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Edited Transcript of MERC earnings conference call or presentation 1-Nov-19 2:00pm GMT

Q3 2019 Mercer International Inc Earnings Call

Vancouver Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Mercer International Inc earnings conference call or presentation Friday, November 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David K. Ure

Mercer International Inc. - CFO & Secretary

* David M. Gandossi

Mercer International Inc. - President, CEO & Director

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Conference Call Participants

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* Adam Zirkin

Knighthead Capital Management, LLC - Partner

* Andrew Evan Shapiro

Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member

* DeForest R. Hinman

Walthausen & Co., LLC - Research Analyst

* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst

* Paul C. Quinn

RBC Capital Markets, Research Division - Analyst

* Samuel Thomas McGovern

Crédit Suisse AG, Research Division - Research Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Mercer International's Third Quarter 2019 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 you, David Ure.

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David K. Ure, Mercer International Inc. - CFO & Secretary [2]

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Good morning, everyone. I'll begin by reviewing the third quarter's financial highlights. Following my remarks, I'll pass the call to David who will comment on our key markets, operational performance, progress on our strategic initiatives along with our outlook into the final quarter of 2019.

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.

Overall, we are pleased with our operating performance this quarter. We achieved solid pulp and lumber production, and we're able to take advantage of modest improvements in pulp demand across most markets to reduce our finished goods inventory to more normal levels.

Q3 consolidated EBITDA was almost $51 million compared to $70 million in Q2. The decrease in EBITDA was principally due to lower European pulp prices, which were partially offset by stronger U.S. dollar, lower fiber costs and higher sales volumes. In addition, we recorded the reversal of previously accrued wastewater fees related to our Rosenthal mill during the quarter.

Our pulp segment contributed $51.1 million of EBITDA and our wood products segment contributed EBITDA of $2.6 million. Our improving wood products segment results reflect steady production despite the construction activities currently underway on site along with the benefit of lower sawlog prices. As usual, you will find additional segment disclosures in our 10-Q.

Quarterly average list prices for both softwood and hardwood pulp were down sequentially in all markets. Compared to Q2, our average pulp realizations negatively impacted EBITDA by about $52 million. Our pulp sales volume totaled 542,000 tonnes, which was up 22,000 tonnes from Q2 due to increased demand in all of our largest markets, and in particular, China.

On the wood products side of our business, we sold the equivalent of about 97 million board feet of lumber in the quarter with about 30% of this volume being sold into the U.S. market. Our lumber sales were down 4 million board feet from Q2 due to minor interruptions in production as a result of the construction activities combined with lower yields from the increased supply of lower quality storm and beetle damaged logs.

Electricity sales totaled 239 gigawatt hours in the quarter, which is down roughly 7% compared to Q2 due to annual maintenance at Rosenthal and the ongoing construction at our Friesau mill. Our Cariboo pulp joint venture, which is accounted for using the equity method, added another 12 gigawatt hours to this total.

We reported net income of $1.2 million in the quarter or $0.02 per diluted share compared to net income of $10.3 million or $0.16 per share in Q2.

Our operating performance led to the generation of $57 million of cash in the quarter compared to $89 million in Q2, a reflection of the lower EBITDA relative to Q2. Overall, we generated free cash flow of almost $20 million in Q3.

We also invested $37 million of capital in our mills this quarter. As noted in previous calls, we have an ambitious capital expenditure plan in 2019, and David will speak more about this in a moment.

Our leverage levels remain at an efficient level and on a 12-month trailing basis, our net debt is up only slightly this quarter to 2x EBITDA, primarily due to lower EBITDA.

At quarter end, we have total liquidity of approximately $544 million, comprised of $265 million of cash and $279 million of available revolving credit facilities.

As I noted a moment ago, we recorded the reversal of $7.2 million of previously accrued wastewater fees during the quarter. The reversal is the result of a waiver provided by regulatory authorities based on our successful completion of qualifying capital expenditures that targeted emission reductions at our Rosenthal mill. You will recall that in Germany, wastewater fees accrue to water-consuming industries. However, under certain conditions, those fees will be waived if the emitters complete capital projects that lead to permanent reductions in permitted emission levels. Given our focus on continuous environmental performance improvement, this is a program to which we apply considerable attention.

