Transcript
Good morning and welcome to Mercer International's First Quarter 2020 Earnings Conference Call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International; and David Ure, Senior Vice President, Finance Chief Financial Officer and Secretary. I will now hand the call over to David Ure. You may begin, sir.
Good morning everyone. I'll begin by reviewing the first quarter's financial results. Following my remarks, I'll pass the call to David, who will comment on our response to the COVID-19 pandemic, key markets, operational performance, progress on our strategic initiatives, along with our outlook into the second quarter of 2020. Please note 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. Our first quarter results were a significant improvement over last quarter, primarily due to the absence of the large annual scheduled maintenance activities that we completed in Q4. The COVID-19 pandemic impacted our results only marginally in the form of lower sales volumes early in the quarter due to logistics challenges in China. The pandemic did, however, significantly impact how we operate and David will speak to that in a moment. We generated EBITDA in the first quarter of about $57 million compared to an EBITDA loss of about $34 million in Q4. This quarter, we benefited from strong production at all of our mills, including record production in our Friesau sawmill along with effective cost controls. Demand for all of our products was steady this quarter. And while product pricing remained low, the U.S. dollar strengthened considerably during the quarter, contributing about $14 million to our EBITDA. Our Pulp segment contributed EBITDA of $52 million, while our Wood Products segment contributed record quarterly EBITDA of almost $8 million. Our Wood Products segments results reflect strong sales volumes, record production and the benefit of historically low sawlog prices. As usual, you can find additional segment disclosures in our Form 10-Q which can be found on our website and that of the SEC. Average NBSK list prices were up marginally in all of our markets. Average hardware pricing was up slightly in China and down slightly in the U.S. in the quarter. However, due to the timing of our sales at modestly higher discounts that took effect in January, our average pulp sales realizations fell during the quarter impacting EBITDA by about $9 million compared to the prior quarter. Our Pulp sales volumes totaled 504,000 tons, which was up about 22,000 tons from Q4, reflecting higher production and steady demand in all of our markets. Sales in our Wood Products business were also strong, as we sold the equivalent of about 180 million board feet of lumber in the quarter, which was up about 17 million board feet from Q4, with about 31% of this volume being sold to the U.S. market. Electricity sales totaled 254 gigawatt-hours in the quarter, which is up significantly relative to Q4 due to our heavy Q4 annual maintenance schedule and strong Q1 production at all of our mills. Our Cariboo Pulp joint venture, which is accounted for using the equity method, contributed another 19 gigawatt-hours to this total. We recorded a net loss of $3.4 million for the quarter or $0.05 per share compared to a net loss of $72.7 million or $1.11 per share in Q4. Cash usage in the quarter totaled $65 million compared to $86 million of cash inflows in Q4. Our cash usage in Q1 was anticipated and was primarily driven by working capital movements. Our heavy maintenance schedule in Q4 left us with significant payables at the end of the year, which were substantially paid in Q1. In addition, receivables were up due to higher sales volumes and the timing of sales, while finished goods inventory was also up as a result of our strong production. We also invested about $23 million of capital in our mills this quarter. David will speak more to that in a few minutes. As expected, after temporarily rising in Q4 on unusually low working capital, our liquidity was reduced in the quarter, but remains considerable totaling roughly $517 million, including $287 million of cash and $230 million of undrawn revolvers. Low prices continue to force us to revalue certain components of our inventory and in Q1 this resulted in a non-cash $5.7 million inventory write-down. However, after considering the realization of the Q4 inventory write-down of $9.2 million, our net positive EBITDA impacted Q1 was about $3.5 million and reflects our current expectations that downward pulp pricing pressure is diminished in recent weeks. To the extent pulp prices increase, we will recognize a profit on this written down inventory in Q2. In Q1, we completed a short and successful two-day plan shut at Celgar compared to Q4 when we executed larger planned maintenance shuts at Stendal, Celgar, and Peace River that in aggregate totaled 54 days. The benefits of higher production and lower direct costs benefited Q1 EBITDA by about $73 million compared to Q4. As a reminder, our competitors that report their results under IFRS are permitted to capitalize the majority of their annual maintenance costs, while we expense our costs in the period of shut completion. Our current share buyback program expires today and in response to the uncertainty created by the COVID-19 pandemic, our Board has elected not to renew the program for the time being. We have not been particularly active in the market, but did purchase about 24,000 shares in the first few weeks of the quarter at an average price of $6.84. And consistent with that prudent stance with respect to the pandemic, our Board has approved a moderated quarterly dividend of $0.650 per share for shareholders of record on June 25th, for which payment will be made on July 7th, 2020. That ends my overview of the financial results and I'll turn the call over to David.
