Good morning, and welcome to Mercer International's Second Quarter 2024 Earnings Conference Call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International; and Robert Short, CFO and Secretary. I will now hand the call over to Richard Short.

Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the second quarter before turning the call over to Juan Carlos to provide further color into the markets, our operations, and our strategic initiatives. Also for you that have joined the call today 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'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 totaled $30 million compared to Q1's EBITDA of $64 million. The lower results were driven by 37 days of planned major maintenance downtime split between two mills compared to no downtime in Q1. We estimate the planned downtime adversely impacted our EBITDA by approximately $60 million. After adjusting for the planned maintenance downtime impact, the improved operating results were primarily driven by higher pulp sales realizations. Our pulp segment contributed quarterly EBITDA of $32 million and our Solid Wood segment contributed quarterly EBITDA of $3 million. You can find additional segment disclosures in our Form 10-Q, which can be found on our website and the SECs. Strong demand for pulp in Q2, combined with softwood supply interruptions in Finland, pushed prices higher than Q1 in all our major markets. In China, the Q2 average NBSK net price was $811 per tonne, up $66 from Q1. European NBSK list prices averaged $1,602 per tonne in…

Thanks, Rich. Our Q2 operating results were positively impacted by significantly improved pulp pricing, our mass timber business and lower energy costs. These positive effects were more than offset by planned maintenance downtime, which negatively impacted our Q2 EBITDA when compared to Q1 by about $60 million. Overall, all our mills ran well this quarter, but the planned downtime and related slow startups negatively impacted our sales volume relative to Q1's record pulp sales volumes. Our lower Q2 sales volumes also reflect the divestment of the Cariboo mill at the end of Q1. I am pleased to note also within our solid wood segment, our massive business was able to execute on some tight deadlines this quarter, which resulted in positive operating results. I will have more to say about this in a moment. As Rich noted, this quarter, we wrote off the goodwill we recorded with the acquisition of Torgau. Regardless of the technical rules around accounting for goodwill, the fact is the pallet and lumber businesses in Europe have been weaker for longer than we anticipated. And this is due to a number of factors, including the high interest rate environment in Europe that has had a dramatic negative impact on the construction business with a direct impact on lumber prices. And in addition, the unprecedented slowdown of the German economy has reduced the commercialization of goods, which is critical for the pallet business. But despite this write-down, we continue to expect to realize significant shareholder value from this investment including the synergies we identified as part of our acquisition strategy. We are currently ahead of schedule on our capital investment at Torgau that will expand the mill's dimensional lumber capacity and expect to begin to see the benefit of this investment in mid-2025. In Q2, we invested…

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

Hi. Good morning. Juan Carlos, once the projects at Torgau are completed, which I think are slated for mid-2025, how do you see the percent of your lumber shipments that you sell to the U.S. changing?

Hello, Hamir. Yes. What we are expecting with these investments is that once everything is concluded, we'll have about a 25% increase in our timber capacity. So we will be able to work with at least 200,000 cubic meters more of wood into our mill. When we look at our total plain lumber capacity, we're thinking that we may be able to add about 240,000 cubic meters of finding capacity. So obviously, a part of that will be destined to the U.S. How much goes to the U.S. will be determined as we normally do, based on how we see prices developing in Europe versus the U.S. If you think for a minute, I think it was last quarter, or the quarter before that, we were talking about how much was going to the U.S., I think we were up to 55% of our business going to the U.S. a few quarters back. This quarter, we closed at 39%. And this is because we saw some important improvements in the U.K. and Ireland market. And therefore, we decided to divert a little bit more of lumber to that space. So we will keep on having that fluctuation, I would say, on average anywhere between 40 to up to 60% as a maximum would be the amount that would flow into the U.S. at any given point in time.

Okay. Thanks, Juan Carlos. That's helpful. I wanted to ask something on the pulp side. This means some report recently we see that Suzano was piloting a kind of new hybrid created, which I think they’re called the UCA (ph) strong to compete with softwood, how do you see the threat to NBSK from some of the innovations that are playing out on the hardwood side.

