Mercer International Inc.

Good morning and welcome to Mercer International's fourth quarter 2024 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, Didi. 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 color 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 has been attached to the investor section of our website. But before turning to our results, I'd 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 operating EBITDA totaled $99 million, compared to Q3's EBITDA of $50 million. The improved quarter-over-quarter results were driven by no days of planned major maintenance downtime compared to 20 days in Q3. The positive impact of a strong dollar and higher MBSK sales volumes. These positive impacts were partially offset by modestly lower pulp pricing. I am pleased to note that in Q4, we successfully redeemed our $300 million 2026 senior notes with proceeds from the issuance of $200 million of additional 2028 senior notes and $100 million of cash on hand, which represents a first step in our leverage reduction initiative. In the 2024 fiscal year, our EBITDA significantly increased to $244 million compared to $17 million in 2023, driven by stronger pulp markets, lower production costs due to easing of inflation pressures, and cost reduction initiatives. Our pulp segment contributed an EBITDA of $106 million in Q4, and our solid wood segment had quarterly EBITDA of negative $5 million. You can find additional segment disclosures in our Form 10-K, which can be found both on our website and the SEC's. In the fourth quarter, MBSK markets remained strong, but our sales realizations modestly decreased from near-record prices achieved earlier in the year. Our Q4 softwood pulp sales realizations were $794 per ton, compared to $814 per ton in Q3. In China, the MBSK net price was $767 per ton in Q4, which was relatively flat compared to Q3. In Q4, the North American MBSK list price averaged $1,687 per ton, and the European MBSK list price averaged $1,500 per ton, both down about $75 from Q3. Hardwood prices in China decreased in the fourth quarter as the market continued to absorb the new capacity which came online earlier in the year. Our Q4 hardwood sales realizations were $578 per ton, a decrease of $54 from Q3. We believe MBHK prices reached the floor in Q4, and in early 2025, we are already starting to see modest price increases. The average price gap in China between softwood and hardwood pulp increased this quarter to about $220, with the average Q4 net eucalyptus hardwood price at $548 per ton down $87 from Q3. The North American MVHK average Q4 list price was $1,298 per ton down $169 from Q3. Overall, the weak hardwood pulp market resulted in us recording a $5 million non-cash impairment in Q4 against hardwood inventories at the Peace River Mill. When compared to the third quarter, total MBSK pulp sales volumes in the fourth quarter increased by 29,000 tons to 405,000 tons. This increase was mostly offset by lower sales of MBHK pulp. Total production volume in the fourth quarter was 467,000 tons, up 51,000 tons when compared to Q3, driven by stronger production and no planned maintenance downtime compared to 20 days in the third quarter. In the first quarter of 2025, we'll have 21 days of planned maintenance downtime at our Selgar mill. For our solid wood segment, realized lumber prices modestly increased in the fourth quarter compared to the third quarter. driven by higher prices in the U.S. market. Overall, Q4 lumber markets remained weak. The Random Links U.S. benchmark for Western SPF No. 2 and better average price was $435 per thousand board feet in Q4, compared to $366 in Q3. Today, that benchmark for Western SPF No. 2 and better is around $488 per thousand board feet. which represents about a 20% increase from the beginning of the fourth quarter. For the first quarter of 2025, we are expecting modestly higher lumber prices in both the US and Europe due to limited supply and increased demand. Demand and pricing for our lumber and other products may be impacted by the ongoing developments regarding US trade policies and the related tariffs involving Canada, the European Union, and China. Later in the call, Juan Carlos will discuss the possible impacts of these policies on our business. Lumber sales volumes were up 14% quarter over quarter to 124 million board feet due to the timing of sales. While lumber production for the fourth quarter was 115 million board feet, down 6% from the third quarter due to planned downtime over the winter holidays. Our consolidated electricity sales volume totaled 241 gigawatt hours in the quarter, up 36 GWh from the third quarter due to higher production at our pulp mills and the planned maintenance work in Q3 on the freeze-out turbine. Pricing in Q4 increased 20% to $109 per MWh as a result of higher spot pricing in Germany. In the fourth quarter, our pulp fiber costs were flat compared to the third quarter as supply remained stable. For our solid wood segment, per-unit fiber costs increased in Q4 due to reduced supply. Production for our solid wood segments mass timber operations decreased in the fourth quarter to 6,000 cubic meters from 10,000 cubic meters in the third quarter as we completed two large mass timber projects in Q3. With the high interest rate environment, growth in this market is expected to be muted in 2025. Foreign exchange positively impacted our operating income in Q4 by about $26 million when compared to Q3, primarily caused by the impact of a stronger U.S. dollar on our U.S.