Thanks, Dave. Good morning, everyone. Let me begin by saying that COVID-19 is an unprecedented event, certainly in my lifetime, and it has presented a number of challenges to our business. I'm proud of how our employees have responded to these challenges. The current working environment and work-related changes have not been easy. And I want to thank all our employees for working cooperatively to keep safety at the forefront. I'm also pleased to note that despite these challenges, including running large industrial manufacturing facilities while maintaining social distancing requirements, our mills ran very well this quarter. We also benefited from strong cost controls and steady demand for our products. Our Friesau sawmill reported record production and a second consecutive quarter of record EBITDA. Pulp prices in Q1 generally experienced modest upward pricing pressure due to steady demand. NBSK pulp prices in all markets increased slightly midway through Q1. In China, the Q1 average NBSK net price was $573 per ton, up slightly from the $563 per ton in Q4. European list prices averaged $833 per ton in the quarter compared to $822 per ton in Q4. The average quarter one hardwood net price in China was $460 a ton, up $5 from Q4, and the hardwood list price in the U.S. market averaged $890 per ton in Q1 compared to $893 in Q4. The pandemic and government responses to limit spread have created significant economic uncertainty and we recognize that changes can happen quickly. Currently, we are expecting steady pulp demand from tissue and hygiene producers but expect demand from the printing and writing producers to be under some pressure. We're also seeing a large drop in recycled office paper which we believe will create increased demand for virgin pulp. On the supply side, we are expecting certain pulp mills to announce production curtailments due to a lack of fiber. We recently announced that our joint venture Cariboo Mill started four weeks of downtime beginning in late April, taking about 30,000 tons out of the market, with our share being 15,000 tons. As a result of social distancing requirements and virus outbreaks, we have seen several announcements of unplanned shuts in mills being forced to defer their scheduled annual maintenance shuts. These deferrals will increase the likelihood of unplanned downtime and will reduce supply of pulp in the second half of 2020. Pulp sales volumes remain high and localized supply shortages have led some producers to announce price increases, despite overall midterm market conditions remaining uncertain. March market statistics reflect positive movement in sales volumes and supply-demand dynamics for both softwood and hardwood. What is less clear is how deep the short-term demand decline for printing and writing grades will be. We believe pulp pricing this year will see floor pricing and if we see any further downward pricing, we expect to see further pulp curtailments that are market-based. I will add that our pulp products are an important part of the healthcare supply chain and in some jurisdictions, we're considered an essential service. So, we expect to continue to run and we will continue to follow all government health-related recommendations to ensure we keep our people safe and to reduce the risk of the virus spreading through one of our facilities. With regards to our Wood Products business, the European lumber market experienced steady demand. However, pricing was down slightly compared to Q4. Lumber markets in the U.S. continue to show improvement in Q1. We believe that lumber production curtailments in British Columbia, due in part to the limited supply of saw logs, and positive statistical data on the U.S. housing market create this upward pressure. The random lengths U.S. benchmark for Western SPF Number 2 and better averaged $399 per 1,000 board feet in Q1 compared to $380 in Q4. Today, uncertainty regarding the pandemic has pushed the benchmark down to close to $332 per 1,000 board feet. In Q1, about one-third of our lumber sales volumes were in the U.S. market, with the majority of the remainder of our sales in the European market. When comparing to Q4, our average realized lumber sales price was flat at $348 per 1,000 board feet in Q1 compared to $347 in Q4 as higher U.S. market pricing was offset by lower European prices. As we move to Q2, we expect lumber markets to remain relatively weak along with sales realizations. Today prices have been volatile as lumber buyers look for clarity in how housing starts and do-it-yourself project demand will fare as governments begin to reopen the global economy. Our mills ran very well this quarter in spite of all the pandemic-related challenges. Including our Cariboo joint venture, we produced 534,000 tons of pulp, up 92,000 tons from Q4 when we had 54 days of scheduled annual maintenance of the pulp mills. Excluding our Cariboo joint venture, our pulp mills produced 570 gigawatt-hours of power, up 148 gigawatt-hours from Q4, again due to our heavy Q4 planned maintenance. Our Wood Products segment performed at a record level this quarter despite ongoing production interruptions as we work through the Friesau construction project. We produced 116 million board feet of lumber and as Dave mentioned, our Wood Products segment generated record EBITDA of almost $8 million in Q1. In Germany, beetle-damaged wood remains plentiful and is resulting in lower log costs generally. We expect this log supply dynamic to last well into 2021. In Western Canada, corporate supply remains very tight. Sawmill curtailments have limited sawmill chip supply resulting in higher-cost options being used to replace those volumes. High wood costs combined with historically low pulp prices are pinching margins considerably. Our annual maintenance program for 2020 has changed in order to reduce the exposure to COVID that may occur when the traditional large numbers of contractors enter a site to assist with maintenance during a shut. Our current expectation is that Stendal will take two short three-day shuts in Q1 and Q4. Cariboo has deferred