Good morning and welcome to the Mercer International's Fourth Quarter 2023 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.

Thanks, Abigail. Good morning, everyone. Thank you for joining us today. I will start by discussing the financial and operational highlights of the fourth quarter before handing over to Juan Carlos for more insights into the markets, our operations, and strategic initiatives. For those who joined today's call by telephone, we have presentation materials available in the investor section of our website. Before I go over our results, I want to remind you that we will be making forward-looking statements during this call, and I encourage you to review the risks associated with these statements as described in our press release and the company's financial filings with the SEC. In the fourth quarter, our EBITDA was $21 million, down from $38 million in Q3. Although higher pulp sales realizations and lower fiber costs were positive factors, they were outweighed by the impact of impairments on inventory sales in Q3 and more significant maintenance downtime in Q4. For the fiscal year 2023, EBITDA was $17 million compared to $537 million in 2022, largely due to much weaker pulp and lumber markets, lower spot energy prices, and rising fiber costs affecting the industry. Our pulp segment generated quarterly EBITDA of $32 million, while our solid wood segment experienced a loss of $6 million. Further segment details can be found in our Form 10-K, available on our website and the SEC’s site. In Q4, we enjoyed higher sales realizations for both NBSK and NBHK compared to Q3, with increasing prices due to customer restocking and a slight uptick in paper demand in Europe. In China, the average NBSK net price for Q4 was $748 per ton, a 10% increase from Q3, while the European NBSK list price rose 7% to $1,245 per ton. The average NBHK net price in China increased to $643 per ton, up about 21% from the prior quarter. In North America, the average Q4 list price was $1,083 per ton, up 6% from Q3, which reduced the market price gap between NBSK and NBHK in China from $150 to about $105 per ton. We faced increased scheduled maintenance downtime in Q4, totaling 23 days compared to 13 days in Q3, which negatively impacted EBITDA by approximately $11 million, but this was partially offset by our not experiencing production curtailments in Q4 unlike in Q3. Adjusting for planned maintenance and logistics issues in Q3, pulp production was up by about 11,000 tons from the previous quarter. Total pulp sales volumes in Q4 remained flat at 491,000 tons. In our solid wood segment, slight lumber price increases in the US were offset by lower prices in Europe, and despite the price hikes in the US, overall lumber demand has remained low due to high-interest rates. The US benchmark for western SPF number two and better was $422 per thousand board feet at the end of Q4, up from $407 at the end of Q3, and currently sits around $428. We anticipate a modest rise in US lumber prices soon, driven by an uptick in housing activity and low inventory levels. In contrast, we expect European prices to remain flat due to weak demand. Lumber production reached 112 million board feet during the quarter, up almost 20% from Q3 due to reduced maintenance efforts. Sales volumes were also about 112 million board feet, flat compared to the previous quarter. Electricity sales stood at 252 gigawatt-hours in Q4, consistent with Q3, but pricing fell to approximately $98 per megawatt hour from $113 in Q3 because of lower spot prices in Germany and Canada. In Q4, both our pulp and solid wood segments saw lower fiber costs compared to Q3, thanks to stable supply and an increase in available lower-cost beetle-damaged wood in Germany. We expect this type of wood to be plentiful through 2024, although strong demand will likely prevent significant price drops. Our solid wood segment is increasing its mass timber operations, contributing positively to EBITDA in Q4, despite revenue dropping to $15 million from $19 million in Q3 due to project timing. This business has built an order book nearing $100 million, and we expect to fulfill most of these orders throughout the upcoming year. During the fourth quarter, we made the strategic decision to sell our sandalwood business, leading to a non-cash impairment of approximately $34 million or $0.51 per share. Juan Carlos will elaborate on this shortly. We reported a consolidated net loss of $87 million, or $1.31 per share for Q4, compared to a loss of $26 million, or $0.39 per share in Q3. For the year, our consolidated net loss was $242 million, or $3.65 per share, a shift from net income of $247 million, or $3.74 per share in 2022. In Q4, we used around $30 million in cash, compared to about $70 million after adjusting for the $200 million senior note offering in Q3. The better cash usage was primarily due to a smaller increase in working capital and lower capital expenditures. The working capital increase was mainly driven by higher receivables from rising pulp prices. In Q4, we invested about $26 million in our mills. Looking forward, we expect to spend between $75 million and $100 million on capital in 2024. By the end of Q4, our liquidity stood at $610 million, made up of $314 million in cash and approximately $296 million in undrawn revolvers. Finally, as noted in our press release, our Board has approved a quarterly dividend of $0.075 per share for shareholders of record on March 27, with payment on April 4, 2024. That concludes my overview of the financial results. I will now turn the call over to Juan Carlos.

