Mercer International Inc. (NASDAQ: NASDAQ:MERC) reported a mix of positive and negative financial outcomes in its third-quarter earnings call for 2024. President and CEO Juan Carlos Bueno and CFO Richard Short presented an operating EBITDA of $50 million, a notable increase from the previous quarter's $30 million. Despite reduced maintenance downtime improving financial performance, the company faced a consolidated net loss of $18 million, albeit an improvement from the $68 million loss in Q2. The pulp segment showed strength with $55 million EBITDA, while the Solid Wood segment recorded a negative EBITDA of $2 million. The company remains optimistic about future demand for its products, particularly mass timber, despite current economic pressures.
Key Takeaways
- Operating EBITDA rose to $50 million in Q3 from $30 million in Q2.
- Consolidated net loss improved to $18 million from a $68 million loss in Q2.
- Pulp segment EBITDA was strong at $55 million; Solid Wood segment struggled with a negative $2 million EBITDA.
- Softwood pulp sales increased slightly, hardwood prices dropped.
- Total production slightly decreased to 416,000 tons, with 449,000 tons sold.
- The company announced a quarterly dividend of $0.075 per share.
- Mercer International anticipates higher lumber prices and strong mass timber segment performance.
- Unplanned downtime resulted in a loss of approximately 71,000 tons of pulp production.
- The company holds 35% of North American mass timber production capacity with a $33 million order file.
- Pallet prices are low but expected to recover as the economy improves.
- Strategic capital expenditure projects are underway to boost production capacity and efficiency.
- The company is focused on sustainable products and carbon reduction targets.
- Net debt to EBITDA ratio target is approximately 2.5 times, with asset sales in progress for debt reduction.
- Management is monitoring potential impacts from U.S. import tariffs.
- Market dynamics show improvements in Europe and growth in the UK, reducing U.S. market dependency.
- Mercer International has managed to keep fiber costs flat and secured long-term contracts with U.S. wood suppliers.
- The majority of the company's business consists of contracted volumes with full-capacity mill operations.
Company Outlook
- Expectation of modestly higher lumber prices due to improved demand and reduced supply.
- Targeting capital expenditures of $95 to $120 million for 2024, with a similar outlook for 2025.
- Anticipation of strong operating results in the pulp segment for Q4 and into 2025.
- Cautious outlook for the solid wood segment due to economic pressures.
Bearish Highlights
- Solid Wood segment recorded a negative $2 million EBITDA.
- Hardwood prices fell, resulting in a CAD 4 million non-cash inventory impairment.
- Unplanned downtime led to a significant loss in pulp production.
- Weak lumber and pallet prices affected overall performance.
Bullish Highlights
- Strong sales in the mass timber segment, with a $33 million order file.
- Optimism for long-term demand for mass timber.
- Pulp segment maintains a significant price gap over hardwood.
- Mass timber market growth at over 20% annually with a current order book of $33 million.
Misses
- Consolidated net loss of $18 million, despite being an improvement from the previous quarter.
- Total production down slightly from the previous quarter.
Q&A Highlights
- Management addressed concerns about potential U.S. import tariffs and a strike at BC ports, expressing confidence in their contingency plans.
- The company's business primarily consists of contracted volumes, ensuring stability.
- Next earnings call scheduled for February.
Mercer International's Q3 2024 earnings call showed resilience in the face of market challenges. The company's strategic focus on mass timber and sustainable products, coupled with prudent financial management, positions it to navigate current economic conditions while looking toward future growth opportunities.
InvestingPro Insights
Mercer International's Q3 2024 earnings report reveals a company navigating through challenging market conditions, as reflected in the latest InvestingPro data and tips. The company's market capitalization stands at $435.86 million, indicating its current valuation in the market.
One of the key InvestingPro Tips highlights that Mercer is "quickly burning through cash," which aligns with the reported consolidated net loss of $18 million in Q3. This cash burn rate is a concern that investors should monitor, especially given the company's significant debt burden, another point noted in the InvestingPro Tips.
