Mercer International Inc (MERC) 2022 Q3 法說會逐字稿

Hello, and welcome to Mercer International's Third Quarter 2022 Earnings Conference Call. My name is Sarah, and I will be your coordinator for today's event. Please note this conference is being recorded, (Operator Instructions)

On the call today is Juan Carlos Bueno, Mercer's President and CEO; and David Ure, Mercer's Senior Vice President, Finance, Chief Financial Officer and Secretary. I will now hand the call over to David Ure. Thank you.

Good morning, everyone. Thanks for joining us today. I'll begin by touching on the financial and operating results of the third quarter before turning the call to Juan Carlos to provide further color on the markets, a strategy update and of course, our recently completed acquisition. Also, for those of you that have joined in today's call by telephone, there's a presentation material that we've attached to the Investors section of our website.

But before turning to our results, I would like to remind you 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.

This quarter, we achieved EBITDA of approximately $141 million compared to Q2 EBITDA of roughly $145 million, which takes our year-to-date EBITDA to a record level of $440 million. This solid result was principally a consequence of improved pricing for energy and pulp, a reduced level of major maintenance, along with the positive impact of a stronger U.S. dollar being offset by lower lumber pricing and costs associated with the chip pile fire at our Stendal mill and lower pulp sales volume, 50,000 tons of which was a consequence of the Stendal fire. We are currently planning for the necessary permanent repairs to Stendal's fire damage chip pile infrastructure. The loss is covered by our insurance program and we expect that it will be settled in the first half of 2023 once permanent repairs are complete. To date, we have received advanced payments from our insurer totaling roughly $9 million.

The energy situation in Europe remains extremely dynamic. The threat of natural gas restrictions is pushing costs for all forms of energy and energy derivatives higher. Today, we continue to benefit from record electricity revenues, but we are seeing inflationary pressure on energy-dependent input costs such as chemicals and freight, and on pulpwood, which is an energy derivative.

After giving consideration to our planned 17-day shut at Rosenthal, our mills ran well this quarter when compared to Q2 when we had 43 days of scheduled maintenance. Looking ahead, we will complete a 14-day planned shut at our Stendal mill in Q4.

Our pulp segment contributed quarterly EBITDA of roughly $138 million and our wood products segment contributed quarterly EBITDA of about $7 million. You can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. Demand for pulp was stable in Q3 and supply constraints pushed prices higher than Q2 in most of our major markets. European list prices averaged $1,500 per tonne in the current quarter compared to $1,437 per tonne in Q2. In China, the Q3 average NBSK net price was $969 per tonne, down $39 from Q2. The price gap between NBSK and hardwood narrowed modestly this quarter due to upward pricing pressure on hardwood with the average Q3 net eucalyptus hardwood price in China at $855 per tonne, up $40 from Q2. In total, average pulp sales realization movements positively impacted EBITDA by almost $18 million compared to the prior quarter.

Overall, our average lumber realizations decreased significantly in Q3 due to both the U.S. and European markets weakening. Prices fell steadily in both markets during the quarter while in the last few weeks, we have seen a modest price recovery in the U.S. market. The Random Lengths U.S. benchmark for Western S-P-F #2 and Better averaged $581 per thousand board feet in Q3 which was down $286 from last quarter. Our average European sales realizations were down approximately $173 per thousand board feet when compared to Q2.

Today, the benchmark lumber price in the U.S. is approximately $470 per thousand board feet.

Our electricity sales reflect our strong generation along with elevated prices in Europe, where Q3 prices were in the range of $400 per megawatt hour. Exports to the grid totaled about 195 gigawatt hours in the quarter, which was down relative to Q2, principally the result of the downtime at Stendal. We reported consolidated net income of almost $67 million for the quarter or $1.01 per basic share compared to net income of $71 million or $1.08 per basic share in Q2. Cash generated in the quarter totaled approximately $27 million after adjusting for the acquisition of the Torgau sawmill and the related draw on our German revolving green credit facility compared to cash generated of $84 million in Q2. Our cash generation in Q3 was primarily the result of strong earnings as our net working capital movements were essentially flat in the quarter.

