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Mercer International Inc. (NASDAQ:MERC) Q1 2024 Earnings Call Transcript

Mercer International Inc. (NASDAQ:MERC) Q1 2024 Earnings Call Transcript May 10, 2024

Mercer International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Mercer International's First 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.

Richard Short: Thanks, Liz. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the first 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 are joining today's call by telephone, there is presentation material that we have attached to the Investors section of our website. But before turning to our results, I would like to remind you that we will make 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.

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This quarter, our EBITDA was $64 million compared to Q4 EBITDA of $21 million. The improved results were driven by not having any major maintenance downtime, improving pulp sales realizations, and lower fiber and other production costs. Our pulp segment contributed quarterly EBITDA of $68 million, and our solid wood segment EBITDA was negative $1 million. You can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. In Q1, both our NBSK and NBHK sales realizations increased compared to Q4. Average list prices increased in Europe and North America due to stronger demand and global supply constraints. In China, prices were flat as demand slowed during the Chinese New Year and picked up near the end of the quarter.

The European NBSK list price averaged $1,400 per ton in the current quarter, an increase of $155 or 12% from Q4. And the North American NBSK list price averaged $1,440 per ton in the current quarter, an increase of $128 or 10% from Q4. In China, the Q1 average NBHK net price was $662 per ton, up $19 or about 3% compared to the Q4 average price, resulting in the market price gap between NBSK and NBHK in China, narrowing to about $83 per ton in Q1 from $105 per ton in Q4. The North American NBHK average Q1 list price was $1,223 per ton, up $140 or 13% from Q4. Total pulp sales volumes in the first quarter increased by 75,000 tons to 566,000 tons, driven by the timing of sales and higher production due to lower scheduled maintenance downtime. We had no scheduled maintenance downtime in Q1 compared to 23 days of downtime in Q4, which positively impacted Q1 EBITDA by about $23 million when compared to Q4.

After adjusting for the Q4 planned shuts, pulp production was essentially flat from the fourth quarter. For our solid wood segment, we had modest lumber pricing improvements in both Europe and the U.S. market. Despite the price increases, overall lumber demand remained subdued as a result of uncertain economic conditions in Europe and high interest rates. The random length U.S. benchmark for western SPF #2&Btr was $462 per thousand board feet at the end of Q1, compared to $422 at the end of Q4. Today, that benchmark price for western SPF #2&Btr is around $421 per thousand board feet, virtually unchanged from the beginning of 2024. For Q2, we are expecting generally flat lumber prices in the U.S. and European markets as demand remains weak. Lumber production was a near record 127 million board feet in Q1, up 14% due to seasonal downtime in the fourth quarter.

Lumber sales volumes were 121 million board feet, up 8% from Q4. Electricity sales totaled 259 gigawatt hours in the quarter, which was about the same as Q4. Pricing in Q1 modestly decreased to about $94 per megawatt hour from $98 in Q4 due to lower spot prices in Germany. In Q1, our pulp segment had lower fiber costs in Q4 as supplied remained stable. On the other hand, our solid wood segment had higher sawlog costs due to strong demand in Germany. Production for our solid wood segment's mass timber operations decreased in Q1 from Q4 due to minor customer driven delays for certain large-scale projects. These projects are now underway and we are satisfied with the order book today. In the first quarter, we made the strategic decision to dissolve the Cariboo mill joint venture, which resulted in the recording of a non-cash loss of roughly $24 million, or $0.35 per share.

We expect the transaction to only have a nominal impact on 2024 EBITDA. Juan Carlos will have more to say on this in a moment. We reported a consolidated net loss of $17 million for the first quarter, or $0.25 per share, compared to a net loss of $87 million, or $1.31 per share, in Q4. We consumed about $40 million of cash in Q1, compared to $30 million in Q4. The large cash usage in Q1 was primarily due to higher receivables, which were up roughly $64 million, driven by higher sales realizations and sales volumes. We expect the majority of this working capital bill to reverse in Q2. At the end of Q1, our liquidity position totaled $555 million, comprised of $274 million of cash and about $281 million of undrawn revolvers. Finally, our Board has approved a quarterly dividend of $0.075 per share for shareholders of record on June 26, for which payment will be made on July 3, 2024.

That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Juan Carlos Bueno: Thanks, Rich. Our Q1 operating results improved significantly relatively to Q4. The improvement was primarily the result of higher pulp prices in combination with no major maintenance at any of our mills, and our results in Q1 also benefited from lower costs, including fiber and energy costs. Overall, all of our mills ran at near record production levels, while both our energy production and sales volumes were at record levels in Q1. As previously announced, we came to the decision to dissolve the Cariboo mill joint venture after reviewing this asset and its future prospect against the strategic priorities, and determined that dissolving the joint venture will allow us to focus our resources to areas more aligned with our long-term strategic goals.

I will also add that we were not expecting Cariboo to have any meaningful impact on our 2024 earnings. In Q1, we invested roughly $18.5 million in our operations. This CapEx spending was in line with our 2024 CapEx target of between $75 million to $100 million. Those of you who follow the company closely will recognize that our 2024 CapEx target is well below our traditional spend. Our 2024 CapEx target is essentially a maintenance of business budget, and is the result of our weak cash flow generation in 2023. I will speak about our markets in a moment, but we're optimistic about our cash flow generation in light of improved pulp pricing expectations for the remainder of the year. Consequently, we are comfortable restarting our Torgau lumber expansion project and the Spokane shorting line project.

