Mercer International, Inc. Q4 FY2025 earnings call

The fourth quarter included a non-cash inventory impairment of $23,000,000 and total non-cash impairment charges against long-lived assets of $216,000,000, including $204,000,000 against the Peace River mill assets. Strategic initiatives at the Peace River mill include expanding softwood pulp production, exploring government support for energy generation, and a carbon capture project. The One Goal 100 program has realized approximately $30,000,000 in cost savings in 2025. Market headwinds such as pricing, weak demand, and elevated fiber costs continued to affect results. There was 21 days of planned maintenance at the Stendal mill in Q4, with expectations of almost 50 days less planned maintenance downtime in 2026 compared to 2025. The mass timber business had revenues up ~6% QoQ, an order book of $163,000,000, and expects 2026 revenues >$120,000,000 with ramping of facilities.

In the fourth quarter, both the pulp and solid wood segments reported negative quarterly EBITDA of $11,000,000. For the pulp segment, NBSK markets weakened with softwood sales realizations decreasing to $707 per ton, North American NBSK list price averaging $1,568 per ton in Q4, and European NBSK list price stable at $1,498 per ton. Hardwood markets in China improved while North America was steady, with hardwood sales realizations flat at $528 per ton. Pulp sales volumes increased by 20,000 tons to 472,000 tons in Q4. For the solid wood segment, lumber pricing in the US modestly decreased, while Europe was stable. Random Lengths US benchmark price for Western SPF Number 2 and Better was $422 per thousand board feet in Q4. Lumber production decreased by about 6% to 109,000,000 board feet, and sales volumes decreased to 103,000,000 board feet. Mass timber revenues had modest growth, with an order book of $163,000,000.

Planned CapEx spend in 2026 is about $60,000,000 to $80,000,000, focused on maintenance, environmental, and safety projects. Aggregate liquidity improved by over $54,000,000 to $430,000,000 in Q4. The mass timber business expects 2026 revenues more than double 2025, with an order book including business for 2027. Expect almost 50 days less planned maintenance downtime in 2026 compared to 2025.

Market headwinds including pricing, weak demand, and elevated fiber costs continue to weigh on results. Tariff uncertainty with CUSMA renegotiation in June and 10% tariff on European lumber imports into the US. Economic uncertainties leading to ongoing downcycle conditions impacting profitability and asset valuations.

Q: Can you say how much headroom that you have under any of your maintenance covenants as of December 31?

A: We are comfortable we are well under the covenants at the end of the quarter, but expect them to tighten as the year progresses given the weak outlook.

Q: Secondly, on cash interest, cash taxes, and any working capital view, inflow or outflow?

A: Taxes to be negligible, interest around 120, CapEx 60-80, net outflow from working capital probably around $100,000,000 to $150,000,000.

Q: Updated thoughts on potential asset recycling opportunities and asset closure potential?

A: Analyzing asset sales/restructuring, but not the right time for reasonable value in current trough, part of debt reduction plans.

Q: Thoughts on Peace River mill, potential closure, timing, approvals?

A: Working on transition to more softwood production, energy projects with government support, carbon capture project, not planning to close yet.

Q: Market dynamics, impact of Indonesia developments on hardwood and softwood prices?

A: Indonesia developments significant, impact on hardwood supply, narrowing gap between hardwood and softwood prices, potential for improved prices.

Q: Fiber cost dynamics in Europe, Q1 outlook, lobbying for wood prioritization, CO2 costs?

A: Fiber costs impacted by German energy policy promoting biofuels, lobbying against biofuel prioritization, CO2 prices considered in operations.

Q: Extension of RCFs, discussions with lenders, timing, size?

A: Conversations with banks going well, expect concluded before end of Q2, possibly reducing capacity slightly for more liquidity.

Q: Lobbying for wood prioritization, CO2 costs impact?

A: Actively lobbying against biofuel prioritization, CO2 prices considered in operations, advocating for proper allocation of biogenic carbon credits.

Q: Long-term use of wood in construction substituting steel and concrete?

A: Growth in mass timber use, 11%+ growth in Europe, 22%-24% in North America, driven by construction cost, environmental, speed factors.