Mercer International Inc.

Good morning, and welcome to Mercer International's second quarter 2024 earnings conference call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International, and Robert Short, CFO and Secretary. I will now hand the call over to Richard Short.

Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the second quarter before turning the call over to Juan Carlos to provide further color into the markets, our operations, and our strategic initiatives. Also, for those of you that have joined the call today 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 in the company's filings with the Securities and Exchange Commission. This quarter, our EBITDA totaled $30 million, compared to Q1's EBITDA of $64 million. The lower results were driven by 37 days of planned major maintenance downtime split between two mills compared to no downtime in Q1. We estimate the planned downtime adversely impacted our EBITDA by approximately $60 million. After adjusting for the planned maintenance downtime impact, the improved operating results were primarily driven by higher pulp sales realizations. Our pulp segment contributed quarterly EBITDA of $32 million and our solid wood segment contributed quarterly EBITDA of $3 million. You can find additional segment disclosures in our Form 10-Q, which can be found on our website and the SECs. Strong demand for pulp in Q2, combined with softwood supply interruptions in Finland, pushed prices higher than Q1 in all our major markets. In China, the Q2 average MBSK net price was $811 per ton, up $66 from Q1. European MBSK list prices averaged $1,602 per ton in the current quarter, an increase of $202 from Q1. And the North American MBSK list price averaged $1,697 per ton in the current quarter, an increase of $257 from Q1. The North American NBHK average Q2 list price was $1,437 per ton. up $214 from Q1. The price gap between softwood and hardwood pulp narrowed slightly this quarter in China, with the average Q2 net eucalyptus hardwood price at $735 per ton, up $73 from Q1. Total pulp sales volumes in the second quarter decreased by 132,000 tons to 433,000 tons, driven by lower production from planned maintenance downtime and the disposition of our equity interest in the Caribou Mill at the end of Q1. All our mills ran well this quarter. In Q2, we had a total of 44 days of downtime at our mills, which included the 37 days for planned annual maintenance and seven days due to slower than expected startups. In Q1, we had no planned maintenance downtime. After adjusting for the planned maintenance and impact of the disposition of our equity interest in the Caribou Mill at the end of Q1, pulp production was flat from the first quarter. For our solid wood segment, lumber pricing was mostly flat as modestly higher prices in Europe were offset by lower prices in the U.S. market. Overall, in Q2, lumber markets remained weak. The Random Links U.S. benchmark for Western SPF No. 2 and better average price was $386 per thousand board feet in Q2 compared to $447 in Q1. Today, that average benchmark price for Western SPF and better is around $355 per thousand board feet, about 16% decrease from the beginning of Q2. For Q3, we are expecting generally flat lumber prices in the U.S. and European markets as demand is expected to remain weak. In the second quarter, we recognized a non-cash goodwill impairment of $34 million, or $0.51 per share, related to the Torgal facility as a result of ongoing weakness in the European lumber, pallet, and biofuel markets. Juan Cardos will have more to say on this in a moment. Lumber production for Q2 was 111 million board feet, down 12% due to planned maintenance. Lumber sales volumes were 117 million board feet in Q2, down 4% reflecting the lower production. Our consolidated electricity sales volume totaled 219 gigawatt hours in the quarter, down about 41 gigawatt hours from Q1, reflecting the lower production at our mills. Pricing in Q2 was essentially flat at about $91 per megawatt hour from $94 in Q1. In Q2, our pulp and solid wood segments fiber costs were both flat compared to Q1 as supply remained stable. Production for our solid wood segments mass timber operations was strong in Q2 at 11,000 cubic meters, an increase of about 54% from Q1 due to the timing of mass timber projects. We reported a consolidated net loss of $68 million for the second quarter, or $1.01 per share, compared to a net loss of $17 million, or $0.25 per share, in Q1. We consumed about $11 million of cash in Q2 compared to about $40 million in Q1. Our net working capital was lowered in Q2 by roughly $49 million, which provided the cash to repay $45 million of borrowings on our revolving credit facilities. As our operating cash flow improves, we will continue to target opportunistic debt reduction. At the end of Q2, our liquidity position totaled $581 million, a modest improvement from Q1 and comprised $263 million of cash and about $317 million of undrawn revolvers. Finally, our board has approved a quarterly dividend of 7.5 cents per share for shareholders of record on September 25th for which payment will be made on October 3rd, 2024. That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. Our Q2 operating results were positively impacted by significantly improved pulp pricing, our mass timber business, and lower energy costs. These positive effects were more than offset by plant maintenance downtime, which negatively impacted our Q2 EBITDA when compared to Q1 by about $60 million. Overall, all our mills ran well this quarter, but the planned downtime and related slow startups negatively impacted our sales volume relative to Q1's record pulp sales volumes. Our lower Q2 sales volumes also reflect the divestment of the Caribou mill at the end of Q1. I am pleased to note also that within our solid wood segment, our mass timber business was able to execute on some tight deadlines this quarter, which resulted in positive operating results. I will have more to say about this in a moment. As Rich noted, this quarter we rode off the goodwill we recorded with the acquisition of Torgau. Regardless of the technical rules around accounting for goodwill, the fact is the pallet and lumber businesses in Europe have been weaker for longer than we anticipated. And this is due to a number of factors, including the high interest rate environment in Europe that has had a dramatic negative impact on the construction business with a direct impact on lumber prices. And in addition, the unprecedented slowdown of the German economy has reduced the commercialization of goods, which is critical for the pallet business. But despite this write down, we continue to expect to realize significant shareholder value from this investment. including the synergies we identified as part of our acquisition strategy. We're currently ahead of schedule on our capital investment at Torgao that will expand the mill's dimensional lumber capacity and expect to begin to see the benefit of this investment in mid-2025. In Q2, we invested roughly $20 million in our operations. As