July 11, 2020

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Edited Transcript of MERC earnings conference call or presentation 1-May-20 2:00pm GMT

Vancouver May 22, 2020 (Thomson StreetEvents) — Edited Transcript of Mercer International Inc earnings conference call or presentation Friday, May 1, 2020 at 2:00:00pm GMT

* David K. Ure

Mercer International Inc. – Executive VP, CFO & Secretary

* David M. Gandossi

Mercer International Inc. – President, CEO & Director

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

* Andrew M. Kuske

Crédit Suisse AG, Research Division – MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

* DeForest R. Hinman

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

Good morning, and welcome to Mercer International’s First Quarter 2020 Earnings Conference Call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International; and David Ure, Senior Vice President of Finance, Chief Financial Officer and Secretary. I will now hand the call over to David Ure.

David K. Ure, Mercer International Inc. – Executive VP, CFO & Secretary [2]

Good morning, everyone. I’ll begin by reviewing the first quarter’s financial highlights. Following my remarks, I’ll pass the call to David, who will comment on our response to the COVID-19 pandemic, key markets, operational performance, progress on our strategic initiatives, along with our outlook into the second quarter of 2020.

Please note that in this morning’s conference call, we will make forward-looking statements. And according to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I’d like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company’s filings with the Securities and Exchange Commission.

Our first quarter results were a significant improvement over last quarter, primarily due to the absence of the large annual scheduled maintenance activities that we completed in Q4. The COVID-19 pandemic impacted our results only marginally in the form of lower sales volumes early in the quarter due to logistics challenges in China. The pandemic did, however, significantly impact how we operate, and David will speak to that in a moment.

We generated EBITDA in the first quarter of about $57 million compared to an EBITDA loss of about $34 million in Q4. This quarter, we benefited from strong production at all of our mills, including record production at our Friesau sawmill along with effective cost controls. Demand for all of our products was steady this quarter. And while product pricing remained low, the U.S. dollar strengthened considerably during the quarter, contributing about $14 million to our EBITDA. Our pulp segment contributed EBITDA of $52 million, while our wood products segment contributed record quarterly EBITDA of almost $8 million. Our wood product segment’s results reflect strong sales volumes, record production and the benefit of historically low sawlog prices. As usual, you can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC.

Average NBSK list prices were up marginally in all of our markets. Average hardwood pricing was up slightly in China and down slightly in the U.S. in the quarter. However, due to the timing of our sales and modestly higher discounts that took effect in January, our average pulp sales realizations fell during the quarter, impacting EBITDA by about $9 million compared to the prior quarter. Our pulp sales volumes totaled 504,000 tonnes, which was up about 22,000 tonnes from Q4, reflecting higher production and steady demand in all of our markets. Sales in our wood products business were also strong as we sold the equivalent of about 118 million board feet of lumber in the quarter, which was up about 17 million board feet from Q4, with about 31% of this volume being sold to the U.S. market.

Electricity sales totaled 254 gigawatt hours in the quarter, which is up significantly relative to Q4, due to our heavy Q4 annual maintenance schedule and strong Q1 production at all of our mills. Our Cariboo Pulp joint venture, which is accounted for using the equity method, contributed another 19 gigawatt hours to this total.

We recorded a net loss of $3.4 million for the quarter or $0.05 per share compared to a net loss of $72.7 million or $1.11 per share in Q4. Cash usage in the quarter totaled $65 million compared to $86 million of cash inflows in Q4. Our cash usage in Q1 was anticipated and was primarily driven by working capital movements. Our heavy maintenance schedule in Q4 left us with significant payables at the end of the year, which were substantially paid in Q1. In addition, receivables were up due to higher sales volumes and the timing of sales, while finished goods inventory was also up as a result of our strong production. We also invested about $23 million of capital in our mills this quarter. David will speak more to that in a few minutes.

As expected, after temporarily rising in Q4 on unusually low working capital, our liquidity was reduced in the quarter but remains considerable, totaling roughly $517 million, including $287 million of cash and $230 million of undrawn revolvers.

Low pulp prices continue to force us to revalue certain components of our inventory, and in Q1, this resulted in a noncash $5.7 million inventory write-down. However, after considering the realization of the Q4 inventory write-down of $9.2 million, our net positive EBITDA impact in Q1 was about $3.5 million and reflects our current expectations that downward pulp pricing pressure is diminished in recent weeks. To the extent pulp prices increase, we will recognize a profit on this written-down inventory in Q2. In Q1, we completed a short and successful 2-day planned shut at Celgar compared to Q4 when we executed larger planned maintenance shuts at Stendal, Celgar and Peace River, that in aggregate totaled 54 days. The benefit of higher production and lower direct costs benefited Q1 EBITDA by about $73 million compared to Q4.

As a reminder, our competitors who report their results under IFRS are permitted to capitalize the majority of their annual maintenance costs while we expense our costs in the period of shut completion.

Our current share buyback program expires today and in response to the uncertainty created by the COVID-19 pandemic, our Board has elected not to renew the program for the time being. We have not been particularly active in the market but did purchase about 24,000 shares in the first few weeks of the quarter at an average price of $6.84. And consistent with that prudent stance in respect to the pandemic, our Board has approved a moderated quarterly dividend of $0.065 per share for shareholders of record on June 25, for which payment will be made on July 7, 2020.

That ends my overview of the financial results, and 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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Yes. Thanks, Dave. Good morning, everyone. Let me begin by saying that COVID-19 is an unprecedented event certainly in my lifetime, and it has presented a number of challenges to our business. I’m proud of how our employees have responded to these challenges. The current working environment and work-related changes have not been easy. And I want to thank all our employees for working cooperatively to keep safety at the forefront.

I’m also pleased to note that despite these challenges, including running large industrial manufacturing facilities while maintaining social distancing requirements, our mills ran very well this quarter.