In addition to the Rosenthal program, we are currently working to complete the final steps for the application of a similar waiver for Stendal.

Low pulp prices continue to force us to revalue certain components of our inventory, resulting in a noncash $6.9 million inventory write-down in Q3. However, after considering the Q2 inventory write-down, which coincidentally was also $6.9 million, our net EBITDA impact in Q3 was 0.

To the extent that pulp prices increase, we will recognize a profit on this inventory in Q4.

In addition, our planned 13-day maintenance shut at Rosenthal resulted in lost production and direct costs that impacted EBITDA by about $10 million. Our competitors reporting under IFRS are allowed to capitalize the majority of these costs.

Subsequent to the end of the quarter, we issued an additional $200 million in face value of our 2025 senior notes. The notes were issued at a 2.75% premium to their face amount for an effective yield rate of roughly 6.4%. These notes will be used to redeem the remaining $100 million of our 7.75% 2022 senior notes with the remainder being used for general corporate purposes.

Earlier this year, we completed filings necessary for us to acquire Mercer shares on the market. The filings prescribe a maximum program of $50 million that, if not extended, will expire in May 2020. During this quarter, we did not purchase any additional shares.

And as we noted in our press release yesterday, our Board has approved our quarterly dividend of $0.1375 per share for shareholders of record on December 12, for which payment will be made on December 19.

That ends my overview of the financial results. I'll now turn the call over to David.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [3]

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Thanks, Dave. Good morning, everyone. As Dave has highlighted, the story of our Q3 results was dominated by weak pulp markets, which obscures our solid operating performance this quarter. Our pulp production was down only slightly this quarter due to Rosenthal's annual maintenance shut, but otherwise remained at near-record levels. Similarly, our Friesau sawmill production was down slightly as we worked through the occasional construction disruption, but we had a strong financial result in Q3 despite historically low lumber prices.

Our strong operating performance is a result of our long-term value creation strategy. And as a reminder, the key pillars of that strategy are to maintain modern world-class assets, seize acquisitions and organic growth opportunities in adjacent businesses and spaces where we have core competence, prudent management of the balance sheet, all while maintaining the highest standard of safety and sustainability.

Now turning to our markets. European NBSK pulp prices weakened steadily through Q3. In China, prices were essentially flat through the quarter. However, we saw increased demand late in the quarter, leading us to implement a $10 price increase for October.

European list prices in Q3 averaged $860 per tonne compared to $997 in Q2. October's European list price was about $825 per tonne.

In China, the Q3 average NBSK price was $585 per tonne, which was down from $653 per tonne in Q2. Decreasing producer inventory levels resulting from maintenance downtime and recent NBSK curtailment announcements combined with tightening fiber supply in some regions lead us to believe that the Chinese NBSK market price is at or near the floor.

The average Q3 hardwood list price in China was $507 per tonne, down a $130 from Q2. The hardwood list price in the U.S. market averaged $970 per tonne in Q3 compared to $1,100 in Q2.

The pulp markets continued to be influenced by a number of factors including macroeconomic conditions, the U.S.-China trade dispute, related tariffs and high pulp producer inventory levels, all of which are creating uncertainty and have been negatively affecting pulp prices in all markets. These factors have been influencing pulp markets by reducing demand for certain printing and writing grades. In addition, high pulp producer inventories have been allowing pulp buyers to limit their purchasing levels today.

Later in Q3, we could feel that the NBSK market tightening as unusually high producer inventories began to shift back into balance and -- as a result of good demand combined with producer maintenance downtime and curtailments.

We believe hardwood prices to be near their floor, but that it will take longer. It will take some time to work through the higher producer inventories. We expect the hardwood market will remain under pressure until the excess inventory at the producer level moves to customers or traders. However, we also believe that paper producers have extremely low inventory levels, so that once this market begins to tighten, paper producers will be compelled to restock.

Looking further ahead, we continue to believe that steady demand combined with the absence of new capacity will exert upward pressure on pulp prices.

With regards to our wood products business, the European lumber market continues to experience steady demand. However, pricing was down slightly compared to Q2, which was primarily the result of lower sawlog prices here in Europe. Lumber markets in the U.S. continued their volatility through Q3, but we are seeing a slow but steady overall increase in lumber prices. We believe that lumber production curtailments and positive statistical data on the U.S. housing market are creating a separate pricing pressure. In addition, lack of sawlog supply in British Columbia could force further curtailment announcements.

