Good morning. And welcome to Mercer International's Fourth Quarter 2020 Earnings Conference Call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International and David Ure, Senior Vice President, Finance, Chief Financial Officer, and Secretary. I will now hand the call over to David Ure. Please go ahead.

Good morning, everyone. I'll begin by reviewing the fourth quarter's financial highlights; and following my remarks, I'll pass the call to David, who will comment on our ongoing response to the COVID-19 pandemic, key markets, operational performance, progress on our strategic initiatives, along with our outlook for the first quarter of 2021. Please note that in this morning's conference call we will make forward-looking statements and according to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission. Our fourth quarter EBITDA was up when compared to Q3, primarily due to improved pulp demand and pricing, record operating results from our wood product segment, solid operating performance from our mills along with lower wood costs. These positive influences were partially offset by the impact of a weaker US dollar and a slightly heavier annual maintenance program in Q4 when compared to Q3, and reduced government wage subsidies at our Canadian Mills. We generated EBITDA in the fourth quarter of about $49.5 million compared to EBITDA of about $45.6 million in Q3. Our pulp segment contributed EBITDA of $34.8 million, and our wood product segment contributed record quarterly EBITDA of $16.4 million. Our wood products segment results reflect high lumber sales prices in the US, strong sales volumes, and the benefit of low sawlog prices. As usual, you can find additional segment disclosure in our Form 10-K, which can be found on our website and that of the SEC. Average quarterly softwood and hardwood pulp prices were up in almost all of our major markets compared to Q3. As a result, our average pulp sales…

Thanks, Dave, and good morning, everyone. Let me begin by saying that despite what is looking like the early stages of a global economic recovery, the COVID-19 pandemic remains a major concern. While National Vaccine programs are gaining speed, infection rates remain stubbornly high due in part to new and more infectious mutations of the virus, and as a result, we remain focused on our protocols to ensure the safety of our employees and the ongoing operation of our plants. I would like to thank all our employees for continuing their efforts to keep themselves, their families, and our colleagues safe. I am pleased with our operating results this quarter. Our mills all ran well resulting in strong production, which allowed us to achieve record annual production of pulp, lumber, and energy. Our fourth quarter results also benefited from increasing pulp demand and prices. Combined, our pulp mills set a sales volume record in Q4. NBSK pulp prices in Europe rose steadily through the quarter and prices in the US rose modestly late in the year while prices in China rose significantly late in Q4. The upward pricing pressure in China at the end of the quarter was due to a number of factors that included low paper producer inventories, unusually high pulp producer downtime, and a global shortage of containers that has limited the volume of pulp into China, combined with a relatively high Chinese currency. This upward pricing pressure in China ultimately pushed prices up in all markets and looks to continue through the first quarter of 2021. In China, the Q4 average NBSK net price was $637 per tonne, up $65 from Q3. European list prices averaged $880 per tonne in the current quarter compared to $840 per tonne in Q3. The average Q4 net hardwood price…

[Operator Instructions] Our first question comes from the line of Hamir Patel from CIBC Capital Markets.

Hi, good morning. Dave could you comment on the sort of M&A environment for lumber and how attractive that opportunity set is looking versus a potential Greenfield?

Well, there’s a few situations out there, but it's the time in the cycle where valuation expectations are very high, so it's unlikely that we'll be chasing M&A sawmills at this stage in the cycle. We are pretty keen on the Klausner One in Florida; we thought that would have been a great deal for us for a bunch of different reasons, but as you know, we stepped away from the auction when it got heated. So yes, I think, for us, the next step in lumber expansion will be Stendel, and I think that'll be a tremendous project for the company.

And then Dave with the Friesau expansion work being completed this year, what level of lumber output are you targeting this year?

Yes, around about 500 million board feet of lumber there, maybe a little bit more. We haven't decided to put on the third shift at this stage. It stresses things a bit when you when you push that third shift from a maintenance perspective, but it's -- we're very pleased with the grade improvements that we're seeing on the profile of the wood coming out, still a little bit of tune up to do with edge trimming and those sorts of like precision and trim on the new planer, those kind of things, but generally, everything's working as we’d expected.

Our next question comes from the line of Sean Steuart from TD Securities.