We also benefited from strong cost controls and steady demand for our products. Our Friesau sawmill reported record production and a second consecutive quarter of record EBITDA. Pulp prices in Q1 generally experienced modest upward pricing pressure due to steady demand. NBSK pulp prices in all markets increased slightly midway through Q1. In China, the Q1 average NBSK net price was $573 per tonne, up slightly from the $563 per tonne in Q4. European list prices averaged $833 per tonne in the quarter compared to $822 per tonne in Q4. The average quarter 1 hardwood net price in China was $460 a tonne, up $5 from Q4. And the hardwood list price in the U.S. market averaged $890 per tonne in Q1 compared to $893 in Q4.

The pandemic and government responses to limited spread have created significant economic uncertainty and we recognize that changes can happen quickly. Currently, we are expecting steady pulp demand from tissue and hygiene producers but expect demand from the printing and writing producers to be under some pressure. We are also seeing a large drop in recycled office paper, which we believe will create increased demand for virgin pulp.

On the supply side, we are expecting certain pulp mills to announce production curtailments due to a lack of fiber. We recently announced that our joint venture, Cariboo mill, started 4 weeks of downtime beginning in late April, taking about 30,000 tonnes out of the market, with our share being 15,000 tonnes. As a result of social distancing requirements and virus outbreaks, we have seen several announcements of unplanned shuts and mills being forced to defer their scheduled annual maintenance shuts. These deferrals will increase the likelihood of unplanned downtime and will reduce supply of pulp in the second half of 2020.

Pulp sales volumes remain high and localized supply shortages have led some producers to announce price increases despite overall mid-term market conditions remaining uncertain. March market statistics reflect positive movement in sales volumes and supply-demand dynamics for both softwood and hardwood. What is less clear is how deep the short-term demand decline for printing and writing grades will be. We believe pulp pricing is near floor pricing. And if we see any further downward pricing, we expect to see further pulp curtailments that are market-based.

I will add that our pulp products are an important part of the health care supply chain, and in some jurisdictions, we’re considered an essential service. So we expect to continue to run, and we will continue to follow all government health-related recommendations to ensure we keep our people safe and to reduce the risk of the virus spreading through one of our facilities.

With regards to our wood products business, the European lumber market experienced steady demand. However, pricing was down slightly compared to Q4. The lumber markets in the U.S. continued to show improvement in Q1. We believe that lumber production curtailments in British Columbia due in part to the limited supply of sawlogs and positive statistical data on the U.S. housing market create this upward pressure. The Random Lengths U.S. benchmark for Western S-P-F #2 and Better averaged $399 per thousand board feet in Q1 compared to $380 in Q4. Today, uncertainty regarding the pandemic has pushed the benchmark down to close to $332 per thousand board feet.

In Q1, about 1/3 of our lumber sales volumes were in the U.S. market with the majority of the remainder of our sales in the European market. When comparing to Q4, our average realized lumber sales price was flat at $348 per thousand board feet in Q1 compared to $347 in Q4, as higher U.S. market pricing was offset by lower European prices. As we move through Q2, we expect lumber markets to remain relatively weak along with sales realizations. To date, prices have been volatile as lumber buyers look for clarity in how housing starts and do-it-yourself project demand will fare as governments begin to reopen the global economy.

Our mills ran very well this quarter in spite of all the pandemic-related challenges. Including our Cariboo joint venture, we produced 534,000 tonnes of pulp, up 92,000 tonnes from Q4 when we had 54 days of scheduled annual maintenance at the pulp mills. Excluding our Cariboo joint venture, our pulp mills produced 578 gigawatt hours of power, up 148 gigawatt hours from Q4, again, due to our heavy Q4 planned maintenance.

Our wood products segment performed at a record level this quarter despite ongoing production interruptions as we worked through the Friesau construction project. We produced 116 million board feet of lumber. And as Dave mentioned, our wood products segment generated record EBITDA of almost $8 million in Q1.

In Germany, beetle-damaged wood remains plentiful and is resulting in lower log costs generally. We expect this log supply dynamic to last well into 2021. In Western Canada, pulpwood supply remains very tight. Sawmill curtailments have limited the sawmill chip supply, resulting in higher cost options being used to replace those volumes. High wood costs combined with historically low pulp realizations is pinching margins considerably.

Our annual maintenance program for 2020 has changed in order to reduce the exposure to COVID that may occur when the traditional large numbers of contractors enter the site to assist with maintenance during a shut. Our current expectation is that Stendal will take 2 short 3-day shuts in Q1 and Q4. Cariboo has deferred its 5-day shut to Q4. Rosenthal will take its typical 15-day shut in Q4. And Peace River will take a 5-day shut in Q4. Its recovery boiler rebuild shut has been deferred until Q2 2021 due to the inability of contractors being able to guarantee the availability of skilled tradespeople during the pandemic. And Celgar will take 3-day shuts in Q2 and Q4 and a slightly larger shut in Q3. In Q1, we invested $23 million in high-return projects at our mills.

We’ve also reduced our expected planned 2020 CapEx program to about $90 million to manage cash in anticipation of the reduced availability of skilled labor as a result of the pandemic. A more modest 2020 capital program will focus on the completion of the Friesau Phase 2 expansion project, along with some smaller high-return productivity and cost reduction initiatives. We also expect to commence early work on the production expansion project at Stendal, which when complete in 2021, will increase the total capacity of that mill from 660,000 tonnes to 740,000 tonnes per year.

Q1 2020 has been unprecedented in terms of operating challenges and potential market shifts. I’ve been comforted by our success in implementing our strategy, our focus on world-class assets, strong balance sheet discipline, and focus on sustainable operations, has and will continue to serve us well as we focus on optimizing our fiber handling and logistics and controlling our costs. Our balance sheet is in good shape with considerable liquidity, and continued financial discipline will contribute to shareholder value over the longer term.

As Dave mentioned, our Board has decided to reduce our dividend as a precaution, given the global economic uncertainty created by this pandemic. This reduction gives us increased financial flexibility, and we are cautiously optimistic this reduction will be short-lived.

This completes our prepared remarks. But if I can take a moment to say that despite governments beginning to take steps to reopen society, the virus is still out there and remains a significant risk. So as we say to all our employees, please, continue to keep your families, friends and neighbors safe. Thanks for listening. I’ll now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) 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 and Paper & Forest Products Analyst [2]

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David, how much do you expect softwood pulp demand to be down this year from COVID-19?