The Random Lengths U.S. benchmark for Western S-P-F #2 and Better averaged $356 per thousand board feet in Q3 compared to $333 in Q2. Today, the benchmark is closer to the $400 level per thousand board feet.

In Q3, about 30% of our lumber sales volume were in the U.S. market with the majority of the remainder of our sales in the European market. Although U.S. lumber prices are up from Q2, they're still not at the sustainable levels. We believe certain producers are currently selling below cost, in part due to sawlog shortages resulting in high log prices in Western Canada.

When comparing to Q2, our average realized lumber sales price dropped slightly to $337 per thousand board feet in Q3 compared to $348 in Q2.

Our mills ran very well in Q3 including our Cariboo joint venture. We produced 517,000 tonnes of pulp and a near-record 625 gigawatt hours of power. Our pulp production was down from Q2's record production, primarily due to scheduled maintenance at our Rosenthal mill in Q3.

Our wood products segment performed well this quarter despite weak market conditions. We produced almost 97 million board feet of lumber and generated about $2.6 million of EBITDA in the quarter. The Friesau sawmill also allowed us to achieve over $3.5 million of synergies this quarter, the majority of which resulted from reduced wood chip costs for the Rosenthal pulp mill. Year-to-date, Friesau's created almost $10 million of such synergies.

In Germany, storm and beetle damaged wood remains plentiful and is resulting in lower log costs generally.

In Western Canada, pulpwood supply continues to be tight as sawmills have been curtailing production, which is limiting the volume of sawmill chips that are available, resulting in higher cost options used to replace those volumes.

Looking forward, we expect our wood cost to be stable for Q4.

Turning now to our major maintenance schedule. In Q4, we expect to have a total 53 planned shut days. At Stendal, we have taken a 16-day shut in Q4. I'm pleased to note that the shut was safely completed this week. At Celgar, we took a 22-day shut in Q4, not only for annual maintenance, but as I mentioned last quarter, we completed the tie-in of some of our important productivity improvements throughout the mill including a packaging line upgrade.

At Peace River, we will take a 15-day shut this quarter. We originally planned to take an extended shut in Q3 to repair the recovery border, but due to a key supplier delaying the delivery of parts, we've rescheduled this work into 2020. While I want Peace River -- I should mention that the integration is more or less complete and was smooth and successful. The people have adopted quickly to our Mercer culture. In fact, it already feels like they've been with us for years.

As Dave noted, earlier this month, we issued $200 million of our 2025 senior notes. This was an opportunistic transaction for us to allow us to lower our average borrowing costs and create some additional flexibility to continue advancing our high-return capital program.

We remain committed to our growth strategy. We will continue to take a disciplined approach to ensure we maximize long-term shareholder value. Any opportunity we consider, will be framed by Mercer's core competencies in pulp and lumber production, wood derivatives and bio-extractives as well as green energy. Our core competencies will continue to drive long-term value creation for Mercer shareholders.

So this completes our prepared remarks. We'll now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Hamir Patel with CIBC Capital Markets.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [2]

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David, I wanted to get your thoughts on this European beetle situation. How impactful do you see it for global lumber markets? And how much further could your pulp costs fall in coming quarters?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [3]

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Well, I think there's a lot of wood that's going to come out. One of the things that happens over here is the very, very strong discipline to get at the trees as they're impacted. And the further south you go in Europe, the more you'll see the spruce beetle. For us, we're -- our Stendal mill and Friesau more sort of closer to the north of Germany as opposed to the south, I think another -- Friesau buys from both directions, it buys spruce and pine. Another factor to consider is the sawmills in the south of the country tend to be the sort of one-off sawmills or sawmills held by smaller groups, so they're really limited to their truck logistics. Whereas in Mercer, we've got rail logistics that can take us all the way to the further stages of Poland and Czech. We can bring in wood from the Baltics as we've discussed many times, Norway and other places. So it's an interesting situation. We've got more than a 30% reduction in our wood cost today at the sawmill, lots of pulpwood. It's just -- I think it's going to continue for quite some time. Whether it accelerates or not, I think, has a lot to do -- we're being told by our foresters a lot to do with the weather this year. So for example, if we have a really wet winter that has a really damaging impact on the beetle. I think that will destroy a lot of the population under the bark. But if it's a super dry winter and dry in the spring, then next summer could be a similar year to we had this year, and then that would be a continuation of the kind of conditions that we're seeing today. So I'll stop there, Hamir, to see if that answers your question.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [4]

