Mercer International Inc. (NASDAQ:MERC) Q4 2024 Earnings Call Transcript

Mercer International Inc. (NASDAQ:MERC) Q4 2024 Earnings Call Transcript February 21, 2025

Operator: Good morning. And welcome to Mercer International’s Fourth Quarter 2024 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.

Richard Short: Thanks, Didi. Good morning, everyone, for joining us today. I will begin by touching on the financial and operating highlights of the fourth quarter before turning the call to Juan Carlos to provide further color into the markets, our operations, and our strategic initiatives. Also, for those of you that have joined today’s call by telephone, there is presentation material that has been attached to the Investors section of our website. But before turning to our results, I’d like to remind you that we will be making forward-looking statements in this morning’s conference call according to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I’d like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company’s filings with the Securities and Exchange Commission.

This quarter, our operating EBITDA totaled $99 million compared to Q3’s EBITDA of $50 million. The improved quarter-over-quarter results were driven by no days of planned major maintenance downtime, compared to twenty days in Q3. The positive impact of a strong dollar and higher MBSK sales volumes. These positive impacts were partially offset by modestly lower pulp pricing. I am pleased to note that in Q4, we successfully redeemed our $300 million 2026 senior notes with proceeds from the issuance of $200 million of additional 2028 senior notes and $100 million of cash on hand, which represents a first step in our leverage reduction initiative. In the 2024 fiscal year, our EBITDA significantly increased to $244 million compared to $17 million in 2023, driven by stronger pulp markets, lower production costs due to easing of inflation pressures, and cost reduction initiatives.

Our pulp segment contributed an EBITDA of $106 million in Q4, and our solid wood segment had a quarterly EBITDA of negative $5 million. You can find additional segment disclosures in our Form 10-K, which can be found both on our website and the SEC’s. In the fourth quarter, MBSK markets remained strong, but our sales realizations modestly decreased from near-record prices achieved earlier in the year. Our Q4 softwood pulp sales realizations were $794 per ton compared to $814 per ton in Q3. In China, the MBSK net price was $767 per ton in Q4, which was relatively flat compared to Q3. In Q4, the North American MBSK list price averaged $1,687 per ton, and the European MBSK list price averaged $1,500 per ton, both down about $75 from Q3. Hardwood prices in China decreased in the fourth quarter as the market continued to absorb the new capacity which came online earlier in the year.

Our Q4 hardware sales realizations were $578 per ton, a decrease of $54 from Q3. We believe MBHK prices reached the floor in Q4, and in early 2025, we are already starting to see modest price increases. The average price gap in China between softwood and hardwood pulp increased this quarter to about $20, with the average Q4 net eucalyptus hardwood price at $548 per ton, down $87 from Q3. The North American MVHK average Q4 list price was $1,298 per ton, down $169 from Q3.

Richard Short: Overall, the weak hardwood pulp market resulted in us recording a $5 million non-cash impairment in Q4 at the Peace River Mill. When compared to the third quarter, total MBSK pulp sales volumes in the fourth quarter increased by 29,000 tons to 405,000 tons. This increase was mostly offset by lower sales of MVHK pulp. Total production volume in the fourth quarter was 467,000 tons, up 51,000 tons when compared to Q3, driven by stronger productions and no planned maintenance downtime, compared to twenty days in the third quarter. In the first quarter of 2025, we’ll have twenty-one days of planned maintenance downtime at our Selgar mill. For our solid wood segment, realized lumber prices modestly increased compared to the third quarter, driven by higher prices in the US market.

Overall, Q4 lumber markets remained weak. The random lengths US benchmark for Western SPF number two and better average price was $435 per thousand board feet in Q4, compared to $366 in Q3. Today, that benchmark for Western SPF number two and better is around $488 per thousand board feet, which represents about a 20% increase from the beginning of the fourth quarter. For the first quarter of 2025, we are expecting modest higher lumber prices in both the US and Europe due to limited supply and increased demand. Demand and pricing for our lumber and other products may be impacted by the ongoing developments regarding US trade policies and the related tariffs involving Canada, the European Union, and China. Later in the call, Juan Carlos will discuss the possible impact of these policies on our business.

Lumber sales volumes were up 14% quarter over quarter to 124 million board feet due to the timing of sales, while lumber production for the fourth quarter was 115 million board feet, down 6% from the third quarter due to planned downtime over the winter holidays.