The company's revenue for the last twelve months as of Q3 2024 was $2,025.45 million, with a revenue growth of 6.65% in Q3 2024 compared to the previous quarter. This quarterly growth is a positive sign, contrasting with the overall revenue decline of -3.84% over the last twelve months. These figures provide context to the company's financial performance discussed in the earnings call.
Another crucial InvestingPro Tip indicates that Mercer "suffers from weak gross profit margins." This is reflected in the gross profit margin of 11.67% for the last twelve months as of Q3 2024. This low margin could explain the challenges faced by the Solid Wood segment, which recorded a negative EBITDA of $2 million.
The dividend yield of 4.6% as of the latest data point is noteworthy, especially considering the company's announcement of a quarterly dividend of $0.075 per share. However, investors should weigh this against the company's profitability challenges, as InvestingPro Tips suggest that analysts do not anticipate the company to be profitable this year.
It's worth noting that InvestingPro offers additional insights beyond these points, with 7 more tips available for Mercer International, providing a more comprehensive analysis for interested investors.
The company's P/B ratio of 0.83 suggests that the stock might be undervalued relative to its book value, which could be of interest to value investors considering the company's long-term potential in the mass timber market.
These InvestingPro insights complement the earnings call information, offering a broader perspective on Mercer International's financial health and market position as it navigates through current industry challenges and positions itself for future growth opportunities.
Full transcript - Mercer International Inc (MERC) Q3 2024:
Operator: Good morning, and welcome to Mercer International's third quarter 2024 earnings conference call. On the call today are 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, Josh. Good morning, everyone. Thanks for joining us today. We will begin by touching on the financial and operating highlights of the third 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 we have attached to the Investors section of our website. But before turning to our results, I would 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 would 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 $50 million compared to Q2's EBITDA of $30 million. The improved quarter-over-quarter results were driven by fewer days of planned major maintenance downtime, as we had 20 days in Q3 compared to 37 days in Q2. The benefit of fewer planned days of downtime in Q3 was partially offset by several unrelated and unplanned events that significantly reduced our pulp production in Q3, as well as unfavorable foreign exchange movements and weaker hardwood prices. Juan Carlos will have more to say about our unplanned downtime in a moment.
The pulp segment contributed quarterly EBITDA of $55 million, and our Solid Wood segment had quarterly EBITDA of negative $2 million. You can find additional segment disclosures in our Form 10-Q, which can be found both on our website and the SEC's. The third quarter is typically a period of weaker seasonal demand, but softwood pulp markets remain steady, resulting in stable prices. Our Q3 softwood pulp sales realizations were $814 per ton compared to $811 per ton in Q2. The North American NBSK list price averaged $1,762 per ton in the current quarter, an increase of $65 from Q2. The benefit of this increase was largely offset by lower price realizations in China, where the Q3 average MBSK net price was $771 per ton, down $40 from Q2. In Europe, the MBSK list price averaged $1,573 per ton in the current quarter, a decrease of $29 per ton from Q2.
Hardwood prices in China decreased due to new capacity coming online in 2024, which will require some time to be absorbed in the market. Q3 hardwood sales realizations were $632 per ton, a decrease of $69 from Q2. The average price gap in China between softwood and hardwood pulp increased this quarter to about $140, with the average Q3 net eucalyptus hardwood price at $635 per ton, down $100 from Q2. The North American MBHK average Q3 list price was $1,067 per ton, up $30 from Q2. Overall, the weaker hardwood pulp price outlook resulted in us recording a CAD 4 million non-cash inventory impairment in Q3 against hardwood fiber inventories at the Peace River Mill.
Today, pulp sales volumes in the third quarter, when compared to the second quarter, increased slightly to 449,000 tons, with roughly 85% of this total being softwood pulp. Total production volume in the third quarter was 416,000 tons, down slightly when compared to Q2, as a series of unrelated production offsets in the current quarter negatively impacted production by approximately 71,000 tons, offsetting the positive impact of fewer days of planned downtime in the current quarter. In Q3, we had a total of 20 days of planned annual maintenance downtime at our mills compared to 37 days in Q2. In the current quarter, we estimate the planned downtime adversely impacted our EBITDA by approximately $18 million, a decrease from the Q2 impact of about $60 million. In Q3, we had no planned downtime, but as previously announced, we have incurred 12 days of unplanned downtime in Q4 at our Peace River Mill.