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

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Yes. That’s — it’s a real mixed bag. So maybe just look at the various grades. So I think the tissue and hygiene is going to continue to be strong, that’s our feeling. RISI is expecting — their forecast for this year, I think, is to be tissue will be an incremental 2.6 million tonnes of pulp required. On the graphics side, though, I’ve been concerned about the printing and writing side for some time here with the slowdown in economic conditions. It impacts things like magazines, flyers, certain types of packaging and so on. So on the graphics side, I think the RISI number is a reduction of about 9.2 million tonnes of pulp in 2020. But having said that, 2/3 of that number is wood containing or recycled fiber. So we’re really only talking about 3 million tonnes of pulp, of which about 25% of that is softwood, so 750,000 tonnes. Packaging, the coarser grades are down — going to be down about 1 million tonnes. This is a RISI forecast.

And then on the supply side, so far, we’ve seen a little more than 1 million, maybe 1.2 million tonnes of pulp supply has been taken off. So on a net-net right now, all good. And it’s — that’s the forecast coming out of RISI. We see it the same. Our — we’ve seen lots of paper machines taking downtime, both in the U. S. and in Europe. In Europe, for sure, there’s really no dryer capacity. So that’s not resulting in more market pulp and it’s just simply a reduction of paper grades. And as I mentioned, those paper grades are a whole combination of different finishes. When these big European — Pan-European companies take downtime at a machine, quite often, they’ll move orders to other machines. What we’re really trying to do is keep the profitable machines running and take down the less profitable machines. So for our customer base, we’re feeling reasonably positive about the rest of the year. We’re expecting it will be slow in the summer — slower in the summer, but on a net basis, should balance out.

And then I think the — what’s really going to be interesting to watch is whether any of the other pulp mills that are maybe a little more older and not as well maintained, if they can’t do their maintenance shuts, what does that look like for them in the back half of the year. So literally every pulp mill has deferred any maintenance from the first half to the second half, so that’s one issue. And then you’re going to have a lot of maintenance and challenged operations in the back half of the year, which I think could create quite an interesting dynamic for us as we go through the recovery. It’s long-winded, but there you go. Yes.

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

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That’s helpful. And then just in BC, given the scale of the sawmill curtailments, do you think we’ll get to a tipping point where we’ll see some pulp mills finally kind of permanently go away in BC, just because of the structural fiber constraints?

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

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Yes. I don’t know. I think part of the answer to that question really depends on the British Columbia provincial government. I’m starting to feel quite critical about their ability to make bold strategic policy decisions. So in the absence of a change there, I would suggest there are mills that are at risk in British Columbia. Fortunately, for us, we — our Celgar mill, we’ve had a long history of processing roundwood. This is the nonsawlog-quality logs that are harvested as a byproduct in sawmill log harvesting. So we’ve got good programs from procedures and equipment to process that. So Celgar has got a good deck of logs in front of it, which should do well for the short to medium term. How long the sawmill stay down is a question for me. If BC doesn’t do something, and they don’t seem like they are, these 4-week announcements we’ve been hearing could stretch into 6 into 8 into 10, who knows. And if it continues into the back half of this year, that’s going to be a challenge for us, as well for everybody. So we have to expect them to do something or — for the recovery to be strong and for sawmills to get back to business because the economics begin to make sense for them again.

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Operator [6]

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Your next question comes from the line of Sean Steuart with TD Securities.

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Sean Steuart, TD Securities Equity Research – Research Analyst [7]

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Following up on Hamir’s question with respect to Celgar, specifically. Can you give us an idea of what the cost differential between residual chips for that mill and the whole log chipping, what that cost differential looks like for that mill?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [8]

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Yes. That’s a good way to look at it, actually. So if you — like a — this is a hypothetical number, okay. But let’s just say your wood cost per tonne of pulp is just below $300 a tonne, like somewhere between $250 and $300. The spectrum of wood that comes into a mill is a balance of everything from your sawmill residuals, which, in our case, we might have chips coming on a belt from, either for sawmill right across the fence, that would be our lowest cost fiber. And then we come through the other sawmills in the region and some of the incremental cost is transportation. And then you move into roundwood, which is the nonsawlog byproduct of harvesting for sawmills. And depending on where those logs are, some of them were fairly close to the mill. And so there maybe a little bit more than the highest cost sawmill because you have the processing and transportation costs, and then you go right out to — you’re picking up your highest cost marginal fiber, which is maybe 100 to 120 kilometers away. And that could be in the $400 per tonne of pulp. And when you blend it all together, you get your average.

What’s happening right now is that virtually all of that saw — lower-cost sawmill residual supply is not happening. And they’re — they’ve all — I don’t think anybody has announced anything more than 4 weeks. We’ve got well over 4 weeks of chip inventory in front of the mill, including logs that we’ve already purchased. So we’ll keep going. But the question is, like how heroic do we need to be buying these higher-cost sawlogs to keep that pile going? And with where pulp prices are today, there’s not a lot of room to be heroic, bringing in higher-cost fiber. So that’s the balance we’ve got to manage here and a big, big driver of the outcome of that is going to be when the sawmills come back.

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

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Understood. And a question on the downtime schedule that you laid out, do you have the contractor crews lined up for that scheduling committed? And is there a risk that there’s potential deferrals to that schedule if social distancing initiatives remain in place? How should we think about that?

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

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Well, for really big things like the power — like the recovery boiler at Peace River, for example, like we just know that’s not feasible. So we defer that, and it’s fine. That boiler’s in good shape. This is not a safety issue. It’s just inconvenient. But given the modern nature of our mills, a lot of the things that we need to do during a maintenance shut, you can do on many shuts, and we can do with our own people. So it’s actually a bit of a silver lining for Mercer that we’ve been seeing with this pandemic is recognizing that it’s unlikely we’re going to have 500 to 1,000 contractors on-site during a shut. So we’ve been really splitting the work up and doing kind of pit stops on different areas of the mill to keep everything in good shape. So I can’t think of anything in any of our mills this year that would hold us back from operating if we were unable to get third-party contractors.

