Mercer International Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2025

There are 8 speakers on the call.

Operator

Good morning, and welcome to Mercer's International First Quarter twenty twenty five 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. You may go ahead.

Speaker 1

Thanks, Lacey. Good morning, everyone. Thanks for joining the call today. I will begin by touching on the financial and operating highlights of the first 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 a presentation material that we've attached to the Investors section of our website.

Speaker 1

But before turning to our results, 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 was $47,000,000 compared to Q4 EBITDA of $99,000,000 The lower results are primarily attributed to twenty two days of planned major maintenance downtime at our Celgar mill compared to no planned downtime in Q4. We estimate this downtime adversely impacted our EBITDA by approximately $30,000,000 in direct costs and lower production. Our Q1 results when compared to Q4 were also negatively impacted by foreign exchange.

Speaker 1

Our pulp segment contributed quarterly EBITDA of $50,000,000 in Q1 and our solid wood segment EBITDA essentially broke even. You can find additional segment disclosures in our Form 10 Q, which can be found on our website and that of the SEC. In the first quarter, MBSK published prices mostly increased in all our key markets compared to Q4 due to stable demand and supply constraints. However, our sales realizations were relatively flat due to the normal lag and realizing the benefit of higher prices. In Q1, the European MBSK list price averaged $15.50 dollars per ton, an increase of $50 from Q4.

Speaker 1

And the North American MBSK list price averaged $17.53 dollars per ton, an increase of $66 from Q4. In China, the MBSK net price was $793 per tonne in Q1, an increase of $26 from Q4. Hardwood sales realizations were essentially flat in Q1 compared to Q4 as higher prices in China were offset by lower prices in North America. In China, the Q1 average MBHK net price was $578 per tonne, up $30 compared to Q4, resulting in the average price gap this quarter between MBSK and MBHK in China being $215 per ton. We believe the price gap is beginning to widen.

Speaker 1

The North American MBHT average Q1 list price was $12.68 dollars down $30 from Q4. Pulp sales volumes in the first quarter increased by 26,000 tonnes to 478,000 tonnes. This increase is attributed to the timing of sales. We had twenty two days of planned downtime compared to no days of scheduled downtime in Q4, which negatively impacted Q1 EBITDA by about $30,000,000 in direct costs and reduced production. After adjusting for the scheduled downtime, pulp production modestly increased from the fourth quarter, driven by improved production at our Canadian mills.

Speaker 1

In the second quarter of twenty twenty five, we had eighteen days of planned maintenance downtime at our Peace River mill, and three days of planned maintenance downtime at our Stendal mill, which combined should have roughly the same EBITDA effect as the Q1 Celgar shut. For our solid wood segment, realized lumber prices increased in the first quarter compared to the fourth quarter. This was driven by higher prices in both The U. S. And European markets, which was a result of reduced supply and steady demand.

Speaker 1

The Random Lengths U. S. Benchmark for Western SPF number two and better average price was $492 per thousand board feet in Q1 compared to $435 per thousand board feet in Q4. Today that benchmark price for Western SPF number two and better is around $485 per thousand board feet, an increase of about $40 from the beginning of the year. Lumber production was a near record 128,000,000 board feet in Q1, up 12% from Q4 due to seasonal downtime in the fourth quarter.

Speaker 1

Lumber sales volumes were also a new record at 131,000,000 board feet, up about 6% from Q4. Electricity sales totaled two thirty five gigawatt hours in the quarter, which was about the same as Q4. Pricing in Q1 modestly increased to about $112 per megawatt hour from 109 in Q4 due to higher spot prices in Germany. In Q1, our pulp segment had stable fiber costs compared to Q4. For our solid wood segment, per unit fiber costs increased in Q1 driven by strong demand for sawlogs in Germany.

Speaker 1

Our mass timber operations within the solid wood segment maintained stable sales volumes in Q1 compared to Q4. We continue to see strong and growing underlying interest in mass timber. However, the prevailing high interest rate environment is currently impacting project timelines and overall market momentum. We believe this is a temporary headwind. Currently, are seeing some planned project start dates slipping from 2025 into 2026.

Speaker 1

We reported a consolidated net loss of $22,000,000 for the first quarter or $0.33 per share, compared to a net income of $17,000,000 or $0.25 per share in the fourth quarter. We consumed about $3,000,000 of cash in Q1 compared to about $54,000,000 in Q4. You will recall we repaid $100,000,000 of senior notes in Q4 last year, which was partially offset by strong operational cash flow generation. In Q1, our net working capital excluding non cash items increased roughly $23,000,000 due to seasonal working capital movements. We expect most of this working capital build to reverse in Q2.

