Mercer International Inc.

Good morning and welcome to Mercer's International First Quarter 2025 Earnings Conference Call. On the call today is 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. You may go ahead.

Thanks, Lacey. Good morning, everyone. Thanks for joining the call today. I will begin by touching on the financial and operating highlights of the first 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 a presentation material that we've attached to the investor 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 Mitigation 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, our EBITDA was $47 million, compared to Q4 EBITDA of $99 million. The lower results are primarily attributed to 22 days of planned major maintenance downtime at our Selgar mill, compared to no planned downtime in Q4. We estimate this downtime adversely impacted our EBITDA by approximately $30 million in direct costs and lower production. Our Q1 results, when compared to Q4, were also negatively impacted by foreign exchange. Our pulp segment contributed quarterly EBITDA of $50 million in Q1, and our solid wood segment EBITDA essentially broke even. You can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. In the first quarter, MBSK published prices mostly increased in all our key markets compared to Q4 due to stable demand and supply constraints. However, our sales realizations were relatively flat due to the normal lag in realizing the benefit of higher prices. In Q1, the European MBSK list price averaged $1,550 per tonne, an increase of $50 from Q4. And the North American MBSK list price averaged $1,753 per tonne, an increase of $66 from Q4. In China, the MBSK net price was $793 per tonne in Q1, an increase of $26 from Q4. Hardwood sales realizations were essentially flat in Q1 compared to Q4, as higher prices in China were offset by lower prices in North America. In China, the Q1 average MBHK net price was $578 per ton, up $30 compared to Q4, resulting in the average price gap this quarter between MBSK and MBHK in China being $215 per ton. We believe the price gap is beginning to widen. The North American MBHK average Q1 list price was $1,268, down $30 from Q4. Pulp sales volumes in the first quarter increased by 26,000 tons to 478,000 tons. This increase is attributed to the timing of sales. We had 22 days of planned down time in Q1 compared to no days of scheduled down time in Q4 which negatively impacted Q1 EBITDA by about $30 million in direct costs and reduced production. After adjusting for the scheduled downtime, pulp production modestly increased from the fourth quarter, driven by improved production at our Canadian mills. In the second quarter of 2025, we had 18 days of planned maintenance downtime at our Peace River mill and three days of planned maintenance downtime at our Stendhal mill. which combined should have roughly the same EBITDA effect as the Q1 Selgar shut. For our solid wood segment, realized lumber prices increased in the first quarter compared to the fourth quarter. This was driven by higher prices in both the U.S. and European markets, which was a result of reduced supply and steady demand. The random length U.S. benchmark for Western SPF number two and better average price was $492 per thousand board feet in Q1, compared to $435 per thousand board feet in Q4. Today, that benchmark price for Western SPF No. 2 and better is around $485 per thousand board feet, an increase of about $40 from the beginning of the year. Lumber production was a near record 128 million board feet in Q1, up 12% from Q4 due to seasonal downtime in the fourth quarter. Lumber sales volumes were also a near record at 131 million board feet, up about 6% from Q4. Electricity sales totaled 235 GWh in the quarter, which was about the same as Q4. Pricing in Q1 modestly increased to about $112 per MWh from $109 in Q4 due to higher spot prices in Germany. In Q1, our pulp segment had stable fiber costs compared to Q4. For our solid wood segment, per unit fiber costs increased in Q1 driven by strong demand for saw logs in Germany. Our mass timber operations within the solid wood segment maintain stable sales volumes in Q1 compared to Q4. We continue to see strong and growing underlying interest in mass timber. However, the prevailing high interest rate environment is currently impacting project timelines and overall market momentum. We believe this is a temporary headwind. Currently, we are seeing some planned project start dates slipping from 2025 into 2026. We reported a consolidated net loss of $22 million for the first quarter or $0.33 per share compared to a net income of $17 million or $0.25 per share in the fourth quarter. We consumed about $3 million of cash in Q1 compared to about $54 million in Q4. You will recall we repaid $100 million of senior notes in Q4 last year, which was partially offset by strong operational cash flow generation. In Q1, our net working capital excluding non-cash items increased roughly $23 million due to seasonal working capital movements. We expect most of this working capital build to reverse in Q2. In Q1, we invested a total of $20 million in capital across our facilities. This included the completion of the woodroom upgrade at our Selgar mill. This project is expected to decrease our reliance on sawmill residuals and lower per-unit fiber costs. At the end of Q1, our liquidity position totaled $471 million, comprised of about $182 million of cash and $289 million of undrawn revolvers. Finally, our board has approved a quarterly dividend of 7.5 cents per share for shareholders of record on June 26, for which payment will be made on July 3, 2025. That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. I would like to begin with the topic we get asked most, which is tariffs. As it stands today, our products are not being subject to tariffs. The pulp and mass timber we import from Canada into the U.S. and the lumber we import from Germany into the U.S. are clearly not subject to tariffs, but they're subject to a Section 232 review due to be published no later than November 2025. In addition, the wood chips we import into Canada from the U.S. are not included in the counter-tariffs that Canada has said it could apply. To give our direct tariff exposure some context, On average, we sell about 200,000 tons of pulp into the U.S. annually. About two-thirds of this volume is hardwood pulp. We also export from Germany about 200 million