Mercer International Inc.

Good morning and welcome to Mercer International's third quarter 2025 earnings conference call. On this 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.

Thanks, Michelle. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the third 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 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 be making 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'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 negative $28 million, including a $20 million non-cash inventory impairment, a decrease from negative EBITDA of $21 million in the second quarter. One of the key drivers of our results was negative pressure on pulp pricing and demand from global economic and trade uncertainty. We had lower sales realizations for both softwood and hardwood pulp, which negatively impacted EBITDA by roughly $15 million and was also a key factor behind our non-cash inventory impairment charge. In the third quarter, our pulp segment had negative quarterly EBITDA of $13 million while the solid wood segment had negative EBITDA of $9 million. Additional segment disclosures are available in our Form 10-Q, which can be found on our website and that of the SEC. Third quarter average published prices for MBSK and MBHK pulp decreased across all our markets compared to the second quarter. This decrease was due to weakened demand caused by a sustained uncertain global economic and trade environment. The price decline in China was further impacted by an oversupplied paper market and the increase in integrated pulp production. MBSK pulp prices faced additional pressure from the increased substitution of softwood with lower cost hardwood. In the third quarter, the MBSK net price in China was $690 per ton, a decrease of $44 in the second quarter. The European MBSK list price averaged $1,497 per ton. a decrease of $56 from the prior quarter, while the North American MBSK list price decreased $120 in the second quarter, averaging $1,700 per ton. The market price gap between MBSK and MBHK in China was about $190 per ton this quarter, a slight decrease from the roughly $200 in the second quarter. In China, the third quarter average MBHK net price was $503 per ton, down $30 compared to the second quarter, and the North American third quarter price was $1,203, down $107 per ton. As mentioned previously, the third quarter included a $20 million non-cash inventory impairment, primarily driven by lower pulp prices. Of this amount, approximately $15 million was attributed to hardwood inventories, and the remainder was primarily against softwood inventories. Pulp sales volumes in the third quarter increased by 26,000 tons to 453,000 tons. Pulp production in the third quarter of 459,000 tons was flat compared to the second quarter. We had 20 days of planned maintenance downtime in the third quarter compared to 23 days in the second quarter. In the fourth quarter of 2025, we had 18 days of planned maintenance downtime at our Stendhal For our solid wood segment, lumber pricing in the third quarter was relatively stable compared to the second quarter in both the U.S. and European markets as reduced supply offset relatively weak demand. The random length U.S. benchmark price for western SPF number two and better averaged $477 per thousand board feet in the third quarter, a modest increase from $472 per thousand board feet in the second quarter. Today, that benchmark price for Western SPF No. 2 Embedder is around $460 per thousand board feet, a modest increase from the beginning of 2025. In the third quarter, lumber production decreased by about 4% to 115 million board feet from the second quarter due to planned maintenance at our Freesale Mill. Lumber sales volumes also decreased to 110 million board feet, down about 9% from the second quarter, reflecting the lower production and timing of sales. Electricity sales for the quarter totaled 204 GWh, a 6% decrease from the second quarter due to planned turbine maintenance at the Rosenthal and Selgar mills. Third quarter pricing increased to about $106 per MWh, up from $90 in the second quarter, driven by higher spot prices in both Canada and Germany. Fibre costs for both our pulp and solid wood segments were flat in the third quarter compared to the second quarter. Overall fibre costs remained high in Germany with strong saw log demand and constrained supply, while in Canada demand was stable. Our mass timber operations within the solid wood segments had stable revenues in the third quarter compared to the second quarter as the elevated interest rates in the US continued to impact project timelines and overall market momentum. However, despite the headwinds, our mass timber business has developed a healthy order book as we continue to see growing interest in mass timber and we expect to improve results in 2026. We continue to make progress on our One Goal 100 program. As a reminder, 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. We currently expect to realize approximately $30 million in cost savings and reliability improvements by the end of 2025. Juan Carlos will provide more details on our progress on this