Good morning, and welcome to Mercer International's third quarter 2024 earnings conference call. On the call today are 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, Josh. Good morning, everyone. Thanks for joining us today. We will begin by touching on the financial and operating highlights of the third 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 Investors 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 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 operating EBITDA totaled $50 million compared to Q2's EBITDA of $30 million. The improved quarter-over-quarter results were driven by fewer days of planned major maintenance downtime, as we had 20 days in Q3 compared to 37 days in Q2. The benefit of fewer planned days of downtime in Q3 was partially offset by several unrelated and unplanned events that significantly reduced our pulp production in Q3, as well as unfavorable foreign exchange movements and weaker hardwood prices. Juan Carlos will have more to say about our unplanned downtime in a moment. The pulp segment contributed quarterly EBITDA of $55 million, and our Solid Wood segment had quarterly EBITDA of negative $2 million. You can find additional segment disclosures in our Form 10-Q, which can be found both on our website and the SEC's. The third quarter is typically a period of weaker seasonal demand, but softwood pulp markets remain steady, resulting in…

Thanks, Rich. In Q3, our operations resulted in a $20 million EBITDA improvement over Q2. However, we had higher expectations. Unplanned and unrelated downtime at a couple of our mills significantly reduced our operating results. We estimate that the negative EBITDA impact of this downtime was about $20 million. I will have more to say about this in a moment. I am pleased to note that within our solid wood segment, our mass timber business had another strong quarter, generating revenue and margins consistent with what we accomplished in Q2. With regards to our Torgo operation, although our pallet business is still struggling under the weight of a weak European economy, we are beginning to realize certain synergies which are benefiting our pulp business. When we purchased Torgo, we estimated we would be able to achieve about $16 million annually. At the end of Q3, we had realized almost $5 million of synergies related to fiber optimization that are showing up in our pulp mills results, and we expect to achieve about $8 million in synergies by the end of the year. Once Torgo's lumber capacity is fully ramped up, we expect our synergies to increase, and we continue to believe that $16 million of annual synergies is achievable. As Rich highlighted, we recently completed the refinancing of our 2026 senior notes. I am pleased to have this behind us, and that we were able to reduce and by $100 million. However, we recognize there is more work to do on this front, and consequently, debt reduction will be an important focus of our capital allocation strategy going forward. In Q3, we invested roughly $27 million in our operations. As previously announced, our planned 2024 capital spending is expected to be between $95 and $120 million. You will recall that…

Thank you. As a reminder, to ask a question, please press Our first question comes from Sean Stewart with TD Cowen. You may proceed.

Thanks. Good morning.

First question is on your deleveraging targets. Even if we have a better pulp operating environment next year versus the challenges you had in 2024, it still looks like your free cash flow prospects are fairly modest. I guess the question is around broader deleveraging targets, and if free cash flow is not a strong contributor, any thoughts on non-core asset sales that might be advanced to accelerate that balance sheet transition? Any broader comments on deleveraging targets?

Thank you, Sean. Yes, as you will point out, the focus that we have is naturally on debt reduction in the medium term. We believe that we have a strong foundation for improved EBITDA next year as well as the following year. Again, this is on the back of what we believe is a solid foundation, especially for softwood. As we mentioned, 85% of our sales are in softwood. So while hardwood might be under pressure, we believe that the foundations for softwood are strong, and therefore, our expectations for an improved performance on softwood are there for next year and following then. As far as asset sales, we are proceeding as we announced earlier. We are proceeding with the sale process of Sentinel, and we are making good progress on that end. So, obviously, that will be an additional source of cash when we are able to conclude that transaction. But we are making good progress on that end. And, obviously, we always keep a look on making sure that we keep the right balance of our portfolio of assets overall. I do not know, Rich, if you want to complement anything that I missed.

No. I think that summarizes it quite well, Carlos.

Okay. Rich, maybe just a follow-up. I mean, is there a target, whether it is net debt to cap or net debt to EBITDA in a normalized environment that you guys are looking towards as a long-term objective?

Yeah, Sean, I think in the fullness of time, obviously, this is not going to happen overnight, but we want to get to about two and a half times net debt. And as Juan Carlos said, we have expectations for EBITDA growth and think there will be opportunities for debt reduction as we go forward as well.

Okay. Thanks for that. Second question, Juan Carlos, around the U.S. election. If Trump were to win, do you have any thoughts on the blanket import tariff that administration would be proposing and how that might affect your strategy for European lumber shipments to the U.S. and potentially, I guess, Canadian pulp shipments into the U.S. as well?