Thanks. Good morning. A couple of questions. David, I would be interested in some further context on your take on pulp momentum right now. It's spectacular run off, I guess a low base for the commodity. These are mill inventory levels that -- while they’ve fallen dramatically from the peaks we saw last summer would not normally support this type of price momentum, and I guess you mentioned the Shanghai Futures, you mentioned currency shifts and the impact on the cost curve. How much of that is playing into what we're seeing right now and how do you think about the momentum relative to where inventories are through the system?

Well, first of all, on the Shanghai Futures, my view is that if you didn't have the fundamentals right and the supply demand, physical side, the Futures Exchange would be a speculative sort of a thing and more likely a bubble, would heat up and cool off that kind of thing. But I think physical markets are tight. Hardwood in particular is really tight when you think about the length of the supply chain for most of the hardwood mills to their natural markets. So, that's the really tight side right now. Softwood is balanced, but having said that, there's quite a bit of supply risk with all the maintenance that is going to happen. There's no new supply coming. Most customers are expecting prices to continue at elevated levels and possibly increase, so everybody's chasing pulp, nobody wants to get behind, everybody wants more than they can get. And so, it's just -- it's driving itself is really my view unless something happens that really significantly impacts demand, and I can't see that it feels like a sustainable sort of a rally here. I mean, it's -- the markets are balanced to tight, inventories are low, and demand is strong. And as I was saying earlier, the printing and writing side is coming back off the floor as countries open, and there's a kind of travel improvements or school forums or just generally people getting back to work will drive some recovery in printing and writing, which is all incremental on top of where we are today, so --.

Okay. Couple questions on CapEx. So I understand correctly, the two woodroom projects, those aren't Board approved yet, but they are in the $150 million budget for this year, is that the correct read?

No, they're not in the 150. They're -- they will be incremental to that.

Okay. And as we think about a Stendal sawmill, what sort of CapEx budget are you thinking about for a project like that?

Yes, all into completion would be around EUR 185 million. Our current thinking is to do it in phases. We haven't established exactly what that looks like, but there's elements of it that we'll do first and get lumber production going and then, I'm thinking some of the log sorting equipment in lines may come later, as step two, just to -- it's just a logical way to -- there are -- sawmill is not like a pulp mill, you don't just build a sawmill and then start it up, you have to start it up in sections. And so, we're working on what that looks like, but yes we will have a lot more to say about it in the summer.

Our next question comes from the line of Andrew Kuske from Credit Suisse.

Thank you. Good morning. I think the question is for David, to drill just on the pulp markets. And if you could just give us maybe some color and context on structural end market changes that have happened that you've seen really pre-COVID till where you are now? And then, your thoughts on really the return to normal and you alluded a little bit of just with the paper and writing coming back, but color on that would be appreciated.

Yes, well, I think the at-home tissue has obviously been very strong. The away-from-home has been weak, but that tends to be more recycle not as heavy to virgin chemical fiber. Printing and writing is down significantly. Lot of the packaging grades are doing quite well to the downside and is really strong, I reported those kinds of things. We see hygiene issues driving more towels and napkin production in time, particularly in areas where it hasn't had great penetration. So we've talked before about, say goodbye to all those forced air hand dryers. I don't think people are going to be satisfied with cloth towel. Hand dryer systems and in restaurants and hotels and things like that. So my view is the hygiene side will drive the towel and tissue side even more significantly than we've seen in the past. The general view is printing, and writing has been like the graphics side has been declining and some significant percentage per year 6%, 7% and with COVID it's like we dropped three years in a row all at once, boom, boom in demand, as the economy's open up, some of that will come back not to the level that was there pre-COVID. But I -- it'll come back to sort of some level and then just to continue a slight decline from there, which is fine, because the growth in specialties and other tissue products will eclipse the declining graphic space and it's becoming a less and less important market for us on the chemical side.

That's very helpful. And then you mentioned also earlier on the supply side risks that you see on NBSK, and a lot of that really being in relation to outages, with your own experiences with just the COVID protocols what have you learned about doing maintenance turnarounds? Obviously, there's an element of increased costs that just come from an outright basis on the COVID protocols, but also, to what degree of the productivity losses, and then what if you went through this?

