Good morning and welcome to Mercer International's Second 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.

Thank you. Good morning everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the second quarter, before returning the call to Juan Carlos to provide further color on the markets, our capital plan, and our strategic initiatives. Also, for those of you who join today's call by telephone, there is presentation material that has been attached to the Investor Relations section of our website. But before turning to our results, I'd like to remind you that we will make forward-looking statements in this morning's 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 was negative $69 million, compared to Q1 positive EBITDA of $27 million. After adjusting for our $51 million non-cash inventory impairments EBITDA in Q2 was roughly negative $17 million The EBITDA decrease in Q2 from Q1 is primarily due to the significantly weaker pulp prices in all of our markets caused by weak demand created by global economic uncertainty. We also had more scheduled downtime at our pulp mills compared to Q1. In Q2, we had 60 days of scheduled downtime compared to 10 days in Q1. Our pulp segment had negative quarterly EBITDA of $56 million, which after adjusting for the $51 million non-cash inventory impairment, leaves a negative $5 million result. Our solid wood segment EBITDA was negative $10 million and was driven by poor lumber prices. You can find additional segment disclosures in our Form 10-Q, which can be found on our website, and that of the SEC. In addition to…

Thanks, Rich. Q2 was a disappointing quarter for us, as the market pulp prices deteriorated sharply across the world and in a very short period of time. As Rich mentioned, prices in China fell by more than $200 per ton for both hardwood and softwood. The rapid decline in pulp prices was led by hardwood pricing in China due to weaker economic recovery than expected, with large pulp producer inventories, and compounded with the ramp-up of the new and large South American eucalyptus mills. Softwood on the other hand, its supply is gradually tightening due to the various curtailments and mill closure announcements around the world. Several pulp producers are extending their annual maintenance shots similar to what we did at Peace River in Q2. In addition to this, the recent British Columbia port strike, as well as Canadian forest fires are also contributing to this tightening supply. On the demand side, European paper producers are still running at reduced capacity rates as the European economy continues to be burdened by the effects of the Ukraine war. And in China, while stimulus measures are being implemented, economic growth to date has been modest. Looking forward, we expect pulp prices to continue to be under pressure in Q3. As a traditionally weak summer month stake hold, while hardwood and softwood pulp prices in China appear to have bottomed out in Q2. Software is currently lagging behind in Europe, and we expect to hit its floor price Q3. This week pulp pricing outlook for Q3 drove us to book the large non-cash inventory impairment charge this quarter that Rich described earlier. As a result of the logistical issues created by the recent British Columbia Port Strike, we were forced to take a temporary 30-day curtailment at our Celgar mill during the month…

[Operator Instructions]. Our first question comes from the line of Sean Stewart of TD Securities.

Thank you. Good morning. Couple of questions. Let's start with CapEx. Can you give us a little more detail on the reduction to the budget? What specific projects are you forgoing or delaying? And are we right to think about this as, taking measures to preserve liquidity, flexibility in the balance sheet, that's the main driver of this decision. Is that the right assumption?

So, to answer your second question, that's correct. We are just trying to be conservative with our cash. And I guess the way we are sort of thinking about is, we are sort of taking our CapEx back to an MOB level. So, some of the strategic initiatives that we had scheduled are now being deferred to a later year, hopefully, 2024.

And any specific projects that you are taking out of budget?

Our last timber, we had a couple of initiatives there we were going to do this year. So, we are going to defer those, that is the -- get the wooden feed changed around at the beginning at the start of the plant. Some work to work out as well with the woodyard and installation of a planer. Those are the ones that are actually going to hurt the most where we were excited about those projects, but we are going to defer those for another year.

The only thing, Sean, about those, as it relates to the one in Spokane and the delay of that one of the considerations that we had was, obviously the fact that, with Structurlam coming in, that obviously gives us still a strong push to continue growing. So, it doesn't hurt necessarily. It just delays further growth, but it doesn't hinder us from continuing the path of growth as such. So those are the kind of considerations that we had when we looked at those things.

