Good morning and welcome to Mercer International’s First Quarter 2023 Earnings Conference Call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International with 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. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the first quarter, before returning the call to Juan Carlos to provide further color on the markets, our capital plan as well as our strategic initiatives. We're also pleased to have with us today Richard Short, who most of you know will become the company's next CFO when I step-out in June. Also, for those of you that have joined today’s call by telephone, there is a presentation material that we’ve attached to the Investor section of our website. But before turning to our results, I’d like to remind you 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. This quarter, we achieved EBITDA of approximately $28 million compared to Q4 EBITDA of $96 million. After adjusting for a $50 million non-cash incurred with inventory impairment, EBITDA [Indiscernible] The increase in Q1 from Q4 [Technical Difficulty] All of our mills ran well this quarter with the freeze out saw mill achieving record production. We continue to see the benefits of our capital upgrades to the mill. Our pulp segment contributed quarterly EBITDA of $40 million, while our solid wood segment's EBITDA was $7 million. You can find additional segment disclosures in our Form 10-Q, which can be found in our website and SEC. In Q1, average NBSK and NBHK list price were down in all of our markets compared to Q4. Overall demand was relatively weak in the current…

Thanks Dave. Let me start by saying that I'm very pleased with the strong performance of our mills as we exceeded our production targets for the quarter. Yet, our operating results were negatively affected by a number of external factors. The most impactful was finished product pricing. Compared to Q4, pricing for most of our products was down. On average, pulp pricing was down about 5%, while lumber prices down about 15% in the US. And although fiber prices peaked in Q1 and were coming down through the quarter, our pulp mill costs on average were considerably higher than Q4. However, our first quarter results also reflected some positives. Most notably, our recent investments in our [Indiscernible] mill allowed the mill to achieve record production and sales volumes this quarter. I am also excited with the progress we're making in developing our mass timber business. Our order book is filling rapidly and we continue to beat a numerous mass timber projects. As production ramps up in Q2, we expect to realize a noticeable increase in CLT revenue. In addition, as some of you may be aware, we are the stocking horse bidder for the bankrupt Structurlam asset. This process may end up in an auction, so the outcome is unclear today, but I will say that regardless of the outcome, we will continue to invest in a growth of this very profitable mass timber business. I am satisfied with the progress we have made on integrating our Torgau sawmill and I applaud our Torgau employees for being open to changing how they do things, especially around safety. Despite the current market dynamics that are limiting our synergies, I believe that in the fullness of time, this asset will add significant shareholder value. Softwood pulp prices were steady through most of…

Thank you. [Operator Instructions] And we'll first hear from Sean Stewart of TD Securities. Sean, do you have a question?

Sorry. Apologies guys. Yes, I'll start with wood products. Can you give us an idea of how much the losses this quarter were split between [Indiscernible] and in the Torgau facility? And then I guess more specific to [Indiscernible], you're still shipping half your volume to the US. Can you give us an idea of the rationale of continuing at that pace with prices where they are, freight rates where they are, any intention to pull back on volumes into that market?

I guess, starting with the mix of the wood products mix, I'd say they're all -- well between Torgau and [Indiscernible], they were they were similar. It wasn't one driving it, wasn't one driving the result over another. They were broadly in in alignment for different reasons of course, but broadly in alignment. So, not really an outlier there. In terms of the 50%, I'd say that's a little bit higher than our target. We had the shipments there were quite a bit higher than normal. We had a little bit of a backlog in vessels that came from Q4 and ended up in Q1. So, I don't think you should think of 50% as being indicative of what we're going to do there in the future.

Okay. Thanks for that. And then Dave, just comments on overall comfort with liquidity and leverage. And I guess particularly with respect to your interest in Structurlam and I appreciate that engineer wood products, mass timber is going to be a growth focus for the company. But your funding constraints will arguably increase as pulp prices are capitulating here. Just overall thoughts on comfort with your balance sheet at this point in the cycle?

Yes, it's hard to see it at the moment, but maybe I'll just talk about the liquidity at the moment, we think is quite sufficient, $300 million of cash. We've got a lot of working capital at the moment that's going to unwind itself quite quickly. So we're coming out of Q1 is our -- always our largest inventory quarter for wood. So that will start unwinding itself and materialize into cash quickly. We've got -- we held back on some pulp sales in Q1 that will come out will be unwound here in Q2. So there's a working capital element. The other thing that is happening in the background where we've just passed the peak of some of our most important costs in our cost structure. So, for example, the pulpwood costs. We peaked during Q1 and we're now seeing considerable reductions in wood costs. We'll have a noticeable improvement in wood costs in Q2. And we're seeing the same thing with chemicals. So most of our chemicals are derivatives of electricity or gas, which ran up really hard in Q4 and now their summer is starting to come back. Not coming back as quickly as the revenue from our electricity, but they're coming back very quickly. We see the same thing. We purchase a little bit of gas on the market as well. And that's coming down very quickly. So these are inputs that most of these inputs went up by 50% or more over the last year and now they're backing off very, very quickly. So we're looking ahead to that. We also have -- you've heard us talk a little bit about our mass timber business and we got our first big order. We believe that that's the beginning of more to come and so we're preparing for that. And in terms of the leverage, yes, we know the leverage is going to be a little bit higher than our target here for a while, but I'd see that as more having to do with the depressed EBITDA at the moment than the value of the debt that we have in place. I think to get -- just to get right to the number of your question, this is a place that we're pretty comfortable. We've got working capital coming. We're trimming back at our CapEx. As you heard, Juan Carlos say, we're going to moderate the CapEx for 2023. But still push ahead with the high return projects and prepare ourselves that we can participate if the Structurlam transaction goes to an auction, we can participate in that.