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Yes, thanks David. That does, but I was curious, does the beetle wood -- when you -- when -- the pulpwood portion of it, does that result in a lower price pulp products when you sell it? How does that impact the quality?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [5]

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No. It doesn't have any impact on pulp quality at all. We cook the wood apart in an alkali solution and we wash the cellulose. So no, it's -- there's no quality impacts. Sometimes, the wood's a little drier, so you have to adjust your chemistry a little bit. But as you know, from North America, the pulp mills in Western Canada have been moving off dry pinewood for years, and it's very, very suitable for our process, not a problem.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [6]

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Great. And David, I wanted to turn to your pulp contract discussions for 2020. Do you have a sense yet as to the discounts for North America and Europe? Should we expect continued discount creep in 2020? And then any indication yet of what that might be?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [7]

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Well, you're catching me just before I go to London Pulp Week, so I've got to be very careful about this. Obviously, discounts are -- they're tough to -- you roll them back when things are tight, and there's pressure to widen when things are sloppy. And with the inventory levels where they are, I'm sure we'll be having those discussions with our customers. But it's -- also, when you think about discounts, you have to think about short-term and medium-term outcomes. And I think even though we've got elevated hardwood inventories today and somewhat elevated softwood inventories, I think the medium- and the longer-term view is fiber will be tight, so I think the discussions with our customers will be very respectful and thinking more about the long term rather than just trying to grind because of the current speed bump that we're in today. So it will be -- I mean, they might widen a little bit, but I'm not expecting anything too significant.

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Operator [8]

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Your next question is from Sean Steuart with TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [9]

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Couple of questions. David, just more generally speaking, it feels like softwood pulp markets are starting to tighten up certainly faster than hardwood, which makes sense given the relative inventory gap. I guess, your broader thoughts on -- over the midterm, the industry's ability to potentially raise softwood prices, while hardwood arguably should remain under pressure until that excess supply gets cleaned up. Any thoughts on the ability to have a divergent trend over the midterm until hardwood settles out?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [10]

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Yes. Well, let me sort of talk around the corners of that question because that's what everybody is trying to get their heads around. Obviously, I guess, first of all, I think my view is that if softwood prices get too far ahead of hardwood prices, you get substitution. Like it's when you're going in the other direction, there's a limit on how much softwood you can take out of a paper grade, but if -- there's always room. And I think where we've come from has been more an elevated softwood component because the price of hardwood and softwood have been closed for a while. And now as we start to pull away that excess amount of softwood, and the grades is going to start pulling back down to the minimum level. So there is definitely a substitution element to it, hard to measure exactly how big it is, but it's there. And then there's the whole psychological impact that the customers have as the gap widens. We've seen gaps of $200 in the past, but it just doesn't feel like that's a sustainable situation and probably not something to hope for.

Another part of the whole thing to think about -- where -- the way we think about it here in Mercer, is when we think about the psychological impacts of improving conditions or weakening conditions to the pulp buyer. And by that, I mean, if things are tight and everything is normal, for -- let's talk about China for a minute. For a Chinese pulp buyer, he knows it's going to take 80 days from the time he cuts his order to the time he's ready to use that pulp in China. And so when things are tight, he tends to carry 80 days of inventory because that's how long it takes for -- you just always have to have that pipeline coming. So it's -- the LC opening takes 15 days, sea transports 35 days, then you got to get it through customs and clearance, so it's another 15 days. I know he's got 15 in his warehouse. So he's always making those orders, and he's got this thing coming. But as we've gone through this effect, the last year or 9 months, the Suzano effect, I'll call it, there's so much pulp in the warehouses that he's -- their customers are -- really saying, I don't need to order pulp from the mill, I just -- I can buy it out of the warehouse in China. So where they usually sit on 80 days, they're sitting on 30 days, and they're comfortable. But if they start becoming uncomfortable and they start trying to catch up and make sure they don't get left behind as pulp prices rise, 30 days of inventory at the paper side of this business is 1 million tonnes. So it's -- the math says it could correct fairly quickly, but it's all about psychology and it's all about where people think it's going. And I think another big part of it is, a lot of it's going to depend on how the south -- the Latin Americans behave. If they can show some discipline and curtail -- you do some market curtailments and stop shipping pulp into warehouses in China, then things could correct fairly quickly. But until -- I guess, my view is until the hardwood starts to really move, it's going to hold the softwood back.