Okay. Thanks for that. And then following on that, the Wood Products segment, I saw some CLT volume, which is encouraging. The previous indication was you expect that business to contribute positive EBITDA this year. And I want to confirm that's still the expectation. And then more broadly speaking with products, it looks like you have lost relative ground to the European comps. Can you give us a sense of how concentrated these losses are at Torgau? And is this really just a pallet pricing issue, any other measures you can take to bridge the gap with your competitors in that region?

Absolutely. When it comes to your first question, yes, we still stand by understanding that, we will be positive by the end of the year in the mass timber business. So that business is growing pretty well. We have an order book that has continued to rally up. And the amount of interest since we acquired Structurlam has just incredibly increased. So, we have something -- it's working pretty, pretty well. It's, I guess, what I'm saying here. Now as far as Torgau, yes, you are right. The pallets prices have come down significantly from where they were last year. And this is what's basically dragging the results down, when you look at the whole lumber business, that is probably the most single significant factor of all. Yes, lumber prices were not strong, they were still weak, Nothing dramatic versus Q1. We see that it's going to be improving in Q3. But, yes, a pallets prices is dragging down. And even though we're the largest pallet producer in Europe. Our volumes are still holding, but obviously with price being down, it creates a hit.

Sean, maybe I just add to that. So, we haven't been able to achieve the synergies we were targeting when we first acquired Torgau, just because the markets have been so low, so that's part of the equation as well. So, there's 16 million at least of synergies that we're still targeting.

Okay, that’s very helpful. Now will be back in the queue.

Our next question comes from the line of Matthew McKellar of RBC.

Hi, guys. Good morning. Just building on that last question, I wonder if you could talk about what kind of improvement in pricing, maybe in percentage terms you would need to see a return to what you consider more normal levels for pallet pricing. And then just wondering, if you're the largest producer of pallets in Europe, whether you plan to reduce production at all to help the market find balance?

Well, just in terms of the pricing one, Matthew probably about 10% or maybe 15%. So, we're talking about $11 or $12 a unit, that's where they're trading today. They need to probably go up to about $15 to be sort of a breakeven level. And then, I'm sorry, I missed your second question.

Yes. On the volume, yes, we've curtailed a little bit of volume, because normally we could produce a roughly 17 million pallets and we're producing shorter from that, maybe around 13 million. So, yes, we are taking measures to try to reduce the amount of supply in the market as a way to hold prices at a more reasonable level.

And that is part of our plan to reduce pallet production and increase lumber production there, so that's consistent with our strategy.

Great. Thanks, that’s helpful. And then just can you talk a bit more about, what the Structurlam acquisition does for you strategically and to the extent you can, what kind of capital plans you might have for that business over the short and medium term? I know you talked about the wood in feed, I think that was probably in Spokane, and then maybe what your expectations are around trajectory for revenue and contribution over that business or for that business over the next year or two?

Absolutely. Well, Structurlam what it gives us, first and foremost is the opportunity to be able to participate of the Southeast American market, which we know is obviously a very important growth market for us. And it also gives us the opportunity to add glulam to our offering. So, we had already cross laminated timber in Spokane, and now we're adding more cross-laminated timber plus glulam. So, that is in essence what the play is from our portfolio and a geographic coverage point of view. Now, on top of that, we are now being able to work not only Southern Yellow Pine but also as we were working before SPF out of Spokane. So, we also have a mix of different types of raw materials that are commonly used, whether it's in the Southeast or the Northwest. So, we're able to serve our customers depending on what their needs and desires are. And that has played out very well. One of the investment projects that we had in Spokane lined up was exactly around adding glulam capacity. We have deferred some of those investments because now obviously we have acquired and we are able to run glulam out of Conway in Arkansas very efficiently. So, that's a little bit of how things play out, and that is one of the reasons why, we wanted this so much and we thought it was such a good play. Not only because we were buying it out of bankruptcy, obviously at a very, at a high discount, but because he would allow us to already immediately start participating on that market, being able to offer both Glulam and CLT to our customers, because that's obviously what the market demands in most of the cases, when we receive inquiries. Now in terms of growth, we see this business growing very quickly beyond $100 million in revenue. So, we're aiming for that in a very short period of time. And that's obviously very positive from a profitability point of view. If already being small as we are right now, now getting into bigger numbers, then obviously the profitability increases in a very significant way. That's about mass timber.