Thank you. And just one follow-up there, Dave, for pulpwood costs and chemicals, can you give us an idea of what kind of declines you might expect to see in the second quarter?

Yes. So when we talk about the declines we're principally talking about Europe because that's where the big inflation was. We're getting a little bit of inflation in Canada, but nothing like we had in Europe. And we're probably expecting somewhere in the range of 10% to 15% reduction in Q2 from Q1 and probably similar for chemicals. And those two elements are form as you know, form probably 90% of our cost structure.

Okay. Thanks very much for that, Dave. That's all I have.

And next, we'll hear from Paul Quinn with RBC Capital Markets.

Yes, thanks very much. Good morning. So you had lined Chinese NBSK preceder 891 in Q1 average down, I think it was $29 from Q4. What occurred prices in April there? And what do you expect for the Q2 price its average?

Prices right now are a bit north of $700 around $700 ton for softwood. So yes, the big decline has happened in April more than it did in May. And we believe it's very close to the floor or we expect that floor to be hit during this quarter.

Okay. Thanks for that. And just could you help me understand the process around the stocking horse bid for Structurlam. And what that process is and what do you expect on the timing side?

The stalking horse process would Structurlam gives us kind of the initial bid priority for this project. As you know, we bid US$60 million for it by May 25th or May 27th, the actual auction would commence. For those parties that would be interested in acquiring this asset for anybody to outbid us. They would have to private at least $62.9 million or $63 million for it. And from then onwards, the auction goes very quickly. I believe every auction maybe bid would have to be probably -- I think it's $500,000 dollars higher than the previous $1 million higher than the previous one. And that goes fairly quickly. So it's on May 27, we should know the results of the bidding process.

Okay. That's great. Thanks for that. And then just on the mass timber, your existing facility, great to hear that the order file is growing. I think I heard you described as very profitable business, but I suspect that's the comment that your expectation in the future Is that business expected breakeven this year?

Yes. Absolutely, yes. I think it's going to be positive this year already. It is positive. So we see that growing very well. The second quarter will be positive without a doubt. So -- and we continue to see a very good momentum on projects that we have been bidding for. And more similar projects to the one we won that we're already in production phase. We have others lined up of similar size that are progressing very well. So that's why we're very, very confident about our ability to achieve very good growth results with cross laminated timber. And we see this mass timber business as you will said as a -- not only as a profitable business, but the big advantage that it brings is the growth that this industry is having overall in the construction business. When you look at the rates at which it has been growing in the U.S. or in North America is north of 15% over the past 15 over the past five years and it is expected to keep on growing at more than 15% for the next five years. So we have a very significant organic growth behind us, and the fact that we're sitting on probably one of the most modern facilities in the U.S. with high productivity indexes, obviously gives us a high confidence in what we can deliver. And Structurlam would be a tremendous complement to that with their glulam capacity on top of what we already have in CLT in Spokane. That obviously rounds it up very nicely with two very new facilities and very large capacities. So it's clearly a growth engine for us.

Okay. And just so we understand the Structurlam facility once, if you're successful. What was the project -- what's the problem with that company that they ran in to trouble that they ended up filing through bankruptcy?

They had some operational issues that basically forced them out of business on some of the deals that they had contracted and that basically those businesses were turned down and that put them into dire straits. So it was performance issues that got them into trouble.

I guess, you guys feel confident that you'd be able to get around those performance issues based on…

Absolutely. Absolutely, because they were more mistakes than actual issues with the facilities or the structure itself. So there were production mistakes that that shouldn't have been committed obviously. And we trust that our -- the management team that we have at Spokane, the leaders that we have, the knowledge of the team that we have built within Mercer gives us very high confidence that we will be able to take over this asset and run it under the standards that we're running our facility in Spokane with the highest quality in delivering those projects on a timely basis and on budget.

Great to hear. Thanks very much. Best of luck.

And next we'll hear from Hamir Patel of CIBC Capital Markets.

Good morning. Thanks. Juan Carlos with pulp prices coming off as much as they have. Where do you think the cost curve is for Canadian softer pulp capacity?