For our solid wood segment, realized lumber prices decreased slightly as lower prices in the U.S. market were mostly offset by higher prices in Europe. Overall, in Q3, lumber markets remained weak. The random lengths U.S. benchmark for Western SPF 2 and better average price was $366 per thousand board feet in Q3 compared to $386 in Q2. Today, that benchmark price for Western SPF number 2 and better is around $405 per thousand board feet, which represents about a 21% increase from the beginning of Q3. For Q4, we are expecting modestly higher lumber prices in the U.S. and European markets due to stronger demand and reduced supply. Lumber production for Q3 was 122 million board feet, up 10% from Q2 due to fewer planned maintenance days in Q3. Lumber sales volumes were 109 million board feet in Q3, down 7% from Q2 due to the timing of sales.
Our consolidated electricity sales volume totaled 205 gigawatt hours for the quarter, down about 14 gigawatt hours from Q2 due to plant maintenance work at the freeze on the freeze-out turbine. Pricing in Q3 was flat compared to Q2 at $91 per megawatt hour. In Q3, both our pulp and solid wood segment fiber costs were flat compared to Q2 as supply remained stable. Production for our Solid Wood segment's mass timber operations was strong in Q3 at 10,000 cubic meters as we completed two of the largest mass timber projects ever undertaken in the U.S. Foreign exchange negatively impacted our operating income when compared to Q2, primarily caused by the impact of a weakening U.S. Dollar on our U.S. Dollar-denominated receivables at Canadian and German mills. We reported a consolidated net loss of $18 million for the third quarter, or $0.26 per share, compared to a net loss of $68 million or $1.01 per share in Q2. We consumed about $24 million of cash in Q3 compared to about $11 million in Q2. Our net working capital, excluding non-cash adjustments, was higher in Q3 by roughly $36 million, and we borrowed an additional $20 million on our revolving credit facilities. At the end of Q3, our liquidity position totaled $554 million, a $26 million decrease from Q2, comprised of $239 million of cash and about $315 million of undrawn revolvers.
And then you may have seen in our recent press release, but I wanted to highlight that this week we have reduced the principal balance of our senior note debt by $100 million. We did this by issuing $200 million of additional 2028 senior notes using the proceeds and cash on hand to redeem $300 million worth of 2026 senior notes. The new 2028 senior notes were issued at a price of 103% principal amount for a yield to worst of roughly 11.6%. In completing this transaction, we have also extended our maturity on $200 million of our senior notes by two years. Finally, our Board has approved a quarterly dividend of $0.075 per share for shareholders of record on December 18, for which payments will be made on December 26, 2024. That ends my overview of the financial results. I will now turn the call over to Juan Carlos.
Juan Carlos Bueno: Thanks, Rich. In Q3, our operations resulted in a $20 million EBITDA improvement over Q2. However, we had higher expectations. Unplanned and unrelated downtime at a couple of our mills significantly reduced our operating results. We estimate that the negative EBITDA impact of this downtime was about $20 million. I will have more to say about this in a moment. I am pleased to note that within our solid wood segment, our mass timber business had another strong quarter, generating revenue and margins consistent with what we accomplished in Q2. With regards to our Torgo operation, although our pallet business is still struggling under the weight of a weak European economy, we are beginning to realize certain synergies which are benefiting our pulp business. When we purchased Torgo, we estimated we would be able to achieve about $16 million annually. At the end of Q3, we had realized almost $5 million of synergies related to fiber optimization that are showing up in our pulp mills results, and we expect to achieve about $8 million in synergies by the end of the year. Once Torgo's lumber capacity is fully ramped up, we expect our synergies to increase, and we continue to believe that $16 million of annual synergies is achievable.
