Good morning and welcome to the Mercer International's Fourth 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.

Thanks, Abigail. 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 we have attached to the investor section of our website. But 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'd like to call your attention to the risks related to these statements, which are more fully described in our press release and the company's financial filings with the Securities and Exchange Commission. This quarter, our EBITDA was $21 million, compared to Q3's EBITDA of $38 million. Higher pulp sales realizations and lower fiber costs were more than offset by the sale of inventory in Q3 that had previously been impaired, as well as increased major maintenance downtime in Q4. In the 2023 fiscal year, we had EBITDA of $17 million compared to EBITDA of $537 million in 2022 due to significantly weaker pulp and lumber markets, lower spot energy prices, and higher fiber costs that impacted the entire industry. Our pulp segment contributed quarterly EBITDA of $32 million and our solid wood segment EBITDA was negative $6 million. You can find additional segment disclosures in our Form 10-K, which can be found on our website and that of the SEC. In Q4, both our NBSK and NBHK sales realizations increased compared to Q3. We had higher prices in all our markets as customers were restocking, and in Europe,…

Thanks, Rich. Our Q4 results were positively impacted by improved pulp pricing, lower fiber costs, and a modest contribution from our mass timber business. In addition, all our mills run very well this quarter. However, results were lower compared to Q3 due to the impact of non-cash items in Q3 that didn't recur and incremental major maintenance compared to Q3. Overall, even though demand remains weak, we saw small improvements in most of our markets in Q4. The one notable exception was the European lumber market that took a step back after some positive momentum in Q3. Generally speaking, our market dynamics remain unchanged with lower producer inventories and weaker-than-normal demand. These challenging market conditions have led us to keep a tight handle on CapEx. We closed the year with capital expenditures of roughly $136 million compared to an original target of $200 million at the beginning of the year. Looking ahead to 2024, we're currently targeting between $75 million and $100 million of CapEx as Rich mentioned before. This is essentially a maintenance of business budget. However, we will be monitoring our operating results and could greenlight additional high-return projects should market continue to improve as the year progresses. We will also continue to manage our working capital and costs closely. While we're expecting 2024 to be a significant improvement over '23, we believe the recovery will be gradual. Overall, pulp markets remain weak, but we are seeing some upward pricing pressure in Europe at the moment as a result of a slight uptick in demand, while in China, the lunar year holiday has, as expected, limited buying activity. Looking ahead to 2024, we believe that the roughly 1 million tons of softwood production that has been either permanently or indefinitely shuttered will put upward pressures on prices. However,…

[Operator Instructions] Our first question comes from Hamir Patel with CIBC Capital Markets. Your line is open.

Hi, good morning. Juan Carlos, could you comment on how you would see wood costs and fiber availability trending across your European fiber baskets for both pulpwood and saw logs in coming years, just as the effects of the spruce beetle play out?

Of course, Hamir. Thank you. Good question, because this is obviously a very significant element of our cost structure. And there's some important developments on that end. We know that calamity wood in Germany is obviously a very significant factor, that we're already seeing some of the benefits of it in the later part of 2023, and we're seeing still some of those benefits in 2024. So we are expecting a continued decrease -- slight decrease on the cost of fiber overall, both for pulp and lumber. It is important to say, though, that obviously this calamity would especially in Germany, it has created quite a significant amount of buzz and demand. So even though there's plenty of it, there's also an uptick in demand, as people obviously prefer to go for this lower-priced wood. So we don't expect necessarily prices to collapse. But yes, there's a positive trend for us with lower prices coming overall. So in that sense, I think it's positive, what we see coming in the months to come, but I'm cautious as to how big that drop will be.

Okay, great. Thanks. That's helpful. And just want to ask about, on the lumber side, what impact you would expect the Red Sea disruptions to have on European lumber exports and whether you think some of that -- more of that wood gets perhaps redirected to the US?

In the case of the Red Sea, the impacts that we're seeing right now, Hamir, are more on the pulp side than on the lumber side. In our lumber business, when we don't ship to the US, we're usually focusing on the European market to a large extent. So then the impact is much more limited. In the case of pulp, we do have a bit more of an impact. Even though that impact has now translated in probably a small uptick in the actual logistic cost, but it's very relative still, relatively small at this time. And obviously, added transit time, which, if you put it from a flip side, it means more tightened supply into China, which is not at all bad. It creates the sentiment of more tightness in the market if there's delays on shipments. So really, the impact so far is very small, and we hope it stays this way obviously.

Okay. Fair enough. Thanks, Juan Carlos. I'll turn over.

One moment for our next question. Our next question comes from Richard Stevens with Amundi USA. Your line is open.

Hi, and thanks for taking my question. I had two questions, just one more housekeeping. I think you mentioned that the revolver availability was $296 million. My sense is that there are no covenant limitations on that availability. Is that correct?

That's correct. Generally, there's a cap on the Canadian revolver, but we factored that into that number.

Got it. Okay. And the next question I had was more from a historical perspective, obviously, you're at the bottom of the cycle at the moment. Typically, how long do these cycles last? Have you seen in the past? I know there was a bit of a one, I want to say going back to maybe 2018, '19, and maybe some earlier in the decade there. But typically, when you go through these cycles, you mentioned there's been over a million tons of capacity that's been shut in. And how long, typically, does the cycle last? How many quarters? Just to get a sense.

Normally, when we look at cycles, these pulp cycles, they can easily have four years, three years in duration, and in some cases a bit more than that. So it really we don't -- it's not a mathematical equation behind them, obviously. But, yeah, there's a few years in behind them. So that's why when we think about what the future holds for us, I think we're looking into a recovery, partial recovery in '24, a much healthier '25 and '26, that's a little bit of what we have in our plans. And when we look at some of the analyst's projections, particularly for pulp, we see the same thing that everybody projecting almost in a very coherent way, pricing picking up in the next few years.