I think obviously with prices at this level, several mills that can be having very, very difficult times in making a profit. I think when it comes to softwood, we still believe even with these prices, we're managing through these rough times the way that we have set up Celgar allows us that possibility. In Celgar, we've improved tremendously our position from a wood cost perspective. That brings us also some relief going forward from a cost perspective, knowing that we will be able to source wood from the US south of the border. And that's something that is probably unique to Celgar, especially for those mills that are in BC that suffer so much from the curtailments of sawmills and actually just access to chips at good prices. What we have in Celgar is the capacity to look for different baskets that other mills would not be able to reach, at least at a competitive basis. So we see that as a positive development for Celgar, the fact that we can continue to develop the mills stronger from a wood perspective. And also, once we have the woodroom ready by the end of the year that would give us even more benefit on the cost side. That woodroom benefit we've seen it already in Peace River that is helping very much our situation in Peace River going forward. So as we, once we finish this maintenance shutdown period in Peace River, we'll begin with softwood campaigns and running the wood room and getting the benefits out of it. So I think that's a little bit where we are. Obviously the situation is complicated in a quarter where, as I said before, I think we're going reach bottom prices in Q2 for softwood at least. But I think we can navigate through those with the assets that we have.

Okay. Great, thanks. That's helpful. And just a question for Dave. I believe you referenced pallet prices coming off year over year. Do you have a sense as to what kind of, maybe the level of price declines you've seen there in Europe, and have prices started to stabilize yet, or are you still expecting further declines from here?

What our teams are telling us is that they were still falling during the quarter, during quarter one, but they're starting to stabilize now. But they've come off probably 40% to 50% in the last six months.

Okay. I didn't realize it was that much. And had they run up quite a bit in the prior year or two?

They did in 2022. They were at quite high levels.

Okay. Fair enough. This is all in the back of this –

Obviously, economic uncertainty. So we do believe that as conditions improve gradually, that commerce will begin reactivating and we will see, obviously, this market rebounding fairly quickly once conditions stabilize.

Yes, fair enough. Thanks. That's all I had. I'll turn it over.

[Operator Instructions] We'll now have from Richard Stevens, Momenta.

Hi. Just a couple follow-ups, if I could. I appreciate the comments regarding the pulpwood costs coming down, chemical costs. One of the things you mentioned in terms of cash generation was the increase in working capital. If you look at your free cash flow burn, most of it was related to an inventory drag in Q1. Can you just quantify how we should expect that to work out through the course of the year? I mean, by definition, you would kind of think that maybe Q2 becomes a little more of a free cash flow break-even period. You guys are at least positive cash from operations. Is that fair to say?

Well, if we talk about the inventory or the inventory build, I'd say roughly half of it is pulp inventory. I'm generalizing here a little bit. Roughly half of it is pulp inventory and half of it is wood inventory in front of the mills. And the wood inventory is higher, it's generally quite high at this time of the year, this is a typical quarter where we build wood inventory. It's at the peak a lot of our harvesting and buying activities happens in the winter and then we consume it during the summer when we don't have access to the sites. So it's relatively high. The other thing about our wood inventory at the moment is we've built quite a bit of inventory at our Peace River Mill in preparation to start up the new wood room. So the new wood room that we built, very high capacity wood room. We wanted to make sure we had a lot of wood in front of it when we started it up, and we started it up a couple of weeks ago now, and so a little bit unusually high wood because of that in preparation for the wood room. On the pulp side, it doesn't have that seasonal impact that we have with wood, but we did have relatively high inventories of pulp. The principal reason for that was when the reductions in pulp first started to materialize, we were trying to manage them and not trying to, we were trying to manage the pricing and make sure that we weren't damaging the price by introducing too much pulp to the market and holding back a little bit on sales but that pulp will relieve itself very quickly here in Q2. So if you ask about the timing how this will unwind I think you can expect that the pulp inventory so half of the build will come out very quickly in Q2. The wood inventory, the other half, will take longer than that because it's wood that is intended to supply the mill through the summer. You can expect that to unwind over probably the next two quarters.

Got it. Got it. Okay. That's helpful. And then, just to follow up on the stocking horse bid, the $60 million, I'm assuming that's not included in your CapEx plan. Is that fair?

Correct. That is not included. As we mentioned, that is not yet a done deal. So when we regrouped and looked at our CapEx expending and adjusted it to 150 to 180, that is not including the 60 million or above that we would be willing to pay for structure land.

And then final question for me, you mentioned earlier that you, in terms of the bonds and trading levels that were out there, post-quarter end, have you guys considered or have you been active in potentially repurchasing the bonds in the open market? There was a pretty steep discount this morning?

No, we've been watching that and I think perhaps in different circumstances that would be something we'd be considering, but if you can imagine we're in a period where we've got some uncertainty on how long the pulp prices are going to stay low, so preparing ourselves for if it could go, if this lasts for longer than a few months. And then also making sure that we've got enough dry powder for something like this structure of land that we're hoping to complete on. So it just didn't seem like the right time to, I mean, the prices of the bonds are attractive, but just not the right time.

Got it. Okay. That's it for me. Thank you.

And at this time, there are no further questions. I will turn the call back over to Juan Carlos for any additional or closing comments.

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

And that does conclude today's call. Thank you all for your participation. You may now disconnect.