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Sean Steuart, TD Securities Equity Research - Research Analyst [11]

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That's great detail. I appreciate that. I apologize if I missed this earlier, but have you guys wrapped your heads around 2020 CapEx budgets relative to what you're spending this year?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [12]

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Yes. Our 2020 capital plan is going to call for about a $100 million. That includes carry-ins, ignoring capital leases for things like railcars and chip rail bins, which is really just cost reduction initiatives. So we're continuing on with our expansion plans at Stendal, completing the planer and the sorters, obviously, for Friesau and then some maintenance of business and a number of smaller high-return projects. We've got a bit of wastewater fee work going on at both the mills in Germany, obviously, and got a bit of work going on at Peace River where we've got access to some government grants, some low-carbon fund stuff. And Celgar has got some utilization improvements, bin order and a chip conditioner, little things like that. So we're carrying on with the important things, but we brought the club back quite a bit considering where pulp prices are.

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Operator [13]

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Your next question is from Andrew Shapiro with Lawndale Capital Management.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [14]

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A real quick one, you -- or 2. Did you -- you mentioned in your script that you implemented a $10 price increase in October. Did that increase take? Or when would you guys get a feel for whether that's stuck?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [15]

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Yes. No, that's stuck, we announced up $20 and got $10 of it.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [16]

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Okay. Well, that's good. Now with the decline in pricing and it seems like there's been some curtailments. Do you have any feel that you can share with us about any industry curtailments or potential curtailments that might become more permanent in nature from some of the higher cost competitors?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [17]

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Yes, it's tough to see what might happen. There's a few situations where pulp mills are curtailing more because of access to wood than they are necessarily about price, like the thing to remember about pulp mills is that it's got a pretty high fixed cost component. So sometimes, you can lose a bit of money selling pulp, but you'd lose a lot more if you curtailed. So you don't typically see curtailments for pulp pricing. I don't think pulp prices are at the level now where you would see that. But being short of fiber, it's possible. We saw some of that out of the Western Canada this summer. Then it gives a couple of other situations out there where the mills are in just such rough shape. These old mills eventually just get older and older that there's quite a bit of industry speculation about who might be the next mill or 2 mills, might go down just because the amount of capital led to keep them running and -- is not really justified. So I think there's some things coming on the horizon, but I can't be certain of how long it will take, obviously, and I don't think we'll ever know until it's actually happened. (inaudible)

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [18]

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And then you've had DMI now for a little while. It's under your belt a bit, but I think you implied that you'd seen the majority of synergies in the first 12 months and that there were other synergies to be seen a little bit longer term. What sort of integration is done? Or more importantly, what needs to be done in order to achieve the full synergies you estimated on this acquisition?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [19]

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Yes. I think the synergies to come that take a little bit of time is really rolling off the contracts that we inherited for pulp sales and getting it into the Mercer program. So it's the timing of when we bought the Peace River mill and the Cariboo tonnes, they had sort of locked that in for a year. There are various programs. Usually, you settle that up a month or 1.5 months before the end of the year. So we weren't really able to influence that at the time. But I think -- I mean, it's not terrible, but I think in the Mercer system, we would have done better. And I think we could redirect some of the pulp a bit going forward as well. But we have seen pretty significant synergies in things like chemical purchasing and some other freight logistics programs and that sort of thing. And so I think we've done pretty well, and we've got more to come once we roll through this year's recontracting of the pulp volumes.

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Andrew Evan Shapiro, Lawndale Capital Management - Founder, Chairman, President, Portfolio Manager, and Managing Member [20]

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Right. It seems like with the -- when prices improve, we'll see the full benefit of this deal. My last one is a typical question. I wanted to get a feel for your plans for investment presentations, non-deal roadshows in the coming months.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [21]

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Do you want to take that, Dave?