Capital spending in the quarter totaled about $49 million and we remain on target to invest about $175 million to $200 million in our operations this year. Juan Carlos will provide an update on our CapEx program here in a moment.

At the end of the quarter, our liquidity position totaled about $621 million comprised of $362 million of cash and $259 million of undrawn revolvers. Our quarter end liquidity position was down about $150 million from the previous quarter due to the EUR 270 million acquisition of the Torgau sawmill net of the related EUR 100 million draw on our German revolving green credit facility.

As I noted last quarter, in connection with the Torgau acquisition, we have obtained an amendment to our German revolving credit facility that expands it from EUR 200 million to EUR 300 million, and converts it to a sustainability-linked, our green facility, a modification that further acknowledges our commitment to our sustainability objectives.

I'd also like to highlight a modest change in our segment reporting. Effective in Q3, we've included our mass timber business in the solid wood segment to reflect the change in our operations and management structure. Previously, the mass timber business was included in the Corporate and Other segment. This change is being made retrospectively in our segment disclosures, and going forward, our Friesau, Torgau and Spokane mills will make up our solid wood segment.

And as you would have noted from our press release, our Board has approved a quarterly dividend of $0.075 per share for shareholders of record on December 21, 2022 for which payment will be made on December 29, 2022.

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

Thanks, Dave. I am pleased with our third quarter operating results. Strong energy and pulp prices, combined with favorable foreign exchange movements, were the main factors behind our solid results. I'm particularly proud of our team's ability to quickly find an effective temporary solution to the chip pile fire in Stendal to mitigate the impact on our Q3 results. Partially offsetting these positive effects was the impact high European energy prices are having on our business in the form of higher fiber and chemical costs.

I'm also excited about the recent addition of the Torgau mill. Mercer's lumber capacity is now almost 1 billion board feet as a result of the addition of this business, and our product mix has been broadened to include shipping pallets, wood pallets and briquettes along with additional green energy capacity. Torgau is the world's largest producer of European Pallet Associated or EPAL wood pallets, with the ability to produce 17 million pallets annually. In addition, the facility can produce up to 150,000 metric tonnes of wood pellets over 400 million board feet of lumber and 85,000 metric tonnes of wood briquettes and 90 gigawatt hours of electricity.

Our teams are now focused on integrating the Torgau mill and realizing the estimated $16 million worth of annual synergies we have identified. These synergies will come from the optimization of lumber production, drying, planing and grading between Torgau and Friesau. And on the input cost side, we see opportunities to optimize wood chip and wood residual deliveries between Torgau, Rosenthal and Friesau. I will have more to say about our progress maximizing these synergies in the coming quarters.

We're also making progress in developing our cross-laminated timber business. During the quarter, we completed the build-out of our design and engineering teams, and are now actively bidding on numerous mass timber projects. We currently have out for evaluation over 30 bids, and we expect several of these bids to be contracted in the coming months. On the other hand, global pulp markets remained strong through the third quarter with almost all realizing modest price increases. These tight supply and demand fundamentals are the result of low paper producer inventories, solid pulp demand in most regions, ongoing logistics bottlenecks and high levels of pulp producer unplanned downtime.

Chinese pulp demand has been muted by pandemic-related lockdowns and logistical restrictions which in turn limited paper producers from accessing global markets. We are currently seeing logistical bottlenecks loosening, which when combined with weakening economic conditions in Europe, is creating some modest downward pressure -- pricing pressure on softwood pulp.

Third quarter lumber markets pricing reflected significant weakening of both the U.S. and European markets. On average, our lumber realizations were down roughly 30%. The sharp decline is principally the result of uncertainty created by rising mortgage rates and weakening economic indicators. Despite the volatility today, we believe the midterm backdrop for U.S. lumber pricing condition remains positive, with low lumber channel inventories, relatively low housing stock and constructive homeowner demographics driving future demand growth.

As such, we expect the U.S. and European lumber prices will stay flat in Q4, partially supported by recent temporary curtailment announcements made by certain Western Canadian lumber producers. And we believe that these temporary curtailment announcements indicate that lumber prices are at or near floor pricing.