Richard Short: Our consolidated electricity sales volume totaled 241 gigawatt hours in the quarter, up 36 gigawatt hours from the third quarter due to higher production at our pulp mills and the planned maintenance work in Q3 on the freeze-out turbine. Pricing in Q4 increased 20% to $109 per megawatt hour as a result of higher spot pricing in Germany. In the fourth quarter, pulp fiber costs were flat compared to the third quarter as supply remained stable. For our solid wood segment, per unit fiber cost increased in Q4 due to reduced supply. Production for our solid wood segment’s mass timber operations decreased in the fourth quarter to 6,000 cubic meters from 10,000 cubic meters in the third quarter as we completed two large mass timber projects in Q3.

With the high-interest rate environment, growth in this market is expected to be muted in 2025. Foreign exchange positively impacted our operating income in Q4 by about $26 million when compared to Q3, primarily caused by the impact of a stronger US dollar on our US-denominated receivables at our Canadian and German mills. We reported a consolidated net income of $17 million for the fourth quarter or $0.25 per share, compared to a net loss of $18 million or $0.26 per share in the third quarter. For the full year, we are reporting a consolidated net loss of $85 million or $1.27 per share, compared to a net loss of $242 million or $3.65 per share in 2023. We consumed about $54 million of cash in Q4 compared to about $24 million in Q3. Our net working capital, excluding non-cash adjustments, was lower in Q4 by roughly $25 million, and we used $100 million of cash to redeem our 2026 senior notes.

In Q4, we repaid $10 million of our revolving credit facilities. In 2024, we invested a total of $84 million of capital in our facilities.

Richard Short: Looking ahead, we currently expect capital spending to be between $100 and $120 million in 2025. At the end of Q4, our liquidity position totaled $489 million, a $66 million decrease from Q3, and comprised $185 million of cash and about $304 million of undrawn revolvers. Finally, our board has approved a quarterly dividend of $0.075 per share for shareholders of record on March 26, for which payment will be made on April 2, 2025. That ends my overview of the financial results. I’ll now turn the call over to Juan Carlos.

Juan Carlos Bueno: Thanks, Rich. Let me begin by saying that I’m pleased with our Q4 operating results. Our EBITDA of almost $100 million highlights the strength of the softwood pulp market and the cash-generating potential for pulp assets. We also benefited from the rapid appreciation of the US dollar and not having planned major maintenance downtime in the quarter. Looking ahead, we’re carrying positive pulp price momentum into 2025. However, we’re also dealing with the uncertainty of tariffs. As we have run several scenarios, we believe we would be able to mitigate the majority of the impacts on our businesses as our operations and sales strategies provide us with a great deal of flexibility to adapt to changing conditions.

In the meantime, we maintain an open and continuous dialogue with our customers as well as with government officials and our industry associations. We’re prepared to take swift action, redirecting products to other geographies if necessary, and adjusting our operations accordingly. Depending on the scenario that actually plays out, we might see some wood cost inflation at our Selgar mill due to the negative impact that tariffs could have on the Canadian sawmilling industry. To give our main tariff exposure some context, on average, we sell about 200,000 tons of pulp into the US annually. About two-thirds of this volume is softwood pulp. We also export from Germany about 200 million board feet of lumber to the US. In contrast, our main import from the US into Canada is wood chips for our Selgar pulp mill, but it’s worth noting that these are being exempted from the counter tariffs initially proposed by Canada.

Selgar imports about 40% of wood chips from the US. Turning to the pulp markets, softwood pricing is expected to remain strong. We continue to believe that demand for softwood will be steady in the midterm, which, when combined with reduced supply, will create some upwards pricing pressure in most markets in the first half of 2025. Conversely, hardwood pricing weakened in the fourth quarter as the market absorbed recent capacity increases.

Juan Carlos Bueno: But we currently believe prices have landed at a floor price of around $550 in China, and we’re seeing some recent upward pricing pressure in the market today, primarily due to heavy South American producer maintenance. The permanent closure of NBSK mills in the last two years, temporary curtailments happening today due to reduced fiber in certain regions, along with unplanned downtime, are all creating tightness in NBSK supply-demand dynamics. Looking forward, we believe that the significant contrast between the supply-demand fundamentals for softwood and hardwood pulp will drive the price difference between these two grades to levels well beyond historical norms. Currently, the net price gap in China is about $220 a ton, but historically, this spread is closer to $100.