Well, there's -- I mean so many things, but one of the front-end challenges is making all those arrangements so your contractors can travel, like making sure that you fully understand what restrictions are at the border, what they're going to need to do to get across and how you test them and certify that they don't have COVID. How you keep crews apart, so you can imagine these, it's all kinds of tent infrastructure, separate washroom facilities, canteens, mobile canteens, those kinds of things so that we don't have any cross contamination between crews. And we certainly keep all our people separate from our contractors and keep our contractors separate from each other. And just lots of regular assessments, lots of rules that need to be followed. Lots of sanitization protocols, obviously, masks, sometimes double masks required, if people are working closely together in any kind of certain set of circumstances, that kind of thing. So far, we think we've got all the border issues well identified, and all our plans in place, so that the shots that are coming up in the coming months, I think we got a clear line of sight on everything we need to do and should be able to conduct our shots safely. But the risks are, changes at the border, or that are unforeseen, surprises, or God forbid, any kind of serious transmission and then all could slow things down or shut things down for a period of time. So it's not going to go perfectly for everybody. And that's -- it's a lot harder than normal conditions to conduct these outages safely as others have found. So yes, it's just; I think the risk is on the supply side, more than a reduction of demand at this stage.

Our next question comes from the line of Andrew Shapiro from Lawndale Capital.

Hi, David. Thank you. A few follow up questions from those that were asked. You discussed and this may explain it the potential incremental CapEx on the wood projects. And I understand you want to take a cautious approach, but has the -- have the prospects of the turnaround and the returns on past recent investments giving you any clarity on when the dividend might be returned towards prior levels and what are you monitoring when making the decision that Mercer would be in a comfortable position to start dividend growth again?

Yes, so, board did discuss the dividend but in the -- with the number of very high return projects on the table, it was decided to hold the dividend where it is and pursue these higher return projects. So financing the Stendel sawmill is going to be challenging for us. We're going to have to work hard to do that in a safe way, thinking some sort of a ring fence financing that protects bondholders and equity holders from the lever, but I'm sure that can be done. So just the dividend at its current level is viewed as the right level considering these other demands on our cash in the short term.

And oh, yes, sure enough. Yes, that makes sense. That's once we heard that those were some of your plans. But I was just wondering what is it you're looking to so that when some of these projects, I guess kick in and the cash flows generated, then focus on dividend growth might be --

Yes. I don't think the board's thinking has changed that the dividend is something to grow over time. But it's always going to be decided in the context of what the highest return, yes.

Okay. You've talked about some producers with higher costs at the tipping point for closure due to the losses in what was a declining price environment. Can you comment on whether the improved pricing now takes that opportunity off the table? Or there are other factors that might challenge some of that supply out?

Yes, it's, I guess we in the last couple of years, and we've seen a couple of mills go down. There's, as we all notice, there's the whole fourth quarter is full of all smaller mills, these pulp prices are certainly going to help them to keep going. But in the fullness of time, these small, higher cost mills will ultimately become difficult to continue to keep maintaining them.

[Multiple Speakers] yes, go ahead anything to catch up.

Yes, no, that's fine. I was just got to say the, as the economy starts to strengthen, some of the takeaways things like dissolving pulp that's been running on paper grade will, we're already seeing a lot of that capacity shifting back into the commodity dissolving pulp side. The fluffed markets are stronger. So there's really very little paper grade, southern softwood coming into the market side. I think there's a combination of all of these factors that are going to contribute to the restrictions on supply on the chemical softwood side.

You've stated previously and maybe it's been several quarters ago, and it's already been done, but there was still a lot of room for improvement on the power generation at Celgar side, whether it was to increase the power or the by product profitability. Has that all been accomplished? Or is that another one of the CapEx opportunities here?

Well, no, we finalized our deal with BC Hydro. And I think I talked about that on the last call, I think we're pretty satisfied with where we ended up and it's got some optionality for us going forward. So I think that's what it is so not much due to report there.

Okay, so there's nothing more that is high on the table here for investment to enhance further cash flow.

