Mercer International Inc.

Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Thank you. Thank you. Thank you. Thank you. Good morning and welcome to Mercer International's Fourth Quarter 2021 Earnings Conference Call. On the call today is David Gandosi, 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.

Good morning, everyone. I'd 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. This quarter we achieved record revenue and near record EBITDA due to strong sales volumes and robust pricing for all of our products. Similar to Q4, we did not have any major maintenance in Q1 and our results also benefited from having the Rosenthal turbine running for most of the quarter. Overall, our mills ran well this quarter, although our Peace River mill lost some production due to limitations of rail service to certain regions. To mitigate this issue, we've had to use extra trucking, which has the effect of increasing our freight and warehousing costs. As expected, we also experienced higher costs for several of our major inputs, including wood, energy, and chemicals. Our near record EBITDA in the first quarter was almost $155 million, compared to EBITDA of about $165 million in Q4 last year. As a reminder, And to put our Q1 result into perspective, our record Q4 EBITDA result benefited from the recognition of almost $32 million of business interruption insurance proceeds related to the Peace River Mills recovery boiler repair. Our pulp segment contributed quarterly EBITDA of roughly $114 million, and our wood product segment contributed near-record quarterly EBITDA of $44 million. You can find additional segment disclosures in our Form 10Q, which can be found on our website and that of the SEC. On average, softwood and hardwood pulp prices in Q1 were higher than Q4 in all of our major markets. The most significant increases were in China, where the Q1 average NBSK net price was $899 per ton, up $176 from Q4. European list prices averaged $1,330 per ton in the current quarter compared to $1,302 per ton in Q4. NBSK remains at a considerable premium to hardwood with the average Q4 net eucalyptus hardwood price in China at $668 per ton up $106 from Q4. In total, Average pulp sales realization movements positively impacted EBITDA by almost $17 million compared to the prior quarter. Despite the railway restrictions, pulp demand was solid in the quarter, which led to higher sales volumes compared to the previous quarter and much lower finished goods inventories. Our Q1 sales totaled 555,000 tons, which was up about 39,000 tons from Q4. We had no planned major maintenance downtime in either Q1 or Q4, but as I mentioned, our Peace River mill reduced production by about 35,000 tons due to continued limitations on the CN rail system. In Q2, we are planning for 39 days or about 51,000 tons of major maintenance downtime at our pulp mills. Our lumber realizations remain strong, but mixed this quarter compared to Q4. In the U.S., we experienced significant price increases. The random lengths benchmark for Western SPF 2 and better averaged $1,274 per thousand board feet in Q1, which was up $563 from last quarter. Our average European sales realizations were down approximately $90 per thousand board feet compared to Q4. Since the end of the quarter, U.S. pricing has come off noticeably and the benchmark lumber price in the U.S. is currently about $1,040 per thousand board feet. Our wood product segment continues to perform well. We sold about 110 million board feet of lumber in the quarter, which was up slightly compared to our Q4 sales volumes. Our electricity sales reflect our strong generation and elevated prices in Europe, where prices in the range of $200 per megawatt hour are twice those of a year ago. Exports to the grid total about 219 gigawatt hours in the quarter, which was up relative to Q4 due to the return of our Rosenthal turbine to service after being down for all of Q4. We reported net income of $88.9 million in the quarter, or $1.35 per basic share, compared to net income of $74.5 million, or $1.13 per basic share in Q4. Cash generated in the quarter totaled approximately $65 million, compared to cash generated of about $7 million in Q4. Cash generation in Q1 was the result of strong EBITDA being partially reduced by working capital movements, primarily in the form of higher accounts receivable balances a consequence of some improvements in logistics channels which began to open up late in the quarter. We invested roughly $33 million of capital in our mills this quarter. We are on target to invest about $175 to $200 million in our operations this year. David will provide an update on our CapEx program in a moment. At the end of the quarter, our strong liquidity position totaled about $692 million, comprised of $411 million of cash and $281 million of undrawn revolvers. Our liquidity position will support our planned working capital movements, along with our ambitious 2022 high return capital spending program. And as you will have noted from our press release, our board has approved a quarterly dividend of 7.5 cents per share for shareholders of record on June 29, 2022, for which payment will be made on July 7, 2022. That ends my overview of the financial results, and I'll now turn the call over to David.