As Rich highlighted, we recently completed the refinancing of our 2026 senior notes. I am pleased to have this behind us, and that we were able to reduce and by $100 million. However, we recognize there is more work to do on this front, and consequently, debt reduction will be an important focus of our capital allocation strategy going forward. In Q3, we invested roughly $27 million in our operations. As previously announced, our planned 2024 capital spending is expected to be between $95 and $120 million. You will recall that last quarter, we restarted both our Torgo lumber expansion project and the Spokane sorting line project. Both of these projects will provide significant value added and were originally contemplated as part of our investment strategy for each of these mills. Looking ahead to 2025, we expect to target a CapEx spend similar to the 2024 range. We will continue to prioritize maintenance of business, environmental, and safety-related CapEx.
Turning to the pulp markets, softwood continues to hold strong. We believe that demand for softwood will remain steady in the midterm, which, when combined with reduced supply, will create upward pricing pressure in most markets late Q4 or early Q1 2025. Conversely, hardwood pricing weakened in the quarter and appears to have landed at a floor price of around $550 in China. The permanent closure of NBSK mills in the last two years, the temporary curtailments happening today due to reduced fiber in certain regions, along with unplanned downtime, are all creating tightness in the NBSK supply-demand dynamics. Looking forward, we believe that the significant differences in the supply-demand fundamentals for both softwood and hardwood pulp will drive the price difference between these two grades to levels well beyond historical norms. Currently, the net price difference in China is about $230 per ton, while historically, this price difference is closer to $100 per ton. We believe this larger-than-historical price difference will be with us well into 2025. As a reminder, softwood sales volume represents roughly 85% of our annual sales.
Rich noted that we lost approximately 71,000 tons of pulp production in Q3 due to unplanned downtime. This was a lost opportunity for us given where pulp prices are today, but I think it is important to note that this unplanned downtime was spread across our Peace River, Stendal, and Celgar Mills and was all unrelated. At Stendal, we lost about a week of production due to a supplier's error when installing new pulp cutter equipment. We have recently completed the root cause analysis for Peace River's digester issues, which concluded the unplanned downtime was related to the mechanical failure of a hydraulic motor that ultimately led to the digester being plugged. Our mills are largely complicated facilities, and maintenance downtime is a reality, but it was unfortunate that this all happened in the same quarter. As always, our team is applying the learnings from these incidents as we move forward to avoid them from repeating themselves. We do not have any major maintenance planned in the fourth quarter, but we have already incurred 12 days of unplanned downtime in Q4 related to Peace River's digester repairs. We have not finalized our full 2025 planned maintenance schedule, but we do expect Celgar to take a 17-day shut in Q1 2025 that will include the final tie-ins for their wood room project.
As previously mentioned, our solid wood segment results benefited from strong mass timber sales in Q3 as we completed two very large projects Rich was referring to earlier. The strong margin realized in Q3 highlights the potential of this business. Despite it operating on just one shift, and despite mass timber's good results, our overall solid wood segment was held back due to the impact of weak lumber and pallet prices. In Q3, we saw some small pockets of lumber price improvement in Europe, while the U.S. market weakened slightly. High interest rates globally continue to weigh on housing starts and construction in general. We expect Q4 lumber pricing to moderately improve in the U.S., as we believe the recently announced lumber production curtailments are starting to create some pricing tension. Similarly, we expect modest upward pricing pressure in the European market. Any meaningful long-term improvement in either European or U.S. markets will be dependent on improved economic conditions, which we expect will be led by near-term interest rate reductions that will end up fueling a recovery in the construction industry in the latter part of 2025.
We continue to believe that low lumber inventories, the large number of sawmill curtailments, 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. In Q3, 43% of our lumber sales volume was sold in the U.S., as we continue to optimize our mix of products in target markets to current conditions. Today, our mass timber order file sits at about $33 million. We continue to receive many inbound project inquiries and are finding developers are taking their projects to the point of being ready to execute once the interest rate environment improves. Economic stability will meaningfully improve the short-term demand for mass timber. In addition, we remain confident that the environmental, economic, and aesthetic benefits of mass timber will allow this building product to grow in popularity at a similar pace to what we have seen in Europe. We are well-positioned to take advantage of that market growth as we have roughly 35% of North American mass timber production capacity, a broad range of product offerings, and a large geographic footprint that gives us competitive access to the entire North American market.