its five-day shut to Q4. Rosenthal will take its typical 15-day shut in Q4, and Peace River will take a five-day shut in Q4 as recovery boiler rebuild shut has been deferred until Q2 2021 due to the inability of contractors being able to guarantee the availability of skilled tradespeople during the pandemic. Celgar will take three-day shuts in Q2 and Q4 and a slightly larger shut in Q3. In Q1, we invested $23 million in high-return projects at our mills. We've also reduced our expected planned 2020 CapEx program to about $90 million to manage cash and anticipation of the reduced availability of skilled labor as a result of the pandemic. A more modest 2020 capital program will focus on the completion of the Friesau Phase 2 expansion project, along with some smaller high-return productivity and cost reduction initiatives. We also expect to commence early work on the production expansion project at Stendal, which when complete in 2021, will increase the total capacity of that mill from 660,000 tons to 740,000 tons per year. Q1 2020 has been unprecedented in terms of operating challenges and potential market shifts. I've been comforted by our success in implementing our strategy; our focus on world-class assets, strong balance sheet discipline, and focus on sustainable operations has and will continue to serve us well as we focus on optimizing our fiber handling and logistics and controlling our costs. Our balance sheet is in good shape with considerable liquidity and continued financial discipline will contribute to shareholder value over the longer term. As Dave mentioned, our Board has decided to reduce our dividend as a precaution given the global economic uncertainty created by this pandemic. This reduction gives us increased financial flexibility, and we're cautiously optimistic this reduction will be short-lived. This completes our prepared remarks. But if I can take a moment to say that despite governments beginning to take steps to reopen society, the virus is still out there and remains a significant risk. So, as we say to all our employees, please continue to keep your families, friends, and neighbors safe. Thanks for listening. I'll now turn the call back to the operator for questions. Thank you.
Your first question comes from Hamir Patel with CIBC Capital Markets.
Morning. David, how much do you expect softwood pulp demand to be down this year from COVID-19?
It's a mixed situation. Generally, examining the various grade sites, we believe that tissue and hygiene products will remain strong. RISI forecasts that tissue will require an additional 2.6 million tons of pulp this year. However, I have concerns about the graphic segment, particularly in printing and writing, due to the economic slowdown affecting magazines, flyers, and some packaging. RISI predicts a decrease of about 9.2 million tons of pulp in 2020 for that segment. Notably, two-thirds of this reduction is made up of wood containing or recycled fiber, so we are essentially discussing a loss of about 3 million tons of pulp, with approximately 25% of that being softwood, translating to around 750,000 tons. For packaging, the coarser grades are expected to decline by about 1 million tons, according to RISI's forecast. On the supply side, we have already seen a reduction of about 1 to 1.2 million tons of pulp supply taken off the market, which is a positive sign overall. The forecast from RISI aligns with our perspective, and we have observed several paper machines in the U.S. and Europe taking downtime. Particularly in Europe, there is a lack of glider capacity, which does not lead to an increase in market pulp but rather a decrease in paper grades. When large European companies take downtime on a machine, they often shift orders to other machines, trying to keep the more profitable ones running while sidelining the less profitable ones. We feel reasonably optimistic about the rest of the year, anticipating a slow summer but expecting everything to balance out. What will be intriguing to observe is how older pulp mills, which are not as well maintained, will handle their maintenance shutdowns in the latter half of the year. Most pulp mills have postponed first-half maintenance to the second half, which could present challenges and create interesting dynamics as we move through the recovery period.
Thanks. That's helpful. And then just in BC, given the scale of the sawmill curtailments, I do think we'll get to a tipping point where we'll see some pulp mills finally, kind of, permanently go away in BC just because of the structural fiber constraints?
I think part of the answer to that question really depends on the British Columbia provincial government. I'm starting to feel quite critical about their ability to make bold strategic policy decisions. So in the absence of a change there, I would suggest there are no further risks in British Columbia. Fortunately for us, our Celgar mill has a long history of processing round wood, which are the non-saw log quality logs harvested as a byproduct of sawmill log harvesting. We have good programs and procedures and equipment to process that, so Celgar has a solid supply of logs, which should perform well in the short to medium term. The situation with the sawmills is uncertain. If you see this, we will do something, and they don't seem to be doing anything. These four-week announcements we've been hearing can stretch into six, eight, or even ten weeks. If it continues into the latter half of this year, that will pose a challenge for us and for everyone. You have to expect them to take action or hope for a strong recovery to get the sawmills back to business because the economics will need to make sense for them again.
Great. Thanks, David. That's all I had. I'll turn it over.
Your next question comes from the line of Sean Steuart with TD Securities.
Thanks. Good morning. Following up on Hamir's question, with Celgar specifically, can you give us an idea of what the cost differential between residual chips for that mill and a whole lot chipping, what that cost differential looks like for that mill?