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David K. Ure, Mercer International Inc. - CFO & Secretary [22]

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Yes. So we've got a non-deal roadshow coming up in the week of November 25, the beginning of that week, the Thanksgiving week. It will be in the East Coast, New York, Baltimore, and then in the first week of December, we'll be attending a Bank of America High-Yield Conference in Florida. And next week or the week after next week, we'll be completing a small non-deal roadshow in London.

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Operator [23]

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Your next question is from DeForest Hinman with Walthausen & Company.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [24]

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I think in the past, you've discussed -- again, you've alluded to a little bit on this call, the clearing of the market, on the softwood side is important. And you've commented in the past, I believe, about how active can those traders be in terms of taking inventory rather quickly. You did mention in the prepared remarks and the press release that there was better sales to China. But can you just give us more color in terms of what you're actually seeing? I mean, how much is the phone ringing, has the order sizes picked up in terms of the amount they're looking to spend and any read-through into October so far would be very helpful for everybody, I believe.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [25]

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Sure. Well, I guess for thinking about the paper side in China, our feeling is that paper companies over there had a pretty good year. Demand is good for their products. I think they've done a really good job of clearing their paper inventories. I think that's primarily a result of them out competing in the export markets to the detriment of Europe, to be honest. They're just -- pulp prices have been low, sentiments improved over there, and so those guys are running pretty hard, is our understanding. So on the softwood side, what we're seeing is orders for consumption. I don't think there's really any trader activity in that at all. No speculative trader activity in that at all.

On the hardwood side, our feeling is and what our team believes is that really, there isn't any speculative buying yet by traders. And I should maybe mention that the trader activity can be a really big component in some months. It could be as much as 30% of the buy. And no -- so those guys aren't in at all. I think they just got smoked on the way down. And I think they're on the sidelines waiting until they're really sure that pulp prices have bottomed and things are starting to improve. And that's another big driver. It's hard to predict. But once sentiment rolls over and things look like they're tightening up, those big traders will come back in. And when they do, they take a lot of volume. So we haven't seen it yet, but that's a dynamic that's out there.

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David K. Ure, Mercer International Inc. - CFO & Secretary [26]

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And just so we're very clear, that's inclusive of the October period as well where you did get a $12 -- a $10 increase, is without traders coming back to the market in October.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [27]

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That's correct. Yes. Yes. No, I think the October's volumes are great. Lots of demand for pulp, and -- but it's all going for consumption at this stage.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [28]

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Okay. And then on the capital management side, capital deployment. I think I would agree with your commentary, the bond deal was opportunistic, your debt structure is in really good shape. CapEx stepping down next year after a pretty high investment year. If this is the bottom of the pricing cycle, does it make sense to be more active with the share repurchase authorization? Your thoughts there would be helpful.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [29]

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Yes. Well, the way I've been thinking about it is -- we've been thinking about it is that the stocks held up reasonably well. We're really catered to the dividend. We think things are bottoming. And we should start moving into recovery. So we've just been patient. We've just done the bond thing to enhance liquidity to allow us to continue our capital strategy. So I can't say what we're going to do in the fourth quarter or if -- what conditions we would do things. But it's in place for us 'til the end of May if we decide we want to access it. But for this quarter -- at this quarter, it just didn't make sense for us to buy stock.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [30]

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Okay, that's helpful. And then I know in the past, you've always had some plans and you always work on plans in terms of mill-based projects, like we've mentioned 2019, more of an investment year; 2020, less so. But when we think about the mill portfolio, can you give us some color in terms of things you're thinking about or things you may be working on? How much could they potentially cost? And then what would be return profile and volume expansion on that? I call it like a wish list, I don't know what you guys call it. But can you help -- just frame some things up for us. What are some opportunities that we're thinking about?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [31]