We expect this wider price differential to persist well into 2025. As a reminder, softwood represents roughly 85% of our annual pulp sales volume. This large price differential between softwood and hardwood will inevitably bring up the topic of substitution. Based on conversations we have had with customers as well as our own research, we believe that most of the potential substitution has already been implemented and that only a marginal amount would still be possible. You will recall that in Q3, we lost approximately 71,000 tons of pulp production due to unplanned downtime. Our production was significantly better in Q4 despite losing 18,000 tons at Peace River as a carryover from the digester issue from Q3. While I’m pleased with our production this quarter, we continue to put strong emphasis on improving further the reliability of our assets across all businesses.

We look forward to Torghao increasing their planned lumber production as we make good progress on our lumber expansion project. In Q4, our overall pulp fiber costs were flat from Q3. In Germany, a steady supply of sawmill chips kept fiber costs constant, while in Canada, costs were steady thanks to our Peace River’s wood room as well as our fiber sourcing strategy in Selgar. Looking ahead, we expect our fiber costs to remain stable for our pulp business and with about a 10% increase in our solid wood business in Q1. Our solid wood segment continues to be held back by a weak European economy and the impact of high-interest rates on the construction industry. Despite some modest price improvements in the US lumber market, as a result, our solid wood segment posted a negative EBITDA of $5 million.

As I look back on our mass timber business in 2024, it was clear the potential of this business is. When our facilities were running full but only on one shift, saw meaningful profitability, which, of course, will only increase when we see some recovery in construction and we transition to two full shifts. We expect that the construction market in general will still be challenging in 2025. Although, we’re observing significant pent-up demand for projects that are just waiting for a positive market signal in order to be released, which will unleash significant growth for mass timber. As such, we are highly confident in this business being a growth engine for Mercer. Today, our mass timber order file sits at about $36 million. We’re receiving an increasing amount of inbound project inquiries and are finding developers taking their projects to the point of being ready to execute once the interest rate environment improves.

We remain confident that the environmental, economic, speed of construction advantages, and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe. We are well-positioned to take advantage of that market growth as we have roughly 30% of North American cross-laminated timber production capacity, a broad range of product offerings, including design and installation services, and a large geographic footprint, giving us competitive access to the entire North American market. We have positioned ourselves to be a one-stop shop for mass timber installations. We expect Q1 lumber pricing to moderately improve in the US as we believe the recently announced lumber production curtailments are starting to create some pricing tension, and potential tariffs will only exacerbate the strength.

Similarly, we expect modest upward pricing pressure in the European market, primarily due to increasing sawlog prices.

Juan Carlos Bueno: However, any meaningful long-term improvement in either the European or US markets will be dependent on improved economic conditions and lower interest rates. The very cost-competitive setup we have in FreeCell gives us the flexibility to have a strong presence in Europe as well as the US and the very high-quality demand in the Japanese market. In Q4, in particular, 38% of our lumber volume was sold in the US as we continue to optimize our mix of products in target markets to current conditions. We continue to believe that low lumber inventories, the large number of sawmill curtailments, reduced allowable cut limits, relatively low housing stock, potential wood shortages created by Canadian forest fires, and homeowners’ demographics are still very strong fundamentals for the construction industry, and this will put sustained positive pressure on the supply-demand balance of this business in the midterm.

Shipping pallets remain weak due to the overhang of the European economy, particularly in Germany. Once the economy begins to show signs of recovery, we expect pallet prices to recover towards more historical levels, allowing Torgo to deliver significant shareholder value. Heating pellet prices were up slightly in Q4 due to expected seasonality in this market. We expect demand and prices to be steady in Q1 as cooler European temperatures call. As part of our objective to keep all of our pulp mills running reliably, we’re planning for major maintenance shutdowns for all of them throughout the year. Our current schedule is the following: In Q1, Selgar is down for longer than usual, twenty-one days, to allow for the completion of the wood room project.

In Q2, Peace River will be down for eighteen days, and Standal will take a three-day shut. In Q3, Rosenthal will be down for two weeks, and Selgar will take four days. And in Q4, Standal will be down for eighteen days. In total, that is seventy-eight days of planned downtime compared to fifty-seven in 2024. The difference being Selgar, as we did not take a major shut in 2024, given that we’re running the mill on an eighteen-month maintenance cycle. We expect to spend between $100 and $120 million on capital projects in 2025. This capital budget is heavily weighted to maintenance, environmental, and safety projects. We will complete the Torghall lumber expansion project as well as Selgar’s wood room. Both projects will provide significant value add through increased lumber output and fiber cost optimization, respectively.