We will continue to match our mix of lumber products and customers to current market conditions. In Q3, 47% of our lumber sales volumes were in the U.S. market, a relatively high volume, influenced somewhat by the timing of vessels from Europe to the U.S. The majority of the remainder of our sales were in the European market. We believe our logistics strategies gives us a competitive advantage. However, freight costs continue to increase modestly in Q3 as a result of higher fuel costs. Offsetting this negative impact is the slowly improving availability of North American railcars, which is allowing us to reduce our reliance on higher cost trucking solutions.

On the other hand, Russia's war in the Ukraine is driving European concerns around energy security. And as a result, has been pushing European energy prices up over the last few months. Consequently, people have been looking for alternative sources of energy, which in Germany is resulting in strong competition demand for pulpwood for using either pellet or firewood production. As a result, European pulpwood costs are up considerably, and we're anticipating further upward pricing pressure in Q4.

In contrast, sawlog demand and supply are in balance, and as a result, we expect sawlog pricing to only increase modestly in Q4.

Germany has recently announced intentions to cap electricity prices at EUR 180 per megawatt hour. While the final form of legislation remains incomplete, we expect the cap program to begin December 2022 and run until June 2023. If enacted, this price cap program will reduce our energy revenues relative to Q3. However, we are hopeful that this electricity market cap program will also be a positive step towards reducing demand for and ultimately, the price of pulp wood. It may also be a partial relief for our customers and suppliers that have suffered the impact of higher energy prices.

In Western Canada, decreased log harvesting levels and related sawmill curtailments are putting upward pressure on pulpwood prices. And as a result, we expect pricing to be generally flat in Q4. We have made steady progress on our 2022 CapEx program in the quarter. The majority of the program is focused on high-return projects that would drive new product development, ESG advances, productivity improvements and input cost reductions.

Two of the larger projects are new woodrooms at Celgar and Peace River. We expect the Peace River woodroom to begin operating late in fourth quarter and the Celgar woodroom to begin operating in the second half of next year. These projects will generate high returns in the form of lower wood costs and have considerable carbon reduction attributes which will help us achieve our carbon reduction goals.

In keeping with our carbon reduction strategy, we have commenced construction on a Lignin Development Center that will include a lignin extraction pilot plant. When completed in late 2023, the plant will employ a leading-edge technology that will allow us to look at commercializing derivatives of lignin. We also commenced a construction on a $27 million expansion project at our Spokane mass timber plant. This set of investments will allow the state-of-the-art facility to fully utilize a more varied raw material mix, add glulam to our product portfolio and increased finger joint production. This is a first step in what will ultimately be an expansion of CLT capacity in anticipation of our efforts to steadily increase our order book for mass timber products, which we expect to begin to materialize in sales next year.

We remain satisfied with the pace of the ramp-up of this business. And we are currently planning for the permanent repairs required for Stendal's fire damage chip file infrastructure. We expect the repairs to begin in Q4 during Stendal's planned maintenance shut with the final repairs expected to be completed in the second quarter of next year. Currently, the mill is running at about 90% of capacity and we expect this percentage to increase to close to 95% with a planned Q4 repairs.

And we think about climate change and the rapid shift occurring regarding reducing carbon emissions, products like lignin, mass timber, green energy, extractives, lumber and pulp are all products that will play an increasingly important role in displacing carbon-intensive products, products like concrete and steel for construction plastic packaging, fossil fuel generated electricity and synthetic fragrances and flavors, even synthetic textiles. We're committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, we believe that in the fullness of time, demand for low carbon products was dramatically increased as the world looks for solutions to reduce its carbon emissions.

As Dave noted, we are so confident in our ability to meet our carbon emission reduction target that we converted our German revolving credit facility to a sustainability linked loan, making us part of a small group of wood product producers willing to invest in carbon emission reduction targets in favor of modest reductions in our cost of borrowing.

Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.