A panoramic view of a forest filled with trees used to make NBSK pulp, wood chips, and saw logs.
A panoramic view of a forest filled with trees used to make NBSK pulp, wood chips, and saw logs.

Both of them will provide significant added value and were originally contemplated as part of our investment strategy for each mill. We have also approved a handful of other small value adding projects, and as a result of these decisions, we now expect our CapEx to be between $95 million to $120 million in 2024. We will also continue to manage our working capital and costs closely. Despite our improved outlook for 2024, we believe the recovery for all our markets will be gradual. Overall, pulp markets have improved significantly in the quarter, with both the European and North American markets showing the most improvement, and China lagging a little bit. We're seeing strong demand from European paper and tissue producers, and this demand is primarily the result of merchant destocking and logistical challenges around Chinese imports.

To a lesser extent, we are seeing demand increases in North America as well. This strong demand is exacerbating the impact of the permanent closure of NBSK mills in the last two years. While the impact of the finished transport strike and the significant unplanned downtime of one of Finland's largest mills are also adding to the supply challenges. Looking forward, we expect upward pulp price pressure through the second quarter. In addition, pulp markets may face an even tighter supply situation should the Canadian railway unions take labor action, as they are currently threatening to do. We're implementing mitigation strategies, but ultimately, should this labor action be significant, it could negatively impact our ability to get our Canadian mills products to market.

Our mills run at near record levels in the quarter when comparing our first quarter production to Q4. Remember that Celgar took a 22-day major maintenance shut in Q4 of last year and Stendal took a one-day maintenance shut, while in Q1 we didn't have any at all. Our remaining major maintenance downtime for 2024 is as follows: In Q2, Peace River already has taken their 16-day maintenance shuts in April. This shut was extended by two days due to final work. In addition, Stendal will take a long 17-day shut. Combined, this downtime equals to roughly a loss of about 61,000 tons of production. In Q3, Rosenthal will have a 14-day maintenance shut, and Celgar will take a short four-day mini shut, which will amount to about 20,000 tons production loss in total during Q3.

As a reminder, Celgar has moved to an 18-month major maintenance schedule and will not have a major maintenance shut in 2024. Our solid wood segment results, although improved compared to Q4, are still not where we expected to be. The U.S. and European lumber markets were up slightly. However, high interest rates continue to weigh on housing starts and construction in general. We see the potential for lumber pricing improvements in Q2, but generally expect pricing to stay flat, with any improvement likely linked to improved economic data. We recognize there may be some short-term pricing upside due to recently announced lumber production curtailments or the realization of a prolonged Canadian railway strike. That said, we continue to believe that low lumber 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 sustained positive pressure on the supply demand balance of this business in the midterm.

We continue to optimize our mix of lumber products and customers to current market conditions. As such, in Q1, 43% of our lumber sales volume was sold in the U.S. market, with a remainder sold in European and other markets. Shipping pallet market remains weak due to an overall weak European economy. Once the European economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing our Torgau assets to deliver significant shareholder value. Heating pellet prices were down in Q1 due to expected seasonality in this market. In addition, the integration of the recently acquired mass timber assets continues to progress very well. We now have roughly 35% of North American mass timber production capacity, a broader range of product offerings, and a much larger geographic footprint, which 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 March, our order file totaled about $80 million. As I previously noticed, we are in the process of restarting strategic and high return CapEx projects at both Torgau and Spokane mills. The Torgau project is focused on the mill's woodyard and log infeed systems. Once completed in the late 2025, this project will allow the mill to produce more high-quality dimensional lumber. This project was originally envisioned as part of our investment strategy for this mill, and we're looking forward to completing this work while lumber prices are in cyclical lows. Similarly, the Spokane project is focused on the mill's wood infeed and sorting processes.

Once this project is complete in May 2025, the mill will be able to source lower-cost feedstock and process it into high-quality lamstock. Ultimately, this will significantly reduce the mill's fiber costs. In Q1, our overall pulp fiber costs decreased from Q4. 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 Celgar wood strategy also pushed our fiber costs down in Q1. Looking ahead, we expect further modest declines in pulpwood costs at our mills in Q2, but we expect a slight increase to our sawlog costs due to strong demand. I am pleased with our new lignin extraction pilot plant ramp-up and the partnerships we have entered into to support the future commercialization of this product.

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, 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 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 our 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, I am pleased that our pulp markets are recovering a little more quickly than expected, and the fact that this improvement is giving us the confidence to increase our planned 2024 capital spend, which will allow the benefits from these key high-return projects to be realized even sooner.

We also expect an improved result from our solid wood business in Q2. As a reminder, we have an unusually heavy schedule of major maintenance in Q2, which will be a drag on what we're expecting, would otherwise be a strong financial quarter. We will remain focused on our cost saving initiatives, and we will also continue to work on rebalancing our assets in line with the execution of our strategic plan, and we'll continue to manage our cash and liquidity prudently. Thanks for listening, and I will now return the call to the operator for questions. Thanks.

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