Good morning, and welcome to Mercer International’s Third 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.

Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the third 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 by telephone, there is a presentation material that we have attached in the investor section of our website. 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 would 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 $38 million compared to Q2’s negative EBITDA of $69 million, this significant improvement over the prior quarter was due to lower fiber and other production costs. Inventory impairment reversal and fewer days of scheduled annual maintenance downtime, partially offset by lower pulp sales realizations. Our pulp segment contributed quarterly EBITDA of $49 million, and our solid wood segment EBITDA was negative $7 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 Q3, our pulp segment had significantly lower fiber costs than Q2. As a reminder, Q2 results included a $51 million inventory impairment, primarily for hardwood. At the end of Q3, only about $9 million of this impairment remains against our closing inventory. Our solid wood segment also had lower per unit fiber cost in Q3, when compared to Q2, due to the availability of lower…

Thank you, Rich. Good morning, everybody. Financially, Q3 was significantly better than our second quarter. Our production costs, including fiber, all trended down this quarter. Lower costs combined with modest price increases in some of our markets led to a significantly improved EBITDA result. And, although, the markets where we operate are still at historically low levels, surprising and have relatively weaker demand than expected, we’re seeing some selective modest recovery, but varying by geography. As a result of uncertain market conditions, we have taken proactive actions throughout this year to reduce our planned CapEx as we had already signaled in the previous quarter, and now expect to land at around $140 million for the full year. At the same time, we continuous our focus on cost saving measures and aggressively managing our inventories during this third quarter, and we will continue this financial discipline, while our markets remain weak. I am pleased with our efforts to increase our liquidity this quarter. Our $200 million senior note private placement and the €70 million increase to our German revolving credit facility leave us well positioned to continue to execute our strategic plan through this business cycle. We’ve recognized that these 2028 senior notes come with a high cost at 12.875%, but given the depth and uncertainty around this down cycle in our markets, we felt it prudent to ensure Mercer has strong liquidity through this cycle. It is also important to note that the investments we have made in our solid wood segment over the last year, namely the acquisition of Torgau and Structurlam were primarily done with our own cash, and in the fullness of time these investments are expected to provide returns well in excess of the cost of these new notes. Overall, pulp markets remain weak, but all…

Thank you. [Operator Instructions] Our first question comes from Hamir Patel with CIBC. You may proceed.

Hi, good morning. Juan Carlos, how much longer would you expect to benefit from the cheaper beetle wood in Europe? And, longer-term, how do you think about the risks to fiber availability just given how the beetle played out in British Columbia?

Yeah. Thank you, Hamir. We have a very important issue and one that we’re following very closely for obvious reasons. We believe that the beetle infestation would support lower prices for wood throughout most of 2024. And that’s what we’ve dialed-in into our estimates already thinking about what next year would look like. So not only Q4, but a large majority of 2024 should be benefiting by the impact of beetle infestation. Having said that, obviously, we monitor very closely how the whole access to wood or fiber in Europe has progressed. And this is something that we keep on in our radar, one of the things that we take advantage of is our Mercer Holz entity allows us to supply wood from all around Europe in a very efficient way. So we keep on putting a lot of emphasis on making sure that we maintain that differentiator from our side on fiber supply, while we monitor the evolution of these beetle infestation.

Fair enough. Thanks, Juan Carlos. And just a last question I had for Rich. How are you thinking about CapEx for 2024 and what are the larger growth projects that you’d expect to advance next year?

Yeah. So, I think we’re still going to have a pretty subdued CapEx plan for next year. So it’s not a lot of strategic initiatives. And, I think we’re going to sort of see how the year plays out. But it’ll be on the lower end, probably in $100 million neighborhood, I think, at this point.

Great. That’s all I had. I’ll turn it over. Thank you.

Thank you. One moment for questions. Our next question comes from [Sean Stewart] [ph] with TD Securities. You may proceed.

Thank you. Good morning. Juan Carlos, you mentioned the restocking efforts that are happening in pulp, in China, and I guess I’m wondering your assessment of how much of this is just inventory arbitrage and buying aggressively at the bottom versus actual consumption. It feels like paper markets in China are necessarily strong, so be interested in your perspective on the sustainability of price momentum we’re seeing right now.

Thank you, Sean. Yes, what you say is absolutely correct. I would say there’s a little bit of both. I wouldn’t attribute to only one of these factors. I think that there is some increase in consumption in China from just on the sake of the new plants that have been put up both in tissue and paper that are obviously demanding pulp. What I see the weakness though is in the actual market for those products from that point onwards. So while pulp might be consumed, the marketing of those paper products, I think, it will take longer than it usually does. On the other side of the spectrum, in fact, as you started your question, we do believe that there’s a lot of arbitrage of inventory going on and that’s why we remain cautious about any increases right now out of China. We see that in Europe and in North America things are picking up, so they are obviously lower than China right now. So they have still space to pick up along the quarter. But I wouldn’t be overly optimistic about China prices developing much stronger until we really see some demand kicking in. Now, having said that, since the NBSK supply equation is in our view so tight, with so many curtailments happening, and so many closures of different mills. We do believe that if there is a reaction from a demand side, particularly in Europe, that has been very dormant, or even North America, we could see that that could be a catalyst for a real recovery in prices. But as everybody knows, it’s not clearly in the picture nowadays, when Europe or North America would start picking up strong momentum. So we’ll have to see, we’re very cautious about pricing for the next few quarters.

Thanks for that detail. That’s helpful. Second question, it does seem like Torgau is an ongoing drag on results of the wood product segment. You touched on pallet markets. Any thoughts on repositioning of the product mix, which is something you talked about before? Does that take a backseat until you have clarity on broader balance sheet improvement for the company? How is the thinking evolved with respect to changing the product mix of Torgau?