Speaker 1

In Q1, we invested a total of $20,000,000 in capital across our facilities. This included the completion of the Woodroom upgrade at our Selgar mill. This project is expected to decrease our reliance on sawmill residuals and lower per unit fibre costs. At the end of Q1, our liquidity position totaled $471,000,000 comprised of about 182,000,000 of cash and $289,000,000 of undrawn revolvers. Finally, our Board has approved a quarterly dividend of $0.75 per share for shareholders of record on June 26, for which payment will be made on 07/03/2025.

Speaker 1

That ends my overview of the financial results. I will now turn the call over to Juan Carlos.

Speaker 2

Thanks Rich. I would like to begin with a topic we get asked most, which is tariffs. As it stands today, our products are not being subject to tariffs. The pulp and mass timber we import from Canada into The U. S.

Speaker 2

And the lumber we import from Germany into The U. S. Are currently not subject to tariffs, tariffs, but they are subject to a Section two thirty two review due to be published no later than November 2025. In addition, the wood chips we import into Canada from The U. S.

Speaker 2

Are not included in the counter tariffs that Canada has said it could apply. To give our direct tariff exposure some context, on average, we sell about 200,000 tons of pulp into The U. S. Annually. About two thirds of this volume is hardwood pulp.

Speaker 2

We also export from Germany about 200,000,000 board feet of lumber to The U. S. In contrast, our main import from The U. S. Into Canada is wood chips for our Celgar pulp mill, which today amounts to about 35% of the fiber consumption of the mill.

Speaker 2

We are experiencing some exposure in the form of secondary effects, particularly as it relates to a weaker U. S. Dollar, and to a lesser degree a weaker pulp demand in China and in The U. S. Lumber market.

Speaker 2

We're watching trade policy developments closely and have contingency plans in place to mitigate any potential tariff impact. With this global economic uncertainty in the background, we have refined our 2025 plan to ensure we can deliver on our top priorities, which are maximizing the operating rates of our mills and generating cash to reduce debt. As such, we have launched a company wide program that targets $100,000,000 that will be generated from improved operational efficiency, as well as cost savings by the end of twenty twenty six when compared to 2024. In addition, in 2025, we are targeting a reduction of inventories of $20,000,000 and a reduction of our 2025 CapEx of another $20,000,000 Our efforts are well underway to achieve this goal of $100,000,000 of improvement in our bottom line results, and I am confident we will reach this goal. We look forward to sharing updates on our progress as time progresses.

Speaker 2

In Q1, our mills ran well. Our EBITDA of $47,000,000 reflects a heavy maintenance quarter that saw our Celgar mill down for twenty two days. We also experienced a weakening of the U. S. Dollar, which negatively impacted our results relative to Q4 last year.

Speaker 2

That said, there is a potential benefit for our Selgar mill, as the weaker dollar should enhance the mill's purchasing power for U. S. Sourced fiber, which accounts, as I said earlier, for roughly 35% of its supply. Fiber costs were up in Germany, most notably for our sawmills, and although pulp pricing was generally up, we sold a larger proportion of hardwood pulp this quarter compared to Q4, which negatively impacted our mill nets. Positive market momentum continued in the second quarter, but as I just mentioned, we're beginning to see the impact of global economic uncertainty negatively affecting buying patterns and pricing in some of our markets.

Speaker 2

We're also expecting to see some modest fiber cost inflation and lower energy sales prices in the second quarter. In the meantime, the US dollar weakened further in this first month of the current quarter, and is under pressure of the U. S. Government's proposed punitive tariff regime. The ultimate impact of trade barriers remains unclear and is likely to remain this way until the third quarter, but we will continue to work on mitigation strategies and remain flexible to manage through the uncertainty.

Speaker 2

In the meantime, we continue to maintain an open dialogue with our customers, government officials, our industry associations. We're prepared to take swift action redirecting products to other geographies if necessary, and adjusting our operations accordingly depending on the scenario that actually plays out. Now turning to the pulp markets. Softwood pricing is expected to remain strong in most markets. We continue to believe that overall demand for softwood will be steady in the mid term, which when combined with reduced supply will create some upward pricing pressure in most markets in the second quarter of twenty twenty five.

Speaker 2

In the first quarter, hardwood pricing strengthened in China due to seasonally strong demand and weakened supply due to heavy South American producer maintenance. Conversely, hardwood pricing weakened in North America due to the weaker demand. More broadly, we continue to believe that the longer term outlook for softwood pulp supplydemand dynamics is favorable due to the reduced supply and increasing demand for long fiber pulp. Despite the uncertainties of tariffs, we believe that the significant contrast between the supplydemand fundamentals for softwood and hardwood pulp will drive the price difference between these two grades to levels well beyond historical norms. At the moment, we believe the net price gap in China is growing.

