Mercer International Inc.

Good morning and welcome to Mercer International's fourth quarter 2023 earnings conference call. On the call today is Juan Carlos Bueno, Mercer's President and Chief Executive Officer, and Richard Short, Mercer's Chief Financial Officer and Secretary. I will now hand the call over to Richard.

Thanks, Abigail. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the fourth quarter before turning the call to Juan Carlos to provide further colour into the markets, our operations and our strategic initiatives. Also, for those of you that have joined today's call by telephone, there is presentation material that we have attached to the investor section of our website. But before turning to our results, I would like to remind you that we will be making forward-looking statements in this morning's conference call 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 the company's financial filings with the Securities and Exchange Commission. This quarter, our EBITDA was $21 million, compared to Q3's EBITDA of $38 million. Higher pulp sales realizations and lower fiber costs were more than offset by the sale of inventory in Q3 that had previously been impaired, as well as increased major maintenance downtime in Q4. In the 2023 fiscal year, we had EBITDA of $17 million compared to EBITDA of $537 million in 2022 due to significantly weaker pulp and lumber markets, lower spot energy prices, and higher fiber costs that impacted the entire industry. Our pulp segment contributed quarterly EBITDA of $32 million, and our solid wood segment EBITDA was negative $6 million. You can find additional segment disclosures in our Form 10-K, which can be found on our website and that of the SEC. In Q4, both our NBSK and NBHK sales realizations increased compared to Q3. We had higher prices in all our markets as customers were restocking, and in Europe, we are benefiting from a modest increase in paper demand. In China, the Q4 average MBSK net price was $748 per ton, up $68 or 10% relative to Q3. European MBSK list price averaged $1,245 per ton in the current quarter, an increase of $85 or 7% from Q3. In China, The Q4 average NBHK net price was $643 per ton, up $113 or about 21% compared to the Q3 average price. The North American average Q4 list price was $1,083 per ton, up $60 or 6% from Q3. As a consequence, the market price gap between NBSK and NBHK in China narrowed to about $105 per ton in Q4 from $150 per ton in Q3. We had increased maintenance downtime in Q4 when compared to Q3. In Q4, we had 23 days of downtime, while in Q3, we had 13 days. The increased scheduled maintenance negatively impacted EBITDA by about $11 million in Q4 when compared to Q3, which was partially offset by the impact of not having any production curtailments in Q4 relative to Q3. After adjusting for planned Schatz and Selgar's Q3 logistics-related curtailment, bulk production was up approximately 11,000 tons from the third quarter. Total pulp sales volumes in the fourth quarter were 491,000 tons, which was flat compared to the third quarter. For our solid wood segment, modest lumber pricing improvements in the U.S. market were more than offset by lower pricing in the European market. Despite the price increases in the U.S., overall lumber demand remains subdued due to high interest rates. The random length U.S. benchmark for Western SPF number two and better was $422 per thousand board feet at the end of Q4, compared to $407 at the end of Q3. Today that benchmark is around $428. We are expecting a modest increase in U.S. lumber prices in the near term, driven by increased house building activity and low housing inventory levels. For the European market, we are expecting prices to remain flat as demand remains weak. Lumber production was 112 million board feet in the quarter, up almost 20% from Q3 due to less scheduled annual maintenance work. Lumber sales volumes were also approximately 112 million board feet, which was essentially flat compared to the prior quarter. Electricity sales totaled 252 gigawatt hours in the quarter, which was about the same as Q3. Pricing in Q4 decreased to about $98 per megawatt hour from $113 in Q3 due to lower spot prices in both Germany and Canada. In Q4, our pulp and solid wood segments had lower fiber costs than Q3 as supply remained stable and the solid wood segment benefited from the availability of lower cost beetle damaged wood in Germany. We currently expect beetle damaged wood to be abundant into 2024 but strong demand for this fiber will likely keep prices from falling significantly. Our solid wood segment continues to ramp up its mass timber operations resulting in a modest positive EBITDA contribution in Q4. Revenues decreased to $15 million in Q4 from $19 million in Q3 due to the timing of projects. This business has grown its order book to almost $100 million and we expect to fulfill the majority of these orders over the course of the coming year. In the fourth quarter, we made the strategic decision to pursue the sale of our sandalwood business, which resulted in the net assets for this business being valued at estimated fair market value and the recording of a non-cash impairment of roughly $34 million, or 51 cents per share. Juan Cartos will have more to say on this shortly. We reported a consolidated net loss of $87 million for the fourth quarter, $1.31 per share compared to a net loss of $26 million or $0.39 per share in Q3. For the full year, we are reporting a consolidated net loss of $242 million or $3.65 per share compared to net income of $247 million or $3.74 per basic share in 2022. We consumed about $30 million of cash in Q4 compared to usage of about $70 million after adjusting for the $200 million senior note offering in Q3. The improved cash usage was driven by a smaller increase in working capital and reduced capex. The fourth quarter working capital increase was primarily the result of increased receivables due to higher pulp prices. In Q4, we invested about $26 million of capital in our mills. Looking ahead, we currently expect capital spending to be between $75 and $100 million in 2024. At the end of Q4, our liquidity position totaled $610 million, comprised of $314 million of cash and about $296 million of undrawn revolvers. Finally, as you would have noted from our press release, our board has approved a quarterly dividend of $0.75 per share for shareholders of record on March 27th. for which payment will be made on April 4th, 2024. That ends my overview of the financial results. I will now turn the call over to Juan Carlos.