That's a good perspective. Let's assume a hypothetical scenario where the cost of wood per ton of pulp is just under $300, likely between $250 and $300. The wood sourced for a mill includes various types, starting with sawmill residuals, which offer the lowest cost fiber. For us, this means chips arriving from a nearby sawmill, and then we also consider residuals from other local sawmills, noting that transportation costs can add to overall expenses. Moving up the cost spectrum, we consider round wood, which is the leftover product from sawmill harvesting. Depending on the location of these logs, prices can vary; some are nearby and may be slightly more expensive than the lowest-cost residues due to processing and transport, while the highest cost fibers can be sourced from locations 100 to 120 kilometers away, potentially reaching around $400 per ton of pulp. When combined, these different sources yield an average cost. Currently, the supply of low-cost sawmill residuals has significantly decreased, and no one has projected any new supply for more than four weeks. We have an ample supply of chip inventory and logs already acquired. However, we need to consider how much we should invest in these higher-cost saw logs to maintain our inventory levels, especially given the current pulp prices, which limit our ability to justify the expense of more costly fiber. Thus, finding the right balance in managing these resources is crucial, and a key factor will be the timing of when sawmills resume operations.
Understood. Thanks for that detail. And a question on the downtime schedule that you laid out, do you have the contractor crews lined up for that schedule and committed? And is there a risk that there are potential deferrals to that schedule? If social distancing initiatives remain in place? How should we think about that?
For significant projects like the power and recovery boiler at Peace River, we know it’s not feasible, so we've decided to defer those plans. It’s not a safety concern, just a bit inconvenient given the modern setup of our mill. During maintenance shutdowns, a lot can be managed with our own team and smaller shutdowns. One of the silver linings we’ve found during the pandemic is realizing that it’s unlikely we will have 500 to 1,000 contractors on site for shutdowns. We’ve been dividing the work into smaller tasks across different areas of the mill to maintain everything effectively. I don’t see any issues this year that would hinder our operations. Even without third-party contractors, I believe we can handle most tasks ourselves in manageable portions. While I feel confident about our mills, I can’t speak for others. Older mills might face challenges due to the age of their equipment, often requiring extensive downtime for thorough inspections and repairs that their teams may not be able to complete quickly. The situation varies for each mill, depending on the condition of their major equipment. If they can defer maintenance for 12 to 18 months, that’s manageable. If not, it could pose challenges for some mills.
Last question for Dave, you laid out various levers you're pulling through liquidity preservation, lower CapEx, the dividend reduction, and it gets an unwinding of working capital in the near-term. Are there any other options in terms of tax deferrals, refunds coming that sort of thing that we can look to for liquidity support?
In response to your question about tax deferrals and refunds, I would say that the examples you've mentioned, like tax refunds, are not significant. We are making adjustments as we are taxable in certain areas, similar to our practices in Canada. In specific situations, if you're paying taxes quarterly, you can adjust those payments to align with your forecasts, and that's what we are doing. We anticipate that our taxable income will be lower for 2020, so we will assess those forecasts and adjust our quarterly tax payments accordingly, but we do not expect any significant refunds. Regarding working capital, it’s a balance. There are operational and market reasons to maintain some working capital. For example, having ample wood piles in front of the yard helps us manage wood costs effectively. From a customer service perspective, having adequate inventories of pulp and lumber is crucial to meeting customer demands and maintaining efficiency. We are continuously evaluating these factors to conduct a thorough cost-benefit analysis. We are committed to refining our working capital and, as David pointed out, we are also focusing on optimizing our capital expenditures as necessary.
Thank you for that. That's all I had. Thank guys.
Our next question comes from the line of Marcus Campeau with RBC Capital Markets.
Hey guys, good morning. With COVID-19 obviously creating a lot of uncertainty in the market here, could you just walk us through how you're thinking about capital allocation, whether that be balancing maintenance needs, growth opportunities, or even eventually returning capital?
I believe, as I mentioned earlier, that I cannot predict how COVID will play out. There seems to be a strong desire to return to work and revive the economy. This is truly an extraordinary situation. I'm not particularly pessimistic, but I do think that once we emerge from this, recovery will happen rapidly. However, during this period, we must proceed with caution, as I'm uncertain about the possible downsides. As Steve pointed out, we have over half a billion in liquidity, split between cash and undrawn revolvers. We continue to operate and generate EBITDA. We have several appealing high-return capital projects and maintenance activities that we will carry on with, and we are ready for that. We've decided not to renew our share buyback program, but we can convene a board meeting to reinstate it quickly if necessary. For now, we're focused on surviving to fight another day and pursuing our long-term strategy of creating value during tough times, which often present opportunities. It's wise to maintain as much liquidity as possible during a downturn. Regarding capital allocation, we are finishing the Friesau project due to its significant potential as the largest sawmill in the world, likely to be one of the best margin producers considering current wood market conditions and the mill’s access to global markets. We are also continuing the expansion at Stendal, having ordered two new digesters, which we expect to complete in 2021. This is not a large capital expenditure, around $40 million, especially with half of that offset by other wastewater programs, effectively making half of the equipment a grant. We are still moving forward and focused on creating long-term value while remaining very cautious in the short term.