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Yes. Well, I think the near-term -- near term things are Stendal and Friesau. So Stendal is a 660,000, 670,000-tonne mill. We'll turn that into a 740,000-tonne mill in the next couple of years. And I think that's relatively very high return capital. It's just -- it's a super mill. So that work is underway. The cash cost of that could be around EUR 40 million, but there's subsidy components to that, which will help defer or defray our cash cost. On Friesau, the -- it's about $20 million of spending left for next year, taking that mill from roughly 500 million board feet up to on a capacity basis, 750 million board feet. It'd be the largest mill in the world. It will be all the bells and whistles, optical scanning, CT scanning, edge trimming and the planer. It will make -- it will have new high-volume bins orders. So we can optimize every log that goes through it, sell into J-grade for the Japanese market, to and better for the U.S. market, make all the grades we want over here in Europe. The different flexibility we have in that mill will be tremendous. So that's -- that mill will -- the margins on that mill, I think, will surprise the industry. And I'd like to do that again. We've talked openly about doing a similar mill for the Stendal area. We'd actually be right on the Stendal site and totally integrate it with that mill the same way Friesau is with Rosenthal and then there'll possibly be 1 or maybe 2 other sawmills in the northern part of Germany that would fit into that cluster quite nicely, which is sort of a longer-term vision that we have. The Stendal sawmill and the other acquisitions are all really sort of dependent on time. We're obviously not going to do it with -- we don't have the firepower today. We wouldn't take that kind of risk. So we'd just continue to do the work to be ready. And then when things are -- when cash flows are stronger, then you'll see us start jumping away on that.

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Operator [32]

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Your next question is from Sam McGovern with Crédit Suisse.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [33]

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I just had a question about the currency impact. There was a $14.6 million FX impact during the quarter. Can you break out the operating component of that relative to the onetime gains due to accounts receivable and cash GAAP adjustment?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [34]

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Sure, Sam. Mike -- Dave's ready for you on that one.

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David K. Ure, Mercer International Inc. - CFO & Secretary [35]

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Yes. It's roughly half-and-half this time, Sam. So half of it is related to revaluing foreign-denominated monetary items. So I think accounts receivable, cash, accounts payable, and the other half, a little bit less than half is related to the translation of our foreign-denominated costs. So our euro-denominated and Canadian dollar cost to U.S. dollars.

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [36]

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Okay. Got it. And then just in terms of 2020, how do we think about what the cost impact would be with or without maintenance?

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David K. Ure, Mercer International Inc. - CFO & Secretary [37]

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With respect to foreign exchange, Sam, or in general?

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Samuel Thomas McGovern, Crédit Suisse AG, Research Division - Research Analyst [38]

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No, no, I am sorry. Just sort of ongoing costs in terms of that, like dollar per tonne?

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David K. Ure, Mercer International Inc. - CFO & Secretary [39]

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Yes. Well, the big swinger for us is, of course, fiber. Fiber is our, by far -- our largest cost. And as you know, it's been quite -- we've been experiencing some pretty considerable fiber cost reductions, really for the last 4 or 5 quarters. And as David was mentioning, we believe that there's still for the -- in the near term, there's going to be considerable low-cost fiber available for us for both the pulp business in the form of pulpwood and the lumber business in the form of sawlogs. So I think we have -- we think the rate of reduction will start to settle off here and level off, but there's still a considerable amount of low-cost wood available to us. So I think you'll see that again in the next few quarters.

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Operator [40]

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Your next question is from Adam Zirkin with Knighthead Capital Management.

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Adam Zirkin, Knighthead Capital Management, LLC - Partner [41]

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Most of what I have has been asked, just 2 quick questions. You've said a lot about the fiber cost. I mean, David, the -- or Dave, the cost per tonne sort of just look at the difference, right, between EBITDA and revenue as a proxy, it was down really significantly, almost $50, it looks like on my numbers sort of net of maintenance per tonne from the second quarter to the third quarter. Is that all fiber and FX? Or is there anything else that's happening on the cost side?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [42]

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Yes. Well, fiber is a big chunk of it. We are starting to see some improvements in our chemical costs in Canada, in particular. With the bigger footprint we've got there, we've been able to lever down both for Peace River and for Cariboo their chemical costs. So some improvements there, but it's -- and costs are also impacted by the shuts. And then, I guess, the third piece that is variable, it's hard to describe, is the impact of the wastewater fees. And so we had Rosenthal in the third quarter, anticipating Stendal, either in the fourth quarter or first quarter of next year. That will drive things positively when that happens.