And then last one from me. Do you expect any impacts to your Peace River mill, either over the near-term or longer term from the wildfires in Alberta?

In terms of our own FMA, we didn't suffer major losses as a consequence of that. So, the impact, the direct impact is negligible. Now what I can say though is there was a tremendous amount of losses around softwood, and that obviously impacts sawmills in the region and other businesses in the region. We are increasing at the same time, our softwood capabilities in Peace River. So, we're running more softwood than we normally do. Obviously, these two situations combined create a bit of a crunch when we're adding more softwood and there's been softwood fires that affected the region, that hinders our ability to do more softwood as we would like to do. But despite that, we are being able to drive higher campaigns or longer campaigns of softwood, which benefit us in the long run. We still make a decent profit with softwood in Peace River, and we shy away from hardwood, which is obviously where we struggle the most. Even though in hardwood we're already at breakeven at the current prices of hardwood. So, it's, we believe that going forward with hardwood prices slowly picking up in China, we will get back to the plaque on hardwood and in Peace River.

Okay thanks, very much. That’s helpful to me. I will turn it back.

[Operator Instructions]. Our next question comes from the line of Cole Hathorn of Jefferies.

Morning. Thanks, for taking my question. I'd just like a little bit of color on what you're seeing in kind of the cost of fiber and pulpwood in Europe, particularly around your German mills. And could you just put that in reference to what's happening up in the Nordics? I mean, the Nordic with pulpwood costs have been higher and they're probably going to be higher for longer. So, just some color around what you're seeing in Germany, and then relate that to, do you have kind of a, an improved cost advantage versus some of the Nordic tier there? Thank you.

Absolutely, Cole. Thank you. Yes, very important, the point that you bring up, in the Nordics, obviously, they are suffering from the fact that, with Russia being out of the equation, their costs of fiber has obviously escalated significantly. And we have seen the impact of those by listening to the news of mill closures in Finland and whatnot. Now, when it comes to our German mills, the situation is quite different. We have an increased beetle infestation that is currently developing in Germany. There is additional wood that is being made available as a result of these increased beetle infestations. We see actually a very significant increase of harvest as a consequence of this. And this will carry on for most likely already in the coming quarters. So, in Q3, we will already start seeing some of that. Q4 the same thing. And we think, it's going to be sustained for the rest of next year. So, for 2024, we expect pulp log prices to come down in Germany, at a significant level, and the same thing already beginning in later part of this year. So, the prognosis for us is favorable, very favorable on the back of the beetle infestation in Germany, which puts us at an advantage versus other geographies.

And then maybe just following up on that point. From the pulp side, I imagine it's helpful, reducing your wood raw materials cost. But from a sawmill perspective, is there any kind of further kind of processing cost that needs to be thought about for the beetle-infected wood or not really?

No. No. And as a matter of fact, it's equally positive, if not so, the same or even more, because it's a direct. The first one to be benefit is the sawmill -- blogs will follow. So, the first benefit it would be Torgau and [Indiscernible] directly. So, both meals will enjoy, much lower prices for saw and timber for saw logs, excuse me, in Q4 and already in 2024.

And then if you allow me on your mass timber business. Could I better understand the commerciality here? Am I right in assuming that, your scale gives you quite a significant advantage going forward? I mean, store in, so, one of your competitors has always called out, the ability and reliability to supply across laminated timber from multiple sites to bigger projects. So, from a commercial perspective, do you expect to see greater interest from your customers? And related to that commerciality, should we think about mass timber as being kind of a more stable volume and pricing business versus traditional number or can't we really make that assumption from a kind of profitability and pricing perspective? Thank you.