Thanks, Rich. Our Q4 results were positively impacted by improved pulp pricing, lower fiber costs, and a modest contribution from our mass timber business. In addition, all our mills went very well this quarter. However, results were lower compared to Q3, due to the impact of non-cash items in Q3 that didn't recur and incremental major maintenance compared to Q3. Overall, even though demand remains weak, we saw small improvements in most of our markets in Q4. The one notable exception was the European lumber market that took a step back after some positive momentum in Q3. Generally speaking, our market dynamics remain unchanged with lower producer inventories and weaker than normal demand. These challenging market conditions have led us to keep a tight handle on CapEx. We closed the year with capital expenditures of roughly $136 million compared to an original target of $200 million at the beginning of the year. Looking ahead to 2024, we're currently targeting between $75 and $100 million of CapEx, as Rich mentioned before. This is essentially a maintenance of business budget. However, we will be monitoring our operating results and could green light additional high return projects should market continue to improve as the year progresses. We will also continue to manage our working capital and costs closely. While we're expecting 2024 to be a significant improvement over 23, we believe the recovery will be gradual. Overall, pulp markets remain weak, but we are seeing some upward pricing pressure in Europe at the moment as a result of a slight uptick in demand, while in China, the lunar year holiday has, as expected, limited buying activity. Looking ahead to 2024, we believe that the roughly 1 million tons of softwood production that has been either permanently or indefinitely shuttered will be put upward pressures on prices. However, we don't see prices moving significantly until demand noticeably improves. On the demand side, European paper producers have increased production on slightly higher paper demand, but have continued to run at lower than normal rates as their economy remains weak. Similarly, in China, the government is pushing and pursuing measured economic stimulus steps, but weak economic conditions continue. Looking forward, we expect pulp prices to continue to slowly increase globally as reduced supply chain supports modest price improvements. Our mills ran very well in the quarter. When comparing Q3 to Q4, remember that Selgar took a 26-day curtailment as a result of the British Columbia port strike in Q3, and Rosenthal took a 13-day major maintenance shut while in Q4, Selgar plummeted took a major maintenance shut, totally 22 days, and Stendhal took one day for maintenance. Looking forward into 2024, we have no maintenance shut scheduled for Q1, and we're expecting a normal maintenance year with the exception of Selgar that has moved to an 18-month major maintenance schedule. In Q2 of 2024, Peace River will have a 16-day maintenance shut and Stenda will take a 14-day shut, which combined, this downtime equals to roughly 56,000 tons. In Q3 of 2024, Rosenthal will take a 14-day maintenance shut, and Selgar will take a short four-day mini shut, which amounts combined to about 20,000 tons. Moving on to our solid wood segment, Our fourth quarter reflected improved lumber and mass timber results. The U.S. market was up slightly on average, while the European market was down compared to Q3. Although high interest rates continue to weigh on housing starts and construction in general, we are expecting U.S. lumber pricing to improve slightly as we move into the spring building season. We're expecting the European lumber market to remain weak in the first half of 2024. We continue to believe that low lumber channel inventories, the large number of sawmill curtailments, relatively low housing stock, wood shortages created by recent Canadian forest fires, and homeowner demographics are still very strong fundamentals for the construction industry, and this will put positive pressure on the supply-demand balance of this business in the midterm. We will continue to optimize our mix of lumber products and customers to current market conditions. In Q4, 39% of our lumber sales volumes was sold in the U.S. market, with a remainder sold in the European and other markets. The integration of Torgau continues to progress well. Shipping pallets remain weak on the back of a weak European economy overall. Heating pallet prices were down in Q4 due to warm winter weather. Once the European economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value. In addition, the integration of the recently acquired mass timber assets continues to progress as planned. We now have roughly 35% of North American mass timber production capacity, a broader range of product offerings, and a much larger geographic footprint that gives us competitive access to the entire North American market. We continue to see strong customer interest in our mass timber products, which has allowed us to build a significant order file. At the end of December, our order file totaled almost $100 million. In addition, our mass timber business contributed a modest positive EBDA in Q4 as planned. We expect EBDA for this business to grow in 2024 as we continue to ramp up. Moving on to costs of fiber, overall we experienced a decrease in pulp wood prices in Q4. In Germany, a steady supply of sawmill chips resulted in cost decreases while work done on our Canadian mills including the ramp up of Peace River's wood room and the renegotiation of contracts in Selgar pushed our fiber costs down in Q4. Looking ahead, we expect further modest declines in pulpwood and saw log costs at our mills in early 2024. In Q4, as Rich mentioned before, we made the decision to sell our sandalwood business in Australia. Although we believe that in fullness of time this business will be a positive cash flow generator, it no longer fits our strategic direction. A process is underway to sell this business, and we hope to have more to say about this in the coming months. Our new lignin extraction plant, pilot plant, continues its ramp-up as planned. As a reminder, this new lignin pilot plant is a large step towards Mercer being able to begin commercializing lignin. We're excited about the future prospects of this product as a sustainable alternative to fossil fuel-based products. such as in adhesives and advanced battery elements, to name only a few. This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a circular carbon economy. As the world becomes more sensitive to reducing carbon emissions, we believe that products like lignin, mass timber, green energy, lumber, and pulp will play increasingly important roles in displacing carbon-intensive products products like concrete and steel for construction or plastic for packaging. Furthermore, the potential demand for sustainable fossil fuel substitutes is very significant and has the potential to be transformative to the wood products industry. We're committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, We believe that in the fullness of time, demand for low-carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions. We remain bullish on the long-term value of pulp and are committed to better balance our company through faster growth in our lumber and mass timber businesses. In closing, we're happy to have 2023 behind us. Although we continue to predict a slow recovery in 2024, we do expect a much stronger financial result. We will remain focused on our cost reduction, CAPEX, and working capital and initiatives while we navigate this period of relatively low pulp and lumber prices. We will continue to work on rebalancing our assets in line with the execution of our strategic plan and will continue to manage our cash and liquidity prudently. Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.