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Adam Zirkin, Knighthead Capital Management, LLC - Partner [43]

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Great. And then lastly, you mentioned the delay in the Peace River work, I guess, for a delay in delivery of parts. Is there any operating issue there that we should expect? Or can that mill run sort of until that maintenance on -- just it's on schedule?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [44]

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Yes, no, it's not an operating issue. It's -- the boiler is fine. We wouldn't want to have those tubes in that boiler long term, like 10, 15, 20 years, because they had that event. So they were compromised. And over time, they will -- over time, they will need to -- more maintenance, and they will need to be replaced sooner than if that hadn't happened. But it's an insurable event. So we're going to completely rebuild the walls of the boiler and the floor where the impact was. And it's just that the supplier of those tubes had a quality issue that we caught and which is resolved, but it just couldn't get ready for the timing of this year shut. So it's pushed out to next year. It will be a similar time frame. It will be roughly 50-plus days bridging the third and fourth quarter of 2020.

Operationally, at this stage, we don't believe there would be any impact between now and then, for sure. We'll know when we open the boiler up in their November shut this year, but we shouldn't expect there to be an issue.

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Operator [45]

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(Operator Instructions) And ladies and -- we do have a question from Paul Quinn with RBC Capital Market.

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Paul C. Quinn, RBC Capital Markets, Research Division - Analyst [46]

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Sorry, I joined late. So I'm not sure what questions have been asked, although I'll ask my question anyways and if we can take it off-line because it has been answered, it's fine. But just wondering that -- the maintenance schedule in Q4 and how that looks in 2020.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [47]

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Yes, okay. Q4 and 2020. Paul, I'm glad you asked the question because if somebody hadn't, I was going to raise this in my closing comments. So we do have 3 large shuts in the fourth quarter of this year, right? So we've got Stendal, Celgar and Peace River. And so analysts need to think about that. And I could point you to the IFRS disclosure that we've historically always included in our conference call scripts. And the reason we put the disclosure out is to help you see the magnitude of the shuts from an EBITDA impact, and you can do that by looking at what -- it is under U.S. GAAP compared to IFRS because the IFRS companies capitalize it and they depreciate it through their depreciation and amortization line, whereas for Mercer, it gets expensed in the quarter. So that number is all out there. So you know these numbers and the impact of these shuts for the big mills is around $15 million per quarter on the direct costs. And then for the additional costs for your energy loss, your chemical costs and the lost tonnes, that's about $5 million per mill. And all of that's happening in the fourth quarter. So you need to factor that in.

In 2020, the lineup is, Rosenthal will again be in the third quarter, roughly 12 days. For Stendal, we won't have a big shut next year. It will be too many shuts for second quarter and fourth quarter. That's roughly 3 days each. For Celgar, we're not completely sure what we're going to get away with here. But the thinking is just to do 4 mini shuts rather than a big shut. We're trying to migrate that mill towards an 18-month frequency. It's -- we've got a lot of the work behind us, and it should be -- if we can start lengthening out the time between shuts over the course of 3 years, you save the cost of a 4-year shut. So we may have a slightly extended shut in the third quarter. It really depends on what the regulatory bodies say to us about further washouts and digester work. Then in Peace River, as I've already mentioned earlier, we've deferred the boiler outage to the third and fourth quarter of 2020. Roughly, I guess, it's 36 days in the third quarter and 22 in the fourth. Remembering that a very large component of that will be covered by -- well, the capital is all covered by insurance for the boiler work and DI insurance will pick up any lost margin on tonnes that we would have otherwise produced.

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Operator [48]

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Your next question is from [Dennis Collins] with Stifel.

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Unidentified Analyst, [49]

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Would you be able to give us or give me the percentages by country -- by revenue that you do witness?

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [50]

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We don't have that one. David might be able to dig it out, but that will be in the Q. I guess, if you don't mind waiting for that. Just don't have the paper.

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David K. Ure, Mercer International Inc. - CFO & Secretary [51]

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Yes, the Q is out now, so it should be there.

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [52]

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It should be there.

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Operator [53]

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(Operator Instructions)

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David M. Gandossi, Mercer International Inc. - President, CEO & Director [54]

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It sounds like there's no more questions, operator. So thanks, everyone, for joining the call. As always, Dave and I are happy to talk anytime. So reach out to us. We're on CET time these days, but happy to go offline if anybody needs any more information. So thanks, again.

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Operator [55]

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And ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.