Absolutely, Cole. Absolutely. When you look at mass timber, this is not a commodity business. So, this has a very different dynamic than what we see in pulp or lumber. Despite being in part of the same construction industry, the dynamics are very different. The margins are very different. These products are tailor-made for customers. And obviously, we look at them from a project-on-project basis where we placing concrete on steel. So, it's again, the parameters under which we look at this business and evaluate it are very different. The fact that we have 35% of North American install capacity gives us an edge. It gives us a more competitive cost to work with that allows us to bid for projects that since North America may not have the capacity to support and Europe is bringing products in from across the ocean. We're able to already compete also with the Europeans that have taken advantage of that situation and the fact that North America is just developing. So, yes, that puts us at an advantage with very modern facilities that we have. The Conway facility is probably the most modern facility in North America and not very far away from Spokane, where Spokane was. So, yes, having the good facilities, highly competitive, and properly dispersed in a geographic fashion is just a tremendous tool to have.

Thank you.

Thank you. Our next question comes from the line of CJ Baldoni of Principal.

Hi, thanks for taking my question. Following up on the last question and your answer. Could you talk about the margin profile of the business and kind of what you might expect and over what timeframe?

We don't disclose a specific margin for our products. One thing that I can say though CJ is, when you look at Spokane, one of the things that we have been working on precisely was how can we fill up the plan. How can we ramp it up and so forth? I can say already that the plant is running full, it's been running full already for the last couple of months. And with the order book that we have, that plant is going to ramp full with what we have already in hand, through the end of the year easily with the projects that we're about to sign off and sign contracts for, which is quite significant. It's probably twice as much as what we have in our order book. That plant will be running, at full already through at least half of next year. And Conway obviously takes advantage of it because Conway will be ramping up as we go through the process. So, having Spokane running in full, right now on one shift running full and Conway ramping up, that obviously puts us in a good situation from a cost perspective, and make sure that we drive in good results to the bottom line. That's why we say that despite of its being still a small business today. By the end of the year, it's going to be already cash-positive or profitable EBITDA. And obviously, the prospects are very, very good for the coming year.

Okay. Are you having to use price to kind of grow and scale up your business? Or can you kind of do it without making concessions on price?

No, as a matter of fact, it's quite the opposite. And just to illustrate a little bit on that particular subject. When we picked up Structurlam and we looked at, at some of the things that they had been working on and we went to bid for those projects or rebid for those projects because obviously they were canceled altogether. We end up looking at our cost position and what we should be able to bid for. And all of our bids came much higher than what structural and had bid for them initially. So, Sif anything for those projects that were, that had already been secured by structural land before their bankruptcy and that had been halted because obviously they ran out of money and had to put a stop on everything when we picked up some of those things since we started the conversations from scratch, the surprise to them obviously was the fact that not only had they been going through a supply that had went bankrupt, but the fact that the new owner is coming with a much higher price than what they had, thought for their project initially. So, if anything, we apply very strict demands in terms of what we expect for profitability, for products and are not willing to just give concessions to make ourselves through into the business, not at all, pretty much the contrary.

And you rebid those, despite having a cost position that was no worse or even better?

Correct. And to the vast majority we're executing and in process of signing contracts for all of those. Yes.

And then lastly, could you talk a little bit about working capital over the back half of the year given all the moving parts in your different businesses and the ramp-up of CLT?

Yes, absolutely. On working capital, we continue to exercise all austerity measures to make sure that we bring inventories down for either fiber or pulp. We're aiming to significantly continue those efforts and bring at least $50 million of further reductions in working capital through the remainder of the year. So, yes, that's a big area of focus for us and it's across all businesses.

Great thank you for clearing my question.

Thanks, CJ.

Thank you. I would now like to turn the conference back to Juan Carlos Bueno for closing remarks. Sir?

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

This concludes today's conference call. Thank you for participating. You may now disconnect.