Thanks, Rich. Our Q4 results were positively impacted by improved pulp pricing, lower fiber costs, and a modest contribution from our mass timber business. In addition, all our mills ran very well this quarter. However, results were lower compared to Q3 due to the impact of non-cash items in Q3 that didn't recur and incremental major maintenance compared to Q3. Overall, even though demand remains weak, we saw small improvements in most of our markets in Q4. The one notable exception was the European lumber market that took a step back after some positive momentum in Q3. Generally speaking, our market dynamics remain unchanged with lower producer inventories and weaker-than-normal demand. These challenging market conditions have led us to keep a tight handle on CapEx. We closed the year with capital expenditures of roughly $136 million compared to an original target of $200 million at the beginning of the year. Looking ahead to 2024, we're currently targeting between $75 million and $100 million of CapEx as Rich mentioned before. This is essentially a maintenance of business budget. However, we will be monitoring our operating results and could greenlight additional high-return projects should market conditions continue to improve as the year progresses. We will also continue to manage our working capital and costs closely. While we're expecting 2024 to be a significant improvement over '23, we believe the recovery will be gradual. Overall, pulp markets remain weak, but we are seeing some upward pricing pressure in Europe at the moment as a result of a slight uptick in demand, while in China, the lunar year holiday has, as expected, limited buying activity. Looking ahead to 2024, we believe that the roughly 1 million tons of softwood production that has been either permanently or indefinitely shuttered will put upward pressures on prices. However, we don't see prices moving significantly until demand noticeably improves. On the demand side, European paper producers have increased production on slightly higher paper demand, but continue to run at lower-than-normal rates as their economy remains weak. Similarly, in China, the government is pushing and pursuing measured economic stimulus steps, but weak economic conditions continue. Looking forward, we expect pulp prices to continue to slowly increase globally as reduced supply chain supports modest price improvements. Our mills ran very well in the quarter. When comparing Q3 to Q4, remember that Celgar took a 26-day curtailment as a result of the British Columbia port strike in Q3 and Rosenthal took a 13-day major maintenance shut, while in Q4, Celgar took a major maintenance shut totaling 22 days and Stendal took one day for maintenance. Looking forward into 2024, we have no maintenance shuts scheduled for Q1 and we're expecting a normal maintenance year with the exception of Celgar that has moved to an 18-month major maintenance schedule. In Q2 of 2024, Peace River will have a 16-day maintenance shut and Stendal will take a 14-day shut, which combined, this downtime equals about 56,000 tons. In Q3 of 2024, Rosenthal will take a 14-day maintenance shut and Celgar will take a short four-day mini shut, which amounts combined to about 20,000 tons. Moving on to our solid wood segment, our fourth quarter reflected improved lumber and mass timber results. The US market was up slightly on average, while the European market was down compared to Q3. Although high interest rates continue to weigh on housing starts and construction in general, we are expecting US lumber pricing to improve slightly as we move into the spring building season. We're expecting the European lumber market to remain weak in the first half of 2024. We continue to believe that low lumber channel inventories, the large number of sawmill curtailments, relatively low housing stock, wood shortages created by recent Canadian forest fires, and homeowner demographics are still very strong fundamentals for the construction industry, and this will put positive pressure on the supply-demand balance of this business in the midterm. We will continue to optimize our mix of lumber products and customers to current market conditions. In Q4, 39% of our lumber sales volumes were sold in the US market, with the remainder sold in the European and other markets. The integration of Torgau continues to progress well. Shipping pallets remain weak on the back of a weak European economy overall, and heating pellet prices were down in Q4 due to warm winter weather. Once the European economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value. In addition, the integration of the recently acquired Mass Timber assets continues to progress as planned. We now have roughly 35% of North American mass timber production capacity, a broader range of product offerings, and a much larger geographic footprint that gives us competitive access to the entire North American market. We continue to see strong customer interest in our mass timber products, which has allowed us to build a significant order file. At the end of December, our order file totaled almost $100 million. In addition, our mass timber business contributed a modest positive EBITDA in Q4 as planned. We expect EBITDA for this business to grow in 2024 as we continue to ramp up. Moving on to costs of fiber. Overall, we experienced a decrease in pulpwood prices in Q4. In Germany, a steady supply of sawmill chips resulted in cost decreases while work done at our Canadian mills, including the ramp-up of Peace River's woodroom and the renegotiation of contracts in Celgar, pushed our fiber costs down in Q4. Looking ahead, we expect further modest declines in pulpwood and saw log costs at our mills in early 2024. In Q4, as Rich mentioned before, we made the decision to sell our sandalwood business in Australia. Although we believe that in the fullness of time this business will be a positive cash flow generator, it no longer fits our strategic direction. A process is underway to sell this business and we hope to have more to say about this in the coming months. Our new lignin extraction pilot plant continues its ramp-up as planned. As a reminder, this new lignin pilot plant is a large step towards Mercer being able to begin commercializing lignin. We are excited about the future prospects of this product as a sustainable alternative to fossil fuel-based products such as in adhesives and advanced battery elements, to name only a few. This aligns perfectly with our strategy which involves expanding into green chemicals and products that are compatible with a circular carbon economy. As the world becomes more sensitive to reducing carbon emissions, we believe that products like lignin, mass timber, green energy, lumber, and pulp will play increasingly important roles in displacing carbon-intensive products, such as 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 are committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, we believe that in the fullness of time, demand for low-carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions. We remain bullish on the long-term value of pulp and are committed to better balance our company through faster growth in our lumber and mass timber businesses. In closing, we're happy to have 2023 behind us. Although we continue to predict a slow recovery in 2024, we do expect a much stronger financial result. We will remain focused on our cost reduction, CapEx, and working capital initiatives while we navigate this period of relatively low pulp and lumber prices. We will continue to work on rebalancing our assets in line with the execution of our strategic plan and will continue to manage our cash and liquidity prudently. Thanks for listening. And I will now turn the call back to the operator for questions. Thank you.