As always, those folks will end up finding some space. The way that we see it is as we work through our customers and our teams not only our sales team, but our market development teams, the technical guys that are working closely with custom make sure that their furnaces are properly set up for their products that they end up producing that bond, we keep on strengthening further and further. So substituting that with an unknown grade, I know it's going to be quite challenging. So we have confidence in making sure that with those customers that we've had long-standing relationship with our softwood pulp that those will remain. And therefore, we don't see this as a very significant threat. I wouldn't be surprised if a product like this ends up flowing more into a less demanding market, whether it's China or others that where quality is a bit more flexible. But in the case of some of the markets that we play with some of the customers that we play, I think it's going to be a bit more challenging.

Okay. Fair enough. That’s all I had. I’ll turn over. Thank you.

Thank you. Our next question comes from Brandon Hole with CIFC Asset Management. Your line is open.

Hi. Good morning. Thanks for taking my question. Just a real quick question about the pulp market as you're seeing it right now. Could you give us a little color on what you're seeing in I guess some of the trade publications were saying that prices in Asia were moving down pretty substantially last week. I just wanted to see if you're seeing that and what the sort of play on interplay between what you see there and what happens in Europe?

Absolutely, Brandon. Yeah, obviously, there's -- we need to make two distinctions. The first one, what's happening on hardwood versus what's happening on softwood. Hardwood, it's undeniable that there's been a correction -- an important correction on hardwood, probably about $100. And this is on the back of Cerrado from Suzano coming up and that was 2.6 million tonnes. And also the Liangxiang product in China, project in China, that was 1.7 million tonnes. So that -- all that pulp coming to market. Obviously, that puts pressure. It makes sense that in a market that is oversupplied, you would start seeing some corrections very quickly, and that is what has happened. However, the situation in softwood is different. If anything, softwood is still under a very tightness situation when it comes to supply. So very, very different from where we see hardwood. Even when we look at the demand to capacity ratio, the way it's evolving, we're saying that we're seeing that softwood is going to 93% next year and hardwood is going to go down to about 86%. So again, the pressure on hardwood will remain while softwood will be in a very different situation. That would mean that the spread between the two will expand and obviously, there's going to be some pressure on substitution and whatnot. But I think the fundamentals for softwood being so tight on supply are going to be still very relevant. Even if you think about -- I think it was recently this week, there was another announcement from another mill in Finland that they're already thinking about laying people off and then stopping for, I think it's three months what I understood it was -- and this is a big mill. If they stop for three months, it's almost taking away another 200,000 tonnes of pulp from the market in any given year, if it's only three months. So again, it just exacerbates the fact that supply on softwood continues to be tight and will be even tighter as we progress. And that would -- what that will translate into is that even if hardwood drops by 100 like it did. The drop in softwood would be mitigated pretty much and very limited. So far, the softwood prices, they have come down a bit, I would say, probably less than $50. And that's more or less where we think they will most likely remain. Our belief is that as the year progresses and we get past the summer season, which obviously comes with low demand, both in Europe and in China. Demand will pick up and prices, and we can recover a little bit of the lost ground in this Q3. Again, we don't expect that ground to be very significant in Q3. Hope that helps, Brandon.

Yeah. That's good color. Thank you very much. And then, in Germany, and obviously, you talked about the struggle, the economic struggles there. Are you seeing any signs of improvement there yet or is it sort of bouncing along this low level?

It's still very timid. Obviously, we see that at least the European authorities interests are starting to come down, which is a good sign. However, Germany as a country in itself is probably lagging a little bit behind the rest of Europe, which is contrary to what everybody is used to when Germany is the one that's leading the pace. And in this case, it's different. It is lagging behind a bit. And that is probably the reason why we believe that the improvement of the recovery, especially in the construction sector is going to take a bit longer than what you would expect and that’s what keeps us a bit more conservative on what we think we can expect from – for either lumber prices or in the case of the German economy itself, what we can expect for the pallet prices in the short term. We’re hoping for more of a second half 2025 commencement of some signs of improvement. Because even if interest rates are cut now, that doesn’t mean that immediately you have an impact and lumber prices will go immediately. We believe that there is a lag between one action and another. So that’s a little bit of the timing that we have in our planning.