board feet of lumber to the U.S. In contrast, our main import from the U.S. into Canada is wood chips for our Selgar pulp mill, which today amounts to about 35% of the fiber consumption of the mill. We are experiencing some exposure in the form of secondary effects, particularly as it relates to a weaker U.S. dollar and to a lesser degree a weaker pulp demand in China and in the U.S. lumber market. We're watching trade policy developments closely and have contingency plans in place to mitigate any potential tariff impact. With this global economic uncertainty in the background, we have refined our 2025 plan to ensure we can deliver on our top priorities. which are maximizing the operating rates of our mills and generating cash to reduce debt. As such, we have launched a company-wide program that targets $100 million that will be generated from improved operational efficiency as well as cost savings by the end of 2026 when compared to 2024. In addition, in 2025, we're targeting a reduction of inventories of $20 million and a reduction of our 2025 capex of another $20 million. Our efforts are well underway to achieve this goal of $100 million of improvement in our bottom line results, and I am confident we will reach this goal. We look forward to sharing updates on our progress as time progresses. In Q1, our mills ran well. Our EBITDA of $47 million reflects a heavy maintenance quarter that saw our Selgar mill down for 22 days. We also experienced the weakening of the U.S. dollar, which negatively impacted our results relative to Q4 last year. That said, there is a potential benefit for our Selgar mill, as the weaker dollar should enhance the mill's purchasing power for U.S. source fiber, which accounts, as I said earlier, for roughly 35% of its supply. Fiber costs were up in Germany, most notably for our sawmills. And although pulp pricing was generally up, we sold a larger proportion of hardwood pulp this quarter compared to Q4, which negatively impacted our mill nets. Positive market momentum continued in the second quarter, but as I just mentioned, we're beginning to see the impact of global economic uncertainty negatively affecting buying patterns and pricing in some of our markets. We're also expecting to see some modest fiber cost inflation and lower energy sales prices in the second quarter. In the meantime, the U.S. dollar weakened further in this first month of the current quarter and is under pressure of the U.S. government's proposed punitive tariff regime. The ultimate impact of trade barriers remains unclear and is likely to remain this way until the third quarter, but we will continue to work on mitigation strategies and remain flexible to manage through the uncertainty. In the meantime, we continue to maintain an open dialogue with our customers, government officials, and our industry associations. We're prepared to take swift action, redirecting products to other geographies if necessary, and adjusting our operations accordingly, depending on the scenario that actually plays out. Now, turning to the pulp markets, softwood pricing is expected to remain strong in most markets. We continue to believe that overall demand for softwood will be steady in the midterm, which when combined with reduced supply will create some upward pricing pressure in most markets in the second quarter of 2025. In the first quarter, hardwood pricing strengthened in China due to seasonally strong demand and weakened supply due to heavy South American producer maintenance. Conversely, hardwood pricing weakened in South and North America due to the weaker demand. More broadly, we continue to believe that the longer-term outlook for softwood pulp supply demand dynamics is favorable due to the reduced supply and increasing demand for long fiber pulp. Despite the uncertainties of tariffs, we believe that the significant contrast between the supply-demand fundamentals for softwood and hardwood pulp will drive the price difference between these two grades to levels well beyond historical norms. At the moment, we believe the net price gap in China is growing. We expect a wider price differential to persist well into 2025. As a reminder, softwood represents roughly 85% of our annual pulp sales volumes. As we have highlighted in previous calls, we believe that the ability of papermakers to substitute hardwood pulp in the place of softwood pulp is limited due to most of the potential substitution options having already been implemented, and that only a marginal amount would still be possible. All our mills ran well, with Selgar being down for 22 days of plant maintenance, equating to about 30,000 tons of lost production. In total, we produced almost 460,000 tons in Q1, and after allowing for Selgar's shot, that equates to about a 20,000 ton improvement over Q4 production. In addition, our lumber production improved relatively to Q4 by over 10%. While we improved our production output this quarter, we continued to put strong emphasis on further improving the reliability of our assets across all businesses. In Q1, as expected, our overall pulp fiber costs were steady relative to Q4. In Germany, we saw increased demand for saw logs, which pushed up the price of sawmill chips While in Canada, costs were down slightly thanks to our Peace Rivers wood room as well as our fiber sourcing strategy in Selgar. The increased demand for saw logs in Germany has also pushed the price of fiber up for our saw milling business. Looking ahead to Q2, we expect fiber costs to remain stable for our pulp business, with a small increase of about 10% for our solid wood business. Our solid wood segment continues to be held back by a weak European economy and the impact of high interest rates on the construction industry, despite some modest price improvements in the U.S. lumber market. As a result, our solid wood segment posted an almost break-even EBITDA in Q1, with high U.S. lumber pricing offsetting the sustained weak demand for pallets. Our mass timber business took a nice step forward in 2024. When our facilities were running full, but only on one shift, we saw meaningful profitability. The uncertainty surrounding the economy on the back of the trade war is forcing developers to delay the construction as they grow concerned about potential cost escalations down the road given the long lead times of their projects, pushing them into late 25 or 26. On the positive side, however, we are currently