Our first question comes from Hamir Patel with CIBC Capital Markets. Your line is open.

Hi, good morning. Juan Carlos, could you comment on how you would see wood costs and fiber availability trending across your European fiber baskets for both pulpwood and saw logs in coming years, just as the effects of the spruce beetle play out?

Thank you, Hamir. That's a great question since it's a significant aspect of our cost structure. There are some important developments in this area. Calamity wood in Germany is a crucial factor, and we are already noticing some benefits from it in late 2023, with ongoing advantages expected in 2024. We anticipate a slight overall decrease in the cost of fiber for both pulp and lumber. However, it's worth noting that this calamity wood has generated substantial interest and demand, leading many to prefer this lower-priced option. Thus, while we do not expect prices to drop significantly, there is a positive trend with lower prices overall. Looking ahead, I am optimistic about the coming months, though I remain cautious about the extent of the decline.

Thanks for that information. I would like to know what impact you anticipate the Red Sea disruptions will have on European lumber exports and if you believe some of that wood might be redirected to the US.

In the case of the Red Sea, the impacts that we're seeing right now, Hamir, are more on the pulp side than on the lumber side. In our lumber business, when we don't ship to the US, we're usually focusing on the European market to a large extent. So then the impact is much more limited. In the case of pulp, we do have a bit more of an impact. Even though that impact has now translated in probably a small uptick in the actual logistic cost, but it's very relative still, relatively small at this time. And obviously, added transit time, which, if you put it from a flip side, it means more tightened supply into China, which is not at all bad. It creates the sentiment of more tightness in the market if there are delays on shipments. So really, the impact so far is very small, and we hope it stays this way obviously.

Okay. Fair enough. Thanks, Juan Carlos. I'll turn over.

One moment for our next question. Our next question comes from Richard Stevens with Amundi USA. Your line is open.

Hi, and thanks for taking my question. I had two questions, just one more housekeeping. I think you mentioned that the revolver availability was $296 million. My sense is that there are no covenant limitations on that availability. Is that correct?

That's correct. Generally, there's a cap on the Canadian revolver, but we factored that into that number.

Got it. Okay. And the next question I had was more from a historical perspective, obviously, you're at the bottom of the cycle at the moment. Typically, how long do these cycles last? Have you seen in the past? I know there was a bit of a one, I want to say going back to maybe 2018, '19, and maybe some earlier in the decade there. But typically, when you go through these cycles, you mentioned there's been over a million tons of capacity that's been shut in. And how long, typically, does the cycle last? How many quarters? Just to get a sense.

Typically, pulp cycles can last around three to four years, sometimes even longer. It's not a precise mathematical formula, but there tends to be a historical trend of a few years. Therefore, as we consider our future outlook, we anticipate a partial recovery in 2024 and a much stronger performance in 2025 and 2026. This aligns with analysts' projections for pulp, which suggest a similar trend of increasing prices over the next few years.