Shipping pallets remain weak due to the overhang on the European economy and particularly in Germany. Once the economy begins to show signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value. Today, pallets are selling for about $11 per pallet, on average. The historical average price for a pallet is around $13 to $14, which would make Torgo highly profitable even without lumber capacity. Heating pallet prices were up slightly in Q3 due to expected seasonality in this market. We expect demand and prices to increase modestly in Q4 as customers build winter stocks. As a reminder, we have restarted strategic and high-return CapEx projects at both Torgo and Spokane Mills. Torgo's project will increase the volume of dimensional lumber available for the U.S. market by about 240,000 cubic meters annually with upgrades to the log in-feed system and the addition of more planning capacity. 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 wanted to remind you our Spokane project was originally envisioned as part of our investment strategy for this mill. This project is focused on the mill's in-feed and sorting processes. Once this project is complete in mid-2025, the mill will be able to source lower-cost feedstock and process it into higher-quality lamb stock. Ultimately, this will significantly reduce the mill's fiber costs.
In Q3, our overall pulp fiber costs were flat from Q2. In Germany, a steady supply of sawmill chips kept fiber costs constant. In Canada, Peace River's wood and our Celgar wood strategy also kept our fiber costs in check. Looking ahead, we expect our fiber costs to remain stable for our pulp business with a slight increase in our solid wood business in Q4. I am pleased with our new lignin extraction pilot plant ramp-up. Our development and expected commercialization of this product is going according to plan, and I expect to share our vision for this product in the near future. We are excited about the future prospects of this product as a sustainable alternative to fossil fuel-based products such as adhesives and battery elements, among many others. We believe this product will be the foundation for a profitable business segment with strong growth potential. The fundamentals of this business align perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with the circular 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 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 target and believe our products form part of the climate change solution. In fact, we believe that in the fullness of time, demand for our 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 through faster growth in our lumber and mass timber businesses.
In closing, I am pleased that the softwood pulp market remains strong. Our recent operational challenges were unrelated, and as a result, those operational challenges are behind us. We are expecting strong operating results from the pulp segment in Q4 and into 2025, which will leave us well-positioned to take advantage of steady pulp pricing. Regarding our solid wood segment, we expect weak economic conditions to continue to keep pressure on demand for pallets in Europe. However, we are seeing signs that cause us to be cautiously optimistic about lumber demand and pricing in Q4 and into 2025. Finally, we will remain focused on our cost-saving initiatives and will continue to manage our cash and liquidity prudently while looking for debt reduction opportunities. Thank you for listening. I will now turn the call back to the operator for questions.
Operator: Thank you. As a reminder, to ask a question, please press Our first question comes from Sean Stewart with TD Cowen. You may proceed.
Sean Stewart: Thanks. Good morning.
Richard Short: First question is on your deleveraging targets. Even if we have a better pulp operating environment next year versus the challenges you had in 2024, it still looks like your free cash flow prospects are fairly modest. I guess the question is around broader deleveraging targets, and if free cash flow is not a strong contributor, any thoughts on non-core asset sales that might be advanced to accelerate that balance sheet transition? Any broader comments on deleveraging targets?
Juan Carlos Bueno: Thank you, Sean. Yes, as you will point out, the focus that we have is naturally on debt reduction in the medium term. We believe that we have a strong foundation for improved EBITDA next year as well as the following year. Again, this is on the back of what we believe is a solid foundation, especially for softwood. As we mentioned, 85% of our sales are in softwood. So while hardwood might be under pressure, we believe that the foundations for softwood are strong, and therefore, our expectations for an improved performance on softwood are there for next year and following then. As far as asset sales, we are proceeding as we announced earlier. We are proceeding with the sale process of Sentinel, and we are making good progress on that end. So, obviously, that will be an additional source of cash when we are able to conclude that transaction. But we are making good progress on that end. And, obviously, we always keep a look on making sure that we keep the right balance of our portfolio of assets overall. I do not know, Rich, if you want to complement anything that I missed.
Richard Short: No. I think that summarizes it quite well, Carlos.