Thanks. And then maybe on pricing, many of your peers have been putting up price announcements for the month of May. What are you hearing from your customers and pricing discussions? And have you seen any notable differences by geography?
In Q1, we've observed consistent pressure across markets. There's a lot of conversation about May in our sector, so I'll refrain from providing too many details. Some additional demand is coming from paper producers who are concerned about supply risks, similar to how people react when they hear about potential shortages in other industries. This has led to many tissue customers requesting more than their usual allocations. However, on the printing and writing side, requests have been adjusted, with some reductions in tonnage. How effectively we can implement price increases during this uncertain period is unpredictable. I remain reasonably optimistic that, barring a significant resurgence of issues, we could see improvements in the latter half of the year. Nonetheless, I wouldn't place too much emphasis on small fluctuations in pricing as they vary based on each player's unique circumstances. Factors such as supply uncertainties, a slowdown in certain grades, and additional tissue supply all contribute to the complex situation. I anticipate that we will need to maintain our current strategy through the next quarter, possibly facing some weakness in the summer. As long as we avoid serious complications in the latter part of the year, I am cautiously optimistic about better outcomes.
All right. That's all I had. Thanks and good luck.
Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management.
Hi, good morning. Can you hear me? Okay.
Hey, fine Andrew. Good morning.
Could you provide insight into the milestones or criteria the board is considering for reinstating the buyback? I understand that it can be done on short notice, but what specific benchmarks will guide your decision? Additionally, when considering the dividend reset, will the approach be a gradual increase or a decision to return to previous levels?
There are many ways to address both of those questions. Central to our approach is our confidence in the cash-generating capabilities of the business versus how well the stock performs. While there's a lot of theoretical math to consider, our priority is to provide a consistent dividend return to our shareholders, and we are committed to that. We aim for the return to increase over time, ensuring that as the company grows stronger and more profitable, shareholders will benefit through dividends. During periods of significant weakness, share buybacks can be considered, but with our growth focus, we've noted a liquidity discount in the stock, making buybacks less of a priority for us. Additionally, for companies looking to utilize government support programs, such as those similar to the green transformation initiatives in pulp and paper, it can be challenging to apply if stock buybacks are ongoing. It's important for us to remain in a position that allows access to those opportunities.
Sure.
So there's a whole bunch of these different factors. What it comes back to when we move it back up again, Andrew? I shouldn't pretend that I have control over that. This would be a board decision. And we'll debate all the different factors and our levels of confidence at the appropriate times. But the board will be very focused on this question, through this whole pandemic.
Sure. And I understand your comments on the buyback and just to flush out a little bit more on the dividend, because it sounded as if you were talking of the dividend as something that might be stock price based. And if that's the case, does that mean your yield targeting the dividend?
No, we're not. We don’t. We were very happy. We were in excess of a 6% yield, and we're very proud of that. But it's just when you can't see the future. And you've got, when you've mentioned risk, we just thought it's better to knock it down to closer to three range, right.
In terms of the dividend, setting aside the buyback, I understand your points. Regarding the dividend and any milestones or thresholds, it seems there might be some visibility. If that visibility were to exist, would it lead to a reinstatement or a gradual increase from the current levels that the board is considering? Or is that part of the discussion?
Yes. I understand your desire for specificity, but I don't want to comment. I don't know what we'll do.
Okay.
It would be incorrect to misguide anyway.
All right. Let's move on. So then, in terms of the CapEx, when you elaborate then on the CapEx reduction, are there any particular projects that you're canceling or pushing back? Or is it just across the board?
No. We went to every mill, and David leads these discussions. I support him in that. What we're looking for is to acknowledge that we will reduce our spending prudently, while evaluating each individual project on its own merits. We are considering which projects can be deferred without creating risk for the company, especially those that have higher returns. We are assessing what offers the best returns and what are strategically the most important actions. There are many factors involved. To be honest, we have deferred several attractive, high-return projects that do not pose any risk to the business. By doing this, we do not affect the strategic direction of the mill, and we will be able to revisit these projects when liquidity or pulp pricing improves.
Okay.
We don't have any major maintenance issues that we're not addressing. Part of our strategy is to keep our assets in good condition throughout the cycle, and we're not taking any risks in that area. Some companies might consider cutting back, but we didn’t want to halt the Friesau or Stendal projects. Additionally, although it is a smaller project, the wastewater project at Rosenthal is also very important for that mill, as it allows us to file a project and have a government wastewater fee offset provide the necessary capital for it.
I've asked in the past, but I don't know if I need to ask any more, is the DMI integration complete or what remains?