Got it. Okay, that's very helpful. That's all I had. Thank you.

One moment for our next question. Our next question comes from Kasia Trzaski Kopytek with TD Securities. Your line is open.

Hey, there. Good morning, everyone. A couple of questions, maybe starting with pulp markets. It seems like pulp mill inventories are decently balanced at this point. Can you speak to where buyer inventories are talking about China and Europe?

The situation with inventories appears to be fairly balanced, leaning in our favor at this time of year. Looking at producer inventories, the recent statistics indicate an average of 40 days for softwood, which is relatively low and healthy. In contrast, the inventory situation in China seems a bit more uncertain; there may be more inventory there as they prepared for the New Year celebration by stocking up. We observed significant product movements into China during the last quarter of the year in anticipation of the New Year. This raises expectations about demand once the celebrations conclude and how it might increase thereafter. In Europe, we are seeing a notable demand increase, although it starts from very low levels. Our customers operating paper machines are performing better than before, but still from a low baseline. The market is far from normal levels, suggesting considerable potential for growth. If the European economy rebounds and paper demand increases, this could lead to a strong price recovery, given the current tight supply conditions. Many mills have closed, and nearly a million tons of softwood capacity has been shut down, leaving limited supply to meet increased demand. A slight uptick in demand could result in a substantial price adjustment for us, but we need strong recovery in Europe and improved conditions in China after the New Year.

Okay, thanks for that. How much are your freight costs currently for delivering lumber from Europe to the eastern seaboard per thousand?

That's a good question, Kasia. It's probably around $100 a thousand board feet.

Okay. And Richard, does that include the land transportation as well?

Yes, that would be all in.

Okay, great. One last question. Just switching gears to the mass timber markets, you indicated you expect things to trend favorably going forward over the next year. Any numbers you can put around that, maybe a cadence for how you expect the revenue to grow from here and then any potential EBITDA contributions that you would expect?

We are very excited about the progress of our mass timber business, as indicated by our order book. In Q3, we had $54 million in projects secured, which we began executing. By Q4, we executed portions of those projects and ended with nearly $100 million worth of projects in our order book. This gives us confidence that if we finish this year with over $60 million in sales, we could potentially double that amount next year. Considering our capacity at our current sites, we believe that gradually ramping up operations will allow us to later add shifts and could lead to at least $500 million in sales a few years down the line. Our assets support this growth. Additionally, while this is a specialty business rather than a commodity one, we anticipate EBITDA margins in the range of 20% to 25% over the long term.

Okay. And just a quick follow-up. So your order book right now is $100 million and appreciating, it takes a while to actually lock in the order. What is the size of the sales that you're going after right now that you haven't locked in yet that you're pursuing? What potential order book size would that be?

No, what we want to do is ensure that our order book will keep increasing as the quarters progress. We are actively executing on projects, which decreases the order book, but at the same time, we are securing future projects that contribute to continued growth. When I mention that we have around $100 million in the order book, not all of that is for 2024; some projects are already extending into 2025. These locked-in projects span beyond one year, and the timeline varies depending on the individual schedules of these projects. We will keep expanding and will introduce more projects in 2024, enabling us to double our revenue this year compared to 2023 and maintain the pace of growth observed in the industry. The mass timber industry in North America is growing at over 20% annually, which is a substantial growth opportunity for us. We plan to leverage this growth by investing in our facilities to enhance cost competitiveness and fully capitalize on the opportunities ahead.

Okay, awesome. Thanks, everyone. That's all I had. Have a great weekend.

Thanks.

Our next question comes from Sam McGovern with UBS. Your line is open.

Hi, guys. Good morning. With regard to the sale of the sandalwood business, any plans in terms of what you're doing with the cash that comes in? Is it just reinvest in the business, increase liquidity, or is there anything else that you're planning to do with that?

We have some exciting growth projects that we had to pause due to the unrest in 2023, and we are eager to restart them. As the year progresses and we see improvements in market pricing, we will keep monitoring this to advance more of our CapEx projects. The sandalwood sale will contribute to this effort, and we are also exploring additional projects that could yield quick returns for the company. We have a number of initiatives lined up, particularly in Torgau, aimed at enhancing lumber production with a fast payback period and improving competitiveness through mass timber. There are many opportunities we can pursue if we maintain some cash reserves.

Awesome. Thank you very much. I'll pass it along.

Thank you. That concludes the question and answer session. At this time, I would like to turn the call back to Juan Carlos for closing remarks.

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

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.