Mercer International Inc.

Good morning and welcome to Mercer International's second 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.

Thank you Michelle and good morning everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the second quarter before turning the call over 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 investor section of our website. But before turning to our results, I would like to remind you that we will make 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 EBITDA was negative $21 million, a significant decrease from Q1's positive EBITDA of $47 million. The key drivers of the lower results included a negative foreign exchange impact from a weaker dollar, primarily on our euro and Canadian dollar denominated costs and expenses, which reduced EBITDA by approximately $26 million relative to Q1. Lower pulp prices in China negatively impacted EBITDA by roughly $8 million and led to a non-cash hardwood inventory impairment of $11 million. We also incurred higher fiber costs for both our pulp and solid wood segments. Our pulp segment had negative quarterly EBITDA of $10 million in Q2 and our solid wood segment had negative EBITDA of $5 million. You can find additional segment disclosures in our Form 10Q, which can be found on our website and that of the SEC. In the second quarter our NVSK pulp sales realizations decreased compared to the first quarter due to the ongoing uncertain global trade environment impacting demand from China. In North America, MVSK published prices modestly increased due to both stable demand and supply constraints while in Europe prices were stable. In Q2, the MVSK net price in China was $734 per ton, a decrease of $59 from Q1. The North American MVSK list price averaged $1,820 per ton, an increase of $67 from Q1. The European MVSK list price averaged $1,553 per ton, flat compared to Q1. Hardwood sales realizations remained largely unchanged in Q2 compared to Q1 as lower prices in China were offset by higher prices in North America. The North American NBHK average Q2 list price was $1,310 per ton, up $42 from Q1. In China, the Q2 average net price for NBHK was $533 per ton, a decrease of $45 from Q1. As a result, the average price gap between MVSK and NBHK in China for the quarter was about $200 per ton. A gap we anticipate will be sustained in the second half of 2025. In addition, lower Chinese hardwood prices resulted in us recording an $11 million non-cash inventory write-down this quarter. Pulp sales volumes in the second quarter decreased by 51,000 tons to 427,000 tons. This decrease is due to weaker demand caused by the ongoing uncertainties in the global trade landscape. Pulp production was flat in Q2 compared to Q1. We had 23 days of planned maintenance downtime in Q2 compared to 22 days in Q1. But we also had a total of six days of downtime related to a slow start-up from Selgar's Q1 shut. In the third quarter of 2025, we had a total of 18 days of planned maintenance downtime. This includes 14 days at our Rosenthal mill and four days at our Selgar mill. For our solid wood segment, realized lumber prices increased about 10% in the second quarter compared to the first quarter. This was primarily due to higher realized prices in the European market, a result of reduced supply and steady demand, while realized prices in the U.S. market were essentially flat. The random lengths U.S. benchmark price for Western SPF number two and better averaged $472 per thousand board feet in Q2, down from $492 per thousand board feet in Q1. Today that benchmark for Western SPF number two and better is around $533 per thousand board feet, an increase of about $90 from the beginning of 2025. In Q2, lumber production decreased to about 120 million board feet, or 6% from Q1, due to planned maintenance at our Freezal mill. Lumber sales volumes also decreased to 121 million board feet, down about 8% from Q1, reflecting the lower production. Electricity sales for the quarter totaled 216 gigawatt hours, an 8% decrease from Q1 due to planned maintenance downtime at the Stendahl mill. Q2 pricing decreased to about $90 per megawatt hour from $112 in Q1, caused by lower spot prices in Germany. Fiber costs for both our pulp and solid wood segments increased in Q2 compared to Q1, due to strong demand in Germany and higher logistics costs in Western Canada. Our mass timber operations within the solid wood segment had lower revenues in Q2 compared to Q1, as the prevailing market uncertainty is impacting project timelines and overall market momentum. However, we believe this is a temporary headwind and we continue to see strong and growing underlying interest in mass timber and expect improved results going into 2026. In Q1, we announced our One Goal 100 program. This initiative focuses on cost reduction and operational efficiencies with a target to improve our profitability by $100 million by the end of 2026, using 2024 as a baseline. To date, we have approximately $5 million in cost savings with an anticipated total of $25 million of cost savings for 2025. We also expect our implemented operational efficiencies to further improve profitability. Juan Cardas will provide more details on our progress on this initiative. We reported a consolidated net loss of $86 million for the second quarter, or $1.29 per share compared to a net loss of $22 million, or $0.33 per share, in the first quarter. In Q2, we consumed $35 million of cash compared to $3 million in Q1. This increase was primarily driven by lower EBITDA, partially offset by a $21 million decrease in our net working capital, excluding non-cash items, due in part to working capital reductions from our One Goal 100 initiative. In Q2, we invested a total of $24 million in capital across our facilities. These investments include upgrades to the log yards at Friisau and Torgau. These strategic projects are expected to enhance efficiencies, positioning us favorably for improvements in the solid wood market. At the end of Q2, our strong liquidity position totaled $438 million, comprised of about $146 million of cash and $292 million of undrawn revolvers. That ends my overview of the financial results. I'll now turn the call over to Juan Cardas.

