Juan Carlos Bueno: Not really to be honest Paul. I think we’re happy with what we have and we’ll continue to focus on those.
Paul Quinn: Alrighty, that’s all I had. Thanks. Best of luck!
Juan Carlos Bueno: Thanks.
Operator: The next question comes from the line of Richard Stevens from . Please go ahead.
Unidentified Analyst : Hi! And thank you for taking that question. I just had to €“ wanted to follow up on Juan’s statement. I thought I heard you guys say, just to make sure I fully understand. I think you had new capacity coming online in 2023 and that it would take some time to absorb this capacity. Is that capacity actually coming out of China, so while you’re importing right now into China, as China opens up, that they will be a net exporter of product. And more than likely that product will end up into Europe. Is that fair to say?
Juan Carlos Bueno: When we were €“ I believe Richard what we were referring to in additional capacity was more on the NBHK market, so hardwood market that will see a very significant capacity coming through during the year. That capacity is coming basically from South America, with Brazil and Uruguay coming, and Chile coming to play, and that’s something that we’ll €“ that during the course of this year and next year will add quite a significant amount of pulp, of hardwood pulp into the market. So the destination of that, obviously as you will say China is going to be a significant market for it. I would say that if not the most predominant one, the off taker of a large part of that, and that’s why we made the statement that we believe that NBHK is going to be going through probably a bit tougher cycle as that amount of capacity is being absorbed by the market.
One thing that I would comment though is, usually when those things happen, it’s kind of phased in. It’s not that you have 2 million tons of pulp dumped in the market from one day to another. So those things are usually phased in a way that it seems a little bit easy to go through it, and as they ramp up their production, but obviously it’s an important factor for I think for the end of this year, when some of those things are fully up and running, and even more in 2024.
Unidentified Analyst: Got it, okay, that’s very helpful. All right, I appreciate it. Thank you.
Operator: The next question comes from the line of Andrew Kuske from Credit Suisse. Please go ahead.
Andrew Kuske: Thanks, good morning. I guess the first question, it’s for Juan Carlos, and it’s really along the lines of balancing the business, and you mentioned this earlier on about €“ when you announced the business. How do you think about the business mix for Mercer on a longer term basis, whether we’re talking five years out, 10 years out, how do you think about that?
Juan Carlos : Thank you, Andrew. Yes, we’re very, very focused on that specific item that you just mentioned, on balancing better our company and diverse it, so that it’s not so heavily dependent on pulp overall. We believe that there is still very good opportunities for us to grow in pulp, but we will pursue higher opportunities for growth in lumber and CLT, and not only that, but also in our biomaterials space with lignin, and as Dave mentioned and I think I mentioned as well. We have this €“ already this lignin investment going through in 2023. If you ask me looking 10 years ahead, I would hope to see a company that is much more balanced, and by that I wouldn’t be surprised if pulp is anywhere below 40% and lumber is anywhere above a third of our company, and some of these biomaterials take €“ start taking some two digit space into this mix. So that would be how I would paint it for the future, with lumber and pulp almost at balance.
Andrew Kuske: Okay, that’s very helpful. And then I guess the second question and sort of thinking about the same kind of timeframe goes to Dave. You don’t really have any near term matures at all. You’ve been very adept and this isn’t to be patronizing, but you’ve been very adept over the years of sort of flexing things, levering up when appropriate and then paying down debt and being well positioned generally through the cycle. How do you think about the evolution of the balance sheet if the business mix changes? Do you move from high yield assure into investment grade and just have different market access points?
David Ure: Yeah, no we do think about that a lot, even though we don’t have any near term maturities, and I think we’ve been pretty fortunate to have kind of that core foundational unsecured, no covenant, very flexible financing structure in the past, but that may not be the place. Maybe as we get closer to the first maturity, which is in 2026, we’ll have to see what the market conditions are for other sources of financing and a lot can change in the next year as well. As you know we’ve been generating €“ we’ve got a pretty good cash flow, pretty good operating cash flow, and so I think we’re going to have the opportunities if the markets aren’t there to roll those facilities over. We’ll have the opportunity to do something else, and that may include shrinking the debt up, and it may include €“ we’ll look at the other sources of financing at the time.