Thank you. At this time, we'll conduct the question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question comes from Hamir Patel with CIBC Capital Markets. Your line is open. Hi.

Good morning. One, Carlos, could you comment on how you would see wood costs and fiber availability trending across your European fiber baskets for both pulpwood and saw logs in coming years, just as the effects of the spruce beetle play out?

Of course, Emil. Thank you. Good question, because this is obviously a very significant element of our cost structure. And there's some important developments on that end. We know that calamity wood in Germany is obviously a very significant factor that we've already seen some of the benefits of it in the later part of 2023. And we're seeing still some of those benefits in 2024. So we are expecting a continued decrease, slight decrease on the cost of fiber overall. both for pulp and lumber. It is important to say though that obviously this calamity wood, especially in Germany, it has created quite a significant amount of buzz and demand. So even though there's plenty of it, there's also an uptick in demand as people obviously prefer to go for this lower priced wood. So we don't expect necessarily prices to collapse, but yes, there is a there's a positive trend for us with lower prices coming overall. So in that sense, I think it's positive what we see coming in the months to come. But I'm cautious as to how big that drop will be.

Okay, great. Thanks. That's helpful. And just want to ask about on the lumber side, what impact you would expect the Red Sea disruptions to have on European lumber exports and whether you think more of that wood gets perhaps redirected to the U.S.?

In the case of the Red Sea, the impacts that we're seeing right now, Hamir, are more on the pulp side than on the lumber side. in our lumber business, when we don't ship to the U.S., we're usually focusing on the European market to a large extent. So then the impact is much more limited. In the case of pulp, we do have a bit more of an impact, even though that impact is now translated in probably a small uptick in the actual logistic cost, but it's very relative still, relatively small at this time, and obviously added transit time, which if you put it from a flip side, it means more tightened supply into China, which is not at all bad. It creates this sentiment of a little bit more tightness in the market if there's delays in shipments. So Really, the impact so far is very small, and we hope it stays this way, obviously.

Fair enough. Thanks for calling us. I'll turn it over.

One moment for our next question. Our next question comes from Richard Stevens with Amundi USA. Your line is open.

Hi, and thanks for taking my question. I had two questions, just one more housekeeping. I think you mentioned that the revolver availability was $296 million. My sense is that there are no covenant limitations on that availability. Is that correct?

That's correct, generally. There's a cap on the Canadian revolver, but we factored that into that number.

Got it. Okay. And the next question I had was more from a historical perspective. Obviously, you're at the bottom of the cycle at the moment. Typically, how long do these cycles last? Have you seen in the past? I know there was a bit of a one, I want to say, going back to maybe 2018-19 and maybe some earlier in the decade there. But typically, when you go through these cycles, you know, you mentioned there's been over a million tons of capacity that's been shut in and How long typically does the cycle last? How many quarters, just to get a sense?

Normally, when we look at cycles, these pop cycles, they can easily have four years, three years in duration, and in some cases, a bit more than that. So it really, we don't, it's not a mathematical equation behind them, obviously, but yeah, there's a few years in behind them. So that's why when we think about cycles, what the future holds for us. I think we're looking into a recovery, partial recovery in 24, a much healthier 25 and 26. That's a little bit of what we have in our plans. And when we look at some of the analysts' projections, particularly for pulp, we see the same thing. Everybody projecting almost in a very coherent way pricing picking up in the next few years.

Got it. Okay, that's very helpful. That's all I had. Thank you.

One moment for our next question. Our next question comes from Kasia Taraski-Kopitek with TD Securities. Your line is open.

Hey there. Good morning, everyone. A couple questions. Maybe starting with pulp markets, it seems like pulp mill inventories are decently balanced at this point. Can you speak to where buyer inventories are, talking about China and Europe?