Sarah, just before -- it's Dave here. Just before we turn it just -- it's been pointed out to me that there might have been some callers that were having problems getting into the call today. So I just wanted to let folks know that I think it's sorted out now. But if you miss part of the call, Don't hesitate to ask your questions. Juan Carlos and I have lots of time here today. And just to remind folks, too, if you did miss part of it, the call is being recorded, and you could pick it up at a later date.

Sorry, Sarah, I'll turn it back to you now for Q&A.

(Operator Instructions) Our first question comes from the line of Sean Steuart from TD Securities.

A couple of questions. Now that Torgau is in your portfolio, wondering if you can give any updated thoughts on potential repositioning of that mill's product mix at the margin, pallets versus standard lumber. I think that was an initial thought when you announced the acquisition, but are there any updated thoughts on that front.

Thank you, Sean, for the question. Yes, we're very pleased with the work that we're doing now with Torgau and the performance of the mill. As we've mentioned before, they're heavily weighted on the dependence on the pallet business. We believe that it's a solid business to carry forward, and we will continue to explore because we know that there are opportunities to increase the lumber production out of that facility without necessarily sacrificing pallet production. So we believe we can carry both business forward, and that is our intent.

And a question on pulp markets. You touched on generally tight conditions and list prices in Europe have held steady to this point. But it does sound like there's some cracks forming in the foundation. Can you give us any update on order file activity as we head into the fourth quarter? Any signs of weakness in your business in Europe at this point?

Absolutely. Yes, when it comes to the order file, we haven't seen any dramatic change in that regard, so we're well positioned into the fourth quarter with the orders that we have in coming. We do see that even though there's obviously some pressure from a situation that is more complicated on the paper producers in Europe with the high cost that they're enduring, the truth of the matter is that we also have a situation where China is not present in the market today in as it has been in the past. And we know that as those lockdown measures related with COVID ease down in China, and China comes back into the market, that's going to be a significant push going forward. So for the fourth quarter, we expect that it's going to be very similar to what we've experienced in the last quarter. No major change on that end. Again, our order book is healthy, and we still have see some forward pressure -- positive pressure with the China situation going forward into the beginning of next year.

The next question comes from the line of Hamir Patel from CIBC Capital Markets.

Could you give us a sense as to what you're seeing in terms of lumber demand across various end markets in Europe, specifically repair and renovation?

Sure, basically, it's kind of a similar situation than what we've seen with the pulp developments in terms of the order file and how things are moving. The only thing that we see differently is, obviously, the logistics are quite a bit complicated at this point in time. So there's significant delays in shipments and a product that is sitting in the ports longer time than what is expected or planned. But we do see that the price development for fourth quarter in both the European and North American markets, is fairly similar to what we are experiencing right now. We're not seeing a further deterioration of those markets. We're seeing a market that is fairly stable over the fourth quarter versus where we are right now. So no major changes there.

And just -- I wanted to ask about the lignin plant, assuming eventually pursue commercialization there. What are the biggest potential end markets that you see? And how big could the potential market be?

Lignin is clearly a very attractive opportunity that we still need to dimension properly. We know that there is a big potential for it as a substitute of fossil-based products the markets in which it can be applied to are various, I'll mention a few; epoxy resins being one of them, probably the low-hanging fruit. If I can put it somehow -- but there's also opportunities in the carbon black space. There's opportunity in the asphalt space, there's opportunity in battery replacement in some of the components. There's opportunity in carbon fiber.

We believe that most likely, the epoxy resins, the carbon black may be very attractive markets, but it's way too soon for us to have already that narrowed down to which market in particular, we would be able to participate. That would also depend on the quality and the specs of the lignin that we would be able to produce. All mills are different in terms of their setups and therefore, the qualities of the lignins that can be extracting from them can vary. So there are still questions to be asked as we push this exciting project forward, and we should know more by the end of the year of next year.

And just the last question I had for Dave Ure. Just given the price cap on energy from December based on maybe what you've seen, sort of, sulfur pricing in October and expect for November, what kind of pricing level would you expect for electricity sales in Q4?

For electricity, Hamir, is that what you mean?

Yes.