Torghall’s project will increase the volume of dimensional lumber available for the US market by about 240,000 cubic meters annually with upgrades to the log in-feed system and the addition of more planning capacity. We expect to reach a little bit over 100,000 cubic meters already in 2025. This was envisioned as part of our original investment thesis to increase the mill’s value-added product mix and maximize potential synergies. I also want to remind you our Spokane project was originally envisioned as part of our investment strategy for this facility and is focused on wood in-feed and trigger jointing processes. Once the Spokane project is complete in mid-2025, the facility will see a retire wood cost through reduced waste. I am pleased with the performance of our new lignin extraction pilot plant at Rosenthal.

Our product development is going according to plan, and we’re excited by the future prospects of this product as a sustainable alternative to fossil fuel-based products like adhesives and advanced battery elements. We believe this product can be the foundation for our profitable business segment with strong growth potential. Fundamentals of this business align perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with a circular carbon economy while adding shareholder value. As the world becomes more demanding about 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.

Products like concrete and steel for construction or plastic for packaging. Furthermore, the potential demand for sustainable fossil fuel substitutes is very significant and has the potential to be transformative to the wood products industry. We remain committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, we believe that demand for low-carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions. We remain bullish on the long-term value of pulp and are committed to better balancing our company to growth in our lumber and mass timbers businesses. In summary, I am pleased to note that the softwood pulp market remains strong and that we are well-positioned to take advantage of it.

We believe that the weak construction market will keep our wood product businesses under pressure during the year. But we will navigate through the uncertainty that potential trade wars may bring and are confident that we have sound mitigation strategies. I’ll finish by saying that during 2025, our absolute priority will be on reducing our leverage through a combination of strategic projects that include aggressive cost reduction programs, reliability of our mills, operational rationalization, and prudent capital management. Thanks for listening, and I now I will return the call back to the operator.

Q&A Session

Operator: Thank you. As a reminder, to ask a question, please press. And our first question comes from Sean Stewart of TD Cowen. Your line is open.

Sean Stewart: Thanks. Good morning. Congratulations on a much improved result. A couple of questions I want to dig into. First, on cost. And, you know, I appreciate the better productivity and the currency tailwinds. Wondering if you can do a little more unpacking of input cost trends this quarter as well. It would appear to us that even adjusting for currency and the maintenance schedule, there were some tailwinds there as well. Can you give us a bit more detail between Europe and Canada? Any trends you might have seen there?

Juan Carlos Bueno: Yeah. Absolutely. Yep. And Sean, I appreciate the question. When we look at cost, obviously, we have to talk about fiber. And the evolution that we got into from 2023 into 2024, I would say, positive for pulp. Not so much for lumber. On pulp in general, one year versus the other, we see our pulps coming down about 5% both in our Canadian mills as well as in the German mills. Well, about a 5% increase was seen in FreeCell in our lumber mills. Now into 2024 into 2025, what we believe is going to happen is that our Canadian pulp mills will still have a little bit of a tailwind. And this is absence of tariffs. Because we know that tariffs may have an impact on the sawmilling industry and obviously on the amount of chips that will be available.

So if that does happen, I think we will see an uptick rather than a decline in fiber prices like we’re looking at. In the German case, we believe that prices for fiber will be going up. Our estimate is about 6% throughout the year. And about 10% for lumber. And this is on the back of Germany harvesting less than they’ve done before. And therefore a bit less availability of wood overall. So that is the major driver for fiber. When we look at chemicals and other things, we don’t see dramatic changes. So it’s basically a fiber-driven economic.

Sean Stewart: That’s great detail. I appreciate that. Question on your European wood business, which continues to struggle, and you referenced some of the factors there. We’re hearing reports of capacity coming out of the European market on the lumber side more in Scandinavia than Germany. But, you know, any sense that conditions or there’s any tension apparent in that market headed into early 2025 and your ability to improve margins in those operations with a really conservative CapEx budget?

Juan Carlos Bueno: Absolutely. There’s two things. I’ll make two distinctions between FreeCell and Torghao. Because they’re very different assets. FreeCell, we have the benefit, as I mentioned earlier, of having an incredibly competitive and efficient and large sawmill. And by that effect, we’re able to navigate through difficult price conditions or difficult market conditions. So the mill stays afloat and runs on profit regularly. In the case of Torghao, it is different because it’s still up to now very much dependent on pallets and only starting this year, we will see a relief of that with lumber beginning to pile up. And, obviously, as we gain traction and we gain volume, obviously, our fixed costs will be diluted further.