Speaker 2

We expect a wider price differential to persist well into 2025. As a reminder, softwood represents roughly 85% of our annual pulp sales volumes. As we have highlighted in previous calls, we believe that the ability of papermakers to substitute hardwood pulp in the place of softwood pulp is limited due to most of the potential substitution options having already been implemented, and that only a marginal amount would still be possible. All our mills ran well with Celgar being down for twenty two days of planned maintenance, equating to about 30,000 tons of lost production. In total, we produced almost 460,000 tons in Q1, and after allowing for Celgar's shut that equates to about a 20,000 ton improvement over Q4 production.

Speaker 2

In addition, our lumber production improved relatively to Q4 by over 10%. While we improved our production output this quarter, we continue to put strong emphasis on further improving the reliability of our assets across all businesses. In Q1, as expected, our overall pulp fiber costs were steady relative to Q4. In Germany, we saw increased demand for sawlogs, which pushed up the price of sawmill chips, while in Canada costs were down slightly thanks to our Peace Rivers wood room as well as our fiber sourcing strategy in Seldar. The increased demand for sawlogs in Germany has also pushed the price of fiber up for sawmilling business.

Speaker 2

Looking ahead to Q2, we expect fiber costs to remain stable for our pulp business, with a small increase of about 10% for our solid wood business. Our solid wood segment continues to be held back by a weak European economy and the impact of high interest rates on the construction industry, despite some modest price improvements in The U. S. Lumber market. As a result, our solid wood segment posted an almost breakeven EBITDA in Q1, with high U.

Speaker 2

S. Lumber pricing offsetting the sustained weak demand for pallets. Our mass timber business took a nice step forward in 2024. When our facilities were running full, but only on one shift, we saw meaningful profitability. The uncertainty surrounding the economy on the back of the trade war is forcing developers to delay the construction as they grow concerned about potential cost escalations down the road, given the long lead times of their projects, pushing them into late twenty five or '26.

Speaker 2

On the positive side, however, we are currently receiving an increasing volume of inbound project inquiries. Based on our order book today, we're expecting a weaker second and third quarter with improvement beginning in the fourth quarter. And at this point, we believe we will be ramping up one of our facilities to two shifts already in early twenty twenty six. Today, our mass timber order file sits at about $24,000,000 We remain confident that the environmental, economic, speed of construction, and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe. As such, we are highly confident in this business being a growth engine for Mercer.

Speaker 2

We're well positioned to take advantage of that market growth as we have roughly 30% of North American cross laminated timber production capacity, a broad range of product offerings, including design and installation services, and a large geographic footprint with manufacturing sites in the Northwest as well as the Southeast, giving us competitive access to the entire North American market. We have positioned ourselves to be a one stop shop for mass timber installations. We expect lumber pricing to be modestly weaker in The U. S. Market at the end of the second quarter due to the impact of the current economic environment on customer demand.

Speaker 2

In contrast, we expect modest upward pricing pressure in the European market, primarily due to increasing sawlog prices. However, any meaningful long term improvement in either the European or US markets will be dependent on improved economic conditions and lower interest rates. Now the cost competitive setup we have in FreeSouth gives us the flexibility to have strong presses in Europe, The US, and the quality sensitive Japanese market. In Q1, '30 '9 percent of our lumber volume was sold in The U. S.

Speaker 2

As we continue to optimize our mix of products and target markets to current conditions. We continue to believe that low lumber inventories, the large number of sawmill curtailments, reduced allowable cut limits, relatively low housing stock, and homeowner demographics are still very strong fundamentals for the construction industry, and this will put sustained positive pressure on the supplydemand balance of this business in the midterm. Our shipping pallet market remains weak, with pallet pricing staying flat due to the overhang of the European economy, particularly in Germany. Once the economy begins to show signs of recovery, we expect pallet prices to recover towards more historical levels, allowing Torgau to deliver significant shareholder value. Heating pellet prices were up slightly in Q1 due to seasonality in this market, and we expect demand and prices to be slightly lower in Q2 as warmer European temperatures take hold.

Speaker 2

As part of our objective to keep all of our pulp mills running reliably, we are planning for major maintenance shutdowns at all mills throughout the year. Our current schedule is the following. In Q1, Selva was down for twenty two days, which is longer than usual for this mill. The wood room project is now completed and being commissioned. The post shut startup of the mill was lower than planned and resulted in five days of lost production, which will impact Q2, but is now running well.