Yes. Well, yes, it looks like the cap will be around EUR 180 per megawatt hour. So the regulation, this particular regulation is still being drafted, but it looks like we're expecting that there'll be -- the cap will go in, and it will be effective December 1. So in Q3, our average electricity price in Germany was in the order of EUR 388 per megawatt hour, and we would expect that for 2/3 of the quarter, if the regulation rolls out the way it's -- the narrative is describing, we would have 2/3 of the quarter would be at a lower rate, like EUR 180 and 1/3 would be at a higher rate.

And would that higher rate be based on what you've seen so far?

Yes, currently, it's still in the range of EUR 300, EUR 375 to -- sorry, I said EUR 300, I meant EUR 400 -- EUR 375 to EUR 400.

The next question comes from the line of Richard Stevens from Amundi.

I'm fairly new to the story, so I did want to follow up on a couple of things, if I could. Just in terms of overall costs, I assume most of your costs are dominated in euro or Canadian dollars, whereas the pulp and wood products is sold in dollars. And I don't know whether you said something about it earlier, but overall, what was the impact of the strong dollar on the Q3 results? And I did have a follow-up.

Just looking it up here, but you're right. Typically, you're exactly right, most of our cost structure is in euros or Canadian dollars. If we can get a rough number for you. [$14 million]? Yes, and so sequentially, just to give you a sense, sequentially, Q2 to Q3, we estimate the impact of foreign exchange was about [$13 million] this quarter. compared to last quarter.

[$13 million] in revenue?

Yes. It depends how you think about -- because we're a U.S. dollar reporter, the way it comes and the products are U.S. to dollar-denominated products, it's actually the conversion of the cost structure, the euro cost and the Canadian dollar cost that gives rise to the improvement.

Okay. And then I wanted to spend a couple of seconds on the energy business. My sense is that the energy generated is a byproduct of your production process and that there really is not a ton of costs associated with that business and it's sold directly back into the grid. And please correct me if I'm wrong. So would it be fair to say that if the cap basically, for lack of (inaudible) kind of cuts rate in half that, that would impact that segment by roughly half as well. Is that fair? It's pretty high margin.

All other things being equal, yes, that's right. Just to remind you, Richard, just to give you some context here, these are still very -- these are really solid rates for us. I mean it sounds like a big reduction coming from EUR 400 down to EUR 180 or EUR 200. But if you go back a year ago, our average was probably closer to EUR 80 that we were selling to the grid. So these are still pretty solid rates in our mind.

The next question comes from the line of [Ryan Dirubio] from Baird.

Before I begin, I was one that had trouble logging in. But just so you're aware, too, the webcast just had the whole music on it. So you'll probably get some people let you know about that later.

Yes, sorry about that, Ryan, yes, we're aware of it. And if we don't get you what you need today, don't hesitate to give us a call after. We'll make sure you get everything you need.

Appreciate it. Just a few for me. Given the projects that you were just mentioning that you want to work on, do you have any guidance that we should think about 2023 CapEx?

Absolutely, Ryan. We're looking at 2023 very much in the ballpark of what we have in 2022. So we're focusing on our growth projects and ESG initiatives and we're maintaining that as what we're doing this year.

And just on the new energy rules. Is there any expectation that, that will go beyond June of next year? Or is it just unclear at this time?

This is still very volatile. What we see so far in the drafts of the documents that have been circulated by the German authorities. They're considering up until June. But at the same time, they've also looked into setting us -- setting a cap for gas. And for example, in the case of gas, we're thinking about the entire year. So again, electricity may be until June, gas may be the full year whether that's going to be maintained that way or they're going to decide otherwise is yet to be seen, but that should be known hopefully, in the next month or so at the latest.

Understood. And just maybe broadly speaking, outside of the investments you're going to make in the business, how should we think about capital allocation? Some of your bonds are trading the low-80s, but there are also going to be some distressed companies out there. Just love to get your thought process on how you're thinking about using some of the excess cash flow and your -- basically your balance sheet too over the next year or so as these opportunities are presented.

We discussed these kind of things regularly with our Board just as we do all the policies around dividends. And we still believe that since we have quite a bit of CapEx growth projects in the pipeline, we believe the better use for that cash is to fund those growth projects before we start buying back some of those bonds.