Well, Celgar is always-- Celgar I think has a bowl of our mills; it has potential to be expanded. And really it's really all about what we call blow tanks and larger filtrate tanks. So the Canadian mills tended to be built everything balanced so that as long as everything runs, everything just keeps running but if you have an upset somewhere in the system, there isn't really a lot of buffer storage in between like the fiber line and the bleach plant for example are between the bleach plant and the dryer. So these big tanks allow if you have an upset summer, you can run up to 12 hours continuing to produce pulp and the digester without going through the bleach plant, for example, or where you can build up from the bleach plant before you go to the dryer and use those kind of investments would allow the mill to produce quite a bit more pulp and would therefore lower its cost, your fixed costs absorption, we haven't prioritized that just yet. I mean, it's really all about getting to a really competitive wood costs for that mill and that's what the woodroom is all about, that's first priority, and that's a -- as I was saying saving $20 million cost reduction to feed the mill at its current state regardless of where you are in the cycle, and its transaction, like its processing costs, it's just, how many times you handle the wood, how much weight you can put on a truck, what your yield is through the chipper, or saying another way, using a centralized wood room, you have less wood loss. So it's all pretty high level of confidence, that it's all going to produce the savings that we expected and then with that lower wood costs, then we can think about whether we want to go to the next level to increase or decrease the production volume. A step down the road.

And you guys spoke of CapEx generally being not CapEx but the maintenance turnarounds generally being expensed versus competitors and all that. I think it's Peace River, but there's one of your plants that's going to be doing a major rebuild a boiler work, et cetera where insurance proceeds are to be paying for the bulk of it. Is that Peace River? And then when that happens, how is that going to be accounted for? Will it just not go through the expense line? Will it go through the expense line? And there'll be a below the line recovery? How's it supposed to work?

Yes, so the capital work is all paid for by the insurance company. And so it won't hit our P&L or our balance sheet. And then there is also a business interruption component. So depending on what the margins are in the months prior to the shut, there will be some business interruption recovery that would come into our P&L.

And where would you guys put that as a reduction of cost of goods sold and reduction of SG&A? Something further below the line?

Yes, I'm not sure exactly. Richard Schwartz on the line with me or David Ure, maybe they've got a better idea.

Yes, it'll match where the costs are. So it'll be offset in the same line that the underlying costs are coming from. So you really -- [Multiple Speakers]

For this business interruption, if it's business interruption recovery, where would that be?

Yes, so that would be in cost of goods sold.

Okay. All right. And you'll call that out in the particular quarter and amounts once it comes through, right.

Well, I'm sure we'll talk about it.

Last two questions here on can you update us on the status of both the BioFilaments venture as well as Stendel venture and status progress, timing of cash flows?

Yes, the Performance BioFilaments still in the development phase. It's our joint venture with Resolute and one of the leaders; there's a whole number of different applications for BioFilaments that they're working on. But they're also working on masks currently to improve the performance and help lower the cost to produce masks in Canada. And then the Stendel, I think I talked before is -- it's got about another year and a half to two before we start to harvest and we'll basically the plan is you harvest the trees when they get to be 15 years of age. And our first rotation will be within about one and a half to two years. And then we'll harvest one-year worth replant harvests, the next replant and carry on that way and that's when we'll start to see the cash flow from that operation. And it'll be -- I mean I don't want to provide guidance at this stage because I can't predict what the market for the oil will be at that time. But we're very pleased with the investment we made there and I'm sure it's going to produce a nice cash flow for us once we start that harvest.

So starting in about two years when that there's a batch that turns age 15.

Yes.

Is there a batch every year thereafter?

More or less, yes, it's been -- it was laddered in the way it was developed. I mean, there's some years might be slightly larger and or smaller. But generally, there'll be a harvest every year, and we'll produce the oil, put it in inventory and have a steady supply of products in the market.

Okay, and the last question I periodically asked a little bit, maybe out of, I don't know, out of place, but at least you'll do it via virtually what's the investor relations, non deal roadshow kind of calendar that you I guess, plan to attend virtually in the coming quarters?

Maybe Dave could speak to that.

Yes, probably for the next quarter, we got two I would call them sort of organized IR events, BofA is hosting us next week on the 24th for a presentation for their investors. And then we'll also be attending the Raymond James Investor Conference on March 3rd. And one of the things, one of the trends we're noticing is that we've got lots of people that are just calling us and not waiting for conferences anymore. So as always, please give David or me a call, anytime. And we can set something up ad hoc. Pleased to talk to you.