I think we could do pretty well everything ourselves and do it in smaller bites. So I don’t see any big operating risks there, particularly for us. But I wouldn’t say that for others. That’s what I meant earlier in my comments for the older mills, some of these mills need — because of the age of the equipment, they need to go down, they need to water wash and do complete inspections and quite often, a lot of remedial work, which their own resources are usually insufficient to do in a short period of time that you usually conduct these shuts. So it’s going to — for everybody — for each mill, it really depends on what’s the state of the equipment and the big pieces or the digesters and the boilers. And if you’re in good shape on those 2, and you can just defer for 12 or 18 months, then that’s easy. And if you’re not, then it’s going to be challenging for some.

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

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Last question for David Ure. You laid out various levers you’re pulling for liquidity preservation, lower CapEx, the dividend reduction and I guess an unwinding of working capital in the near term. Are there any other options in terms of tax deferrals, refunds coming, that sort of thing that we can look to for liquidity support?

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David K. Ure, Mercer International Inc. – Executive VP, CFO & Secretary [12]

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I guess, in terms of — I would say not — those — the examples that you’ve given, like tax refunds, I would say not material, no. We’re obviously adjusting — we’re taxable in some jurisdictions. And like we’re accustomed in Canada, there are certain circumstances where, if you’re paying quarterly, you can adjust those quarterly payments to match your forecast, and we’re doing that. So to the extent that we believe our taxable income will be lower for 2020, we’ll be evaluating those forecasts and modifying our quarterly tax payments.

But in terms of big material refunds, I would say, not material. In terms of working capital, obviously, we’re — it’s a balance here. We’d like to hold — there are certain operational reasons and market reasons why it’s good at times to have some working capital, for instance, having considerable woodpiles in front of the yard is good to make sure that you can keep control of your wood costs and same with — from a customer service point of view, having pulp inventories and lumber inventories that are sufficient to keep you efficient and able to meet your customer demands, that’s helpful, too. But we’re evaluating all of those things to make sure that we’re regularly doing that cost and benefits analysis, and we’ll keep sharpening up the working capital. And as David mentioned, we sharpened up the CapEx as well. We’ll keep doing that as warranted.

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Operator [13]

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Next question comes from the line of Marcus Campeau with RBC Capital Markets.

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Marcus Campeau, RBC Capital Markets, Research Division – Research Associate [14]

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With COVID 19, obviously creating a lot of uncertainty in the market here, could you just walk us through how you’re thinking about capital allocation, whether that be balancing maintenance needs, growth opportunities or even eventually returning capital?

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

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Yes. So I think it’s, as I mentioned in my opening remarks, I don’t have a crystal ball for how COVID resolves. There just seems to be a lot of pent-up energy to get back to work, get the economy going. I mean, it’s just an unprecedented time. So I’m not overly negative. I mean I think when we come out of this, we’re going to — things are going to recover very quickly. But while we’re in the middle of it, we have to be cautious, I think, because I just don’t know what the downside looks like.

So as Dave mentioned, we’ve got well over $0.5 billion of liquidity, half of that in cash, half of that in undrawn revolvers. We’re able to operate. We’re still able to generate EBITDA. We have some very attractive high-return capital projects and several maintenance things that we will continue to do, and we’re prepared for that. We have mentioned that we have not renewed our share buyback program. We can always call a Board meeting and reinstitute that on short order if we need to. But at this point in time, we’re really — and we cut our dividend by 50%.

At this point in time, it’s all about living to fight another day, maintaining our long-term strategy of creating value. In difficult times, quite often, there are opportunities. There may be some things that we will want to do. And so having as much liquidity as possible when things are very weak is, I think, a very — I think that’s a wise way to go. We’re continuing to — from a capital allocation point of view, we’re finishing the Friesau work because we see so much upside in that sawmill. It will be the largest sawmill in the world, probably one of the best margin producers as well, given that the whole wood situation and the flexibility of that mill and its access to global markets. And we’re continuing the expansion program at Stendal. We’ve ordered the 2 new digesters for that, and we’ll have that completed in 2021.

And I’ve guided, that’s not an overly huge capital expenditure considering the benefits. It’s in the $40 million range with more than half of that in offsets from the wastewater program. So it means we spend the capital, and we don’t have to pay a wastewater fee, so it’s like getting a grant for half of the equipment. So we’re still moving forward, still intending to create long-term value, but we’re being very cautious in the short term.

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Marcus Campeau, RBC Capital Markets, Research Division – Research Associate [16]

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And then maybe on pricing, many of your peers have been putting up price announcements for the month of May. What are you hearing from your customers in pricing discussions? And have you seen any notable differences by geography?

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

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Well there’s — in Q1, there’s been steady pressure across — in all markets, I would say. Yes, I don’t want to be too — it’s — there’s a lot of discussion about May right now in our markets. So I don’t want to say too much. Some of the incremental demand is coming from paper producers worried about supply risk. So there — it’s kind of like people going to Costco. You hear and you read the news that meatpacking plants might go down or you can’t get toilet paper, so everybody buys a whole bunch. And it’s a little bit like that on our industry, too.

So I mean, there’s been — I would say, almost every tissue customer has taken or asked for more than they would have otherwise been allocated. But having said that, on the printing and writing side, it’s, hey, instead of 5,000 tonnes this month, can it be 4,000. That’s the kind of thing.

So there’s — yes, how well we do on price increases in this uncertain time is, for me, I don’t know. I’m reasonably optimistic that as long as we don’t get a second or third wave, we’re going to dig out of this quite nicely in the back half of the year. But I wouldn’t read too much into $5 or $10 price increases or $5 or $10 price decreases in any particular market. It’s really a function of the different situations that all the different players are dealing with. It’s the uncertainty of supply, the slowdown in printing and rating grades, slowdowns in packaging grades, incremental supply in tissue. So it’s a mosaic out there. And I think it will be — I think we should expect to stay the course here through the next quarter. A little bit of weakness in the summer. And then as long as we don’t have a really serious problem with wave 2, the back half of the year. And my — I’m cautiously optimistic could be quite a bit better.