Understood. Appreciate all the responses.

The next question comes from the line of Andrew Kuske from Credit Suisse.

I think the first question is really for Juan Carlos, I think you mentioned on the mass timber business, you've got 30 bids out in the market already. Maybe if you could just give us a bit of flavor on the projects you're targeting. Are they just dedicated to mass timber? Are they looking potentially to go mass timber? And then how do you see the competitive landscape for you in that business?

Absolutely, Andrew, yes. It's exciting times because we just finished setting up or building the team, actually, the marketing team that is working on these bids. And as you might know, this is a pretty intensive piece of work just to get a bid together for any such project. The projects that we're looking at are of all different sizes. You have large buildings and complexes that would carry several buildings altogether. And also, you would have individual construction units. So you have an array of different sized projects within those 30.

And obviously, our expectation -- and as such, some of those projects are all CLT. Others are a combination of CLT together with steel. So there's a bit of both, but obviously, a heavy weight towards CLT as a replacement of concrete -- but it's looking very attractive, as I mentioned before, and we're eager to see those bids come to closure as the team is now advancing successfully into those.

That's helpful. And then maybe just as a follow-up to that, how would you roughly -- and I know they are all different shapes and sizes as far as the projects go, but how would you just sort of conceptually think of the average project, how many average projects do you need over the course of the year to effectively fill the utilization of the facility?

It's probably -- as much as I would like to give you a straight answer and know that it would be the right answer. I don't think we're in a capacity right now to be able to say that the 30 projects that we have right now, when we have barely entered the market, we just launched our website. We haven't done any mass work to spread the word out from our -- for ourselves. We're getting -- we're about to be part of the San Francisco conference in the first week of November. That's going to be really the first time that we go out there and are present in a very significant way with a significant amount of developers and architects. So the 30 projects that we are bidding for, I don't know that they would be a representative share of what we would expect to see in the future. If those 30 projects are in the in the tens of hundreds of millions of dollars -- in the tens of millions of dollars. So it's -- they're significant in essence. But again, I don't think those are necessarily representative of what we see once people really know that we're out there.

If I could sneak one more in and it really just changing geographies into Europe. You clearly have an advantage from a power standpoint on the portfolio. There are the pulp mills. Are you seeing signs of stress? Or do you think there's times of stress with some of the other pulp producers? Or I guess, sort of asking a different way, are we seeing elevated pulp prices in part because input prices have gone up, but even with that, are we seeing margin compression for some of the competitors? And does that distress potentially create opportunity for you?

I think we do enjoy a significant advantage because we've made a constant effort to be able to extract as much energy as we can from our facilities, and that obviously has paid positively for us in our strategy. I cannot say the same of other competitors that may have different positions as it retains -- reflects to energy. So I think we're positively positioned versus others on the energy equation. Now whether it's something that is hitting some more than others, I'm sure there is. For us, it's obviously positive, very positive. And we still are very bullish about this for Q4.

The next question comes from the line of DeForest Hinman, a private investor.

Just so -- I was looking through the 10-Q, it was kind of interesting to see the pro forma numbers with the MIT. I don't have a lot of experience with pallet manufacturing. So could you just give us kind of a quick education on the call in terms of like how that business works from a pricing perspective? Is there contracts? Is it all spot? Is there any seasonality with that business? And I'll pause there.

Absolutely, yes, we're also in the process of learning more and more about the pallet business. But I can anticipate already that, yes, this is a -- even though it's a very dynamic market, and we know it follows very much how the -- it's kind of a leading indicator of the economy as such. We do have long-term contracts with customers as well as some reserved spot business. We are, by far, the largest manufacturer of European or the EPAL pallets. So we have a kind of a very significant presence in Europe with our product.