Got it. Okay, that's very helpful. That's all I had. Thank you.

One moment for our next question. Our next question comes from Kasia Trzaski Kopytek with TD Securities. Your line is open.

Hey, there. Good morning, everyone. A couple of questions, maybe starting with pulp markets. It seems like pulp mill inventories are decently balanced at this point. Can you speak to where buyer inventories are talking about China and Europe?

Yeah. I think the situation on inventories is quite balanced, probably more to our favor at this time of the year. In terms of producer inventories, when you look at the recently revealed statistics that show 40 days on average for softwood, that's in good levels, relatively low levels and proper. When you think about customer inventory, we believe that the situation in China is a bit more uncertain. There might be more inventory there. And actually, as they came into the New Year celebration, obviously they were stacking up with inventory prior to that. We saw very big swings of product in the last quarter of the year into China in preparation for the new year. So obviously there's a lot of expectations on what will happen demand-wise, once that New Year celebration is past us, and how demand will pick up from that point onwards. What we do see is an important demand uptake in Europe, and this again is coming from a very, very low level. So when we think about our customers that are running their paper machines, they're running at better than they were running before, but again, coming from very low level. So it's far from being what the market traditionally is. And that's why we think there's a very significant upside. If paper -- if the European economy comes back and paper comes back, that would be a very significant factor in what we would believe to be then a much stronger price recovery. Because again, as you all said, the tightness in supply is there. There's so many mills that have closed down, so much capacity, almost a million tons of capacity of software that has been shut, that there's not a whole lot of supply out there to cope with an increment in demand. So it won't take a whole lot to -- for this thing to actually move into a much stronger price schedule for us. But again, we need Europe to wake up strongly and China to come back after the New Year in a better situation.

Okay, thanks for that. And how much -- what are your freight costs right now for delivering lumber from Europe to the eastern seaboard per thousand?

That's a good question, Kasia. It's probably around $100 a thousand board feet.

$100. Okay. And Richard, that includes the land -- over-land transportation as well?

Yes, that would be all in.

Okay, great. One last question. Just switching gears to the mass timber markets, you indicated you expect things to trend favorably going forward over the next year. Any numbers you can put around that, maybe a cadence for how you expect the revenue to grow from here and then any potential EBITDA contributions that you would expect?

Yeah. On mass timber, as I've said, and Richard as well, we're very excited about how this business is progressing. The order book is a great indicator of it. If you think about where our order book was in Q3, we had $54 million of projects locked in, that we would then start executing from that point onwards. In Q4, we not only executed part of those $56 million projects, but we closed with $100 million or almost $100 million of projects in the order book. That gives us a very strong confidence to believe that if we close this year with about $60 plus million in sales, next year it would be at least twice that amount. And when we look at our capacity with the sites that we have, we know that by building up gradually and continuing to run up those mills in a way that we can add more shifts later down as time progresses, this is a business that just with our setup could provide us sales of at least $500 million a few years down the road. So the assets that we have, provide us for that growth trend for us to work on. Margin-wise, this is meant to be -- obviously, this is not a commodity business. This is more of a specialties business. And we look at EBITDA margins around 20%, 25% in the long run. So that's what we expect of this business going forward.

Okay. And just a quick follow-up. So your order book right now is $100 million and appreciating, it takes a while to actually lock in the order. What is the size of the sales that you're going after right now that you haven't locked in yet that you're pursuing? What potential order book size would that be?

No, what we want to do is, for example, for this year, we're very confident that as quarters progress, our order book will continue to increase. We keep on executing on projects, so that reduces the order book, and the same time we lock in future projects, and that makes it -- continues to grow. When I'm talking, that we have $100 million or close to $100 million in order book, not all of that is into 2024. So some of those projects are already looking into 2025. So you have locked in projects that will already go beyond the one year. So that's the way this thing works. You have quite a bit of lead time in some cases, and it's all tied up to the individual schedules of these projects. So we will continue to grow. We will bring more projects into 2024 that will allow us, as I said, to double our revenue this year versus 2023 and for sure keep on the pace that this industry is showing overall. When you look at the mass timber industry in North America, it's growing at more than 20% a year, as a matter of fact. So this is a very significant growth engine for us. And obviously, we intend to ride that wave and do investments in our facilities to make sure they're even more and more cost-competitive so we can take full advantage of those opportunities ahead of us.

Okay, awesome. Thanks, everyone. That's all I had. Have a great weekend.

Thanks.

[Operator Instructions] Our next question comes from Sam McGovern with UBS. Your line is open.

Hi, guys. Good morning. With regard to the sale of the sandalwood business, any plans in terms of what you're doing with the cash that comes in? Is it just reinvest in the business, increase liquidity, or is there anything else that you're planning to do with that?

Sam, as it comes to that, obviously we have some interesting growth projects that were given all the unrest that we went through in 2023, a lot of projects that we kind of put on hold, and we're very eager to bring them back in. So that is obviously part of the equation. As we see the year progresses and we see what we believe to be an improvement overall in how the market prices behave, obviously this will be something that we will be keeping an eye on so that we can bring some of our -- more of these CapEx projects to fruition. The sandalwood sale process will obviously add to that picture. So we see ourselves looking into what other potential projects we can bring forward that can have a good and quick return for a company. And we have quite a bit lined up. There's so many things that we want to do in Torgau to increase our lumber production there with a very quick payback and obviously, mass timber to increase the competitiveness over there. So, yeah, there's plenty of things that we can work on if we have -- hold additional cash in hand.

Awesome. Thank you very much. I'll pass it along.

Thank you. That concludes the question and answer session. At this time, I would like to turn the call back to Juan Carlos for closing remarks.

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

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.