Speaker 2

In Q2, Peace River was down for eighteen days as they already went through their shutdown, or about 24,000 tons, and Stendhal will take a short three day shut, or roughly 6,000 tons. In Q3, Rosenthal will be down for fourteen days, or about 14,000 tons And Selga will take four days, equivalent to 5,500 tons And in Q4, Stendal will be down for eighteen days, equivalent to 37,000 tons. In total, that is seventy nine days of planned downtime compared to fifty seven in 2024. The increase in twenty twenty five planned maintenance days is due to Celgard not taking any major shut in 2024, now that it is on an eighteen month maintenance cycle. In light of recent economic uncertainty, we have reduced planned CapEx and now expect to spend about $100,000,000 on capital projects in 2025.

Speaker 2

This capital budget is heavily weighted to maintenance, environmental and safety projects and includes both Torgau's lumber expansion project and Celgar's recently completed woodroom project. Dorgov's project will increase the volume of dimensional lumber available for The U. S. Market by about 240,000 cubic meters annually, with upgrades to the log in feed system and the addition of more planing capacity. We expect to reach a little bit over 100,000 cubic meters already in 2025.

Speaker 2

This was envisioned as part of our original investment thesis to increase the mill's value added product mix and maximize potential synergies. Our new linen extraction pilot plant at Rosenthal continues to run exceptionally well. Our product development is going according to plan. We're excited about the future prospect of this product as a sustainable alternative to fossil fuel based products like adhesives and advanced battery elements. We believe this product can be the foundation for a profitable business segment with strong growth potential.

Speaker 2

The fundamentals of this business align perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a circular carbon economy while adding shareholder value on our existing asset base. As the world becomes more demanding about reducing carbon emissions, we believe that products like mass timber, green energy, lumber, pulp, and lignin will play increasingly important roles in displacing carbon intensive products, products like concrete and steel for construction or plastic for packaging. Furthermore, the potential demand for sustainable fossil fuel substitutes is very significant and has the potential to be transformative to the wood products industry. We remain committed to our 2,030 carbon reduction targets and believe our products form part of the climate change solution. In fact, we believe that demand for low carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions.

Speaker 2

We remain bullish on the long term value of pulp and are committed to better balance our company through growth in our lumber and mass timber businesses. I would also like to note that we're beginning a FEL two engineering review on the potential for carbon capture project at our Peace River mill. We have a lot of work to do given the early stages of this review, but we're excited about the potential a project like this could have on the economics of this mill. We will publish our 2024 sustainability report in the coming weeks. I invite you to go to our website and have a look at this report, as it highlights our main initiatives and our progress on our sustainability related targets.

Speaker 2

While I'm encouraged by the softwood pulp market outlook, it's disappointing to see the overall market uncertainty that the trade war unleashes. As a result, and as I noted above, I have asked our operators to focus on driving efficiency through aggressively reducing costs while enhancing reliability, to strengthen our resilience and readiness for potential tariff impacts, including being ready with various tariff mitigation strategies. We remain committed to increasing shareholder value by reducing our leverage through aggressive cost reduction programs, strong mill reliability, operational realization, and prudent capital management. Thanks for listening. And I will now turn the call back to the operator for questions.

Speaker 2

Thank you.

Operator

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Your first question comes from the line of Sandy Burns with Stifel. You may go ahead.

Speaker 3

Hi, good morning everyone and thanks for all the color and information about the uncertain outlook. I was wondering on slides nine and ten you mentioned exposure in the form of secondary effects and you are starting to see some negative impact on pricing in some markets. I was hoping you could elaborate on those bullet points, those comments a little bit more.

Speaker 2

Yeah, absolutely, Sandy. The secondary effects when we talk about tariffs is basically related to things like the weakening of the US dollar. We're seeing also, which obviously is evident for us, it impacts all our cost basis out of Europe and out of Canada, as well as our cash balances. And then when you look at demand, in China particularly, there has been quite a slowdown in the last few days. Now they're going through a long weekend holiday, it's a five day holiday.

Speaker 2

We'll see how the reaction is when they return from holiday, but there's been a halt in buying in China. And obviously that has put pressure on prices. More significantly on hardwood than on softwood, but still, we don't know if it's a one off, if it's something that will be recovered after they come back from the holidays. But obviously we see that this all uncertainty, the tariffs coming in, coming out, is just making people a little bit cautious about building inventories or having stuff shipped around the globe, not knowing when they arrive whether they're going to be subject to a different tariff or something different. So I think that's the comment around those collateral effects or indirect impacts that the tariffs are having.