Yes, Sean. That is obviously a situation that we will be monitoring closely. We do not know, obviously, nobody knows yet how dramatic those tariffs will be and if they will actually be put in place if Trump wins. So a lot of ifs in that sentence. But, obviously, if there were tariffs exerted on lumber, we know that part of what we do is destined to the U.S. Now we have had the possibility of supplying different markets, and we vary the amount of lumber that goes into the U.S. depending on how our price conditions flow. I think this quarter, we said about 43% went to it. In a different quarter, it had been about 60%. So it fluctuates quarter by quarter, and this is all depending on the conditions that we see in other markets. Now it is important to say that we are seeing improvements in Europe. We are seeing significant improvements in the UK market. We are shifting volumes towards that market more recently than what we have done before, with regular shipments far exceeding what we have done previously. So there are certain markets that are posing very interesting for us, and that gives us the opportunity then not to be so dependent on the U.S. But, obviously, back to your point, if there were tariffs, obviously, this would put a bit more of a strain into that. But, again, given some of the other markets that we have developed, we believe that there are ways to go around it without that being a significant impact on our results. On one end, and on the other end, I think it is very important to remind ourselves that we do believe, and I guess everybody is under the same line of thought, that as interest rates continue to come down, and I think everybody's expectations, regardless of Trump or Harris being in power, and obviously the Fed dictates this by their own accord, but the expectations that interest rates will continue to go down, we believe, are an important element that will favor overall. Lumber demand should rise if construction rebounds, which everybody is expecting that to rebound. I think the lack of housing, the aging of the housing offer are critical elements that give us confidence that with construction rebounding, we will have far better lumber prices than what we have had so far this year or last year. So even with tariffs, I think there are expectations that lumber prices will be higher as we move on. So we are confident that there are good days ahead of us. And on the tariffs, again, we will see a lot of ifs in that equation.

That's great context. Much appreciated. That's all I have.

Thank you. Our next question comes from Matthew McKellar with RBC Capital Markets. You may proceed.

Good morning. Thanks for taking my questions. With elevated interest rates weighing on construction activity, are you seeing a more competitive environment for mass timber projects? And more broadly, what is your sense of how the North American supply-demand balance in that space evolves over the next couple of years?

Yeah, Matt, you raise a very important question. Mass timber is a product that has proven to be competitive to concrete and steel, and obviously, it is gaining traction. I would not say little by little because the growth year over year is in excess of 20% as an overall market. And we do believe that that growth will continue to carry forward at that pace in the next five years. So having a business that grows 20% on average every year is, for us, a very strong foundation for growth given the capacity that we have been able to acquire. Now a lot of this growth obviously comes from the knowledge that little by little, mass timber has been able to attract from different people that have been having the opportunity to work with us. As it is a technology that is not widely used across the entire states of North America, around the U.S. or Canada, there are certain regions that are more prone to it. There are certain regions, for example, in the U.S., although the eastern border and the western border of the U.S. have much more penetration on projects. And little by little, we see that in the states, none of the coastal states, there are increasing rounds of projects. Now what's holding back still some of these projects are the interest rates. We mentioned in the call earlier that the order book is at $33 million, and we have an increasing amount of interest in projects. And when we say that, it's because this is higher than the interest that we have seen in previous months. So as the quarters advance, we end up participating in more quotations for more and more projects. So we know that it's a market that is growing. And…

Thanks. That's great commentary. If I could just follow up on that. What do you think the tipping point is in terms of rate relief? What do we really need to see until some of those projects that have been developed and are ready for better financing conditions to start moving forward?

I think if mortgage rates are now, what, between 6% and 7% or around those lines, I think once they come down to the four-ish or when people see that there's really a clear reduction and maybe not back to the very low historical levels, but yes, very attractive reductions, I think that's when things will start moving. So that's why we believe, and there's always a lag. Even if interest rates come down, construction will always have a lag by the time that you actually see the impact. And that's why we believe that we're expecting to see that more in the second half of 2025 than earlier.

Okay. Thanks very much. I'll turn it back.

Thank you. Our next question comes from Cole Hathorn with Jefferies. You may proceed.

Good morning. Thanks for taking my question. Just like to follow up on your commentary around seeing a bit of an uptick in the European lumber markets because there's a bit of a divergence between some of the Nordic players that are calling for a bit of stability and then Stora Enso's as well, similar to you, that's got probably a more similar footprint in, you know, Germany calling about an uptick in demand and pricing. So just wanting to know, are you seeing some regional differences there, and what's driving the strength as the first one? And then the second is on the fiber costs that you're seeing. Can you give a little bit more color on, you know, regionally, what are you seeing in your feedstock to your pulp mills as well as your sawmills from a cost perspective, in Europe rather than Canada, please? Thank you.