Thanks, Dave. Our solid Q1 operating results were essentially an extension of our Q4 results. Our mills ran well, and we have benefited from particularly strong market conditions for pulp, lumber, and green energy. Although we experienced considerable cost inflation pressures, particularly in natural gas and shipping, the diversity of our products, our locations, and end markets, along with solid cost control measures, allowed us to take full advantage of the strong pricing conditions for our products. Our mill's strong production this quarter, combined with overall steady demand for our products, were key factors in our Q1 results. Global pulp supply demand fundamentals remained tight through Q1, and as a result, Relative to Q4, average pulp prices were up in all markets with the largest increase coming in China. Chinese demand continues to be negatively impacted by pandemic conditions. In other markets, demand has been steady and logistics bottlenecks in certain regions have created extremely tight conditions. In addition, supply reductions due to the Finnish pulp and paper industry strike recently announced reductions in MBSK capacity along with the commencement of the traditional major maintenance season continue to support price increases that have continued into Q2. European hardwood pulp supply will also be negatively affected by the sanctions-related reduction in supply of Russian birch wood. We believe that pulp consumers have low inventory levels, forcing some producers to use additional NBSK in their furnish or slow their machines. Lumber markets also remain strong in the quarter. U.S. lumber pricing approached the near record levels of 2021, before weakening again late in Q1. And while average lumber pricing in Europe weakened modestly during the quarter, both markets remain at historically high levels. The mid-term backdrop for U.S. lumber pricing conditions remains positive, with relatively low housing inventory, strong housing expectations supported by recent statistics, and constructive homeowner demographics. At the same time, the current market volatility is the result of a number of factors, including rising borrowing costs construction being constrained by inflexible supply chains, labor and home construction supply shortages, and inconsistent lumber supply from Canada. Looking ahead, positive home builder sentiment remains despite the expectation that mortgage rates will rise further in 2022, which is consistent with our view that despite these short-term factors, we will continue to see strong lumber demand based on expected steady U.S. home construction. European lumber prices, which often lag those of the US, moderated in Q1, but with the expected strength of the US market, we believe pricing conditions remain favorable. We will continue to optimize our mix of lumber products and customers. In Q1, 42% of our lumber sales volumes were in the US market, with the majority of the remainder of our sales in the European and Japanese markets. Although we feel our logistics strategies put us at a competitive advantage to many of our competitors, We experienced some freight cost increases in Q1. This is primarily the result of increased use of trucking, along with higher warehousing costs in North America caused by pandemic and extreme weather related shipping delays, which continue to negatively impact the availability of rail cars, particularly on the CN network. While we expect this condition or situation to ease over time, the lack of rail car availability will likely persist in the near term as the railway works through its shipping backlogs. Our turbine generator at Rosenthal was put back into service in mid-January and our Q1 results reflect having this asset back online. These current conditions highlight the benefits associated with our modern assets. Fossil fuels are a relatively small source of energy for us, primarily used in our lime kilns as part of our chemical recovery process. While we have been impacted by higher prices for natural gas, Our ability to sell electricity at market prices, which have increased significantly, acts as a powerful hedge against rising gas prices. Our wood product segment achieved another solid production result, producing almost 116 million board feet of lumber in Q1, up 5 million board feet compared to Q4. We're also making great progress on our value-add strategy, employing modern transverse grading, trimming, and sorting equipment. In Germany, we continue to see strong demand for both pulpwood and saw logs, Demand for pulp logs is being driven by pellet producers, as high European energy prices are creating more demand for wood-based heating solutions, which is creating upward pricing pressure. While saw log demand and supply appear to be in balance, we are expecting modest upward pricing pressure for both pulpwood and saw logs in Q2. In Western Canada, as expected, increased harvesting activity and fewer COVID restrictions helped ease pricing pressure, and we expect only modest upward pricing pressure in Q2. As Dave noted we're off to a good start on our 2022 CAPEX program which could approach $200 million, the majority of that being on high return projects that will drive new product development, ESG advances, productivity improvements and input cost reductions. We expect our two new wood rooms at Selgar and Peace River to be completed in the second half 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 at our Frisian mill to maximize the benefits of our new planer by allowing for even greater grade differentiation. And while most of the Stendahl 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. Now, in keeping with our carbon reduction strategy, we are developing a lignin development center as we expect to commence construction of a lignin extraction pilot plant a leading-edge technology and team that will allow us to look at commercialization of derivatives of lignin. And, of course, we remain committed to our approach to solid wood products expansion. We are developing an investment strategy for our mass timber plant in Spokane that will expand that mill's product mix and profitability. While a full ramp-up of the plant will continue for several more quarters, we are progressing well with our long-length finger joint material, and we have delivered our first CLT project. On the human resource side, we've been very actively building out our business development, engineering, and design teams to take advantage of the continued growth in the mass timber space. As we think about climate change and the rapid shift occurring regarding carbon, products like lignin, mass timber, green energy, extractives, lumber, and pulp are all products that will play increasingly important roles in displacing plastics and carbon-intensive products, products like concrete and steel for construction, plastic packaging, fossil fuel generated electricity, and synthetic fragrances and flavors, even synthetic textiles, excuse me, all products that are releasing carbon or ending up on our oceans or our food chain. Fundamental to our strategy is to operate modern facilities and encourage innovation. As you may have seen from our recent press release, our carbon reduction initiatives were recently validated by the Science Based Target Initiative, the leading evaluator of sustainability performance, We're looking forward to the pending release of our 2021 sustainability report, which will be published soon. Our 2022 annual maintenance schedule will be significantly less intensive than 2021 due to the Peace River Recovery Boiler Rebuild being behind us. We did not have any planned maintenance downtime in Q1. 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 15-day shut, and Caribou has a six-day maintenance 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. And now, before I turn the call over for questions, I'd like to take a quick moment on a personal note. As many of you know, I am retiring effective May 1st as Mercer's CEO and President. I'm excited about this next chapter in my life, and I'm looking forward to spending more time with my family. I leave Mercer with a very strong management team, and my successor, Juan Carlos Bueno, is a proven leader in our space. I believe the company is well positioned for future growth. I'll be watching its progress closely, albeit from a distance. I would like to thank our board, my management team, and all of the Mercer employees for the support and dedication. Thanks for listening. Be safe. And now I'll turn the call back to the operator for questions.