Speaker 3

Okay, great. That was helpful. And second and last one for me. You did mention how given your typical lag in market pulp prices versus your realizations, your realizations were down a little bit this quarter versus the market prices up. I guess you still got two months left in the quarter and you said in an uncertain pricing environment.

Speaker 3

But is there anything else that we should be thinking about positively or negatively in those first quarter price increases impacting your second quarter realizations?

Speaker 2

We don't see necessarily a big delta there. I think there's going to be more positive than negative when it comes to pulp prices when you compare Q2 with Q1. And even lumber, also because there's a lag. Even though we've seen some relatively softness, a relative softness in lumber in the last few weeks, it takes a while for that to be dialed into the shipments. So my interpretation is that Q2 will be positive on prices for both pulp and lumber when compared to Q1.

Speaker 3

Okay, great. Thank you. Good luck with everything.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Sean Steuart with TD Cowen. You may go ahead.

Speaker 4

Thank you. Good morning. A couple of questions. The cost savings objectives of 100,000,000 by the end of twenty twenty six, can you give us some specific context on cost buckets, productivity improvement targets, specific assets that you're looking at there? And any context on the cadence of those costs flowing through over the next two years?

Speaker 2

Absolutely, Sean, good question. On the cost reduction program or the profitability enhancement program that we have launched, First of all, we started on it in the very beginning of the year. And since then we've been able to already capture quite a bit of indication of where the buckets or where the opportunities lie. Now this program, as I mentioned, is company wide, and we've obviously put a lot more emphasis on those assets that are in a weaker situation from a cash perspective. So assets like Torgau will have a much more dramatic turnaround from that perspective, just as Peace River.

Speaker 2

And we're looking at all aspects, whether it's manning, whether it's logistic costs, handling or overhandling of fiber, looking at every single detail that would allow us to identify opportunities for reduction. Just as well, we're doing a similar exercise in the other mills that are running extremely well, whether it's Stendal or Celgar or Rosenthal or Friesau. We've done also our restructuring already in mass timber. So there's a lot of things that are already underway. When you look at the 100,000,000 overall, I believe that we should be able to get maybe 40 or 50,000,000 already in 2025 when we compile everything that we have already done, plus the things that are in progress.

Speaker 2

And then the balance would be coming next year.

Speaker 4

Okay. Thanks for that detail. And then just to follow-up on your pulp market outlook and I appreciate everything you're saying for the second quarter with relative resilience in North America and Europe. I guess through the latter half of the year though with China looking like it might be cracking their dominant buyer globally. Perspective on the ability to hold pricing for this industry in North America and Europe if China rolls over, any perspective on what you're seeing for customer inventories in those markets?

Speaker 4

I guess, a broader perspective on how resilient those markets could be if China does weaken through the summer?

Speaker 2

Absolutely, Sean. In that respect, there's an element that comes into play which is very relevant at this point in time, and it is tariffs. When you look at the European pulp that flows into The US, well, that is now taxed or tariff, excuse me. So that opens an opportunity for us from Canada to become more competitive than the Europeans, which is something that obviously we are going to take advantage of, because that allows us to ship products down south rather than across the ocean into China. So we are already moving our pieces so that we can have a bigger flow into The US than what we normally do.

Speaker 2

So it basically opens an opportunity for us in that regard. Now, as it comes to the price sustainability itself, what we believe is that still the supply situation for softwood is pretty constrained. That hasn't changed. And that is the biggest element that we believe will help keep the prices for softwood at levels similar to what we're seeing today. I don't expect any if there's any flip right now, I don't expect that flip to be sustained over time precisely due to those constraints on supply.

Speaker 2

And the other thing that we need to be cautious about is that overall, globally, there's still a lot of pressure from a fiber perspective, which obviously, the cost of producing pulp goes up due to fiber going up, obviously that puts even more stress on not allowing the prices to go down. Even more, if you add the currency impact on it, then there's another effect right there. Because as you think of whether we're in Canada buying fiber in Canadian dollars, or in Europe buying fiber in euros, obviously those costs go up in U. S. Terms with a devaluation of the U.

Speaker 2

S. Dollar, which again puts a limit on how much the producers are willing to let their prices go down when their costs are already going up. So I think those are the elements that would allow us to believe that prices will tend to hold for the remainder of the year.