Yes, it's always a work in progress. Our culture focuses on continuous improvement. We haven't finished yet, but to summarize our experience, it's been fantastic in terms of cultural fit. The team there sees themselves as part of the Mercer family now. They feel like us; they’re the candy people. They have been really pleased with the acquisition and the team we have there. On the marketing side, we are working on untangling some arrangements set by the previous owners and implementing our own program. On the accounting systems side, we still need to enhance their systems and integrate them into the enterprise-wide system. This work is ongoing, and some aspects have been delayed due to COVID, which has made certain initiatives challenging. However, it is now a Mercer mill, with Mercer people, the cultural fit is great, and everything is going well.
But the rest of the synergies have been created?
Well, like I say, it's a work in process. So we've optimized the wood costs, like a big chunk of what goes on in a pulp mill is wood cost and we've been studying, we've optimized what they have. And now we've been studying what can we do differently? What can we do better? And there are opportunities, high return capital project opportunities to continue to lower the wood cost, but those are on hold until we have a better line of sight on the recovery. So we're not finished. We'll never be finished, but we're in great shape, and there's still lots of good questions.
It sounds like the big stuff is done. I don't need to ask that regularly. So that's the main thing I was getting off the plate here. I was late to the call. Did you break out what the net currency effects were for the quarter?
I think we had some of that in our queue, but maybe Dave could speak to that for a minute. Dave?
Yes. We had about so that the U.S. dollar strengthened considerably during the quarter against both the euro and the Canadian dollar. And we estimate that that had a positive impact to EBITDA about $14 million.
Okay. In the prior call, not too long ago, we talked about the impacts of the pandemic in China being primarily transport and logistics around the country with their mills otherwise kind of up and running, although demand might have been constrained. Where do things stand in China and business in China for the company, either the transport and logistics issues, now behind us or what remains as major hurdles other than we'll call it just net demand?
Yes, I think things have improved significantly. In our last call, you mentioned the issues truck drivers faced getting from one point to another. Most of those logistics constraints have now been resolved, particularly concerning container availability and shipping capacity. Initially, there was a significant amount of shipping tonnage stuck in Asian waters, as there was reluctance to return empty without cargo. This resulted in what we refer to as blank sailings, meaning many sailings were canceled. However, that situation is changing, and ships are now returning with materials and containers that will be used for future shipments. It will likely take another two or three months for container prices to stabilize back to normal levels, and this process is already underway. It was like facing a major obstacle for a while, but that's diminishing. Regarding Europe, the situation is somewhat similar but not as severe. There was a period when crossing borders between Germany, Poland, and the Czech Republic was extremely difficult, with truck drivers waiting for hours. Fortunately, those issues have been resolved with the introduction of green and blue lanes, allowing freight to move smoothly across Europe. We are no longer facing those types of challenges.
Great. And then lastly, for me given the pandemic and obviously the inability to travel and the cancellation of many conferences and all. What are the company's plans to continue to reach out to new and existing investors in the coming months as well as new and existing customers?
Yes. On the industrial side, we will increasingly participate in bank-led virtual conferences, with a few already scheduled. Dave can provide more details on those. While we're not currently focusing on investor relations, we're committed to sharing our story as best we can. For those listening, I encourage you to check out our new website, which we put a lot of thought into. Dave and I have contributed our perspectives, allowing you to understand our views on various topics. We also included a significant amount of new ESG materials.
Yes. It's very impressive. That something.
Thank you. Regarding our customers, Mercer is a prominent global producer. They are familiar with us, and our teams have a strong understanding of them. There are effective communication channels in our marketing efforts. As much as our team enjoys traveling and values those relationships, we are all adapting to working from home or other remote locations. We utilize the Google platform, including Google Hangouts and Google Meet, which makes it easy for us to connect face-to-face with our customers. If you would like to set up a Zoom or Google Meet, we would be eager to arrange a meeting, as I believe that is the direction we are heading.
Yes, the virtual conferences you're attending for investor purposes will allow us to participate or listen in more than we could have if we were traveling on short notice. So, what are the ones you have already scheduled?
You wanted to give Andy, just the next one, and we can line that up?
Yes, it's a bit too early to provide specific dates, but it appears that we will have two events scheduled for early June. Once we finalize the details, we will ensure that the information is available on our website.
Awesome. Thank you, guys.
We can also say open invitation to anybody who wants to do a face to face we're very happy to do there.
Your next question comes from the line of Andrew Kowski with Credit Suisse.
Thank you. Good morning, David, you did a good job of breaking down all the categories of unused demand and giving us a lot of granularity there. Maybe just a broader question; it's a tricky one. But it's, to the degree we've seen prices move upwards, and they've moved up modestly, what part of that is really supply-related where we've seen some downtime and just some issues in operating some of the mills globally versus just underlying demand changes?