Yeah, I think the situation on inventories is quite balanced, probably more to our favor at this time of the year. In terms of producer inventories, when you look at the recently revealed statistics that show 40 days on average for softwood, That's in good levels, relatively low levels and proper. When you think about customer inventory, we believe that the situation in China is a bit more uncertain. There might be more inventory there and actually as they came into the new year celebration, obviously they were stacking up with inventory prior to that. We saw very big swings of product in the last quarter of the year into China in preparation for the for the New Year, so obviously there's a lot of expectations on what will happen demand-wise once that New Year celebration is past us and how demand will pick up from that point onwards. What we do see is an important demand uptake in Europe, and this, again, is coming from a very, very low level. So when we think about our customers that are running their paper machines, they're running better than they were running before, but again, coming from very low levels. So it's far from being what the market traditionally is, and that's why we think there's a very significant upside. If the European economy comes back and paper comes back, that would be a very significant factor in what we would believe to be then a much stronger price recovery. Because again, as you well said, the tightness in supply is there. There's so many mills that have closed down, so much capacity, almost a million tons of capacity of software that has been shut, that there's not a whole lot of supply out there to cope with an increment in demand. So it won't take a whole lot for this thing to actually... move into a much stronger price schedule for us. But again, we need Europe to wake up strongly and China to come back after the new year in a better situation.

Okay, thanks for that. And what are your freight costs right now for delivering lumber from Europe to the eastern seaboard per thousand?

Yeah. That's a good question, Kasia. It's probably around $100 a thousand board feet.

A hundred? Okay. And Richard, that includes the land over land transportation as well?

Yes, that would be all in.

Okay, great. One last question. Just switching gears to the mass timber markets, you indicated, you know, you're expecting this to trend favorably going forward over the next year. Any numbers you can put around that? Maybe a cadence for how you expect the revenue to grow from here and then any potential EBITDA contributions that you would expect?

Yeah, on Mass Timber, as I said, and Richard as well, we're very excited about how this business is progressing. The order book is a great indicator of it. If you think about Where our order book was in Q3, we had $54 million of projects locked in that we would then start executing from that point onwards. In Q4, we not only executed part of those $56 million projects, but we closed with almost $100 million of projects in the order book. That gives us a very strong confidence to believe that if we close this year with about $60-plus million in sales, next year it would be at least twice that amount. And when we look at our capacity with the sites that we have, we know that by building up gradually and continuing to ramp up those mills in a way that we can add more shifts later down as time progresses, this is a business that just with our setup could provide us sales of at least $500 million a few years down the road. So the assets that we have provide us for that growth trend for us to work on. Margin-wise, this is meant to be, obviously, this is not a commodity business. This is more of a specialties business. And we look at EBDR margins around 20%, 25% in the long run. So that's what we expect of this business going forward.

Okay, and just a quick follow-up. So your order book right now is $100 million and appreciating it takes a while to actually lock in the order. What is the size of the sales that you're going after right now that you haven't locked in yet that you're pursuing? What potential order book size would that be?

No, what we want to do is, for example, for this year, we're very confident that as quarters progress, our order book will continue to increase. We keep on executing on projects, so that reduces the order book, and at the same time, we lock in future projects, and that makes it continue to grow. When I'm talking that we have $100 or close to $100 million in order book, not all of that is into 2024. So some of those projects are already looking into 2025, so you have locked-in projects that will already go beyond the one year. So that's the way this thing works. You have quite a bit of lead time in some cases, and it's all tied up to the individual schedules of these projects. So we will continue to grow. We will bring more projects into 2024 that will allow us, as I said, to double our projects. our revenue this year versus 2023. And, and for sure, keep on the pace that this industry is showing overall, when you look at the mass timber industry in the in North America, it's growing at more than 20% a year, as a matter of fact, so so this is a very significant growth engine for us. And obviously, we intend to ride that wave and, and do investments in our facilities to make sure they're even more and more cost competitive so we can take full advantage of those opportunities ahead of us.

Okay, awesome. Thanks, everyone. That's all I had. Have a great weekend.

Thanks. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from Sam McGovern with UBS. Your line is open.

Hi, guys. Good morning. With regard to the sale of the Sandalwood business, any plans in terms of what you're doing with the cash that comes in? Is it just reinvest in the business to increase liquidity, or is there anything else that you're planning to do with that?

Simon, as it comes to that, obviously we have some interesting growth projects that we're given all the unrest that we went through in 2023, a lot of projects that we kind of put on hold and we're very eager to bring them back in. So that is obviously part of the equation. As we see the year progresses and we see what we believe to be an improvement overall in on how the market prices behave. Obviously, this will be something that we will be keeping an eye on so that we can bring some more of these CAPEX projects to fruition. The sandalwood sale process will obviously add to that picture. So we see ourselves looking into what other potential projects we can bring forward that can have a good and quick return for our company, and we have quite a bit lined up. There's so many things that we want to do in Torgal to increase our lumber production there with a very quick payback, and obviously mass timber to increase the competitiveness over there. So yeah, there's plenty of things that we can work on if we hold additional cash in hand.

Awesome. Thank you very much. I'll pass it on.

Thank you. That concludes the question and answer session. At this time, I would like to turn the call back to Juan Carlos for closing remarks.