So in time, we do see that Torghao will become much more resilient. It won’t be the same size as FreeCell, but it will be still, since it’s a very large sawmill, with a combination of pallets, it has a good way through. Obviously, the fact that pallets remain as they are doesn’t help. That’s why we’re putting so much emphasis on driving hard the increase of lumber production. So those two assets will navigate through it. Fiber costs, as I said before, are not going to help. It’s not going to help because we do believe that fiber costs will go up in Europe in 2025. But again, as I said, I think FreeCell is resilient enough. The qualities that we’re able to produce allow us to play in markets that are very demanding, like Japan. And we’re anywhere between 10% to even 12% or in some cases, 15% of our sales can go to that market.

So that gives us a very good breathing space in terms of very, very healthy margins. And we see evolutions of prices in different markets that are going in the right direction. The UK is recovering very well. Actually, it’s one of the hotspots in Europe right now in terms of seeing some sort of recovery, especially in the construction industry, and we’re taking advantage of that. And in the case of the US, we’re all very familiar with it. There’s obviously some recovery there of prices. But again, we have this lingering thing around tariffs on how that may happen. If it applies only to Canadian lumber into the US, and not yet to Europe, obviously, we will benefit from it. If it is applied also in Europe as well as in Canada, the thing that will keep us apart from each other is the fact that on top of it, very unfortunate 25% tariffs that are being announced, we know that Canadian has these anti-dumping duties that are right now around 15% and that are expected to grow to 30% by the third quarter.

So Canadian lumber will still be in a very difficult position competitive-wise, even if European tariffs are matched, Europe will still have an advantage from that point of view.

Sean Stewart: That’s great detail. I really appreciate it. Very much. That’s all I have.

Operator: Thank you. Our next question comes from Matthew McKellar of RBC Capital Markets. Your line is open.

Matthew McKellar: Good morning. Thanks very much for taking my questions. I’d like to just follow-up on Sean’s question on the outlook for fiber costs in Germany. Your commentary on 2025 was certainly helpful. If we take a slightly longer-term perspective, where do you expect your fiber cost in the country to trend over the next two or three years? Does that trend get better in 2026 and 2027?

Juan Carlos Bueno: When we’ve recently done some work looking at fiber availability ten years out, and our conclusion is that there will be enough fiber to source or to feed our mills or the market in general. Assuming that there’s no closures, that everything happens as it is right now, the amount of wood to be harvested, the amount of forests that are available, will still remain there. The only difference that we’re seeing in the longer run is a reduction of some species versus others. So we’re seeing less availability of spruce while other species remain still very resilient. So that is in the longer term, that’s what we see. We don’t see a shift of some species versus others as the more predominant element out there in at least a ten-year time frame.

Matthew McKellar: Okay. Thanks. That’s helpful. And next, I was just wondering if you could provide a bit more color around how you’re managing your manufactured products business right now given the slack you’re seeing described the outlook as needed. Should we assume no revenue growth in 2025 if we don’t see relief on interest rates? We’re expecting flat results, even generous, given the conditions you’re seeing today. And then are the steel tariffs at all helpful for the medium-term outlook for mass timber demand from a comparative cost perspective?

Juan Carlos Bueno: Absolutely. That’s a good question. On mass timber, what we see for 2025 is that most likely, we will end up with roughly the same, I’m going to say, $100 million in sales for that business as we did in 2024. The main difference there is in 2024, we had some a couple of very, very large and significant projects, and those very large projects, one of which, and this was publicly announced, Walmart. When you add the Walmart campus and some of the other two major projects that we worked on, that was about 65%, almost 70% of our sales. In 2025, those big, big projects are not there. We have only one that we’re going to be finishing in the first quarter, and then the remainder of the year is going to be fighting for the smaller projects.

The projects that are out there, you see our order book is at $36 million. And that is comprised of many smaller projects. So filling out our factories with smaller projects obviously takes a bit more time. It is not as efficient from a fixed cost perspective, that’s why we believe that even though we might be able to achieve the same as last year, with a bunch of very significant load of new projects but smaller ones, because we’re just filling in the facilities. Now when it comes to tariffs, and this is very important to your question, the fact that we have three facilities scattered in different geographies plays to our advantage immensely. When you look at Conway in Arkansas, we source Southern Yellow Pine, and we serve the US market from it with both Glulam and CLT.

So we’re good. No impact on tariffs whatsoever. When it comes to Spokane in Washington, we are shifting to source wood from the US instead of sourcing from Canada. We have both options. We’ll start sourcing from the US if necessary. And that is already set up so that we can serve the US market from Spokane without any impacts on tariffs. And what we will do is on the Canadian asset on Okay Lamb, we will dedicate it towards the Canadian market. They can produce Glulam and CLT, so we will be able to serve the two markets independently without having to be concerned about tariffs of shifting products from one country to another.