Sean Stewart: Okay. Rich, maybe just a follow-up. I mean, is there a target, whether it is net debt to cap or net debt to EBITDA in a normalized environment that you guys are looking towards as a long-term objective?
Richard Short: Yeah, Sean, I think in the fullness of time, obviously, this is not going to happen overnight, but we want to get to about two and a half times net debt. And as Juan Carlos said, we have expectations for EBITDA growth and think there will be opportunities for debt reduction as we go forward as well.
Sean Stewart: Okay. Thanks for that. Second question, Juan Carlos, around the U.S. election. If Trump were to win, do you have any thoughts on the blanket import tariff that administration would be proposing and how that might affect your strategy for European lumber shipments to the U.S. and potentially, I guess, Canadian pulp shipments into the U.S. as well?
Juan Carlos Bueno: Yes, Sean. That is obviously a situation that we will be monitoring closely. We do not know, obviously, nobody knows yet how dramatic those tariffs will be and if they will actually be put in place if Trump wins. So a lot of ifs in that sentence. But, obviously, if there were tariffs exerted on lumber, we know that part of what we do is destined to the U.S. Now we have had the possibility of supplying different markets, and we vary the amount of lumber that goes into the U.S. depending on how our price conditions flow. I think this quarter, we said about 43% went to it. In a different quarter, it had been about 60%. So it fluctuates quarter by quarter, and this is all depending on the conditions that we see in other markets. Now it is important to say that we are seeing improvements in Europe. We are seeing significant improvements in the UK market. We are shifting volumes towards that market more recently than what we have done before, with regular shipments far exceeding what we have done previously. So there are certain markets that are posing very interesting for us, and that gives us the opportunity then not to be so dependent on the U.S. But, obviously, back to your point, if there were tariffs, obviously, this would put a bit more of a strain into that. But, again, given some of the other markets that we have developed, we believe that there are ways to go around it without that being a significant impact on our results. On one end, and on the other end, I think it is very important to remind ourselves that we do believe, and I guess everybody is under the same line of thought, that as interest rates continue to come down, and I think everybody's expectations, regardless of Trump or Harris being in power, and obviously the Fed dictates this by their own accord, but the expectations that interest rates will continue to go down, we believe, are an important element that will favor overall. Lumber demand should rise if construction rebounds, which everybody is expecting that to rebound. I think the lack of housing, the aging of the housing offer are critical elements that give us confidence that with construction rebounding, we will have far better lumber prices than what we have had so far this year or last year. So even with tariffs, I think there are expectations that lumber prices will be higher as we move on. So we are confident that there are good days ahead of us. And on the tariffs, again, we will see a lot of ifs in that equation.
Sean Stewart: That's great context. Much appreciated. That's all I have.
Operator: Thank you. Our next question comes from Matthew McKellar with RBC Capital Markets. You may proceed.
Matthew McKellar: Good morning. Thanks for taking my questions. With elevated interest rates weighing on construction activity, are you seeing a more competitive environment for mass timber projects? And more broadly, what is your sense of how the North American supply-demand balance in that space evolves over the next couple of years?