previously announced, our stronger operating results outlook has allowed us to adjust our planned 2024 capital spending to be between $100 and $120 million. You will recall that last quarter we restarted both our Torgao Lumber Expansion Project and the Spokane Sorting Line Project. Both of them will provide significant added value and were originally contemplated as part of our investment strategy for each mill. We remain optimistic about our cash generation forecast for the remainder of 2024 and will be prioritizing debt reduction as we move forward. Overall, pulp markets improved significantly in the quarter, with both the European and North American markets showing the most improvement. We were seeing improved demand from European paper and tissue producers. This demand was primarily the result of merchant destocking and logistical challenges around Chinese imports. To a lesser extent, we were also seeing demand increases in North America. The permanent closure of NBSK mills in the last two years The impact of the Finnish transport strike and the significant unplanned downtime at one of the Finland's largest mills created softwood supply challenges, further tightening the supply-demand dynamics. Looking forward, we expect modest downward pulp price pressure into the third quarter due to slower seasonal paper demand. However, we expect some positive pricing pressure late in Q3 and through Q4, due to both ongoing global softwood supply challenges and increased seasonal paper demand. We're closely monitoring the Canadian Railway Union labor issues and have taken steps to mitigate the potential impact it may have. In Q2, we produced 422,000 tons of pulp compared to 539,000 tons in Q1. This reduction was due to the impact of the 44 days of major maintenance that we had in Q2, plus the divestment of Caribou Mill at the end of Q1. Our remaining major maintenance downtime in 2024 is scheduled as follows. In Q3, Rosenthal will take a 14-day maintenance shut, and Selga will take a four-day mini shut, which will amount to about 20,000 tons production loss in total. and we won't have any maintenance plans shut down in Q4. As a reminder, Celga will not have major maintenance shut in 2024 as the mill has moved to an 18-month maintenance schedule. Our solid wood segment results benefited from improved mass timber sales in Q2, but was not enough to compensate for the impact of lower lumber prices on average, with some small pockets of improvement in Europe while the U.S. market weakened. High interest rates globally continue to weigh on housing starts and construction in general. We expect Q3 lumber prices to stay essentially flat. There may be some short-term lumber pricing upside due to recently announced lumber production curtailments, the current forest fire situation in Western Canada, and the potential for a prolonged Canadian railway strike. Any meaningful long-term improvement would be dependent on improved economic conditions. That said, we continue to believe that low lumber inventories, the large number of sawmill curtailments, relatively low housing stock, potential wood shortages created by Canadian forest fires, and homeowner demographics are still very strong fundamentals for the construction industry, and this will put sustained positive pressure on the supply-demand balance of this business in the midterm. In Q2, 39% of our lumber sales volume was sold in the U.S., as we continue to optimize our mix of products and target markets to current conditions. Today, our mass timber order file sits at about $55 million. We continue to receive many inbound project inquiries, and our finding developers are taking their projects to the point of being ready to execute once the interest rate environment improves. Economic stability will meaningfully improve the short-term demand for mass timber. In addition, we remain confident that the environmental, economic, and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to that what we've seen in Europe. We are well positioned to take advantage of that market growth, as we have roughly 35% of North American mass timber production capacity, a broad range of product offerings, and a large geographic footprint, giving us competitive access to the entire North American market. On the other hand, Shipping pallets remain weak due to the overhang of the European economy, particularly in Germany. However, due to our efforts to improve our product mix, we saw a slight increase in average pallet prices in Q2. Once the economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value. Heating pallets. We're down slightly in Q2 due to expected seasonality in this market, but we expect demand and prices to increase in Q3 as customers build their winter stocks. As I previously noted, we have restarted strategic and high return CAPEX projects at both our Torgau and Spokane mills. I've already spoken about Torgau's project, and I wanted to remind you our Spokane project was also originally envisioned as part of our investment strategy for this mill. This project is focused on the mill's wood infeed and sorting processes. Once this project is complete in mid-2025, the mill will be able to source lower cost feedstock and process it into high quality lamb stock. Ultimately, this will significantly reduce the mill's fiber costs. In Q2, our overall pulp fiber costs were flat from Q1. In Germany, a steady supply of sawmill chips resulted in modest cost decreases and in Canada, a ramp up of Peace River's wood room and our Selga wood room strategy, wood strategy also kept our fiber costs in check. Looking ahead, we expect our fiber costs to remain stable for both our pulp and solid wood businesses in Q3. I am pleased with our new lignin extraction plant ramp up and the partnerships we have entered into. to support the future commercialization of this product. I expect to share our vision for this product in the near future. As a reminder, this new lignin plant is a large step towards Mercer being able to develop a portfolio of novel offerings before going commercial with it. We're excited about the future prospect of this product as a sustainable alternative to fossil fuel-based products, such as in adhesives and advanced battery elements, among many others. This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a circular carbon economy while adding shareholder value. 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 remain 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 mast timber businesses. In closing, I am pleased that our pulp markets have improved and that we have the majority of our major maintenance behind us. We're expecting strong operating results from this segment in the second half of 2024. Regarding our solid wood segment, we expect weak economic conditions to continue to keep pressure on demand for construction products and pallets. Finally, we will remain focused on our cost-saving initiatives and will continue to prioritize debt reduction as we manage our cash and liquidity prudently. Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.