Okay. Thank you, Abigail. And thanks to all of you for joining our call. Rich and I are available to talk more at any time, so please don't hesitate to call any one of us. Otherwise, we look forward to speaking to you again on our next earnings call in May. Bye for now.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. you Bye. Thank you. Thank you. Good morning, and welcome to Mercer International's fourth quarter 2023 earnings conference call. On the call today is Juan Carlos Bueno, Mercer's President and Chief Executive Officer, and Richard Short, Mercer's Chief Financial Officer and Secretary. I will now hand the call over to Richard.

Thanks, Abigail. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the fourth quarter before turning the call to Juan Carlos to provide further colour into the markets, our operations and our strategic initiatives. Also, for those of you that have joined today's call by telephone, there is presentation material that we have attached to the investor section of our website. But before turning to our results, I would like to remind you that we will be making forward-looking statements in this morning's conference call 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 the company's financial filings with the Securities and Exchange Commission. This quarter, our EBITDA was $21 million, compared to Q3's EBITDA of $38 million. Higher pulp sales realizations and lower fiber costs were more than offset by the sale of inventory in Q3 that had previously been impaired, as well as increased major maintenance downtime in Q4. In the 2023 fiscal year, we had EBITDA of $17 million compared to EBITDA of $537 million in 2022 due to significantly weaker pulp and lumber markets, lower spot energy prices, and higher fiber costs that impacted the entire industry. Our pulp segment contributed quarterly EBITDA of $32 million, and our solid wood segment EBITDA was negative $6 million. You can find additional segment disclosures in our Form 10-K, which can be found on our website and that of the SEC. In Q4, both our NBSK and NBHK sales realizations increased compared to Q3. We had higher prices in all our markets as customers were restocking, and in Europe, we are benefiting from a modest increase in paper demand. In China, the Q4 average MBSK net price was $748 per ton, up $68 or 10% relative to Q3. European MBSK list price averaged $1,245 per ton in the current quarter, an increase of $85 or 7% from Q3. In China, The Q4 average NBHK net price was $643 per ton, up $113 or about 21% compared to the Q3 average price. The North American average Q4 list price was $1,083 per ton, up $60 or 6% from Q3. As a consequence, the market price gap between NBSK and NBHK in China narrowed to about $105 per ton in Q4 from $150 per ton in Q3. We had increased maintenance downtime in Q4 when compared to Q3. In Q4, we had 23 days of downtime, while in Q3, we had 13 days. The increased scheduled maintenance negatively impacted EBITDA by about $11 million in Q4 when compared to Q3, which was partially offset by the impact of not having any production curtailments in Q4 relative to Q3. After adjusting for planned Schatz and Selgar's Q3 logistics-related curtailment, pulp production was up approximately 11,000 tons from the third quarter. Total pulp sales volumes in the fourth quarter were 491,000 tons, which was flat compared to the third quarter. For our solid wood segment, modest lumber pricing improvements in the U.S. market were more than offset by lower pricing in the European market. Despite the price increases in the U.S., overall lumber demand remains subdued due to high interest rates. The random length U.S. benchmark for Western SPF number two and better was $422 per thousand board feet at the end of Q4, compared to $407 at the end of Q3. Today that benchmark is around $428. We are expecting a modest increase in U.S. lumber prices in the near term, driven by increased house building activity and low housing inventory levels. For the European market, we are expecting prices to remain flat as demand remains weak. Lumber production was 112 million board feet in the quarter, up almost 20% from Q3 due to less scheduled annual maintenance work. Lumber sales volumes were also approximately 112 million board feet, which was essentially flat compared to the prior quarter. Electricity sales totaled 252 gigawatt hours in the quarter, which was about the same as Q3. Pricing in Q4 decreased to about $98 per megawatt hour from $113 in Q3 due to lower spot prices in both Germany and Canada. In Q4, our pulp and solid wood segments had lower fiber costs than Q3 as supply remained stable and the solid wood segment benefited from the availability of lower cost beetle damaged wood in Germany. We currently expect beetle damaged wood to be abundant into 2024 but strong demand for this fiber will likely keep prices from falling significantly. Our solid wood segment continues to ramp up its mass timber operations resulting in a modest positive EBITDA contribution in Q4. Revenues decreased to $15 million in Q4 from $19 million in Q3 due to the timing of projects. This business has grown its order book to almost $100 million and we expect to fulfill the majority of these orders over the course of the coming year. In the fourth quarter, we made the strategic decision to pursue the sale of our sandalwood business, which resulted in the net assets for this business being valued at estimated fair market value and the recording of a non-cash impairment of roughly $34 million, or 51 cents per share. Juan Cartos will have more to say on this shortly. We reported a consolidated net loss of $87 million for the fourth quarter, $1.31 per share compared to a net loss of $26 million or $0.39 per share in Q3. For the full year, we are reporting a consolidated net loss of $242 million or $3.65 per share compared to net income of $247 million or $3.74 per basic share in 2022. We consumed about $30 million of cash in Q4 compared to usage of about $70 million after adjusting for the $200 million senior note offering in Q3. The improved cash usage was driven by a smaller increase in working capital and reduced capex. The fourth quarter working capital increase was primarily the result of increased receivables due to higher pulp prices. In Q4, we invested about $26 million of capital in our mills. Looking ahead, we currently expect capital spending to be between $75 and $100 million in 2024. At the end of Q4, our liquidity position totaled $610 million, comprised of $314 million of cash and about $296 million of undrawn revolvers. Finally, as you would have noted from our press release, our board has approved a quarterly dividend of $0.75 per share for shareholders of record on March 27th. for which payment will be made on April 4th, 2024. That ends my overview of the financial results. I will now turn the call over to Juan Carlos.