And of course we’re always balancing that with what we have in the pipeline for CapEx or M&A opportunities. As you know, we’ve been €“ we’ve had a little bit of extra cash on the balance sheet at times in the last couple of years, and we’ve deployed that to pick up a couple of assets in the Spokane facility and recently the Torgau facility. I think we’ve been €“ we may have struggled to get those assets if we didn’t have a little bit of dry powder on the balance sheet. So I think you’ll see us at times be a little bit conservative or what might look outwards to be a little bit conservative, to make sure that if we do come across an opportunity that aligns with the strategy that Juan Carlos was talking about, that we’re able to jump on those opportunities quickly.
Sorry Andrew, that’s a bit of a ramble, but yes, there’s a lot of moving parts, but we’re paying a lot of attention to that, particularly over the next year or two.
Andrew Kuske: Okay, I appreciate the color. Thank you.
Operator: The next question comes from as a private investor. Please go ahead.
Unidentified Analyst: Hey! Thanks for taking my questions. Can you just give us an update on the woodrooms? I think you had spoken about these at length in the past and talked about the opportunity for grant proceeds tied to the completion of those. Is that still possible, and what would the quantity of the proceeds be?
Juan Carlos Bueno: Yes, the woodrooms are progressing well. One that is very, very close to completion is the one in Peace River. We expect that to be concluded and starting up already in the second quarter, early in the second quarter. So we’re already halfway through the commissioning phase. So that is obviously of high expectations, and we’ve gotten good support from the government into that project. So that to us is very, very important as we mentioned before. , that one we need to associate it with €“ there’s some work that needs to be done, and we want to do it at the time of our shutdown. As Dave mentioned earlier, that shutdown is scheduled for the fourth quarter for October, so it is linked to the fourth quarter shutdown for us to be entering to that commissioning phase in Celgar. As far as the values, do you remember really how much is
A – David Ure: Yeah, round numbers. The peace river, the peace river woodroom is in the range of $50 million to $60 million, and we’ll start up in the next few months here, and the Celgar one is about in the range of $30 million to $40 million.
Unidentified Analyst: And I think there was talk in the past that there would be some grants associated with that. Are there still grants tied to those?
David Ure: Yes, there are, yes. So those numbers that I’m referring to, those are net of grants.
Unidentified Analyst: Okay, thank you. And then the second question on €“ can you just give everyone an update in terms of where we stand with the cross laminated timber. Obviously been on this asset out of bankruptcy. There was some commentary. It was a really nice facility, brand new, lots of equipment, lots of capacity. We started doing some finger joint work. We’ve added a pallet business in there as well. It’s just a little confusing, you know given €“ how the mix of that segment has changed, and now you’ve talked about some investments to increase capacity. So you know taking a big step back. What is the profit outlook for that business going forward, either over the next one to two years, and what’s the targeted return on investment for that Spokane facility. Just to help everyone understand you know what is that building, what’s it able to do in our minds?
Juan Carlos Bueno: Absolutely! As I mentioned earlier, we’re very happy with the way things are evolving there, and when I say that, despite the fact that materially in our revenue it doesn’t show up yet, what we see is a tremendous amount of project and bidding work that we’re doing with the team that we have assembled in Vancouver, and that is what gives us an extremely high confidence about the future of this business. We have several projects as I mentioned earlier, and that are in the bidding process. Some of them in the very, very final stages and with very high confidence that we will close in a few that are very significant, and they we’ll make a mark for, let’s say the full load of our CLT facility and that is very important.
That’s why as we were seeing already this unraveling, even though we’ve only been into this, as you well said, for a short period of time and this is coming out of bankruptcy. Almost considered €“ for us, it’s considered as a startup. and that’s why we decided to make the investment ahead of time, because we see the need for that facility to develop itself further, even though it’s €“ it was state of the art technology, but obviously there’s opportunities to do more. One of the things that we are adding is the capacity to put Glulam in there. Glulan and CLT, as we phase many of these projects that we’re bidding on, we see more and more the need of those two going together in many of the construction projects that we’re working on. So having the facility, being capable to provide both offerings is obviously something that would be very attractive to our customers and hence are decided to go through with that investment.
In terms of your question of how material it can be going forward, without getting into committing to numbers, I would say that we would be €“ by the end of ’24, we should be much closer to rounding values in €“ closer to the $100 million profit overall in this facility. So that is the rain, and we see a very strong likelihood that we will be able to achieve that growth. So it is important that we talk about how those projects materialize, and we will be sharing more of that as we go into the future.
