Mercer International, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Highlights: Q2 EBITDA was negative $21 million, a significant decrease from Q1's $47 million. Key drivers included negative foreign exchange impact, lower pulp prices in China, a $11 million non-cash hardwood inventory impairment, and higher fiber costs.
• Market Insights: Trade uncertainty impacted demand, with the weak dollar affecting costs. NBSK pulp prices varied by region: down in China, up slightly in North America, flat in Europe. Hardwood prices were mixed.
• Initiatives: The One Goal, One Hundred program targets $100 million profit improvement by 2026, with $5 million in cost savings in Q2 and $25 million expected for 2025. Capital investments were made in facilities like log yard upgrades.
• Mass Timber: Incoming project inquiries exceeded $400 million over the last two quarters, order book is growing, backlog is ~$68 million, and revenue is expected to pick up in Q4 with plans to ramp up shifts in 2026.
• Carbon Initiatives: Focus on carbon reduction targets, with products like mass timber and green energy seen as key in displacing carbon-intensive products.

Segment Performance

• Pulp Segment: Negative quarterly EBITDA of $10 million in Q2. NBSK pulp sales realizations decreased in China due to global trade uncertainty; Q2 net price was $734 per tonne, down from Q1. Pulp sales volumes decreased by 51,000 tonnes to 427,000 tonnes. Fiber costs increased.
• Solid Wood Segment: Negative EBITDA of $5 million in Q2. Lumber prices increased ~10% in Europe but were flat in the U.S. Lumber production and sales volumes decreased. Mass Timber revenues were lower due to market uncertainty but expected to improve. Electricity sales decreased, and fiber costs increased.

Guidance

• Pulp: Softwood prices expected to firm in Q4 2025 and 2026 due to reduced supply. Hardwood pricing likely to recover post-summer.
• Solid Wood: Anticipate improved economic recovery in Europe, potentially boosting pallet prices. U.S. lumber pricing is volatile but could be pushed up by duties.
• Capital Spending: Planned CapEx for 2025 reduced to ~$100 million, weighted towards maintenance, environmental, and safety projects.

Risks

• Market Uncertainty: Global trade disputes and tariff uncertainties impact demand and pricing.
• Dollar Fluctuations: A weak dollar negatively affected EBITDA.
• Inventory Impairment: A $11 million non-cash hardwood inventory write-down occurred due to lower Chinese prices.
• Operational Downtime: Planned maintenance at mills affected production volumes.

Question and Answer

• Q: Provide information on other cash flow items like 2025 cash taxes and operating cash flow less the $100 million of CapEx A: Richard Short stated they expect cash tax for the year to be about $20-25 million, CapEx targeted at $100 million, and working capital to be slightly negative.
• Q: Remind on German revolver facility covenants and liquidity A: Richard Short said there are no maintenance covenants on the German revolver, and there is ample headroom with over $100 million in available capacity.
• Q: Comment on softwood inventory and potential write-downs A: Richard Short noted softwood inventory is slightly elevated but not at a level where immediate impairments are expected.
• Q: Catalysts for pulp price momentum A: Juan Carlos Bueno mentioned restocking post-summer and reduced supply in softwood markets as factors expected to boost pulp prices in Q4 and 2026.
• Q: Details on carbon capture project at Peace River A: Juan Carlos Bueno said the project could generate over $100 million annually from CO2 credits, with 10-year contracts, and is supported by grants covering 60% of costs.
• Q: Impact of lumber duties and European operations A: Juan Carlos Bueno noted German operations are more competitive due to tariffs, and European pulp mills have low breakeven points, making them resilient.