Thanks Rich. Trade uncertainty resulting from tariffs and global trade disputes was the main driver behind our disappointing Q2 results. This is despite the fact that our products are not being tariffed up to this point. The market uncertainty coupled with excess supply of cheap hardwood fiber locally has caused Chinese demand for imported hardwood pulp to weaken, resulting in an 8% decrease in prices with a similar knockdown effect on softwood when compared to Q1. In addition, trade disputes have caused the US dollar to weaken dramatically against the euro and Canadian dollar. This US dollar weakness created almost $26 million of negative EBDA for us relative to Q1. While these uncontrollable factors create significant macroeconomic headwinds for our business, we continue to focus on the things we can control. For example, we are beginning to see improvements in our reliability as our mills ran well this quarter. Early in the second quarter, we launched a company-wide program aimed at identifying $100 million in cost savings and profitability improvement opportunities by the end of 2026 when compared with 2024. Our organization has actively embraced this program, which is known internally as OneGole100. At the end of Q2, we achieved $5 million of cost savings and have already identified an additional $20 million by the end of this year. This initiative also includes targeting working capital reductions of $20 million as well as another $20 million in capex reductions. Beyond this, we have started to unlock some significant reliability improvements that combined with additional cost savings next year gives us high confidence that we will reach our $100 million target by the end of 2026. In parallel, our working capital and capex reduction plans are tracking exactly as planned. The trade war has created an unprecedented level of uncertainty in the markets in general. As a reminder, on average, we sell about 200,000 tons of pulp into the U.S. annually. About half of this volume is hardwood pulp. We also export from Germany about 200 million bolt feet of lumber to the U.S. Today, these products do not have any tariffs applied to them. However, lumber is subject to Section 232 review by the U.S. Department of Commerce, so it is unclear if tariffs will be applied at some point in time. This review is to be completed before the end of the year, but we expect decisions will be made beforehand. In contrast, our main import from the U.S. into Canada is wood chips for Selgar pulp mill, which today amounts to about 45% of the fiber consumption of the mill. There are no counter-tariff currently applied to this fiber. As I previously mentioned, our businesses are being impacted by the secondary effects of tariffs, as this uncertain business environment directly affects the regular trade flows of other commodities we produce and forces delaying construction projects that we aim to serve. In addition to the above, the weaker dollar has an immediate effect on our cost bases and our receivable balances. With this global economic uncertainty in the background, our board has taken the difficult decision to suspend our dividend. We view the suspension as temporary but prudent from a capital allocation standpoint as we focus on debt reduction and navigate the uncertainty impacting our industry. Our board of directors remains committed to a competitive dividend as the market uncertainty dissipates and our balance sheet strengthens. Our EBITDA of negative $21 million reflects a heavy maintenance quarter. Our Peace River mill was down for 20 days. Stendhal took a short three-day shut, and as a reminder, Selgar's Q1 shot had six days of slow startup in Q2. In Q2, the combined effect of uncontrollable negative market impacts, including a weakening of the US dollar on power pricing and the associated hardwood inventory impairment reduced our EBITDA by almost $45 million compared to Q1. These were the results of the indirect impact of tariffs and trade uncertainty. Even though we carried good momentum during Q1, the strength changed very quickly as we entered into Q2. Midway through the quarter, the Chinese market weakened dramatically on concerns and uncertainty on tariff costs and the availability of export markets. Today, pot prices in China appear to have hit the floor. Given that we're now in the seasonally low summer period, we don't expect pot prices to regain any positive momentum until the fourth quarter. While some trade agreements are beginning to take shape, the global trade landscape continues to be unclear. 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 and are prepared to take swift action redirecting products to other geographies as necessary and adjusting our operations accordingly depending on the scenario that actually plays out once the dust settles and the tariff map is completed. Turning to the pot markets, softwood pricing is expected to remain weak through the summer months. However, we are confident 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 fourth quarter of 2025 and into 2026. In the second quarter, hardwood pricing remained weakened significantly in China due to weak paper demand and increased domestic pot supply. Conversely, hardwood pricing in North America was resilient due to steady demand. As we have highlighted in previous calls, we believe that the ability of paper makers to substitute hardwood pulp in the place of softwood pulp is limited as most of the substitution options have already been exhausted and understand that while customers will continue to push the limits given the wide gap that still persists between the two fibers, only a marginal amount will still be possible. In total, our pulp production was flat at almost 460,000 tons compared to Q1. Our lumber production was down slightly relative to Q1 by about 6% due to plant maintenance at our freeze-out mill. Overall, we are pleased with our lumber production and look forward to the incremental lumber production at our target mill going forward. As a reminder, we expect the increased annual capacity to be about 100,000 cubic meters of dimensional lumber or roughly 65 million board feet. In Q2, our overall pulp fiber costs were up slightly relative to Q1. In Germany, we saw increased demand for saw logs, which pushed up the price of saw mill chips while in Canada costs were up slightly due to the increased logistic costs. The increased demand for saw logs in Germany also pushed the price of fiber up for our saw milling business. Looking ahead to Q3, we expect fiber costs to modestly decrease for pulp business and increase by about 10% for solid wood business as harvesting levels in Germany are very low due to lack of calamity wood. The business environment for solid wood segment remains consistent with Q1. 