Thanks, Rich. Our Q4 results were positively impacted by improved pulp pricing, lower fiber costs, and a modest contribution from our mass timber business. In addition, all our mails went very well this quarter. However, results were lower compared to Q3, due to the impact of non-cash items in Q3 that didn't recur and incremental major maintenance compared to Q3. Overall, even though demand remains weak, we saw small improvements in most of our markets in Q4. The one notable exception was the European lumber market that took a step back after some positive momentum in Q3. Generally speaking, our market dynamics remain unchanged, with lower producer inventories and weaker than normal demand. These challenging market conditions have led us to keep a tight handle on CapEx. We closed the year with capital expenditures of roughly $136 million compared to an original target of $200 million at the beginning of the year. Looking ahead to 2024, we're currently targeting between $75 and $100 million of CapEx, as Rich mentioned before. This is essentially a maintenance of business budget. However, we will be monitoring our operating results and could green light additional high return projects should market continue to improve as the year progresses. We will also continue to manage our working capital and costs closely. While we're expecting 2024 to be a significant improvement over 23, we believe the recovery will be gradual. Overall, pulp markets remain weak, but we are seeing some upward pricing pressure in Europe at the moment as a result of a slight uptick in demand. While in China, the lunar year holiday has, as expected, limited buying activity. Looking ahead to 2024, we believe that the roughly 1 million tons of softwood production that has been either permanently or indefinitely shuttered will be put upward pressures on prices. However, we don't see prices moving significantly until demand noticeably improves. On the demand side, European paper producers have increased production on slightly higher paper demand, but continue to run at lower than normal rates as their economy remains weak. Similarly, in China, the government is pushing and pursuing measured economic stimulus steps, but weak economic conditions continue. Looking forward, we expect pulp prices to continue to slowly increase globally as reduced supply chain supports modest price improvements. Our mills ran very well in the quarter when comparing Q3 to Q4. Remember that Selgar took a 26-day curtailment as a result of the British Columbia port strike in Q3, and Rosenthal took a 13-day major maintenance shut while in Q4, Selgar plummeted took a major maintenance shut totally 22 days and Stendhal took one day for maintenance. Looking forward into 2024, we have no maintenance shut scheduled for Q1 and we're expecting a normal maintenance year with the exception of Selgar that has moved to an 18-month major maintenance schedule. In Q2 of 2024, Peace River will have a 16-day maintenance shut and Stenda will take a 14-day shut, which combined, this downtime equals to roughly 56,000 tons. In Q3 of 2024, Rosenthal will take a 14-day maintenance shut, and Selgar will take a short four-day mini shut, which amounts combined to about 20,000 tons. Moving on to our solid wood segment, our fourth quarter reflected improved lumber and mass timber results. The US market was up slightly on average, while the European market was down compared to Q3. Although high interest rates continue to weigh on housing starts and construction in general, we are expecting US lumber pricing to improve slightly as we move into the spring building season. We're expecting the European lumber market to remain weak in the first half of 2024. We continue to believe that low lumber channel inventories, the large number of sawmill curtailments, relatively low housing stock, wood shortages created by recent Canadian forest fires, and homeowner demographics are still very strong fundamentals for the construction industry, and this will put positive pressure on the supply-demand balance of this business in the midterm. We will continue to optimize our mix of lumber products and customers to current market conditions. In Q4, 39% of our lumber sales volumes was sold in the U.S. market, with a remainder sold in the European and other markets. The integration of Torgau continues to progress well. Shipping pallets remain weak on the back of a weak European economy overall. Heating pallet prices were down in Q4 due to warm winter weather. Once the European economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value. In addition, the integration of the recently acquired mass timber assets continues to progress as planned. We now have roughly 35% of North American mass timber production capacity, a broader range of product offerings, and a much larger geographic footprint that gives us competitive access to the entire North American market. We continue to see strong customer interest in our mass timber products, which has allowed us to build a significant order file. At the end of December, our order file totaled almost $100 million. In addition, our mass timber business contributed a modest positive EBDA in Q4 as planned. We expect EBDA for this business to grow in 2024 as we continue to ramp up. Moving on to costs of fiber, overall we experienced a decrease in pulp wood prices in Q4. In Germany, a steady supply of sawmill chips resulted in cost decreases while work done on our Canadian mills during the ramp up of Peace River's wood room and the renegotiation of contracts in Selgar pushed our fiber costs down in Q4. Looking ahead, we expect further modest declines in pulpwood and saw log costs at our mills in early 2024. In Q4, as Rich mentioned before, we made the decision to sell our sandalwood business in Australia. Although we believe that in fullness of time this business will be a positive cash flow generator, it no longer fits our strategic direction. A process is underway to sell this business, and we hope to have more to say about this in the coming months. Our new lignin extraction plant, pilot plant, continues its ramp up as planned. As a reminder, this new lignin pilot plant is a large step towards Mercer being able to begin commercializing lignin. We're excited about the future prospects of this product as a sustainable alternative to fossil fuel-based products. such as in adhesives and advanced battery elements, to name only a few. This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a circular carbon economy. As the world becomes more sensitive to reducing carbon emissions, we believe that products like lignin, mass timber, green energy, lumber, and pulp will play increasingly important roles in displacing carbon-intensive products products like concrete and steel for construction or plastic for packaging. Furthermore, the potential demand for sustainable fossil fuel substitutes is very significant and has the potential to be transformative to the wood products industry. We're committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, We believe that in the fullness of time, demand for low-carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions. We remain bullish on the long-term value of pulp and are committed to better balance our company through faster growth in our lumber and mass timber businesses. In closing, we're happy to have 2023 behind us. Although we continue to predict a slow recovery in 2024, we do expect a much stronger financial result. We will remain focused on our cost reduction, CAPEX, and working capital and initiatives while we navigate this period of relatively low pulp and lumber prices. We will continue to work on rebalancing our assets in line with the execution of our strategic plan and will continue to manage our cash and liquidity prudently. Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.