It's a good question. In my view, the market dynamics are psychological. There is a genuine increase in demand for tissue and hygiene products. I believe that COVID will permanently alter some consumer habits. Reflecting on my career, I recall when diapers were not prevalent in China until a campaign introduced them to the region, leading to significant growth in that market. Currently, China's economy accounts for one-third of global fiber demand, yet their towel consumption remains low, around 5%, compared to 30% or 35% in developed economies. When considering hygiene, the aerosol effects of COVID raise concerns about using hand dryers, which spread germs. This leads to a potential increase in the use of industrial and home paper towels for various needs, including hygienic purposes. I anticipate notable shifts towards hygiene products. The demand loss in other areas, especially graphic products, appears to be more permanent, as travel and magazine consumption, particularly in airports, are unlikely to return to previous levels soon. A significant portion of that demand loss will impact wood-containing products and the recycled fiber markets as well. Overall, I maintain a positive outlook for our chemical pulp segment moving forward, although the path may be uneven. The approach we take will largely rely on market psychology and the short-term supply risks that customers are concerned about. Globally, I don't foresee much downside in pricing for hardware or software. Minor fluctuations of around $5 or $10 may occur due to market sentiments on supply and demand. However, any substantial price reductions could lead to global capacity shutdowns. Once conditions improve, I expect substantial pent-up demand in packaging and specialty grades that are currently on hold to return forcefully. Thus, I believe the potential for upside outweighs the risks.
That's very helpful. Appreciate the color. Thank you.
Your next question comes from the line of Adam Zirkin with Knighthead.
Hi gentleman, appreciate you taking the time. David, you had mentioned early in the comment that that the crisis was causing you to change the way you operated and you didn't really speak to that too much. You spoke about it with respect to maintenance and contractors and social distancing, but not in any depth beyond that. So, I'm wondering, sort of how the operations of the mills changed because obviously despite those changes, they're running well. And are any of those changes permanent? And are there any opportunities to utilize things learned in the crisis to say reduce the cost structure your long time or improve efficiencies long term?
Thanks, Adam. That’s a great question. There have been numerous changes, many of which have positive aspects. For instance, early on, we realized we needed to respond quickly to the situation. We implemented our crisis management plan and gathered our senior team to tackle the challenges ahead. A group of our top 40 executives met every morning for five or six weeks to discuss the pandemic updates and safety protocols. We had our health and safety team constantly researching information to stay ahead of the situation and began adopting measures to ensure the safety of our workforce. For example, in our canteens, we recognized that a single outbreak could lead to a shutdown, so we revised our procedures. We also adjusted how we interact with truck drivers who deliver and pick up goods, introducing plexiglass barriers, switching to digital forms, ensuring social distancing, and enforcing strict personal protective equipment policies. We also modified our team configurations: instead of having two large teams of 150 workers, we split them into four smaller teams that operate at staggered times to avoid overlap. This not only improved safety but also provided consistent coverage, allowing us to shift workers in a way that maintained operations throughout the week and minimized the impact of any potential contagion. In assessing risks, our teams evaluate every procedure to ensure that when working closely with others, they have the necessary protective gear. We remain diligent and careful, and so far, our strategies are proving effective. Historically, we wouldn’t have made such significant adjustments to shifts, but in the face of crisis, we’ve found these changes are working well. We continue to learn and adapt, and while we are unsure how long this will last, these measures are enhancing our safety protocol, improving coverage, and allowing our own teams to accomplish more maintenance tasks effectively.
Obviously, there safety is paramount, but are there financial implications to that as well?
Well, the biggest one is that, if you're doing work with your own workforce, you're not spending money on contractors and if I were going to say the single largest cost reduction initiative in mostly today is the benefit of recognizing we can do so much more ourselves and really limit these large 15-day, 1,000 personal contractor maintenance shuts, I mean you have to have a major shut. Periodically, historically they've been 12 months since we've talked, Mercer has been moving to the 18 months and possibly even two years in certain mills and this whole change in the shift structure and the way we do maintenance and the inability to bring in outside contractors is just accelerating our move down that path. It's changing, it's changing the way our people think about their responsibility to the company and to the mill as well because in our company, here is just we have got a can-do spirit where everybody's doing whatever they need to do to help us be successful and they're proud of that and they're proud of their safety values as well. And so, digging in and doing work that we used to have contractors do is something we're very prepared to take on. I'm very encouraged.
Great. Let me follow-up with you some more on that. But in the meantime, that's all I have. Thank you, guys.
Your next question comes from the line of DeForest Hinman with Walthausen & Company.
Hi, thank you. Can you hear me?
Yes, DeForest, loud and clear.
Okay, great. You mentioned earlier in the call about, I think your termed as being a hero on the Celgar side with picking higher-cost log inventory. And then later on in the call, you talked about pricing inventory could be down too much. Could you see a scenario where log pricing remains elevated in British Columbia and then end market pricing and softwood remains where it is and there's a potential as that mill could shut or do you run it even with that environment?