-denominated receivables at our Canadian and German mills. We reported a consolidated net income of $17 million for the fourth quarter, or 25 cents per share, compared to a net loss of $18 million, or 26 cents per share, in the third quarter. For the full year, we are reporting a consolidated net loss of $85 million, or $1.27 per share, compared to a net loss of $242 million, or $3.65 per share, in 2023. We consumed about $54 million of cash in Q4 compared to about $24 million in Q3. Our net working capital, excluding non-cash adjustments, was lower in Q4 by roughly $25 million, and we used $100 million of cash to redeem our 2026 senior notes. In Q4, we were paid $10 million of our revolving credit facilities. In 2024, we invested a total of $84 million of capital in our facilities. Looking ahead, we currently expect capital spending to be between $100 and $120 million in 2025. At the end of Q4, our liquidity position totaled $489 million, a $66 million decrease from Q3 and comprised $185 million of cash and about $304 million of undrawn revolvers. Finally, our board has approved a quarterly dividend of 7.5 cents per share for shareholders of record on March 26th, for which payment will be made on April 2nd, 2025. That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. Let me begin by saying that I'm pleased with our Q4 operating results. Our EBITDA of almost $100 million highlights the strength of the softwood pulp market and the cash generating potential for pulp assets. We also benefited from the rapid appreciation of the US dollar and not having a planned major maintenance order in the quarter. Looking ahead, we are carrying positive pulp price momentum into 2025, however, We're also dealing with the uncertainty of tariffs. As we have run several scenarios, we believe we would be able to mitigate the majority of the impacts on our businesses as our operations and sales strategies provide us with a great deal of flexibility to adapt to changing conditions. In the meantime, we maintain an open and continuous dialogue with our customers, as well as with government officials and our industry associations. We're prepared to take swift action, redirecting products to other geographies if necessary, and adjusting our operations accordingly, depending on the scenario that actually plays out. We might see some wood cost inflation on our surrogate mill due to the negative impact that tariffs could have on the Canadian sawmilling industry. To give our main tariff exposure some context, on average, we sell about 200,000 tons of pulp into the U.S. annually. About two-thirds of this volume is softwood pulp. We also export from Germany about 200 million board feet of lumber to the U.S. In contrast, our main import from the U.S. into Canada is wood chips for our Celgar pulp mill, but it's worth noticing that these are being exempted from the counter tariffs initially proposed by Canada. Celgar imports about 40 percent of wood chips from the U.S. Turning to the pulp markets, softwood pricing is expected to remain strong. We continue to believe that demand for softwood will be steady in the midterm, which, when combined with reduced supply, will create some upwards pricing pressure in most markets in the first half of 2025. Conversely, hardwood pricing weakened in the fourth quarter as the market absorbed recent capacity increases. But we currently believe prices have landed at a floor price of around $550 in China, and we're seeing some recent upward pricing pressure in the market today, primarily due to heavy South American producer maintenance. The permanent closure of NBSK mills in the last two years, the temporary curtailments happening today due to reduced fiber in certain regions, along with unplanned downtime, are all creating tightness in NBSK supply-demand dynamics. Looking forward, we believe that the significant contrast between the supply-demand fundamentals for softwood and hardwood pulp will drive the price difference between these two grades to levels well beyond historical norms. Currently, the net price gap in China is about $220 a ton, while historically this spread is closer to $100. We expect this wider price differential to persist well into 2025. As a reminder, softwood represents roughly 85% of our annual pulp sales volume. This large price differential between softwood and hardwood will inevitably bring up the topic of substitution. Based on conversations we have had with customers as well as our own research, we believe that most of the potential substitution has already been implemented and that only marginal amount would still be possible. You will recall that in Q3, we lost approximately 71,000 tons of pulp production due to unplanned downtime. Our production was significantly better in Q4, despite losing 18,000 tons at Peace River as a carryover from the digester issue from Q3. While I am pleased with our production this quarter, we continue to put strong emphasis on improving further the reliability of our assets across all businesses. We look forward to Torgao increasing their planed lumber production as we make good progress on our lumber expansion project. In Q4, Our overall pulp fiber costs were flat from Q3. In Germany, a steady supply of sawmill chips kept fiber costs constant, while in Canada, costs were steady thanks to our Peace River's woodroom as well as our fiber sourcing strategy in Selgar. Looking ahead, we expect our fiber costs to remain stable for our pulp business and with about a 10% increase in our solid wood business in Q1. Our solid wood segment continues to be held back by a weak European economy and the impact of high interest rates on the construction industry, despite some modest price improvements in the U.S. lumber market. As a result, our solid wood segment posted a negative EBITDA of $5 million. As I look back on our mass timber business in 2024, it was clear what the potential of this business is. When our facilities were running full but only on one shift, we saw meaningful profitability, which of course will only increase when we see some recovery in construction and we transition to two full shifts. We expect that the construction market in general will still be challenging in 2025, although we're observing significant pent-up