Thank you. At this time, we'll conduct the question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. Our first question comes from Hamir Patel with CIBC Capital Markets. Your line is open.

Hi, good morning. One caller, could you comment on how you would see wood costs and fiber availability trending across your European fiber baskets for both pulpwood and saw logs in coming years, just as the effects of the spruce beetle play out?

Of course, Anil. Thank you. Good question, because this is obviously a very significant element of our cost structure. And there's some important developments on that end. We know that calamity wood in Germany is obviously a very significant factor that we're already seeing some of the benefits of it in the later part of 2023. And we're seeing still some of those benefits in 2024. So we are expecting a continued decrease, slight decrease on the cost of fiber overall both for pulp and lumber. It is important to say though that obviously this calamity wood, especially in Germany, it has created quite a significant amount of buzz and demand. So even though there's plenty of it, there's also an uptick in demand as people obviously prefer to go for this lower priced wood. So we don't expect necessarily prices to collapse, but yes, there is a there's a positive trend for us with lower prices coming overall. So in that sense, I think it's positive what we see coming in the months to come. But I'm cautious as to how big that drop will be.

Okay, great. Thanks. That's helpful. And just want to ask about on the lumber side, what impact you would expect the Red Sea disruptions to have on European lumber exports and whether you think more of that wood gets perhaps redirected to the U.S.?

In the case of the Red Sea, the impacts that we're seeing right now, Hamir, are more on the pulp side than on the lumber side. in our lumber business, when we don't ship to the U.S., we're usually focusing on the European market to a large extent. So then the impact is much more limited. In the case of pulp, we do have a bit more of an impact, even though that impact is now translated in probably a small uptick in the actual logistic cost, but it's very relative still, relatively small at this time, and obviously added transit time, which if you put it from a flip side, it means more Titan supply into China, which is not at all bad. It creates this sentiment of a little bit more Titans in the market if there's delays in shipments. So Really, the impact so far is very small, and we hope it stays this way, obviously.

Okay, fair enough. Thanks for calling us. I'll turn it over.

One moment for our next question. Our next question comes from Richard Stevens with Amundi USA. Your line is open.

Hi, and thanks for taking my question. I had two questions, just one more housekeeping. I think you mentioned that the revolver availability was $296 million. My sense is that there are no covenant limitations on that availability. Is that correct?

That's correct, generally. There's a cap on the Canadian revolver, but we factored that into that number.

Got it. Okay. And the next question I had was more from a historical perspective. Obviously, you're at the bottom of the cycle at the moment. Typically, how long do these cycles last? Have you seen in the past? I know there was a bit of a one, I want to say, going back to maybe 2018, 19, and maybe some earlier in the decade there. But typically, when you go through these cycles, you mentioned there's been over a million tons of capacity that's been shut in and How long typically does the cycle last? How many quarters, just to get a sense?

Normally, when we look at cycles, these pop cycles, they can easily have four years, three years in duration, and in some cases, a bit more than that. So it really, we don't, it's not a mathematical equation behind them, obviously, but yeah, there's a few years in behind them. So that's why when we think about what the future holds for us. I think we're looking into a recovery, partial recovery in 24, a much healthier 25 and 26. That's a little bit of what we have in our plans. And when we look at some of the analysts' projections, particularly for pulp, we see the same thing. Everybody projecting almost in a very coherent way pricing picking up in the next few years.

Got it. Okay, that's very helpful. That's all I had. Thank you.

One moment for our next question. Our next question comes from Kasia Taraski-Kopitek with TD Securities. Your line is open.

Hey there. Good morning, everyone. A couple questions. Maybe starting with pulp markets, it seems like pulp mill inventories are decently balanced at this point. Can you speak to where buyer inventories are, talking about China and Europe?