initiative. We reported a consolidated net loss of $81 million for the third quarter or $1.21 per share compared to a net loss of $86 million or $1.29 per share in the second quarter. In the third quarter, we consumed about $48 million of cash compared to $35 million in the second quarter. This increase was primarily driven by lower EBITDA. In the third quarter, we invested a total of $30 million in capital across our facilities. These investments were primarily for maintenance, but also included upgrades to the log yards at Friesau and Torgau. The upgrades are expected to enhance efficiencies, positioning us favorably for improvements in the solid wood market. At the end of the third quarter, our strong liquidity position totaled $376 million, comprised of about $98 million of cash and $278 million of undrawn revolvers. That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. This quarter's operating results were disappointing. mainly due to trade uncertainty, which created significant industry headwinds, such as China increasing its paper exports to Europe, thus negatively impacting European paper producers. Economic uncertainty created by tariffs and trade disputes is negatively impacting demand for both paper and lumber. Another factor this quarter was the $200 price gap between hardwood and softwood pulp, which incentivizes certain customers to use more hardwood in their furnishings. In spite of these factors, demand for softwood pulp has been steady, but weak hardwood pricing is holding softwood prices down despite strong overall softwood fundamentals. In addition, the ongoing trade disputes are putting downward pressure on the U.S. dollar, which negatively affects our operating results. This U.S. dollar weakness increased our operating costs by almost $11 million compared to Q2. While these uncontrollable factors create significant macroeconomic headwinds for our we continue to focus on the things we can control. In this sense, we have made good progress on our mill reliability and our cost control initiatives are gaining traction. As a reminder, in the second quarter, we launched a company-wide program aimed at identifying $100 billion in cost savings and profitability improvement opportunities by the end of 2026 when compared with 2024. We have named this program One Gold 100. Currently, we expect to achieve $30 million of cost and reliability-related savings by the end of 2025. This initiative also includes targeting working capital reductions of $20 million, as well as $20 million in CapEx reductions relative to our previous 2025 guidance. A significant part of the One Go 100 program relates to reliability improvements that combine with additional cost savings expected to be realized 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 as planned. The trade war has created an unprecedented level of uncertainty in the markets in general. However, we are beginning to have clarity on the direct impacts of tariffs on our business. During the quarter, the US Department of Commerce concluded their Section 232 review on lumber. European lumber is now subject to a 10% tariff, as is Canadian lumber. The 10% incremental tariff on Canadian lumber brings the total duty and tariff impact to about 50% on average for Canadian lumber. As a result, we have already seen Canadian lumber curtailment announcements, and we expect more to come. This will create a reduced supply of residual chips for pulp mills, and will inevitably create pressure on fiber costs. We feel, however, that our Selgar mill is well positioned given its ability to access the U.S. fiber market and our ability to harvest and process whole logs. Nonetheless, we expect to see some cost inflation. On the other hand, our Peace River mill's hardwood supply will not be impacted. Today, our pulp shipments to the U.S. from Canada are not impacted by tariffs as pulp is KUSMA compliant. As mentioned, our main import from the US into Canada is wood chips for our Selgar pulp mill, which today amounts to about 45% of the fiber consumption of the mill. We have the ability to grow this percentage slightly going forward if required. Most importantly, there are no counter tariffs applied to this fiber. Our EBITDA of negative $28 million reflects 20 days of plant downtime, maintenance downtime, including 16 days at our Rosenthal mill and lower pulp prices in all markets. Overall, pulp markets weakened significantly in the third quarter. Seasonality-driven weak paper demand combined with low fiber costs in China contributed to this weakening. We believe these market dynamics have also encouraged opportunistic pulp substitution in some paper grades as paper producers are running their machines more slowly given the overcapacity. In addition, we believe pulp stocking by paper producers is putting additional pressure on pulp prices. At present, we believe paper producers' pulp inventories are low, supported by the availability of prompt delivery pulp. Looking ahead, we expect to see some modest NBSK price improvements late in Q4 and into Q1 of 2026. as the impact of the announced European NBSK curtailments impact Chinese port stock and the Please stand by.