Absolutely, Cole. As far as the first question, the uptick that we see in demand is basically coming from the UK. So that is the market where we have seen a pretty good recovery and good signs that indicate that this would be sustained for a longer period of time. So that is precisely to your point. That is the market where we serve and where we have products that fit very nicely into their quality demands. As far as the fiber costs in our different mills, we see obviously there's differences when we look at how the market is behaving in Canada versus Germany. On average, our fiber costs in both regions have been relatively flat this quarter versus last quarter. There's different dynamics behind them, but overall, average prices. In the case of Canada, one thing that we're benefiting from is in the case of Peace River, the fact that we have our wood room running. And in the case of Celgar, the fact that we are a little bit escaping from the situation in BC due to the strategy that we implemented about a year ago. On sourcing ourselves from the U.S., we've been able to close long-term contracts with U.S. suppliers of wood for us. We are being able to bring across the border thanks to the fact that Celgar is so close to the U.S. border, and by doing so, we have been able to reduce the amount of the highest-cost wood chips that we were acquiring from BC. So that's the way that we balanced out the fact that even though in BC, the wood costs are higher, and they're higher because there are more sawmills being closed, and we hear this in the news very frequently, unfortunately. Well, in our case, this opportunity…

Thank you. And maybe I'll just follow up on that point because, you know, the steeper cost curve that we're seeing in Europe with, you know, UPM, made to fiber taking downtime due to those fiber costs and your, like, relatively better cost position mills in softwood. Are you really seeing that benefit? And, you know, with the commercial downtime that these competitors have taken recently, are you seeing kind of increased incomings, you know, better order books, because of your relative cost position and people a bit nervous or not ready at that stage of the, am I reading in too much to that?

We have, for the vast majority of our business, is all under contracted volumes. And most of those contracted volumes would be with pretty large companies, and whether it's in tissue, about 50% of what we do is in tissue, about 30% goes to specialties, and I would say about the other 20% to printing and writing. So most of that volume is already contracted. And our mills are running flat out. So everything that we produce is being sold. The inventory levels that we're managing are very, very small. We believe that in both German mills, we're going to end up the year with not more than 15 days of inventory, which is very, very low. So again, the demand is there. And what we benefit from is not that we benefit from these issues that you relate to as others have taken curtailments or downtime or have had issues, it's not necessarily that we see that impacting our volumes per se. What we see this is impacting pulp prices. Softwood pulp prices overall, the amount of curtailments, the amount of permanent closures that we've seen both in Canada and in Finland in recent times, in recent times, I'm not going more than a year away. In the last 12 months, those are very significant closures of capacity that is not there anymore. And that's what's keeping softwood prices at bay. That's what's keeping softwood prices from going down, and that's why we see this gap of more than $200 between hardwood and softwood. So it's precisely those issues that you relate to that are helping softwood maintain a very healthy price overall. And that's where we see the benefit in the price that we see because, again, our mills are running flat out.

Yep.

Thank you. And as a reminder, to ask a question, please press Our next question comes from CJ Baldoni with Principal. You may proceed.

Hello. Thank you for taking my question. I'm just wondering what the implications might be to the extent that there's a strike in the, you know, BC port. It looks like a 72-hour strike notice was given by some of the longshoremen there.

Yes, CJ. We've been following since yesterday the announcement that came out from the BC ports. And, obviously, any strike is a disruption. The way that we've tackled this, and this we prepared already since July when there was a risk of a strike, I think it was in the month of August. We took measures to make sure that if there was any strike, we would not necessarily suffer any consequences from it. So in terms of arranging alternative logistics for our inbounds in terms of raw materials, those were properly assessed. The same thing around outbound logistics and having plan B's already lined up in case we have issues around those same issues. Those were put in motion. So I think we're very well prepared. And when we did that, we did that thinking that the strike back then in August, we were planning for maybe a three-week kind of extension. So again, we're conservatively planning or keeping contingency plans for these events. Let's see what this one entails. Hopefully, since these disruptions are so big for the economy as a whole, I would assume they will be short-lived, and the government will end up intervening. But, anyway, the important thing is, at least from our end, we were prepared as needed.

Great. Okay. Thank you. That's all that I have.

Thank you. I would now like to turn the call back over to Juan Carlos for any closing remarks.

Okay. Thank you, Josh. And thank you all for joining our call. Rich and I are available to talk more at any time, so do not hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in February. Bye for now.

This concludes the conference. Thank you for your participation. You may now disconnect.