Matthew McKellar: Great. That’s helpful. Thanks very much. I’ll pass it back.

Operator: Thank you. Our next question comes from Hamir Patel of CIBC Capital Markets. Your line is open.

Hamir Patel: Hi. Good morning. Juan Carlos, could you help us understand how those returns on lumber sales within Europe compare to North America now? Seems like we’ve had a further movement in domestic price here, but I’m curious what you’re seeing on the continent.

Juan Carlos Bueno: Yes, Hamir. On our pricing in Europe, it’s still evolving positively on the back of the UK. As I mentioned before, that’s probably the market that has seen a much more clear improvement. Similar to what we’ve seen in the US also, but it’s been more consistent along the year. We see in the case of the US, it’s kind of depending on which week you’re talking about, you don’t know if it’s going to be up or down. Right now, it’s been up for the last few weeks. But in the UK, it’s been consistently upwards, and that, I think, is what makes it more attractive to us. That’s why even when you compare the amount or the percentage of lumber that we sold to the US, we’re actually at the low end right now, 38% in the quarter.

But we’ve been at much higher levels before. I think it was 41% in the previous quarter, and even at some point in time, we were above 50%, 55%, I think, in 2023. So we do play with those numbers as we see that things play out better for us. And the other one that I wouldn’t discard because it has shown some good penetration for us, and we’ve been able to capture that with good quality, is the Japanese market. We’re selling more to Japan right now than we’ve sold before. So we’re very pleased with how that is progressing.

Hamir Patel: Okay. Great. Yeah. Maybe just to put the number to that. In Europe, pricing’s up probably 2% to 5%. And then in the US, as we put in the comments, it’s getting close to 20% in the last, well, month or so.

Hamir Patel: Okay. Great. Thanks for appreciating that detail. And then just following up on the tariff discussion, you mentioned, I think in your prepared remarks, that Selgar sources 40% of its chips from the US. If tariffs do come in and the counter tariffs don’t end up actually exempting chips from the US, would you still be able to find fiber within BC at an acceptable cost? Or would Selgar likely then have to reduce its operating rate?

Juan Carlos Bueno: We don’t see Selgar needing to reduce operating rates because there is plenty of wood that we can source from the US. We have now secured two long-term contracts with the US, and we have further suppliers that are providing us on a spot basis. So we feel very comfortable with our sourcing capability from the US. I would say in 2023, we were probably trying to reach 30%. In 2024, we finished about 40%. And we know that we can go further if we need to do that. Now, obviously, right now, especially with exchange rates, it is more favorable for us to source from Canada. So we will obviously keep a good balance on how much we can bring from Canada and what is more convenient for us from that perspective. But I don’t see any risk of curtailments or fiber scarcity or fiber availability because we have that outlet.

In the absence of that outlet, I think I would be concerned. I think for many pulp mills in BC that do not have that outlet, the lingering tariffs and the impact that that may have, I think, is an issue that is of high concern. Sawmill closures wouldn’t be discarded in a scenario with 25% tariffs on top of the anti-dumping duties that are going to jump or double to between 15% to 30%. It is just unsustainable for many sawmills in BC. So I think the situation may be very critical from that point of view. Again, for Selgar, based on the way that we have things set up, I think we’re far better off than others.

Hamir Patel: Okay. No. Appreciate that. But I guess, one more thing, Carlos, if there are tariffs and the counter tariffs do not actually end up exempting chips coming from the US to Canada. In that situation, would you still be buying chips from the US?

Juan Carlos Bueno: We would need to balance that out. Obviously, we would need to calculate what would be the end result of running with those additional costs in our wood basket. Having said that, when you look at the amount, and this is very technical, but the actual code on which our chips fall into is a very small percentage of the entire gamut of codes. So say it another way, what was not exempted in the counter tariffs is the vast majority of the lumber products. So anything that you think about from lumber going the other way, everything would be included in the counter tariffs. There’s a few small codes that are used for other purposes. Those are the ones that are exempted. You look at what we import into Canada from the US.

I think it’s half of all the imports of Canada from the US. That’s how much we are. There’s very few imports. It’s a very small code. In the midst of a much larger pile that Canada is targeting. It wouldn’t make a whole lot of sense of targeting a very small code that has no meaningful impact whatsoever. Because it’s really nothing in the context of what Canada is trying to do of imposing counter tariffs.

Hamir Patel: Okay. Fair enough. That makes sense. That’s all I had. I’ll turn it over.

Operator: Thank you. Our next question comes from Sandy Burns of Speake Nicholas. Your line is open.