There are other geographies that are important. Ukraine is being one of them and which is not suffering as you would imagine, because it's the eastern part of Ukraine -- that is the western part of Ukraine, excuse me, the one where the production is held. So they are pretty much active in the market still. So it's an active market, a very competitive market, but we enjoy probably the fact that by being the largest, we're also probably the most competitive or not probably, but the most cost competitive out there. With the volumes that we're able to produce and how we manage inventory for our customers. It's quite a unique competitive advantage. So we'll see how, again, economy determines a little bit of how this market oscillates in terms of price. And there is some softness, obviously, in the price right now but nothing that is out of the ordinary for this point of view.

And then just our expectations, it looks like based on that pro forma disclosure, it was a profitably operating business year-to-date in 2022. Is that still a reasonable expectation for 2023?

Absolutely, it will be a profitable business in 2023. And I would say, more since we are reconfirming the fact that we have the synergies that were identified early on in the project. We're materializing those synergies. If you remember, and I believe we mentioned it during the call earlier, today that we had identified [$16 million] worth of synergies by running HIT, the synergies being spread between hardwood chips and lumber. And we believe that we are in very good track towards achieving those -- that level of synergies that we had identified. Just for the first month, we're on target, and we're just beginning. So -- so there's a clear value in how we integrate the benefits of having the different setup mills close to each other, whether it's Friesau, or whether it's Rosenthal or now HIT and us being able to move around chips where they're needed and move sawdust where it's needed. And so that flow of product back and forth between mills, rather than each mill looking what to do with those excess products brings a very significant benefit, and we're capitalizing on it.

And then on the sawmill side on Friesau, it’s a very dynamic market. The last couple of years, prices up, prices down, -- we are seeing fiber costs higher in Europe. Is that facility able to run profitably with just say right now in terms of where all the metrics are, do we have ability to flex some of the labor shifts there? Is that business profitable in the current state?

It is very profitable, and I would say more -- Friesau is most likely the most profitable and cost-competitive sawmill in Europe. So we have a structure that allows us to navigate through these moments where lumber prices are not as high as we would like them to be or some of the costs are higher than we would like them to be. It still generates quite a bit of earnings. So it is still profitable.

And then just last question on -- I think you alluded to this on the prepared comments, but just the normalization -- maybe the normalization of trade flows as it relates to shipping costs coming down. I think within the European region, we were kind of a little bit of captive trade flows. We had the disruption in BC from the flooding. We're getting further away from that, and we're also seeing shipping prices coming down. Is it going to be going forward a more dynamic, a more competitive market as it relates to pulp with shipping costs falling?

Yes, I think you have -- you're absolutely correct. There's -- we see falling shipping rates, especially out of China. Now out of China, either to the U.S. or to Europe, you're basically getting fantastic rates. So you can move product out of there with not too much cost. Again, as lockdown cease and those things are -- and China starts to wake up, I think we expect to see a lot more movement and then taking advantage of those being able to ship at lower costs. I think that's absolutely true. I wish we could say the same about railways, railcar situation in Canada, where we still suffer the consequences of not having enough, even though there might have been a slight improvement over where we were in a couple of quarters ago, but it's still far from where we would like it to be. So I think there's a bit of mixed signals depending on where you go, where you're going at, where you come from that in some cases, it's still advantageous and some others, we still don't see the benefit that you would expect to see.

(Operator Instructions) The next question comes from the line of Matthew McKellar from RBS Capital Markets.

First, just on German fiber cost. You mentioned that you expect per unit fiber costs to increase in the fourth quarter with continued strong demand for wood for energy purposes. Are you able to provide a little bit more color or a sense of magnitude here on how fiber cost to trend from Q3 into Q4 and how you might expect fiber cost to trend into next year, including once we're through the winter?

Sure, Matthew. When we look at pulpwood costs, just looking at Q3, when we look at Q3 versus Q2, they went up almost 20%, give or take, 17% or so. So it's -- and we see that, that escalation has not stopped that, that escalation will continue in Q4. Whether it's going to be at that same level or not, we yet have to see. As I mentioned earlier, the wood chip is the one that is having the highest impact as people are now seeing the possibility of using those wood chips for the production of pellets and going into energy, and that's a market that, as we know, is booming. While the sawlogs are more or less not the sawlogs, but the pulp wood is more or less -- the round wood is more or less stable or relatively stable, just a little bit up, but not to that effect, nothing in comparison to what we've seen in the wood chips. So we believe that trend will continue still in Q4, where there's still -- until we see this energy cap impact and how that will materialize and what impact it would have on the overall situation of the biofuels and whether they will be maintained at the record levels that they are or whether they will -- we see it a little bit and go back to more normal levels, we have to see.