Speaker 4

That's great context. Just one follow-up there. The incremental volume you would move into the state, is that spot market activity? Are you able to contract that volume? How should we think about, I guess, relative discounts for what might be moved into states That's

Speaker 2

spot market activity. There are opportunities that we can take advantage of and obviously we will do. That's, when you look at the way that we've dealt our business in Europe versus North America, it is different in that regard. Most, if not all, of our business in Europe is contracted. In the case of our North American mills, that is not the case.

Speaker 2

We have played traditionally a lot in the spot market, and yes, we have some contracts, but we used to play very much the market depending on what is more convenient to us.

Speaker 4

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

Operator

Your next question comes from the line of Matthew McKellar with RBC Capital Markets. First

Speaker 5

for me, if we do see meaningful Section two thirty two tariffs introduced by The U. S, how would you expect the lumber markets to evolve both in The US and in Europe? And what kind of mitigation options would you have in this scenario?

Speaker 2

Yes, Matthew. One of the things that we see in that regard is that before those tariffs come into effect, assuming that it's November, if they come into effect and we have no idea if it's going to be 25% or nothing or 10%, who knows? Between now and then, the countervailing duties in Canada are going to grow significantly. And that is already a known fact. They will grow from an average of 14 to about 30%.

Speaker 2

So that will favor, competitively, let's put it, our fiber or lumber coming out of Germany. So we intend to basically capitalize on that opportunity that will happen regardless. We know that that is something that will come out in November or maybe sooner. Speculation is that it should be probably earlier than that. But again, since the Canadian lumber is going to be impacted already in a very significant way, the competitiveness of our product out of presale will increase by default.

Speaker 2

So that won't necessarily force us to move or change geographies or destinations for our products. We are preparing Torgau as well. Torgau is starting to produce plain lumber, as I mentioned. That was part of the initial thesis when we acquired the mill. Not for it to be a pallet mill, but to gradually become a lumber mill.

Speaker 2

This is becoming a reality as we speak. And that market, or one of the markets that we're aiming for that product, is precisely The U. S. Market. It is a complementary product to what we already have in FreeSell.

Speaker 2

So those two combined go very well together with our customers. So that's the way that we see it. We don't see right now a situation where we would need to divert our product to different geographies. Again, on the back of the fact that Canadian lumber will be less competitive by itself, unfortunately, due to the contravailing tariffs.

Speaker 5

Great, thanks very much for that color. And then last for me, you made some comments around how you think softwood to hardwood substitution will be limited from here with lots already having played out. Do you have any, I guess, perspective you can share around in what end markets, either by product or geography, that substitution story is further along versus where maybe there's further left to run?

Speaker 2

Absolutely. And this is something, when you think about it, substitution is a concept that you've heard around for years. It's not something new, it's something that every time there's a price increase or a gap between the two fibers, we all talk about substitution. And yes, all customers, whether in specialties or tissue, they all try to push their furnaces to the limit to see how far they can go. We've talked to customers openly about it, and we always ask the question, how far are you in your substitution scale?

Speaker 2

Can you do more? Do you think that's what you've done is about it? And the answer that we get is the vast majority of what we could have done, we already did. And we did it several years ago. And we keep on adding at it little by little every time, but it's just small pieces here and there.

Speaker 2

And this goes whether it's tissue or specialties, because those are the markets where we play the most on right now. And yeah, the answers that we get directly from them is what I just shared. Most of it has been done. Anything that is done right now is a little bit on top of it, but it's not a game changer. It's not something significant.

Speaker 5

Thanks very much for that perspective. I'll turn it back.

Operator

Your next question comes from the line of Cole Hawthorne with Jefferies. You may go ahead.

Speaker 6

Good morning. Thanks for taking the questions. I'd just like your views on some of the raw material costs. You talked about sawlog costs going up kind of 10% in the Germany region. I'm just wondering, are you seeing kind of same sawlog costs as well as kind of wood chip and pulpwood costs?

Speaker 6

Or there's a diverging dynamic that you're seeing to your sawmills versus your pulp mills? And then I'd like to follow-up on the price stability that you're calling out in Europe and North America versus China. What do you think will help support that price stability in Europe versus China at this stage in softwood or even hardwood pulp, if you have a view there? Thank you.

Speaker 2

Perfect. Thank you, Carl. Well, first of all, to your first question on the fiber cost increases, what we've seen is that the impact that we expect in Q2 versus Q1, that 10% increase, it's even more in the case of Torgau than anything else, and a bit on freeze out. But it is basically created by the fact that there is less calamity wood to be harvested while the demand is still normal. So you have kind of unbalanced situation because you have a lesser amount of wood being harvested, and therefore a portion prices.