Yeah, I think the situation on inventories is quite balanced, probably more to our favor at this time of the year. In terms of producer inventories, when you look at the recently revealed statistics that show 40 days on average for softwood, That's in good levels, relatively low levels and proper. When you think about customer inventory, we believe that the situation in China is a bit more uncertain. There might be more inventory there and actually as they came into the new year celebration, obviously they were stacking up with inventory prior to that. We saw very big swings of product in the last quarter of the year into China in preparation for the for the new year so obviously there's a lot of expectations on what will happen demand wise once that new year celebration is past us and how demand will pick up from that point onwards what we do see is an important demand uptake in Europe and this again is coming from a very very low level so when we think about our customers that are running their paper machines they're running at a better than they were running before, but again, coming from very low levels. So it's far from being what the market traditionally is. And that's why we think there's a very significant upside. If paper, if the European economy comes back and paper comes back, that would be a very significant factor in what we would believe to be then a much stronger price recovery. Because again, as you well said, the tightness in supply is there. There's so many mills that have closed down, so much capacity, almost a million tons of capacity of software that has been shut, that there's not a whole lot of supply out there to cope with an incremental demand. So it won't take a whole lot for this thing to actually move into a much stronger price schedule for us. But again, we need Europe to... to wake up strongly and China to come back after the new year in a better situation.

Okay, thanks for that. And how much, what are your freight costs right now for delivering lumber from Europe to the eastern seaboard per thousand?

That's a good question, Kasia. It's probably around $100 a thousand board feet.

100. Okay. And Richard, that includes the land over land transportation as well?

Yes, that would be all in.

Okay, great. One last question. Just switching gears to the mass timber markets, you indicated you're expecting this to trend favorably going forward over the next year. Any numbers you can put around that? Maybe a cadence for how you expect the revenue to grow from here and then any potential EBITDA contributions that you would expect?

Yeah, on Mass Timber, as I said and Richard as well, we're very excited about how this business is progressing. The order book is a great indicator of it. If you think about Where our order book was in Q3, we had $54 million of projects locked in that we would then start executing from that point onwards. In Q4, we not only executed part of those $56 million projects, but we closed with $100 million or almost $100 million of projects in the order book. That gives us a very strong confidence to believe that if we close this year with about $60 plus million in sales, next year it would be at least twice that amount. And when we look at our capacity with the sites that we have, we know that by building up gradually and continuing to ramp up those mills in a way that we can add more shifts later down as time progresses, this is a business that just with our setup could provide us sales of at least $500 million a few years down the road. So the assets that we have provide us for that growth trend for us to work on. Margin-wise, this is meant to be, obviously, this is not a commodity business. This is more of a specialties business. And we look at EBDR margins around 20%, 25% in the long run. So that's what we expect of this business going forward.

Okay, and just a quick follow-up. So your order book right now is $100 million and appreciating it takes a while to actually lock in the order. What is the size of the sales that you're going after right now that you haven't locked in yet that you're pursuing? What potential order book size would that be?

No, what we want to do is, for example, for this year, we're very confident that as quarters progress, our order book will continue to increase. We keep on executing on projects, so that reduces the order book, and at the same time, we lock in future projects, and that makes it continue to grow. When I'm talking that we have $100 or close to $100 million in order book, not all of that is into 2024. So some of those projects are already looking into 2025. So you have locked-in projects that will already go beyond the one year. So that's the way this thing works. You have quite a bit of lead time in some cases, and it's all tied up to the individual schedules of these projects. So we will continue to grow. We will bring more projects into 2024 that will allow us, as I said, to double our projects. our revenue this year versus 2023. And, and for sure, keep on the pace that this industry is showing overall, when you look at the mass timber industry, and in the in North America, it's growing at more than 20% a year, as a matter of fact, so so this is a very significant growth engine for us. And obviously, we intend to ride that wave and and do investments in our facilities to make sure they're even more and more cost competitive so we can take full advantage of those opportunities ahead of us.

Okay, awesome. Thanks, everyone. That's all I had. Have a great weekend.

Thanks.

As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from Sam McGovern with UBS. Your line is open.

Hi, guys. Good morning. With regard to the sale of the Sandalwood business, any plans in terms of what you're doing with the cash that comes in? Is it just reinvest in the business to increase liquidity, or is there anything else that you're planning to do with that?

Simon, as it comes to that, obviously we have some interesting growth projects that we're given all the unrest that we went through in 2023, a lot of projects that we kind of put on hold and we're very eager to bring them back in. So that is obviously part of the equation. As we see the year progresses and we see what we believe to be an improvement overall in and how the market prices behave. Obviously, this will be something that we will be keeping an eye on so that we can bring some more of these CAPEX projects to fruition. The sandalwood sale process will obviously add to that picture. So we see ourselves looking into what other potential projects we can bring forward that can have a good and quick return for our company, and we have quite a bit lined up. There's so many things that we want to do in Torgal to increase our lumber production there with a very quick payback, and obviously mass timber to increase the competitiveness over there. So yeah, there's plenty of things that we can work on if we hold additional cash in hand.

Awesome. Thank you very much. I'll pass it on.

Thank you. That concludes the question and answer session. At this time, I would like to turn the call back to Juan Carlos for closing remarks.

Okay. Thank you, Abigail. And thanks to all of you for joining our call. Rich and I are available to talk more at any time, so please don't hesitate to call any one of us. Otherwise, we look forward to speaking to you again on our next earnings call in May. Bye for now.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.