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 on certain grades in the US lumber market. As a result, our solid wood segment hosted a negative EBDA of $5 million in Q2 with higher European lumber pricing not offsetting the sustained weak demand for pallets. Looking ahead, we feel we are seeing the beginning of improved economic recovery growth in Germany and Europe in general, which we believe will bring improved pallet pricing. As a reminder, a $1 per pallet increase or roughly 10% will put this business into a very positive cash flow position. Given the economic forces affecting the US construction activity, US lumber pricing would be volatile in the short term. Currently, weak housing construction due to high mortgage rates is a headwind, but the expected implementation of significantly higher anti-dumping and countervailing duties is expected to push lumber prices up. It may also result in the curtailment of some Canadian sawmills, which could create additional pricing tailwinds. In contrast, we expect modest upward pricing pressure in the European market, primarily due to increasing sawlock prices. However, any meaningful long-term improvement in either the European or US markets will be dependent on improved economic conditions and lower interest rates. The cost competitive configuration we have in Freesell gives us the flexibility to have a strong presence in Europe, the US, and the quality sensitive Japanese market. In Q2, 40% of our lumber volume was sold in the US as we continue to optimize our mix of products and target markets to current conditions. Looking forward, we believe the US lumber market will be driven by favorable homeowner demographics. Additionally, factors that we believe will improve lumber market dynamics include potential Canadian sawmill curtailments in the aftermath of higher softwood lumber duties and relatively low housing stock. Combined, we expect these factors will put sustained positive pressure on the supply-demand balance of this business in the midterm. Shipping pallet markets remain weak with the pallet pricing staying generally 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 total to deliver significant shareholder value. Heating pallet prices were up in Q2, which is unusual, given the seasonality of this product, but higher German fiber costs created supply constraints and drove prices up. We expect demand and prices to be slightly lower in Q3. With regard to mass timber business, we have seen steady growth in the number of incoming projects inquiries. In the last two quarters, the potential sales volumes of these inquiries have exceeded $400 million and equates to well over 100 projects per quarter, and as a result, our order book is growing. The projects we are bidding on and winning today are meant to be constructed nine months from now, well into 2026. While our work orders for Q3 remain weak, revenue will start picking up momentum in Q4, to the point that we are planning on ramping up one of our facilities to two shifts in the early part of next year. Today, our mass timber backlog of projects sits at about $68 million. We remain confident that the environmental, economic, speed of construction, and aesthetics 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 are highly confident in this business being a growth engine for Mercer. We are 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 assist and installation services, and a large geographic footprint with manufacturing sites in the Northwest as well as Southeast, giving us competitive access to the entire North American market. As part of our objective to keep all of our partners running reliably, we plan major maintenance and shutdowns at all mills throughout the year. Our remaining shut schedule is as follows. In Q3, Rosenthal will be down for 14 days or about 14,300 tons, and Selgar will take 4 days or 5,300 tons. In Q4, Stendal will be down for 18 days or 37,100 tons. 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 Torgau's lumber expansion project and Selgar's recently completed woodroom project. We are currently conducting a fail-to engineering review for a potential carbon capture project at our Peace River mill. We have a lot of work to do given where we are in the project, but we are excited about the potential that such a venture could have on the economics of this mill. As we look forward, 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 adds 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 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 balance our company to our growth in our lumber and mass timber businesses. Overall, our Q2 operating results were disappointing and equally frustrating given the cost for our weak earnings lies in this uncertain business environment created by global trade challenges. We believe our businesses have strong fundamentals and when combined with a debt reduction strategy, we are poised to create significant shareholder value. We will continue to pursue the benefits of our One Goal 100 program and continue to improve the reliability of our mills to strengthen our resilience. We remain committed to increasing shareholder value by reducing our leverage through aggressive cost reduction programs, strong mill reliability and prudential capital management. Thanks for listening and I will now turn the call back to Michelle for questions. Thank you.