Speaker 2

The difference between Torgau and Friesau is given by the mix of products that we have. Obviously the quality of Torgau now is increasing because we were used to produce and buy lower quality wood because we were producing only pallets, and now we're buying higher quality wood because we're producing lumber. So therefore we're gonna see just by that effect, a higher increase or relative increase in torgao than we do in free cell. Both of them are going up for the reasons that I just mentioned, that there's less wood being harvested, but it shows more on Torgau because now we're producing lumber on top of pallets. And just the quality of the lumber required for that is different.

Speaker 2

In the case of fiber costs for the pulp mills, we basically don't see any dramatic changes. We were considering them basically flat across the quarter, Maybe as a very small increase in Rosenthal on chips, but very little, so less than 5%. But all in all, it's basically, I would say for pulp, it's going to be relatively flat. And to your second point on pulp price stability, I would repeat a little bit of the comments made earlier. I think what we believe would hold that stability in Europe and in The US or North America is precisely the supply situation.

Speaker 2

And right now, one of the things that I think is on the back of everybody is, particularly those that are European producers, is the fact that with the, again, with the currency changes, some of those costs have raised. If there's pulp moving from Europe into The US, that pulp is now being tariffed. So there's additional elements that would make the Europeans, or some of the Europeans, were already concerned about their cost structure. We had seen already closures of mills in Finland late last year, just as we saw in Canada. We don't believe there's any relief from a cost perspective to them.

Speaker 2

If anything, I think with all this tariff situation, it just got a bit more complicated. And therefore we believe that that weakness of supply is still going to be a significant element in the outcome of whatever we see price wise. And that's what our theory on why pulp prices should remain relatively stable.

Speaker 6

Thank you. And then maybe just as a follow-up on China softwood futures, we've seen a step down, but to the point you were making around the European cost base I mean wood cost in the Nordic region are elevated. Now they've got FX challenges considering your production base is in euros versus your sales prices in dollars. But the China softwood futures has moved lower and you're a big supplier to that region from Canada.

Speaker 6

And I'm just wondering is there anything that you think might be impacting the softwood futures like more supply coming out of Russia or ability to settle with some of the Russian softwood pulp. I'm just wondering if there's any dynamics that might be impacting either the domestic China resale or the China futures prices? Because at $700 a ton, I suppose you're kind of into the cost curve. I'm just wondering if there's anything that you can highlight there.

Speaker 2

I think you hit it on the head, Cole, because Russian fiber flows, particularly in exchange in China, is probably the most relevant fiber that is out there. And we know that it's the lower quality of all, and therefore very difficult to compare that with prime Canadian fiber, for that matter, or European. So I think, I do believe, just as you said, that the major factor creating that unbalance in those futures is in fact Russian fiber. And it is not new. When you look back a year, when you look back over the last several months, that has been a predominant element of discussion when it comes to the futures market.

Speaker 2

The fact that it's so much heavy on Russian fiber being one being transacted, the one that is actually playing a big part in that market.

Speaker 6

So maybe if I lead you on from there, I probably shouldn't assume that the import price necessarily matches to the futures price or necessarily the domestic China resale price. Potentially a gap with the import prices there a bit higher.

Speaker 1

Agree. Hey, Cole. It's Rich here. One other thing to think about is with the weakening US dollar, the Chinese buyers will have their won or have a little bit more buying power as well.

Speaker 6

Thanks, Richard.

Operator

Your next question comes from the line of Roger Spitz from Bank of America.

Speaker 7

Thanks very much. Good morning. Can you please remind us what was the EBITDA impact of the 2024 pulp mill turnarounds? You had fifty seven days out downtime last year.

Speaker 1

So Roger, you want that a total impact?

Speaker 7

Yeah, where I'm going with in this line of question is I'm trying to get a sense of how many, what's the EBITDA impact of a day of turnaround like Celgar that was $1,350,000 turnaround. Now, one of the questions I'll ask you is obviously not all turnarounds are the same and some are more expensive, some are less expensive. I'm trying to get a rule of thumb to think about the impact of prior turnarounds and downtimes and how they impact your EBITDA.

Speaker 1

Okay, well, the rule of thumb is about call it 1 and a half million dollars a day. You can test that because last year's total impact was about $80,000,000.

Speaker 7

Perfect. And I know these turnarounds are planned way ahead of time. Do you have days of turnaround for 2026 yet?

Speaker 2

We do not, no. We do not, for example, as we have some mills that are on an eighteen month cycle, if we do the Stendal shut in 2024, in late twenty twenty, excuse me, in late twenty twenty five, we shouldn't have a shutdown in 'twenty six.

Speaker 7

Got it. Sandell is also eighteen months?