Sandy Burns: Hi. Good morning, and congrats on a good quarter. Just wanted to kind of follow-up with the downtime schedule for the first quarter, I guess, was the company planning this pretty far in advance so you built up your inventories in anticipation of it. So we should expect to see especially MBSK sales, you know, much higher than the production for the quarter?

Richard Short: Hey, Sandy. It’s Richard here. So we’ll see sales stay flat. So you’re correct. We saw some inventory build-up at the end of the year in anticipation of the shut. But of course, you lose the production during that three-week outage, so you won’t see an increase in sales. They’ll come down a little bit. But we’ve tried to plan and just making sure our customers have the volumes they need.

Juan Carlos Bueno: Obviously, this was planned during that outage. And to your point, Sandy, this shutdown has been planned for a long time. We actually know since already last year early in the year, that the only time where we could be able to finish the wood room would be in the maintenance shut. So we knew that the downtime, the maintenance downtime would have to be extended next time we had it. So, yeah, this was coming all along.

Sandy Burns: Right. But you’re saying you think sales volumes will probably still be down from the fourth quarter. Is kind of how demand is pulling up.

Richard Short: Yes. Modestly down. Yeah. Yeah. Modestly down. For that mill.

Sandy Burns: Okay. Then my second question would be, you know, a lot of questions about the tariffs, and you did make the comment that there could be positive impacts and opportunities. Could you elaborate on that a little bit? What you’re thinking could be, you know, a positive for the company if they do all play out as harshly as worst-case?

Juan Carlos Bueno: Yeah. Yeah. It’s all scenario planning here, but so anything can change. But let’s talk about pulp for a minute. I mentioned about 200,000 tons of pulp travel south. And two-thirds of that is softwood. When you think about softwood, the US does not produce softwood. The US imports all their softwood from either Canada or Europe. And it’s about 80% in Canada and 20% from Europe. So the US doesn’t have any options when it comes to softwood. It is a very delicate situation for them, and I can only assume that the tariffs will be passed on. And customers in the US for tissue products and kitchen towels and all of that will end up paying or carrying the burden of the tariffs. When it comes to hardwood, in that case, it’s different.

Because hardwood can be sourced from other places. We have hardwood coming from Peace River into the US. And we know that that hardwood can be substituted by Brazilian eucalyptus. So in that case, our plan is to shift towards Asia. Right now, when we do the math of selling down south or shipping to Asia with container rates the way they are, costs are very equivalent. So there we don’t lose much or anything at all by just shifting from one geography to another. Again, it’s a smaller volume because most of it is softwood, but there would be some impact there that we would just shift it to another geography. So that’s pulp in itself. And that is regardless of what happens in other geographies or tariffs in other geographies. That’s just reality for us.

Now when it comes to lumber, then we do have the variability of what happens in other geographies. Because if it’s only Canadians that are impacted, then we benefit in Europe. Because then, all of a sudden, we’re much more competitive coming into the US. So that’s where a positive spin would come from. However, because we know all these later announcements, and we don’t know if it’s by April, but they’re going to do something on Europe, on cars, and other products. If lumber is or is not going to be included because it was kind of a comment that was thrown out there by President Trump, we don’t know if that’s going to be the case. Again, if it is the case, then you would say it’s a level playing field as we have today because Canadians would have Europe would have the same effect.

So there’s in terms of competitiveness, no major change. However, again, Canadians are going to go through a review of the anti-dumping in August or maybe September, and they will double. So it will not be again a level playing field. And, again, Europe will be better positioned than Canadian counterparts. So that’s where some of the positives may still remain. But, obviously, it’s a situation that, I guess, none of us would like any of this to play out. I think this is a disruptor of commerce. I think at the end of the day, it’s the end users that are going to be paying the bill. The US needs the lumber for construction right now more than ever with everything they have to do in California in terms of rebuilding. It’s the worst moment to be talking about tariffs and additional costs into the US.

But I’m afraid that’s what’s going to happen.

Sandy Burns: Right. Okay. Great. Thank you. Good luck.

Operator: Thank you. And as a reminder, if you have a question, please press star one one. And our next question comes from Cole Hathorn of Jefferies. Your line is open.