Our next question comes from the line of Sam McGovern from Credit Suisse.

Hey, guys, earlier on the call, you guys struck a pretty optimistic tone with regard to the duration and potential strength of the whole pricing environment. With regard to that you what's the ability for you guys to defer any maintenance to capture as much volume as possible, if pulp prices remained strong for quite a while.

Yes, Sam. Not really much ability there, these maintenance shuts take a lot of coordination. The contractors moved from mill to mill to mill, it's kind of all scheduled well in advance. So if we were to step out of that lineup and run, we may have or what we would have challenges rescheduling contractors for certain work. And then there are also the regulatory and insurance issues, all these pressure vessels and pieces of equipment have maintenance requirements that need to be scheduled. And we're not really in a position to defer any of that maintenance at this point in time. And that's normally the case with pulp mills; they need to go down when they're scheduled to go down.

Our next question comes from the line of Paul Quinn from RBC Capital Markets.

Yes, thanks. Good morning, guys. I guess started on the CapEx side, because you got a 150 for the year plus the two wood room projects. So do we assume that it's half that to 8 million in 2021?

Say that again, half --

Well, I'm just wondering the two woodroom projects are they going to be complete in 2021, is that $58 million all in the 2021 by the end or does that spillover to 2022 and is it at --.

Well, some of them, yes, some of that will spill over into early 2022. But a big chunk of it will be in 2021. There's government grants against it as well though, Paul there -- we got $13 million of government incentives will come in funds so far, and there's some more that we're waiting on to hear. So it's not the full 458 but and a chunk of it is the trucks and the Mobile Equipment that will either be could be company leased or could be pushed off to contractors and recovered through rates, those sorts of things. So there's lots of optionality and what we're doing.

Okay, so on 2021 CapEx, they should be thinking somewhere in the $175 million, including some for their wood room projects.

Yes, that's not a bad number, yes.

Okay. And then just the timing of the Stendel sawmill, if the board approves it, at the end of the summer in the fall, is that a 2023 start?

Yes, probably the equipment suppliers are, they're up in the 18 month range right now for some of the big pieces. So if you're in the fall of 2021, you got all of 2022, and then you're putting it together somewhere in 2023, yes.

Okay, no, are we investing in the same sort of capacity that you've got to produce or [Indiscernible]

It'll be a little smaller, and it'll be slightly different configuration, won't be a link, no -- will be the use, I think, but probably the 100,000 cubic meter input, something of that size.

Okay, and then you guys reference the Rosenthal power price. It's come up and now back on market rates, if you could just helped me just understand the impact of that.

Well, today market rates in Germany are I think it's around EUR 45 a megawatt hour. And the green rate, the tariff was around between 80 and 85, depending on the season. So it's roughly half of what it was just right now, low power rates in Germany really a result of the lower economic activity. Before COVID, I would have said yes within a couple of years, the market rate would be more or less equal to what the green rate tariffs were. But they've fallen off as a result of this slowdown in all the industrial activity. They'll come back in time we expect that as Germany's moving away from all their coal and lignite fired boilers. So it's going to be recovery in power prices, and we'll be, I think it's still something to look forward to. But today, it's about EUR 6 million or EUR 7 million hit to their P&L at Rosenthal.

Okay, and then you sort of referenced to the German government, probably bringing back incentives for green energy, do you expect to get that in the back half of the year, i.e. should we model this as sort of a half that rate in the front half? And then back to the full rate in the backend?

Yes, I don't think you can model that, Paul. We don't have any clarity on what's going to happen in the back half to the year at this stage.

All right and then just maybe overall on pulp pricing. I mean, it's been quite a rally here. Definitely totaling this one. I feel like many of these pulp rallies in the past but sounds like you think it's quite durable here. What do you seen in terms of prices in China for February and March?

Yes, well, prices are going up, it feels like in China. I think there if you were transacting today, you'd be, a typical seven type of thing and spot and in all the markets is up, in an 800 to 900 net range.

And at this time, I would like to turn it back to the speakers for any further comments.

Yes, thanks very much. And thanks everyone for joining our call today. And as Dave mentioned earlier, if anybody has further questions, please don't hesitate to reach out and look forward to speaking with you again in another quarter. Thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.