Speaker 2

Yes, Sandell is on eighteen months, just as Celgar is on eighteen months.

Speaker 7

And how about, could you remind me on Rosenthal and Peace River?

Speaker 1

Peace River is

Speaker 2

on 12 as well as Rosenthal.

Speaker 7

Got it. Are those assets set up, or with money you can set them up so you can get them on an eighteen month turnaround cycle?

Speaker 2

It is an objective, but it depends on, first of all, something that we need to review. It's obviously important that we check how the recovery boiler is behaving. That's one of the major pieces of equipment that determines whether you can stretch it or not stretch it. We talk to our insurance companies to make sure that they're comfortable with it. If they're not comfortable with it, obviously we cannot go forward.

Speaker 2

So it goes without saying that it is quite a bit of an exercise to demonstrate, particularly to the insurance companies, that we can go to eighteen months. And if we have the get go, the green light from them, then we pursue it to that effect. And it is something that we obviously want to do in our mills, and we've achieved already two of them, and we keep on working on the other two as well.

Speaker 7

One more on this line of questioning. I know particularly in Germany for other kinds of operations, there's, I don't know what the word is, stipulated turnarounds. That's not the right word, but I don't know how does it work in Germany for pulp mills? Are there, whatever you call it, stipulated turnarounds?

Speaker 1

You mean regulations that require, like regulations? Is that what you mean, Roger?

Speaker 7

Right, regulations that say, I'm using the wrong word here. I can't remember the right word, but I know that in like the chemical industry, it's written into law that you have to take a turnaround over a certain period, twelve months or eighteen months or maybe three years or whatever it is for that particular operation. I just don't know whether that's the case in Germany for a pulp mill or not.

Speaker 1

Yeah, Roger. So I guess the answer is no. I mean, these are high pressure vessels that we're dealing with and obviously there's a ton of regulations around them. But like for example, Stendal is on an eighteen month cycle. So we met whatever rules are in place there.

Speaker 1

We managed to work with the regulators and get the green light. So there's no reason why we couldn't do that with Rosenthal provided. As Juan Carlos said, we meet all the requirements around the different boilers.

Speaker 2

And to complement that, Roger, even though in the case of, for example, take Celgar, which, went through that, longer shot or Stendal, in the year that they don't have that shot because they're enjoying, let's say, the valley of the eighteen month, we normally have a small one. So they normally stop for three or four days, rather than the normal two weeks or whatever. So it's not that we don't do anything at all during that year, that they have free ride, no. There's usually a three to four day shut for other related matters, but that is always scheduled.

Speaker 7

Got it, understood. Thanks very much for this information. Appreciate it.

Speaker 2

Thanks, Roger.

Operator

Your next question comes from the line of Jim Cox with PPM America. You may go ahead.

Speaker 2

Yeah, hi, thank you. Sorry, Roger just asked the questions about the downtime that I was going to ask. Thanks. No problem, Ian.

Operator

Your final question comes from the line of Cole Hathorn with Jefferies. You may go ahead.

Speaker 6

Thanks for taking the follow-up. I'd just like to ask around, are you seeing any change in order patterns from your pulp customers either on the tissue side or into various end markets? And the reason I ask is because obviously with U. S. Tariffs, I'm just wondering if there's some front running and consumer stocked up in The U.

Speaker 6

S. And then maybe on the European side, we're also seeing very big divergence between what the consumer staples businesses are calling out from a demand perspective. It's most relevant in the box market, right? Europe's up two to three and The U. Is down two.

Speaker 6

So I'm just wondering if there's any difference in customer stock levels or order patterns that are relevant. If not, I completely understand.

Speaker 2

So far, Cole, we haven't experienced anything that would be impactful in either Europe or North America. In Europe, think just the sole fact that it's mostly contract based, and that our customers usually follow their contracts and their deliveries as scheduled from the beginning of the year, yeah, we're not seeing any slowdown or any change at this point in time. The only impact that we're seeing, or the only effect that we're seeing is what I mentioned earlier around China, that there's clearly something there around slowing down or checking or trying to figure out how to move forward. But no, in the case of Europe, or even North America, haven't seen much. At least that impact us, no.

Speaker 2

Again, I would repeat myself, the only thing that we've seen is an opportunity for our Canadian pulp into The U. S. That we want to capitalize on. But that's about it.

Speaker 6

Thank you.

Operator

That concludes today's question and answer session. I will now turn the call back over to Juan Carlos. Thank you.

Speaker 2

Okay, thank you Lacey, 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 August. Bye for now.

Operator

That concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Mercer International Q1 2025
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