Okay. Thanks very much for taking the questions.

Thank you. [Operator Instructions] Our next question comes from Kasia Kopytek with TD Cowen. Your line is open.

Hi. Good morning, everyone. It’s Kasia on the line. You articulated focus on deleveraging over the midterm. Just curious about your updated thoughts on potential asset divestitures to expedite that?

Hi, Kasia. Yeah. The only thing that we've got on the books right now for sale is Santanol and that process is ongoing, and we don't expect any further write-down on that. .

Okay. Got you. Rich, can you talk about your order file and how that varies throughout the cycle? Just getting -- trying to get a sense, if there's going to be any order file timing lags reflected in your Q3 average price realization?

Are you referring to mass timber?

No, sorry, pulp.

Yes. So I guess maybe expand on what you mean by order file a little bit because we sell primarily spot in Asia. And in Europe, we basically sell the mills out every month. Yes, we've got pretty low inventories across the board.

Got you. Okay. So you sell it every month, but if you're selling to a customer, it wouldn't ship for, let's say, two weeks or three weeks at this point or what does that lag look like?

Okay. For delivery times, again, it depends where it's a number of weeks, one to two weeks generally it depends where it's going. But in Asia, yes, it would take 30 to 60 days to deliver.

Okay. Got it. Yeah. I'm just trying to get a sense, prices are rolling off here, but maybe not all of that is going to be reflected in Q3 and maybe some of that will bleed into Q4? Just trying to get a sense of the timing. But that's good color.

Yes. Okay. Great.

Sorry, go ahead. You were about to say something.

Yeah. I was just going to say, if you're trying to use like an average like a 45-day average it would probably be for your modeling purposes.

Okay. Yeah. Got it. That’s a good rule of thumb. So good pickup on the top line for the mass timber business, is that EBITDA positive at this point?

Yes, it is. It was EBITDA positive. I think since Q4 of last year. It was the first time that it was EBITDA positive. It was very strong. It was strong this quarter. So we're looking forward to the growth of the business in 2024. We're expecting it to be twice the amount of sales that we had in 2023, it should be around $110 million by the end of the year. And Q2 was particularly strong. There was some projects delayed from Q1 that ended up being kind of all compounded into Q2 that made us running against the clock in Q2. We delivered all the projects on time and no complaints whatsoever. Quality on spec, everything very well produced and delivered. And that allowed us to run our mills more efficiently on one shift only at this point in time. So that's why Q2 was I would say, more stronger or stronger than what we have planned for as they were picking up a little bit of the slack from Q1. And this is on the back of customers delaying some of their projects, and therefore, we have to adjust with whatever the customer planning schedule is. And that's a situation that followed in Q2. In Q3 and Q4, we don't have any more -- or very little of the big, big large-scale projects that we had at the beginning of the year. So that's a little bit of a change in dynamic. It's going to be smaller projects that we attend to during the second half of the year.

Well, thanks for that. That's helpful. Juan Carlos, can you remind me what kind of EBITDA margins are you looking at for that -- for those sales?

We talk about EBITDA margins in the long term, more than specifically what we do right now. And we aim for between 10% and 20% in the long run, it's going to be around 20% or more, that's what we expect of mass timber.

Okay. But right now, you're probably sort of low-single digits, I imagine something in that range?

Yeah.

Okay. Got you. That’s all I had. Thanks very much gentlemen.

Thank you.

And the important thing, Kasia, just to expand on that, keep in mind that right now, the margins that we're seeing is running with one shift. And not being able only in Q2, we've had those shifts practically full in our facilities. Going forward, when we -- as we expand this business, obviously, the margins can grow as we can put two shifts or even three shifts into those facilities. So that is the key thing here is for us to grow this business a way that we can add more shifts and take advantage of the capacity that we have installed and therefore, have a better return on those fixed costs.

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to Juan Carlos Bueno for closing remarks.

Okay. Thank you, Michelle, and thanks to all of you for joining our call. Rich 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 November. Bye for now.

This concludes the program. You may now disconnect. Everyone, have a great day.