Cole Hathorn: Good morning. Thanks for taking my question. Just a bit of a follow-up or clarification question on the fiber costs in Germany. We’re seeing quite a bit of a divergence in the Nordic players between sawlog costs and effectively pulpwood and wood chips. When you’re talking about fiber cost inflation, are you predominantly talking about the saw logs for your lumber operations, or are you also talking about related wood chips and kind of pulpwood into your pulp side? I’m just wondering if it’s just saw logs or both pulpwood and saw logs. And then secondly, the European packaging players have talked about improvements in some of their order books. I’m just wondering, are you seeing anything on the pallet side of your business? Any kind of green shoots there? Thank you.

Juan Carlos Bueno: Thank you, Cole. So in terms of the fiber cost, we see a higher inflation, let’s put it that way, or higher increase in costs of sawmilling logs than we see on pulp logs. So in essence, what we see is maybe about a 10% increase in sawmilling fiber costs versus about 5% or 6% in pulp. So again, we see a bit more of an effect on the saw logs than we see on the pulp logs. And to your point on pallets, we still don’t see any significant demand in terms of or shift in demand. We’re following through with the news that you mentioned, but it hasn’t materialized in a way that is really moving the needle demand-wise. Just to give you a little bit of context on this, Torghao has the capacity to produce 17 million pallets in a year.

We’re running the mill producing only 10 million pallets in a year. Many other competitors, whether they’re in Poland, in Ukraine, which are probably one of the geographies that we compete with the most, they’re also running their mills at lower capacity. So there’s plenty of capacity that would be out there once the market comes back. I think the major issue that is keeping this down is the German economy. And by the German economy, I mean the automakers. That’s probably one that fuels a tremendous amount of volume and usage of pallets. And that’s still subdued.

Cole Hathorn: And then maybe while we’re still on that, is there any other end markets besides autos that would really move the needle for the pallets business? And then I wanted to ask on softwood pulp. You know, we’ve seen Suzano raise prices consecutively for the last three months, and they’re trying to get something in March. We’ve seen softwood pulp move up in Europe, but, you know, it’s effectively to cover the discount increase in discount. Do you think the gap narrows first before softwood can move higher? Or, you know, how do you think the softwood price dynamic might play out from here if hardwood prices are rising? Thank you.

Juan Carlos Bueno: Absolutely. What we see actually in between Q4 and Q1, we see that both fibers, when you look at China, both fibers have come up by about $50. So China, MBSK, it was around $770. And we believe that it’s going to end the quarter around $820. We’re already around $800. And NVHK, we finished or finished around $575. And our estimates are that it’s going to be around $635 or so. Again, another roughly $50. And I’m talking our prices. So we do feel that both will go up. Both are in fact going up, as you will point out. Suzano has made an announcement on hardwood. We have made announcements for the month of February, and we made an announcement for the month of March. So we do see that those prices will come up, and that gap between the two fibers will be maintained.

The dynamics for, as I was mentioning earlier at the beginning of the call, the dynamics for softwood are still very positive towards us. Because supply is just not there. And even if demand doesn’t change, because demand, I mean, demand for softwood peaked in 2019. And from that point onwards, it’s been basically mute. If it goes down, it goes down by 1%, and that’s it. It doesn’t really move. But the supply situation has changed dramatically over the last two years. Now with this tariff situation that is lingering behind us, I can only imagine a scenario. If those tariffs do come through, we know that the burden on sawmills in Canada is going to be tremendous. And if sawmill closures become the norm, then there is no other solution but for others to follow suit.

So again, the situation here is still very dramatic. And that would keep softwood on a high end versus hardwood, no doubt. Hardwood will go through the effects of, yes, higher capacities and bigger mills being set up and whatnot. They went through that wave throughout 2024. Now they’re catching up a little bit now that everybody’s going into maintenance season. So it’s always going to be a tough balance between that additional capacity when demand is picking up, but not as much. But I think that gap between those two fibers will remain in 2025. The fundamentals are there for it to remain. I’m sorry. Your first question, I forgot what it was. It was an unrelated matter.

Cole Hathorn: It was just on pallets. If there’s any other big set driver that might come back to help besides autos. Thank you.

Juan Carlos Bueno: Yeah. Perfect. Chemical industries, another one that moves quite a bit. So that’s when you look at the buyer, BASF, all of those major companies. Yeah. Those would be another big indicator. And whenever you hear news about buyer and those companies, you hear layoffs, you see changes, you see, I mean, they’re still struggling. Thank you.

Operator: Thank you. I’m showing no further questions at this time. I’d like to turn it back to Juan Carlos Bueno for closing remarks.

Juan Carlos Bueno: Okay. Thank you, Didi. And thanks to all of you for joining our call. Rich and I are available to talk more at any time, so don’t hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in May. Bye for now.

Operator: This concludes today’s conference call. Thank you for participating.