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Operator [18]

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Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [19]

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Can you hear me okay?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [20]

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Yes, you’re fine, Andrew.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [21]

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Okay. Excellent. We’re sheltering, so it’s kind of not sure how our connections are. So following on this prior questioners’ calls, if I could approach the shareholder return question from a different angle, which is, what milestones or thresholds are you and the Board looking at with respect to — I understand you can reinstate the buyback on a short notice. But what milestones and thresholds are you guys going to be looking to in terms of determining when you would reauthorize the buyback? And in addition, when you would reset the dividend either for an increase? And based on how you described the moderation of the dividend, would it be a gradual increase? Or would it be just a decision to reinstate to the level we were at?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [22]

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Well, I think there’s lots of different ways to approach both of those questions. And I think underpinning all of that is our confidence in the cash-generative potential of the business compared to how well the stock trades. So there’s a whole bunch of theoretical math you can do around these things. But our view is that we want to provide a dividend return to our shareholders through time, and we’re very committed to that. We want it to be a good return. And we intended, and we’ve always said that over time, we intend to continually push and increase the dividend return to shareholders. As the company grows and gets stronger and more profitable, the shareholders will be rewarded through the dividend. In times of extreme weakness, share buybacks or — there’s, I understand reasons for it. With our focus on growth and one of the reasons we’re growing is we recognize, there’s a bit of a liquidity discount in the stock. Buybacks has not been a real focus for us for that — primarily for that reason.

Another factor that I should just put out there is that for companies that want to tap into some of these government support programs and there are considerable support programs coming, very similar, I believe, in Canada anyway, be a lot like the Pulp and Paper Green Transformation Program. When it come — when governments try to stimulate the economy and they’re looking for shovel-ready projects and they want to get people working, there’s going to be support programs for that. And it’s kind of hard to apply for that kind of stuff when you’ve been buying back your stock, right? Like why would they give you a hand out when you’re buying back stock. So I just don’t want to put Mercer in a position where we can’t tap into some of that stuff, and it’s not. So there’s a whole bunch of these different factors.

What it comes back to when we move it back up again, Andrew, I shouldn’t pretend that I have control over that. This will be a Board decision. And we’ll debate all the different factors and our levels of confidence at the appropriate times. But the Board will be very focused on this question throughout this whole pandemic.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [23]

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Sure. And I understand your comments on the buyback and just to flesh out a little bit more on the dividend because you sounded as if you were talking of the dividend as something that might be stock-price based? And if that’s the case, does that mean you’re yield targeting the dividend?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [24]

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No we’re not. No. We’re all very happy. We were in excess of a 6% yield, and we’re very proud of that. But it’s just when you can’t see the future, and you’ve got — when you measure risk, we just thought it better to knock it down to closer to that 3% range, right?

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [25]

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So then– so in terms of the dividend, forgetting about the buyback, you’ve touched on that clear enough, I understand. In terms of the dividend, in terms of milestones or thresholds, it sounds as if its visibility and if it were — there were visibility, would that mean a reinstatement or a gradual increase from present levels that the Board would have in mind or that’s been kind of the discussion about or…

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [26]

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I understand your desire for specificity. But I don’t want to comment. I don’t know what we’ll do. It would be incorrect of me to guide you in any way.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [27]

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All right. Let’s move on. So then in terms of the CapEx, can — and when you elaborate then on the CapEx reduction, are there any particular projects that you are canceling or pushing back? Or is it just across the board?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [28]

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Well, we went through every mill, obviously. David leads these discussions. We have — and our Chief Operating Officer and I support him in that. And really, what we’re looking for is let’s acknowledge that we’re going to reduce. We’re being prudent. But let’s evaluate each individual project on its merits. What project can be deferred that doesn’t create risk for the company? For those that are high return, what are the superior returns, what are the most important things to do strategically. And there’s a lot of different factors that come in. And I’ll be honest, we’ve deferred a lot of really attractive high-return projects that don’t cause any risk to the business, by doing that don’t impact the strategic direction of the mill, and we’ll be able to bring back when liquidity or when pulp pricing improves.

We don’t have any big maintenance issues that we’re not addressing. We have — part of our strategy is to maintain our assets in good shape throughout the cycle, and we’re not taking any risks on that front. So a different company might have said, let’s go down to 50 or 40, but we’re — we didn’t want to stop. And I said this when we did our bond last year, we don’t want to stop or slow down the Friesau work, and we don’t want to stop or slow down the Stendal work. And similarly, a much smaller project, but the wastewater project at Rosenthal is also very important for that mill in terms of filling a project and having a government wastewater fee offset to provide the capital for it. So it’s short term liquidity, but it’s a freebie. So we’re maintaining those types of things.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [29]

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I’ve asked in the past, but I don’t know if I need to ask anymore. Is the DMI integration complete or what remains?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [30]

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Yes. It’s — well, it’s always a work in process. Our culture is continuous improvement. So we’re not finished yet, but if I was going to summarize how it’s gone, I’d say it’s been fantastic in terms of a cultural fit, great team up there. They think of themselves as part of the Mercer family now. They’re like us. They’re candy people. They were just really, really, really pleased with that acquisition with the team we’ve got there. And there’s — I think on the marketing side, we’re continuing to unwind some of the arrangements that the previous owners had put in place and running our own program. On a strictly accounting systems side, there’s still work to be done in terms of creating more efficient systems for them and getting them on to the Mercer enterprise-wide system. So that work is ongoing. And a little bit of it’s been deferred because of COVID. Makes it difficult to do some of these things. But yes, it’s a Mercer mill now with Mercer people, the cultural fit is great and all going fine.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [31]

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But the rest of the synergies have been created?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [32]

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Well, like I say, it’s a work in process. So we’ve optimized the wood costs, like the big chunk of what goes on in a pulp mill is wood cost. And we’ve been studying — we’ve optimized what they have, and now we’ve been studying, what can we do differently? What can we do better? And there are opportunities, high-return capital project opportunities to continue to lower the wood cost, but those are on hold until we have a better line of sight on the recovery. So we’re not finished. We’ll never be finished, but we’re in great shape, and there’s still lots of good questions.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [33]

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It sounds like the big stuff is done, I don’t need to ask that regularly. So that’s the main thing, I was getting off the plate here. I was late to the call, did you break out what the net currency effects were for the quarter?