receiving an increasing volume of inbound project inquiries. Based on our order book today, we're expecting a weaker second and third quarter with improvement beginning in the fourth quarter. And at this point, we believe we will be ramping up one of our facilities to two shifts already in early 2026. Today, our mass timber order file sits at about $24 million. We remain confident that the environmental, economic, speed of construction, and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe. As such, we're highly confident in this business being a growth engine for Mercer. We're well positioned to take advantage of that market growth, as we have roughly 30% of North American cross-laminated timber production capacity, a broad range of product offerings, including design and installation services, and a large geographic footprint, with manufacturing sites in the northwest as well as the southeast, giving us competitive access to the entire North American market. We have positioned ourselves to be a one-stop shop for mass timber installations. We expect lumber pricing to be modestly weaker in the U.S. market at the end of the second quarter due to the impact of the current economic environment on customer demand. In contrast, we expect modest upward pricing pressure in the European market, primarily due to increasing SOLOC prices. However, any meaningful long-term improvement in either the European or U.S. markets will be dependent on improved economic conditions and lower interest rates. Now, the cost competitive setup we have in Freesal gives us the flexibility to have a strong presence in Europe, the U.S., and the quality-sensitive Japanese market. In Q1, 39% of our lumber volume was sold in the U.S., as we continue to optimize our mix of products and target markets to current conditions. We continue to believe that low lumber inventories, the large number of sawmill curtailments, reduced allowable cut limits, relatively low housing stock, and homeowner 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. Our shipping pallet market remains weak, with pallet pricing staying flat due to the overhang of the European economy, particularly in Germany. Once the economy begins to show signs of recovery, we expect pallet prices to recover towards more historical levels, allowing Torgau to deliver significant shareholder value. Heating pallet prices were up slightly in Q1 due to seasonality in this market, and we expect demand and prices to be slightly lower in Q2 as warmer European temperatures take hold. As part of our objective to keep all of our pulp mills running reliably, we are planning for major maintenance shutdowns at all mills throughout the year. Our current schedule is the following. In Q1, Selga was down for 22 days, which is longer than usual for this mill. The wood room project is now completed and being commissioned. The post-shut startup of the mill was slower than planned and resulted in five days of lost production, which will impact Q2, but it's now running well. In Q2, Peace River was down for 18 days, as they already went through their shutdown, or about 24,000 tons, and Stendhal will take a short three-day shut, or roughly 6,000 tons. In Q3, Rosenthal will be down for 14 days, or about 14,000 tons, and Selgar will take four days equivalent to 5,500 tons. And in Q4, Stendhal will be down for 18 days equivalent to 37,000 tons. In total, that is 79 days of plant downtime compared to 57 in 24. The increase in 2025 plant maintenance days is due to Selgar not taking any major shot in 2024 now that it is on an 18-month maintenance cycle. In light of recent economic uncertainty, we have reduced planned CAPEX and now expect to spend about $100 million on capital projects in 2025. This capital budget is heavily weighted to maintenance, environmental, and safety projects and includes both Torgao's lumber expansion project and Celgar's recently completed woodroom project. Dorgao'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 planing capacity. We expect to reach a little bit over 100,000 cubic meters already in 2025. This was envisioned as part of our original investment thesis to increase the mill's value-added product mix and maximize potential synergies. Our new linear extraction pilot plant at Rosenthal continues to run exceptionally well. Our product development is going according to plan. We're excited about the future prospect of this product as a sustainable alternative to fossil fuel based products like adhesives and advanced battery elements. We believe this product can 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 carbon economy while adding shareholder value on our existing asset base. As the world becomes more demanding about reducing carbon emissions, we believe that products like mass timber, green energy, lumber, pulp, and lignin will play increasingly important roles in displacing carbon-intensive products 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 targets and believe our products form part of the climate change solution. In fact, we believe that demand for 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 balance our company through growth in our lumber and mass timber businesses. I would also like to note that we're beginning a Feld II engineering review on the potential for carbon capture project at our Peace River Mill. We have a lot of work to do given the early stages of this review. but we're excited about the potential a project like this could have on the economics of this mill. We will publish our 2024 sustainability report in the coming weeks. I invite you to go to our website and have a look at this report as it highlights our main initiatives and our progress on our sustainability-related targets. While I'm encouraged by the softwood pulp market outlook, it's disappointing to see the overall market uncertainty that the trade war unleashes. As a result, and as I noted above, I have asked our operators to focus on driving efficiency through aggressively reducing costs while enhancing reliability to strengthen our resilience and readiness for potential tariff impacts, including being ready with various tariff mitigation strategies. We remain committed to increasing shareholder value by reducing our leverage through aggressive cost reduction programs, strong mill reliability, operational realization, and prudent capital management. Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.