Mercer International Inc 2026 Q2 Earnings Call

Thanks, Howard. 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 to Juan Carlos to provide further color into the markets, our operations, and our strategic initiatives. 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. 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'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.

In response to persistent economic uncertainty and challenging market conditions, we are currently working with advisors and are actively evaluating strategic alternatives to enhance our liquidity and strengthen our balance sheet. Juan Carlos will have more to say about these efforts shortly. We also added disclosure to our financial statements regarding our status as a going concern. This disclosure stems from the classification of our revolving credit facilities to current liabilities. Our Canadian revolving credit facility matures in January 2027, and we currently believe we will be able to renegotiate or replace this facility prior to its maturity. Separately, while we hold a waiver for our German revolving credit facilities leverage ratio through September 30th, 2026, market conditions suggest we will likely miss that required ratio in the fourth quarter.

We have also classified the borrowings under this facility as a current liability to comply with accounting standards. Our second quarter operating EBITDA was negative $21 million, down from a positive $8 million in the first quarter. This decrease was primarily due to higher fiber costs in Germany, which also led to a $29 million non-cash inventory impairment charge. In the second quarter, our Pulp Segment reported negative quarterly EBITDA of $13 million and our Solid Wood Segment reported negative quarterly EBITDA of $8 million. Additional segment disclosures are available in our Form 10-Q, which can be found on our website and that of the SEC. Softwood pulp markets continued to be impacted by the ongoing global economic headwinds through the second quarter. Our softwood pulp realizations were down slightly to $682 per ton from $696 per ton in the first quarter.

In the second quarter, the NBSK net price in China decreased to $658 per ton, a $27 decrease from the first quarter. This decrease was mostly offset by higher NBSK list prices in Europe and North America. In Europe, the average NBSK list price was $1,655 per ton, a $37 increase from the first quarter. In North America, the average price was $1,577 per ton, a $14 increase. Hardwood markets in China and North America improved in the second quarter due to tight supply. As a result, our sales realizations improved to $607 per ton from $564 per ton in the first quarter. In the second quarter, the average price gap in China between softwood and hardwood pulp narrowed to approximately $56 per ton. The average net price for eucalyptus hardwood pulp in China in the second quarter was $602 per ton, modestly up from the first quarter.

In North America, the average hardwood list price was $1,495 per ton, up $157 per ton from the first quarter. As mentioned previously, the second quarter included a $29 million non-cash inventory impairment, primarily driven by high fiber costs in Germany and low pulp prices. Of this amount, approximately $26 million was against inventory at our pulp mills, and the remainder was against the inventory at our Friesau sawmill and Torgau facility. Second quarter pulp production slightly decreased to about 456,000 tons from 466,000 tons in the first quarter. Our mills production was stable in the second quarter. We strategically reduced production at our German pulp mills in Q2 because of economical fiber supply limitations. Pulp sales volumes in the second quarter decreased to about 450,000 tons from 471,000 tons in the first quarter. The decrease was due to the timing of sales.

We do not have any planned maintenance downtime in the first or second quarter of 2026. In the third quarter, we have 40 days or about 42,000 tons scheduled. For our solid wood segment, lumber sales realizations increased in the second quarter to improved prices in the U.S. In Europe, demand remained weak, but prices were stable due to reduced supply. The Random Lengths U.S. benchmark price for Western SPF number two and better averaged $488 per thousand board feet in the second quarter, an increase of $25 from $463 per thousand board feet in the first quarter. Today, that benchmark price for Western SPF number two and better is around $506 per thousand board feet, a $104 increase from the end of 2025. In the second quarter, lumber production increased by about 7% to 124 million board feet compared to the first quarter.

This increase was driven by strong mill production and improved availability of saw logs. While production was up, sales volumes decreased 11% from the first quarter to 100 million board feet, reflecting the timing of sales. Electricity sales for the second quarter totaled 206 gigawatt hours, which is about 12 gigawatt hours less than the first quarter due to lower production at our pulp mills. Pricing also decreased to about $117 per megawatt hour from $127 in the first quarter due to lower spot prices in both Canada and Germany. Fiber costs for both our pulp and solid wood segments increased for the second quarter compared to the first quarter. This trend was driven by higher costs in Germany caused by low harvesting levels, and for our pulp mills, strong demand for sawmill residuals as an energy source.

Looking ahead to the third quarter of 2026, we expect fiber costs for our German pulp mills to remain elevated. However, we anticipate costs will moderate for our sawmills as saw log availability improves with increased downtime at high-cost operators. Meanwhile, our Canadian mills should see lower costs resulting from reduced fiber demand. Our mass timber operations within the solid wood segment had significantly higher revenues in the second quarter compared to the first quarter, reflecting our strong order book. Our current order book is expected to provide stable production for our facilities through 2026 and into 2027. We continue to make progress on our One Goal 100 program and are on track to achieve our target of improving our profitability by $100 million by the end of 2026, using 2024 as a baseline.

In the second quarter, our aggregate liquidity decreased by $37 million to about $192 million, comprising $79 million of cash and $113 million of undrawn revolvers. This decrease was caused by our weak operating results. Excluding the impact of our $29 million non-cash inventory impairment, our working capital modestly decreased by $6 million. In the second quarter, we invested a total of $12 million of capital across our facilities, the majority of which was maintenance capital. We reported consolidated net loss of $76 million for the second quarter, or $1.13 per share, which includes the non-cash inventory impairment of $29 million, or $0.43 per share. In the first quarter, we reported a net loss of $52 million, or $0.78 per share, which included a non-cash inventory impairment of $22 million or $0.33 per share. That ends my overview of the financial results.

I'll now turn the call over to Juan Carlos.

Thanks, Rich. Our Q2 results were disappointing, with both our pulp and solid wood segments reporting negative EBITDA. These results were driven by extremely high German fiber costs and a delayed recovery in pulp prices. Additionally, geopolitical conflicts in both Ukraine and the Middle East have exacerbated tariff-driven market volatility, resulting in high energy production and logistic costs. While these macroeconomic headwinds present ongoing challenges, we remain laser-focused on managing costs and executing on our strategic priorities. Obviously, in response to these ongoing weak operating results and market conditions, we took decisive steps, and these includes launching a restructuring plan for our Torgau mill, extending Rosenthal's plant maintenance shut in the third quarter by two weeks, and slowing both Stendal and Rosenthal's daily production rates by about 10% in response to a shortage of economical fiber.

At the same time, our One Goal 100 program, launched in Q2 of 2025, yielded about $30 million of concrete results for the full year of 2025, with an additional $24 million achieved in the first half of 2026. We remain on track to reach our goal of $100 million of improvements by the end of the year. While achieving this milestone is significant, we are aggressively pursuing additional operational improvements across the business to help offset these other macroeconomic pressures. Finally, to address debt maturities, enhance liquidity, and strengthen our balance sheet, our special committee of independent directors is actively evaluating the development and implementation of potential alternatives to improve our capital structure.

We have also engaged advisors to support this process. We're currently in discussions with holders of our 2028 and 2029 senior notes and other stakeholders across our capital structure regarding potential financing and other liquidity-enhancing transactions. Our objective is to achieve a comprehensive solution that supports our long-term business plan. The international trade environment continues to evolve, although not in the news lately, the uncertainty around CUSMA may introduce additional trade headwinds, as could any new tariffs imposed by the U.S. or any counter-tariffs applied by a trading partner of the U.S. As it stands today, the only direct impact we are facing is a 10% tariff on our European lumber imports into the U.S.