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

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I think we had some of that in our Q, but maybe Dave could speak to that for a minute for you.

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David K. Ure, Mercer International Inc. – Executive VP, CFO & Secretary [35]

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Yes. We had about — so the U.S. dollar strengthened considerably during the quarter against both the euro and the Canadian dollar. And we estimate that, that had a positive impact to EBITDA of about $14 million.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [36]

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Okay. In the prior call, not too long ago, we talked about the impacts of the pandemic in China being primarily transport and logistics around the country, with their mills otherwise kind of up and running, although demand might have been constrained. Where do things stand in China and business in China for the company, are the transport and logistics issues now behind us? Or what remains as major hurdles other than we’ll call it just net demand?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [37]

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Yes. I think things have opened up a lot. On the last call, we were describing the challenges of simply for a truck driver to try to get from A to B. And I think most of that logistic constraint has been alleviated. The other piece is the availability of containers and shipping capacity. I think at the beginnings, there was a lot of tonnage — shipping tonnage sitting over in Asian waters, not wanting to come back empty, not having cargo to bring back. So there was, what we call, blank sailings. So there was just a lot of sailings that didn’t happen. And that now has — is unwinding. These ships are coming over with material. They’re bringing containers with them, there’ll be empty containers to go back. So it is probably 2 or 3 more months to unwind to the point where container prices come back down to normal, and that’s happening as we speak. So I think that hole that was like a brick wall in front of us for a little while there, I think that’s really resolving itself.

While I’m on that topic, I think in Europe, it’s a bit of a similar story, only not as dramatic. I mean there was a time there where you really couldn’t cross the border between Germany, Poland or Czech. The queues were just crazy. And a truck driver would have to sit 8 hours to cross the border. That’s all resolved. They’ve got green and blue lanes now, and freight is moving freely throughout Europe.

So we’re not having any — we’re not really having those kind of challenges anymore.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [38]

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Great. And then lastly, for me, given the pandemic and obviously the inability to travel and the cancellation of many conferences and all, what are the company’s plans to continue to reach out to new and existing investors in the coming months as well as new and existing customers?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [39]

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Yes. Well, on the investor side, I think we’ll be participating more and more in some of the bank-led virtual conferences. We’ve got a couple of those lined up now. Dave can speak to those. And we’re always available. We’re not target marketing on the IR side at the moment. We’re all pretty busy, but we will do our best to tell our story. While I’m on telling the story, take a look at our new website for those listening if any of you haven’t had a chance to see our new website. It’s — we put a lot of thought into it. And Dave and I have our own voice in it so that you can hear how we think about a lot of these things. So I encourage you to have a look at that. There’s quite a bit of new ESG material in there as well. As far as customers go…

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [40]

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Yes. It’s very impressive. I saw that.

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [41]

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Thank you. Yes, as far as customers go, Mercer is a leading global producer. We — they all know us and our teams all know them. There’s great open channels of communication within the marketing sphere. And so COVID is not — I mean, as much as our guys like to travel, and it’s important to maintain a relationship, there’s — we’re all learning to work from home or from remote locations. We use — we’re on the Google platform. So we have Google Hangouts, Google Meet. It’s very easy for us to see each other face-to-face, see our customers. Andy, if you had — if you wanted to do a Zoom or Google Meet, I’d — we’d love to have a meeting. If that’s the – I think that’s what the future is going to be.

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Andrew Evan Shapiro, Lawndale Capital Management – Founder, Chairman, President, Portfolio Manager, and Managing Member [42]

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Yes. It’d be nice to — well, the virtual conferences — yes, the conferences you’re attending for investor purposes now virtually would actually enable us to participate or listen in to more than what we could have otherwise traveling around on short notice to wherever you’re going — you’re doing your things. So what are the ones that you already scheduled at?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [43]

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Dave, why don’t you give Andy just the next one, and we can line that up.

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David K. Ure, Mercer International Inc. – Executive VP, CFO & Secretary [44]

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Yes. And, actually, it’s a little bit too early because we don’t have a pin down yet the date, but it looks like it’s going to be early June. So I think we’ll be doing 2 of them in early June. But maybe what I can do is we’ll make sure we get that posted on our website once those materialize.

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [45]

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We could also say open invitation to anybody who wants to do a face-to-face, we are very happy to do that.

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Operator [46]

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Your next question comes from the line of Andrew Kuske with Crédit Suisse.

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Andrew M. Kuske, Crédit Suisse AG, Research Division – MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [47]

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David, you did a good job of breaking down all the categories of unused demand and giving us a lot of granularity there. But maybe just a broader question, it’s a tricky one. But it’s to the degree we’ve seen prices move upwards, and they’ve moved up modestly. What part of that is really supply related, where we’ve seen some downtime and just some issues in operating some of the mills globally versus just underlying demand changes?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [48]

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Yes, good question. I — it’s all psychological in the market, is my view. And so I think there’s real demand pickup on the tissue and hygiene side. And I think COVID is going to change somehow that’s permanently even. What I’m thinking about here, we’ve been talking a lot about towel as a grade. And in my working career, I can still remember when diapers were not a thing in China. And the industry, like the developed economy industry, took a campaign to Asia about diapers. And I mean they just exploded, and it was a very successful thing. And as that economy has evolved, being now 1/3 of all fiber demand, their towel consumption is minimal. Like I think it’s below 5% compared to maybe a 30% or 35% of end-use fiber in the developed economy. So when you think about hygiene, the aerosol impacts of COVID, like why would you use a Dyson hand dryer, which is what you see all throughout China is used, blow your germs all over the place to dry your hands off. So industrial paper towels, paper towels for wiping up in the home, just having in your pocket when you want to push an elevator button, all those kind of things. I think there’s some real big potential shifts in pulp going into hygiene products. I think the graphics side is — a lot of that demand loss is probably permanent. And it’s — people are not going to travel as much. Most of the magazines are happening in airports, like that’s not — I don’t see that coming back anytime soon. So on the demand loss side, a lot of that’s going to be wood containing. So that’s the non-chemical pulps. And big shifts in the recycled fiber markets as well. So net-net, I feel I’m pretty positive about our — about chemical pulp going forward for all these reasons. It’ll be bumpy getting there. A lot of how we get there is going to depend on the psychology in the market, like is there short-term supply risks that customers are thinking about or customer thinking about taking a machine down and not wanting to have too much pulp in inventory when they do that, those kind of opposing factors will drive it.

