternative supplies to heat their homes, such as wood pellets, which will put some upward pricing pressure on our main raw material, low-cost pulpwood. However, we believe the benefit of higher electricity prices will more than offset the impact of higher gas and potentially higher wood costs. Our wood product segment achieved another solid production result, producing 111 million board feet of lumber, which was up 9 million board feet compared to Q3. We are pleased with the rate that our wood product segment investment is developing, particularly as we've been forced to regularly interrupt production during our ongoing construction project. As I mentioned, we believe that we have the conditions in place to see improving pricing for all of our products, power, lumber, and pulp, and we are aware of inflationary pressure on the cost side at the moment, Inflation has been limited to natural gas, some elements of our delivery channels, and more recently to fiber costs. In Germany, we are seeing strong demand for both pulpwood and saw logs, which is driving increased fiber costs. Demand for pulp logs is being driven by pellet producers, as I mentioned, as high European energy prices are creating more demand for wood-based heating solutions. While saw log demand and pricing appears to be peaking, we are expecting increases in the prices we pay for lower-value pulpwood to rise over the next two quarters. In Western Canada, reduced harvesting due to extreme winter weather combined with COVID-related hauling limitations pushed pulpwood prices up modestly in the quarter. However, we're beginning to see incremental harvesting activities, and we're optimistic COVID restrictions will begin to ease trends that we believe will limit Canadian fibre costs increases in the near term. Despite not having any annual major maintenance in Q4, we did continue to invest in our operations. In Q4, capital expenditures totaled $34 million, mostly in high-return projects like upgrading the woodrooms that are pre-sewered and silver mills. We are excited about the benefits these projects bring, including improved fiber resource utilization, reduced greenhouse gas emissions, and lower fiber costs. We are using our liquidity and strong balance sheet to continue to pursue the growth aspect of our strategic plan in areas where we have core competencies. Specifically, we focused our growth in building products, green energy, market pulp, and chemical extractives, and we will continue to do so in 2022. And we have another ambitious capital expenditure plan in 2022. We expect to invest approximately $175 million in our mills this year, the majority of that being on high-return projects that will drive new product development, ESG advances, productivity improvements, and input cost reductions. Our two wood rooms at Salgar and Peace River will be completed late this year, and we will be making additional investments in our German wood procurement infrastructure that will add to our competitive advantage. We have one more sorter to add to our Frisjau mill to maximize the benefits of our new planer by allowing for even greater grade differentiation. And while most of the Stendhal 740 pulp expansion project is complete and running as expected, we will complete the final element, some modest modifications to the pulp machine wrapping line in 2022. You can also look to us to take steps on our carbon strategy in 2022 as we expect to commence construction of a lignite extraction plant, a leading edge technology that will allow us to look at commercializing derivatives of lignite products that have historically been limited to biomass fuels. And of course, we remain committed but cautious in our approach to solid wood expansion. We continue to develop our Stendhal sawmill project, but we need more stable equipment supply conditions to emerge before launching this project. conditions that we expect to return when the pandemic wanes. We have long recognized the importance of sustainable operations and planning for the long term. We are proud of our sustainable performance and we are applying a lot of resources to ensuring that our ESG performance continues to improve and that our performance and objectives are transparent. We're looking forward to the publication of our sustainability report in early 2022, which will further support our messaging regarding our sustainability reports and values. Our 2022 annual maintenance schedule will be significantly less intensive than 2021 due to the Peace River recovery boiler rebuild being completed, and we will be running through Q1 without any planned maintenance downtime. The timing of our scheduled downtime for the remainder of the year is as follows. In Q2, Stendhal will take a three-day mini-shut, Selgar will have its regular 15-day shut, Peace River will have a 16-day shut, and Caribou has a 16-day shut. In Q3, Rosenthal has its regular 14-day shut planned, and in Q4, Stendhal has a 14-day maintenance shut scheduled. In total, we are planning for about 67 days of major maintenance in 2022. The 2021 highlight of our growth strategy was our acquisition of Bursar Mass Timber. We remain very excited about the potential of this business, and it fits well with our value-add, carbon-focused, solid wood strategy. We continue to build up the order book for the plant's core product, cross-laminated timber panels, We're already producing long-length finger joint and lumber, and we're studying the plant's ability to produce other complementary engineered wood products. This facility has an annual production capacity of approximately 140,000 cubic meters of CLT, which represents about 30% of the current CLT manufacturing capacity in North America. We feel that the environmental and construction flexibility benefits compared to traditional steel and concrete construction methods make this product right for future growth. Looking forward, our record 2021 operating results, liquidity position and strong balance sheet leave Mercer well positioned to use that financial flexibility to add shareholder value by continuing to execute on our growth strategy. Finally, as Dave mentioned, our board has approved a 15% dividend increase this year. I believe this emphasizes the confidence we have in our ability of our world-class assets to generate strong cash flow throughout the cycle. The term we're using a lot within Mercer these days is fit for the future. a commitment to being on the right side of the climate change challenge. Given our role in managing forests and producing physical goods and green power from renewable resources, along with our focus on human talent and our strategy to operate only top performing modern mills, we believe and expect Mercer will be a welcome industrial player for the future. This will not be the case for everyone operating in our space and therein lies the opportunity. Now, let me conclude by remarking that the safety of our people continues to be our focus as COVID-19 variants spread globally. We are committed to our safety protocols to ensure the safety of our employees, contractors, and the ongoing operation of our mills. And in keeping with one of our core values, I encourage everyone to get COVID-19 vaccine to keep your families, friends, colleagues, and neighbors safe. Thanks for listening. Be safe. And I'll now turn the call back to the operator for questions.