demand for projects that are just waiting for a positive market signal in order to be released, which will unleash significant growth for Mass Timber. As such, we are highly confident in this business being a growth engine for Mercer. Today, our Mass Timber order file sits at about $36 million. We're receiving an increasing amount of inbound project inquiries and are finding developers taking their projects to the point of being ready to execute once the interest rate environment improves. We remain confident that the environmental, economic, speed of construction advantages, and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe. We are well positioned to take advantage of that market growth as we have roughly 30% of North American cross-laminated timber production capacity, a broad range of product offerings, including design and installation services, and a large geographic footprint, giving us competitive access to the entire North American market. We have positioned ourselves to be a one-stop shop for mass timber installations. We expect Q1 lumber pricing to moderately improve in the U.S. As we believe, the recently announced lumber production curtailments are starting to create some pricing tension, and potential tariffs will only exacerbate this trend. Similarly, we expect modest upward pricing in pressure in the European market, primarily due to increasing solid prices. However, any meaningful long-term improvement in either the European or U.S. markets will be dependent on improved economic conditions and lower interest rates. The very cost-competitive setup we have in Freesale gives us the flexibility to have a strong presence in Europe as well as the U.S., and the very high quality demanding Japanese market. In Q4, in particular, 38% of our lumber volume was sold in the US as we continue to optimize our mix of products and target markets to current conditions. We continue to believe that low lumber inventories, the large number of sawmill curtailments, reduced allowable cut limits, relatively low housing stock, potential wood shortages created by Canadian forest fires and homeowners 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. Shipping pallets remain weak due to the overhang of the European economy, particularly in Germany. Once the economy begins to show signs of recovery, we expect pallet prices to recover towards more historical levels, allowing Torgau to deliver significant shareholder value. Heating pellet prices were up slightly in Q4 due to expected seasonality in this market. We expect demand and prices to be steady in Q1 as cooler European temperatures take hold. As part of our objective to keep all of our pulp mills running reliably, we're planning for major maintenance shutdowns for all of them throughout the year. Our current schedule is the following. In Q1, Selgar is down for longer than usual 21 days to allow for the completion of the woodroom project. In Q2, Peace River will be down for 18 days, and Stendhal will take a three-day shut. In Q3, Rosenthal will be down for two weeks, and Selgar will take four days. And in Q4, Stendhal will be down for 18 days. In total, that is 78 days of planned downtime compared to 57 in 2024, the difference being Selgar, as we did not take a major shot in 2024, given that we're running the mill on an 18-month maintenance cycle. We expect to spend between $100 and $120 million on capital projects in 2025. This capital budget is heavily weighted to maintenance, environmental, and safety projects, But we will complete the Torgau lumber expansion project, as well as Selgar's wood room. Both projects will provide significant value add through increased lumber output and fiber cost optimization, respectively. Torgau's project will increase the volume of dimensional lumber available for the US market by about 240,000 cubic meters annually, with upgrades to the log infeed system and the addition of more planing capacity. We expect to reach a little bit over 100,000 cubic meters already in 2025. This was envisioned as part of our original investment thesis to increase the mill's value, added product mix, and maximize potential synergies. I also want to remind you our Spokane project was originally envisioned as part of our investment strategy for this facility and is focused on wood infeed and trigger jointing processes. Once the Spokane project is completed in mid-2025, the facility will see a reduction in the wood cost through reduced waste. I am pleased with the performance of our new lignin extraction pilot plant at Rosenthal. Our product development is going according to plan. We're excited by the future prospects of this product as a sustainable alternative to fossil fuel-based products like adhesives and advanced battery elements. We believe this product can be the foundation for a profitable business segment with strong growth potential. The fundamentals of this business align perfectly with a 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 demanding about 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 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 growth in our lumber and mass timber businesses. In summary, I am pleased to note that the softwood pulp market remains strong and that we are well positioned to take advantage of it. We believe the weak construction market will keep our wood product businesses under pressure during the year. But we will navigate through the uncertainty that potential trade wars may bring and are confident that we have sound mitigation strategies. I'll finish by saying that during 2025, our absolute priority will be on reducing our leverage through a combination of strategic projects that include aggressive cost reduction programs, reliability of our mills, operational rationalization, and prudent capital management. Thanks for listening, and now I will return the call back to the operator. Thank you.