Juan Carlos Bueno: Yeah, Matt, you raise a very important question. Mass timber is a product that has proven to be competitive to concrete and steel, and obviously, it is gaining traction. I would not say little by little because the growth year over year is in excess of 20% as an overall market. And we do believe that that growth will continue to carry forward at that pace in the next five years. So having a business that grows 20% on average every year is, for us, a very strong foundation for growth given the capacity that we have been able to acquire. Now a lot of this growth obviously comes from the knowledge that little by little, mass timber has been able to attract from different people that have been having the opportunity to work with us. As it is a technology that is not widely used across the entire states of North America, around the U.S. or Canada, there are certain regions that are more prone to it. There are certain regions, for example, in the U.S., although the eastern border and the western border of the U.S. have much more penetration on projects. And little by little, we see that in the states, none of the coastal states, there are increasing rounds of projects. Now what's holding back still some of these projects are the interest rates. We mentioned in the call earlier that the order book is at $33 million, and we have an increasing amount of interest in projects. And when we say that, it's because this is higher than the interest that we have seen in previous months. So as the quarters advance, we end up participating in more quotations for more and more projects. So we know that it's a market that is growing. And the only thing that is stopping it from really booming, even though it's growing significantly, is the fact that developers are waiting for interest rates to come further down so that they can secure better financing for their projects. So that's why we do believe that 2025 is going to be kind of almost a repeat of 2024. But 2026, once construction really, really comes through, end of 2025, we believe that 2026 is going to be an extremely busy year for mass timber projects. The demand capacity is well served in the U.S., as we said, we have 35% capacity, and we're just using one shift of our capacity. So we have a lot more that we can deliver of mass timber projects than what we do today. Last year, we invoiced $60 million. This year, we're going to invoice about $100 million in mass timber projects. And these three assets running at three shifts can well deliver above $500 million. So in terms of capacity, there is plenty that we know that we can provide. In the case of other companies in the space that have been in this market for longer, obviously, their space for growth is much more limited than ours. But, again, with the market growing at 20% per year, that's a significant opportunity for growth for us.
Matthew McKellar: Thanks. That's great commentary. If I could just follow up on that. What do you think the tipping point is in terms of rate relief? What do we really need to see until some of those projects that have been developed and are ready for better financing conditions to start moving forward?
Juan Carlos Bueno: I think if mortgage rates are now, what, between 6% and 7% or around those lines, I think once they come down to the four-ish or when people see that there's really a clear reduction and maybe not back to the very low historical levels, but yes, very attractive reductions, I think that's when things will start moving. So that's why we believe, and there's always a lag. Even if interest rates come down, construction will always have a lag by the time that you actually see the impact. And that's why we believe that we're expecting to see that more in the second half of 2025 than earlier.
Matthew McKellar: Okay. Thanks very much. I'll turn it back.
Operator: Thank you. Our next question comes from Cole Hathorn with Jefferies. You may proceed.
Cole Hathorn: Good morning. Thanks for taking my question. Just like to follow up on your commentary around seeing a bit of an uptick in the European lumber markets because there's a bit of a divergence between some of the Nordic players that are calling for a bit of stability and then Stora Enso (OTC:SEOAY)'s as well, similar to you, that's got probably a more similar footprint in, you know, Germany calling about an uptick in demand and pricing. So just wanting to know, are you seeing some regional differences there, and what's driving the strength as the first one? And then the second is on the fiber costs that you're seeing. Can you give a little bit more color on, you know, regionally, what are you seeing in your feedstock to your pulp mills as well as your sawmills from a cost perspective, in Europe rather than Canada, please? Thank you.
Juan Carlos Bueno: Absolutely, Cole. As far as the first question, the uptick that we see in demand is basically coming from the UK. So that is the market where we have seen a pretty good recovery and good signs that indicate that this would be sustained for a longer period of time. So that is precisely to your point. That is the market where we serve and where we have products that fit very nicely into their quality demands. As far as the fiber costs in our different mills, we see obviously there's differences when we look at how the market is behaving in Canada versus Germany. On average, our fiber costs in both regions have been relatively flat this quarter versus last quarter. There's different dynamics behind them, but overall, average prices. In the case of Canada, one thing that we're benefiting from is in the case of Peace River, the fact that we have our wood room running. And in the case of Celgar, the fact that we are a little bit escaping from the situation in BC due to the strategy that we implemented about a year ago. On sourcing ourselves from the U.S., we've been able to close long-term contracts with U.S. suppliers of wood for us. We are being able to bring across the border thanks to the fact that Celgar is so close to the U.S. border, and by doing so, we have been able to reduce the amount of the highest-cost wood chips that we were acquiring from BC. So that's the way that we balanced out the fact that even though in BC, the wood costs are higher, and they're higher because there are more sawmills being closed, and we hear this in the news very frequently, unfortunately. Well, in our case, this opportunity that we have in the U.S. to counterbalance those increases in fiber are paying off very nicely. In the case of Europe, it's a different dynamic. In there, I think the strength that we have in Mercer Holz, the company that we have established as the buyer, and it's actually the biggest buyer of wood in Germany overall, and how we have structured Mercer Holz to make sure that we have very, very competitive logistics to bring wood into our mills from not only from Germany but from neighboring countries or further out from other countries around Europe, I think that's been the key factor in us being able to hold prices for our fiber just very flat when compared to what we saw last quarter. And this is on the back of, obviously, overall increased fiber prices in Europe because without Russian fiber being present, obviously, there's been some inflationary aspects that have impacted especially the Scandinavians more than anything else. But, obviously, there's a ripple effect on the rest of Europe. I think that, again, the way that we're structured in Germany, the way that Mercer Holz has been set up has been the key way of us not being impacted by what others are suffering much more dearly.