Yeah, very important matter. When you look at Torgau, one of the things that we are doing, since pallet prices are very depressed historically, based on the fact that Europe is very little is moving in Europe right now from an economic perspective, things are very, very slow. Based on that, what we’ve done since we have capacity installed to produce pallets, we have rearranged our product portfolio and have changed a little bit more in the type of pallets that we’re able to produce and which markets we can serve them into open new markets for some of them and go for the higher value markets for us. That’s a little bit of what we’ve done behind the scenes on the pallet market. We’ve kind of made changes to all the sales organizations that we had or that Torgau had prior to our acquisition. That’s been one change from our end with the existing footprint. On the other hand, we have started some of the transformation projects in Torgau, so that we can significantly take advantage of the capacity that the mill can offer from a lumber perspective. Some of those projects we’ve kind of put on the back burner for the time being. We know that once we restart them, they will soon be into fruition. So as you will have said, we’re cautiously looking at how the market develops, how our cash flow and our liquidity evolves. So that we can trigger the continuation and finalize those transformative projects for Torgau, which would give us the advantage, obviously, of a much larger production of lumber. It wouldn’t make a whole lot of sense to produce a whole lot of lumber right now at the current prices, but we do want to be ready when the prices pick up, and therefore us having a larger capacity to produce higher volumes of lumber by then.

That’s great. I appreciate the detail. That’s all I have.

Thank you. One moment for questions. Our next question comes from Matthew McKellar with RBC. You may proceed.

Hi, good morning. Thanks for taking my questions. I’d like to stick with the palette market to start with. Should we be looking just to a general economic recovery in Europe as we think about what could kind of cause recovery in the pallet markets or given the Torgau is one of the larger facilities in Europe is likely EBITDA negative and the pallets have finite lives, could that market begin to tighten even absent a broader economic recovery?

Matthew, we do believe that this is very much linked to Europe’s economy not moving. When you think about pallets, it’s all about commerce, it’s all about shipping products here and there. And, basically, when you look at Germany overall, Germany being one of the most important economies in Europe is probably the one that has suffered the most and it’s actually going under our recession. So we do believe that only when we see some recovery from an economic perspective, GDP overall in Europe, we will see an immediate move towards a higher use of pallets and therefore with higher demand, we would expect higher prices. So that’s really what we believe we’re up against and that’s where all kind of our chips based on that premise, which we believe hold very true.

Okay, thanks for that. Maybe switching over to manufactured products in the mass timber. Are you able to talk about whether your EBITDA positive at this point? And then, how should we think about a reasonable target for 2024 revenues in that business just given what you’re seeing in terms of kind of inbound inquiries and backlog in that business at present?

Yeah, the business as we mentioned in the call has been progressing pretty well since we acquired Structurlam. The interest and the level of inquiries multiplied significantly, putting a lot of pressure on our teams to be able to deliver on all the design work that is required for this business prior to being able to close any deals. As such, we’re seeing a very significant growth, not only we already saw it in Q3 versus Q2, but also when you back to your question when we look at next year, we most likely would be at least twice in terms of revenue as we have, as we will close in Q4. So we’re thinking that for next year, we should be around $120 million plus in terms of sales. And that’s, again, twice of what we will finish by the end of this year. And we’re very, very close to being breakeven now. So we’re, again, very confident that, it will be a positive contributor overall, very soon to our company.

Great. That’s helpful. Thanks for that. Last one to close. I’d like to ask about just the dividend here and the level of commitment when it comes to maintaining it. Do you think you’re getting credit for the dividend and do you view it as something you’d like to maintain just given the broader company focus on optimizing liquidity and the cost of debt?

Juan Carlos, do you want me to take that one?

Yeah, feel free, Rich.

Yes, so Matt, I think it’s probably fair to say the board is very committed to the dividend through the cycle. Every quarter they look at our leverage, our balance sheet metrics, I mean, our capital allocation plans, and so this was a big discussion for sure. But, we’re projecting modestly improving financial results as we go through the rest of this year and into 2024. So they’re very committed to the dividend and we just didn’t think now the time to be changing it.

Okay. Tanks very much. That’s all for me. I’ll turn it back.

Thank you. [Operator Instructions] Our next question comes from Sam McGovern with UBS. You may proceed.

Hey, guys, good morning. Following the recent bond deal, you guys have lots of liquidity. How do you think about what a normalized level would be? And can you also discuss possible uses for the excess liquidity once earnings return to a more normalized level?

Okay. So I would say we’ve probably averaged about $500 million of liquidity over the last probably 2 years. We’ve always liked to have dry powder, as we used to say, just because we have been able to use that liquidity to invest in things like Torgau and our mass timber businesses. So we like to have that available, especially given the volatility in our industry. So I would probably say that’s our target. But as we sort of come out of this down cycle, as Juan Carlos mentioned earlier, Torgau is a big area of focus for us for some value-add investments there. Our mass timber business as well, there’s some things we want to do there to lower our costs at our Spokane mill and a little bit more efficiency at the Conway plant as well. So, I think those will be the main areas of focus as we move forward.

Great. Thanks so much. I’ll pass it on.

Thank you. And I’d now like to turn the call back over to Juan Carlos Bueno for any closing remarks.

Thank you very much, operator, and thank you all for joining our call. Rich and I, are available to talk more at any time, so don’t hesitate to call either one of us. Otherwise, we look forward to speaking to you again on our next earnings call in February. Bye for now.

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