Globally, as I’ve mentioned, the big picture, I think we should not expect as — I don’t think there’s really much downside at all on pricing for either hardwood or softwood. Like I just don’t see that. Yes, maybe $5 or $10 up or down could bumble around based on how different markets and the participants feel about the supply/demand tension at the time. But if you get any kind of serious price reduction, there would be all kinds of capacity globally that would shut down supply capacity, I’m thinking about. And as soon as things start to open up, I think there’s a lot of pent-up demand on the packaging and on the specialty grades that are temporarily on hold that will come back with a vengeance. So I think the upside is much greater than the downside. Is that clear?

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Operator [49]

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Your next question comes from the line of Adam Zirkin with Knighthead.

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Adam Zirkin, Knighthead Capital Management, LLC – Partner [50]

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David, David Ure mentioned early in the comment that the crisis was causing you to change the way you operate, and you didn’t really speak to that too much. You spoke about it with respect to maintenance and contractors and social distancing, but not in any depth beyond that. So I’m wondering sort of how has the operations of the mills changed? Because obviously, despite those changes, right, they’re running well. And are any of those changes permanent? And are there any opportunities to utilize things learned in the crisis, to say, reduce the cost structure long time or improve efficiencies long term?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [51]

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Yes. Thanks, Adam. What a great question. There’s all kinds of changes, and there’s a lot of silver linings in all this. So you just maybe talk about a few examples. So very early on, we recognized that things are coming at us like a freight train. So we initiated our crisis management response plan and met as a senior team and recognized that we needed to react very quickly. So we have a team of the top 40 in the company. We meet every morning. For about 5 or 6 weeks, we met every morning at 7:15 on a Google Meet call. And we just discussed all the different things we were hearing about the pandemic, what the stats were, we had our health and safety guys scouring websites looking for information, so that we could see what was coming and we started adopting practices to keep our people safe. And some of the — so for example, the risks that you — that exist in these big industrial facilities that could take you down would be things like, if you had an outbreak in a canteen. It just takes one person in a canteen who has fed 150 people during the day, for the health authorities to say you’re going to have to shut down for 14-day quarantine until we know how wide the spread is going to be.

So we changed all our procedures in our canteens. Truck drivers coming in to pick up finished goods or bringing in loads of hog fuel or chips. So we have different procedures, plexiglass windows, scanners instead of paper forms, social distancing and policing of that, heavy, heavy PPE policy initiatives to ensure people with all the right kind of stuff. And then we started moving into changing our shift configuration. So if you have a big — look, if you imagine, you’ve got a big operating team and you’ve got a big maintenance team. Instead of 2 teams of 150 people, we break them into 14 smaller teams. And they work at different hours of the day, and they don’t intersect in the middle. And one of the real interesting things about that is, we have much more consistent coverage, like we can have people that’ll work 3 on, 3 off; 3 on, 3 off; 4 on, 4 off user days, right? You have 4 pods doing the same thing. You’ve almost — you’ve got 24/7 coverage on maintenance, whereas we used to have weekends uncovered and we’d have weeknights uncovered.

Now we’ve got a morning and an afternoon shift that gives you coverage to 10:00 or 11:00 o’clock at night. And you’ve got that — you’ve got the security that if you do get a contagion, somebody makes a mistake and infects his coworkers, you lose a pod, you don’t lose the whole team. And we also — we risk assess every — our guys are understanding, they risk assess every procedure that they need to do, whether it’s changing a pump or a valve or what have you. If they need to work in close proximity with another individual, then it’s heavy PPE. It’s really tight properly fitting N-95 masks, face shields, hazmat suits, the whole 9-yards, we’re just extremely careful. And so far, it’s been working.

So on the shift side, we could never have done any of this kind of shift adjustment historically. I mean, it’s just human nature, you like what you got. We don’t want to do anything differently. In a crisis, anything’s possible. And it’s surprising, a lot of them are starting to think well, how long are we going to stay like this? And they want the certainty so they know about their vacation times in the summer and so on. So we’ve indicated, well lets — we’re just — we’ll just keep tweaking as we learn more. But so far, it’s working. I think it’s mitigating risk, and it’s giving us more coverage. And we’re actually getting a lot more maintenance done with our own people as opposed to having to bring in others from the outside. And it’s just — it’s got more hours on the tools with our own people as a result of these changes in the shifts, so. I’ll stop there, Adam, yes.

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Adam Zirkin, Knighthead Capital Management, LLC – Partner [52]

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Look, obviously, the safety is paramount, but are there financial implications to that as well?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [53]

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Well, the biggest one is that if you’re doing work with your own workforce, you’re not spending money on contractors. And if I were going to say the single largest cost reduction initiative in Mercer today is the benefit of recognizing we can do so much more ourselves and really limit these large 15-day, 1,000-person contractor maintenance shuts. I mean you have to have a major shut periodically. Historically, they’ve been 12 months, as we’ve talked. Mercer has been moving to the 18 month and possibly even 2 years in certain mills. And this whole change in the shift structure and the way we do maintenance and the inability to bring in outside contractors is just accelerating our move down that path. It’s changing the way our people think about their responsibility to the company and to the mill as well. In our company, it is just that we have got a can-do spirit where everybody is doing whatever they need to do to help us be successful, and they’re proud of that. And they’re proud of their safety values as well. And so digging in and doing work that we used to have contractors do is something we’re very prepared to take on. And I’m really encouraged by it.

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Operator [54]

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Your next question comes from the line of DeForest Hinman with Walthausen & Company.

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DeForest R. Hinman, Walthausen & Co., LLC – Research Analyst [55]

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Can you hear me?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [56]

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Yes, DeForest, loud and clear.