Cole Hathorn: Thank you. And maybe I'll just follow up on that point because, you know, the steeper cost curve that we're seeing in Europe with, you know, UPM, made to fiber taking downtime due to those fiber costs and your, like, relatively better cost position mills in softwood. Are you really seeing that benefit? And, you know, with the commercial downtime that these competitors have taken recently, are you seeing kind of increased incomings, you know, better order books, because of your relative cost position and people a bit nervous or not ready at that stage of the, am I reading in too much to that?
Juan Carlos Bueno: We have, for the vast majority of our business, is all under contracted volumes. And most of those contracted volumes would be with pretty large companies, and whether it's in tissue, about 50% of what we do is in tissue, about 30% goes to specialties, and I would say about the other 20% to printing and writing. So most of that volume is already contracted. And our mills are running flat out. So everything that we produce is being sold. The inventory levels that we're managing are very, very small. We believe that in both German mills, we're going to end up the year with not more than 15 days of inventory, which is very, very low. So again, the demand is there. And what we benefit from is not that we benefit from these issues that you relate to as others have taken curtailments or downtime or have had issues, it's not necessarily that we see that impacting our volumes per se. What we see this is impacting pulp prices. Softwood pulp prices overall, the amount of curtailments, the amount of permanent closures that we've seen both in Canada and in Finland in recent times, in recent times, I'm not going more than a year away. In the last 12 months, those are very significant closures of capacity that is not there anymore. And that's what's keeping softwood prices at bay. That's what's keeping softwood prices from going down, and that's why we see this gap of more than $200 between hardwood and softwood. So it's precisely those issues that you relate to that are helping softwood maintain a very healthy price overall. And that's where we see the benefit in the price that we see because, again, our mills are running flat out.
Cole Hathorn: Yep.
Operator: Thank you. And as a reminder, to ask a question, please press Our next question comes from CJ Baldoni with Principal. You may proceed.
CJ Baldoni: Hello. Thank you for taking my question. I'm just wondering what the implications might be to the extent that there's a strike in the, you know, BC port. It looks like a 72-hour strike notice was given by some of the longshoremen there.
Juan Carlos Bueno: Yes, CJ. We've been following since yesterday the announcement that came out from the BC ports. And, obviously, any strike is a disruption. The way that we've tackled this, and this we prepared already since July when there was a risk of a strike, I think it was in the month of August. We took measures to make sure that if there was any strike, we would not necessarily suffer any consequences from it. So in terms of arranging alternative logistics for our inbounds in terms of raw materials, those were properly assessed. The same thing around outbound logistics and having plan B's already lined up in case we have issues around those same issues. Those were put in motion. So I think we're very well prepared. And when we did that, we did that thinking that the strike back then in August, we were planning for maybe a three-week kind of extension. So again, we're conservatively planning or keeping contingency plans for these events. Let's see what this one entails. Hopefully, since these disruptions are so big for the economy as a whole, I would assume they will be short-lived, and the government will end up intervening. But, anyway, the important thing is, at least from our end, we were prepared as needed.
CJ Baldoni: Great. Okay. Thank you. That's all that I have.
Operator: Thank you. I would now like to turn the call back over to Juan Carlos for any closing remarks.
Juan Carlos Bueno: Okay. Thank you, Josh. And thank you all for joining our call. Rich and I are available to talk more at any time, so do not hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in February. Bye for now.
Operator: This concludes the conference. Thank you for your participation. You may now disconnect.
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