Well, I certainly do see the risk and I've been quite vocal here in British Columbia with government and our profitability, our EBITDA is not coming out of the Canadian mills today. It's really our European and our energy businesses and the Canadian mills, while in a normal market are great mills, what’s happening with wood cost right now are more or less breakeven. So, if this situation deteriorates, we'll unfortunately make the right decision to minimize the impacts of that unfortunate circumstance.
Is there any issues with the…
Sorry, deploys and security remind you, we've got the average cost on the wood in front of the mills already spent. The decisions that we're having to make is like, would we keep the scales open and allow $450 wood to come to the mill? I'm saying today, no, I'm not going to do that. So if we burn through our pile and there's no sawmills running, then unfortunately we would have to take that mill out for a period of time.
And then in terms of the union structure at the mill, is that going to be an issue if we had to do a shut? And then is the union able to relay this message in any way to the government about what's going on as well?
Yes. We are very well-aligned with our unionized employees, they're in some tremendous workforce and they're all on the same team. So we're all like a Noah's Ark, we're doing everything we need to do together and we've seen all kinds of flexibility and engagement. And on the lobby front, our union executive supports us or Mayors and MLA’s and Community Chambers of Commerce leaders, we all are putting pressure on this provincial government to do something different, but so far we have been unsuccessful.
Okay. Thank you.
But recovery at COVID would change everything again. Once the sawmills comeback, things will normalize.
Your next question comes from Austin Nelson with AIG.
Hi, thanks for taking the question. I just kind of wanted to go back in recognizing that you don't do this and it's very hard to have any outlook, but you would kind of walk through, you can think that we're at a bottom in pricing. We've walked through the puts and takes on demand and some supply coming down. And maybe summer's a little bit weaker and kind of see where Q2 is going and then you'd expect a back half ramp, assuming we don't have a second layer of Coronavirus. If that's the case, if I'm just kind of running back of the envelope math on the dividend cut, the reduction in CapEx, and then how the working capital will move, is it fair to think that things progress the way you think they'll progress that, you'll actually generate cash this year? I understand you're being prudent around liquidity, but it looks like just looking at how the quarter went, that depending on working capital swings, you shouldn't really have any problems with the cash burn and could potentially generate positive cash flow, is that correct?
That's a direct question about my views on the latter half of the year. I don’t have the insight to predict how the pandemic will resolve. However, I can highlight the cash-generating potential of our company and assets; we possess a strong set of assets with a solid fiber supply under typical operating conditions. I don’t want to claim to have foresight. I’m uncertain about how the pandemic will progress, and I'm quite concerned about the initiatives being taken to reopen the economy and the testing efforts in specific areas. Therefore, it remains uncertain, and I can't predict what the latter half of the year will look like, nor do I want to speculate inaccurately. We are committed to being as cautious and prudent as possible given the current circumstances. Apologies for the lack of a definitive answer.
That’s fair. No, I understand that. I understand. Then my other question was just, I understand it makes a lot of sense that the CapEx comes down this year, just because it's hard to actually get done. If we're thinking about and I also understand that it kind of depends on how things progress with the pandemic, but any event that you're comfortable having the crews come in 2021, is it fair to think that we are essentially deferring it and we see CapEx spike in 2021? I guess, is it just a question of also how the market is and you're willing of the cash flow to accelerate some of those high-return projects versus just the actual maintenance that you have to continue doing?
Yes, I believe we are very focused on growth. Investors who have been with us for some time would have heard me discuss our aspirations for our sawmill, particularly the super mill at Stendal. We believe there is sufficient wood supply, and with our excellent logistics, the scale and economics of the pulp mill, having a sawmill there for the long-term would be outstanding and would strongly support our overall strategy. Ultimately, we believe the sawmill can compete effectively. This is a priority for us, and we have a similar initiative in Peace River. We are confident we have enough wood to establish a sizable softwood sawmill, or perhaps a combination of softwood and hardwood, there. We have completed a lot of the strategic and preliminary engineering work, enabling us to engage with the necessary agencies and communities to advance these projects. These are two examples of organic growth opportunities that we will pursue when the time is right. Stendal is progressing, Friesau is also advancing, and we continually explore mergers and acquisitions. There will be plenty to discuss in the upcoming years.
That's helpful. Thank you.
There are no further questions. At this time, I would now like to turn the call back over to the speakers for any closing or additional remarks.
Okay. Thank you, Samantha and thank you all for joining our call. As always, Dave and I are available to talk any time and in fact, if anybody wants to do a Zoom or a Google Meet, just to see each other, we'd be very happy to do that. So I'm feeling that we'll look forward to speaking to you all again on our next earnings call in July. Thanks again. Bye for now.
This does conclude today's conference call. You may now disconnect your lines.