I think the gas cap and the electricity cap that Germany is about to implement, all those measures will help bring things a bit more into a more reasonable level. Not at a cheaper level than we used to before, but not low. But at least not increasing at the rate that we've seen from Q2 to Q3.

And then just one other -- following up on Sean's question earlier on Torgau, I know it's early days. They are just under a month since you closed. But could you talk about the opportunities you see to expand whether those are kind of opportunities you're looking at in the near-term that we should expect to see in your capital program for '23? Or is your focus at this point still working towards the synergies you're targeting?

Sure. Right now, we're focusing primarily on the synergies that we targeted. At the same time, we're looking at what would be the capital plan for taking that mill to a higher level. We know that, that mill can perform at higher levels, and it will require some cash in order to do that, some CapEx to do that. But we don't know at this point exactly what we would be looking at in terms of investments into the mill. We know the potential is large, but it's too soon for us to already put a number out there of how much we think we will be investing into that facility.

There are things that we can do that are not very costly. We have planar capacity, excess capacity in Friesau that we can simply move to Torgau. So that would be -- those would be kind of investments that are not material in terms of CapEx but can bring already a significant improvement in the lumber output capacity of Torgau. So there are things that we can do without necessarily adding a significant amount of CapEx. But we know that if we -- that if we're aggressive on CapEx, there's a lot more that we can extract from that facility.

Our next question comes from the line of Dennis Collins from Stifel.

Gentlemen, as of September 30, the company has looking at the Q2 $87 million in cash and estimate that the cash position will be as high as $430 million to $440 million end of '23. So just looking at that, looking at obviously, the bond offering that's due in 3 years and 3 months, I'm guessing that the Board has spoken about a buyback of stock. And I'm sure there's opportunities that the company is looking at in terms of acquisitions, but the stock has been volatile at times. Isn't it advisable to have a $50 million to $80 million buyback, that would be about 11% of the cash position at the end of next year, in place for volatile times? Is the Board considering a buyback announcement? If not, can you explain why not?

Yes, thanks, Dennis. No, I can tell you the Board is considering, this is a regular every meeting that the board has. This is a regular topic. So you can imagine they think about other ways of giving back to shareholders, buyback, a dividend, a special dividend. Those are all on the table. But ultimately, they get weighed against alternatives, and the alternatives that they're looking at are the high-return capital program that we have, not only the one that Juan Carlos talked about guiding for next year, but the portfolio of other projects that we have behind that and many of these projects have got considerable returns, better than 3 years. And then, of course, on top of that, we've got a lot of resources that we're applying to trying to grow the company still. So folks that are looking for new opportunities to buy something to grow in spaces where we've got confidence.

And having a bit of dry powder, has been -- we've been rewarded for that several times in the last few years, including the Torgau acquisition, including the Spokane, [MIT] acquisition that we probably wouldn't have been able to do if we weren't able to -- if we didn't have the agility that we do and have the cash available that we do. So these are all considerations, including debt reduction. That's also a topic, particularly at the moment since the bonds are trading at a bit of a discount today. These are all topics. At the moment, we feel the right thing to do and the Board thinks the right thing to do, is push ahead with the high-return CapEx and give ourselves a little bit of dry powder to make sure that we can take advantage of some of the M&A opportunities that we're currently looking at. So I know not the answer you're looking at, but I can tell you it's a -- these are -- these are elements that the board considers quite considerably.

We currently have no questions coming through. (Operator Instructions) There are no further questions. So I will now hand you back to your host.

Okay, thank you, Sarah, and thanks to all of you for joining our call. Dave and I are available to talk more at any time. So don't hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in February.

Bye for now.

Thank you for joining today's call. You may now disconnect your lines. Hosts, please stay on the line and await further instructions.