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DeForest R. Hinman, Walthausen & Co., LLC – Research Analyst [57]

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Okay. Great. You mentioned earlier in the call about, I think your term was being a hero on the Celgar side with taking higher-cost log inventory. And then later on in the call, you talked about pricing, you didn’t think it would be down too much. Could you see a scenario where log pricing remains elevated in British Columbia? And then end-market pricing and softwood remains where it is, and there’s a potential that, that mill could shut? Or would you run it, even with that environment?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [58]

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Well, no, I certainly do see the risk, and I’ve been quite vocal here in British Columbia with government. And our profitability, our EBITDA is not coming out of the Canadian mills today. It’s really our European and our energy businesses. And the Canadian mills, while in a normal market, are great mills. With what’s happening with wood costs right now, are more or less breakeven. So if the situation deteriorates, we’ll unfortunately, make the right decision to minimize the impacts of that unfortunate circumstance. To date, you saw a lot of — sorry, DeForest, just to remind you, we’ve got — the average cost on the wood in front of the mill is already spent. The decisions that we’re having to make is like would we keep the scales open and allow $450 wood to come to the mill. And I’m saying today, no, I’m not going to do that. So if we’re burning through our pile and there’s no sawmills running, then unfortunately, we would have to take that mill down for a period of time.

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DeForest R. Hinman, Walthausen & Co., LLC – Research Analyst [59]

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Okay. And then in terms of the union structure at the mill, is that going to be an issue if we had to do a shut? And is the union able to relay this message in any way to the government about what’s going on as well?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [60]

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Yes, yes. We are very well aligned with our unionized employees. It’s a tremendous workforce, and they’re all on the same team. So we’re all, like in Noah’s Ark, we’re doing everything we need to do together, and we’ve seen all kinds of flexibility and engagement. And on the lobby front, our union executives support us, our mayors and MLAs and community chambers of commerce leaders, we all are putting pressure on this provincial government to do something different. But so far, we have been unsuccessful. But recovery of COVID would change everything again. But once the sawmills come back, things will normalize.

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Operator [61]

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(Operator Instructions)

Your next question comes from the line of Austin Nelson with AIG.

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Austin Nelson;AIG, [62]

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I just kind of wanted to go back and recognizing that you don’t add to this and it’s very hard to have any outlook, but you had kind of walked through, you tend to think that we’re at a bottom in pricing. You walked through the puts and takes on demand and some supply coming down and maybe summer is a little bit weaker, kind of your 2Q is going. And then you’d expect a back half ramp, assuming we don’t have a second wave of coronavirus. If that’s the case, if I’m just kind of running back of the envelope math on, the dividend cut, the reduction in CapEx and then how the working capital will move, is it fair to think that things progress the way you think they’ll progress, that you’ll actually generate cash this year? And I understand you’re being prudent around liquidity, but it looks like just looking at how the quarter went, that depending on working capital swings, you shouldn’t really have any problems with a cash burn and could potentially generate positive cash flow. Is that correct?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [63]

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Well, it’s a — that’s a question that’s asking me directly my opinion on what the back half of the year is going to be. And I’m not smart enough to understand how this pandemic unwinds. But I can point to the cash-generating potential of this company and these assets. It’s a great suite of assets that we own, with a great fiber supply under normal operating conditions. So it’s really — I don’t want to be — I don’t want to pretend that I’m clairvoyant. I don’t know how this pandemic unfolds. I’m very nervous about it. I’m very nervous about some of the things I see about the energy and effort that’s going into opening up the economy and without all the testing in place in certain geographic locations. So it’s — I’m just going to leave it. It’s unknown. I don’t know what it looks like in the back half of the year, and I don’t want to be guessing or misleading. And we’re doing everything we can in the company to be as cautious and prudent as we can under these conditions.

Sorry for that answer, but that’s the best they can do.

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Austin Nelson;AIG, [64]

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That fair. No, I understand that. I understand. And then my other question was just, I understand it makes a lot of sense that the CapEx comes down this year just because it’s hard to actually get it done. If we’re thinking about — and I also understand that it kind of depends on how things progress with the pandemic. But in the event that you are comfortable having the crews come in, in ’21. Is it fair to think that we — you’re essentially deferring it and we see a CapEx spike in ’21? And I guess, is it just a question of also how the market is and you’re willing and you have the cash flow to accelerate some of those high-return projects versus just the actual maintenance that you have to continue doing?

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [65]

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Yes. I think we’d approach that is we were very focused on growth. Investors who’ve been with us for a while, heard me talk about our aspirations for a sawmill, like a super mill at Stendal. We believe there’s — the wood supply is there. And with our logistics, superior logistics, the scale of that pulp mill and its economics, having a sawmill there for the long term would be fantastic and would really, I think, underpin the whole — that pulp mill with the sawmill inside it, it can outcompete anything. And — so that’s just priority.

And we have a similar initiative in Peace River where we believe we’ve got enough wood to build a good-sized sawmill — softwood sawmill there or maybe even a combination softwood/hardwood. And we’ve done a lot of the strategic work and quite a bit of the preliminary engineering work on these things so that we can speak to the various agencies and communities that we need to, to keep moving those projects forward. And so those are 2 examples of organic growth opportunities that when time is right, we’ll be able to move forward on. Stendal is moving forward. Friesau’s moving forward. And then there’s the M&A piece, and we are always — we’re spending a lot of time looking at things. So yes, there will be lots to talk about in the coming years.

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Operator [66]

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There are no further questions at this time. I would now like to turn the call back over to the speakers for any closing or additional remarks.

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David M. Gandossi, Mercer International Inc. – President, CEO & Director [67]

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Okay. Thank you, Samantha, and thank you all for joining our call. As always, Dave and I are — will be able to talk any time. And in fact, if anybody wants to do a Zoom or a Google Meet, just see each other, we’d be very happy to do that. So — and failing that, we look forward to speaking to you all again on our next earnings call in July. Thanks, again, and bye for now.

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Operator [68]

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This does conclude today’s conference call. You may now disconnect your lines.