Mercer International Q2 2026 Earnings Call - Strategic Alternatives Underway as German Cost Pressures and Liquidity Constraints Mount

Howard, Conference Call Moderator, Mercer International: Good morning, welcome to Mercer International’s second quarter 2026 earnings conference call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International, and Richard Short, CFO and Secretary. I will now hand the call over to Richard Short.

Richard Short, Chief Financial Officer and Secretary, Mercer International: 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.

Juan Carlos Bueno, President and Chief Executive Officer, Mercer International: 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.

This positions us favorably against Canadian lumber exports to the U.S., which, despite recent decreases in anti-dumping and countervailing duties, are subject to a significantly higher average combined tariff and duty rate of about 35%. Although the direct tariff impacts have been modest, we continue to monitor events as indirect impacts reshape global commodity supply and demand dynamics. Moving to Torgau. This mill has been heavily impacted by the global economic uncertainty and heightened raw material and energy costs created by these macro events. In response, we have taken comprehensive measures to enhance operations, including increasing production of higher value dimensional lumber for the U.S. market and adjusting our product portfolio to better meet market demand.

We also have taken steps to align our production with current market conditions, including product portfolio rationalization, moving from a four-shift to a three-shift system, reducing 100 positions in our workforce during the month of July, with 250 more to go between now and Q2 of 2027. A difficult but absolutely necessary step. Our German fiber costs have reached historically high levels, driven by supply constraints and strong demand. These market dynamics are a direct result of the war in Ukraine, which not only stopped the inflow of wood fiber from Russia into Europe, but caused energy costs to reach record levels. High energy prices, coupled with a permissive legislation that allows wood burning for energy purposes, and the German government subsidizing wood-burning home heating solutions, resulting in high demand for wood pellets, placing us in direct competition with the pellet producers for our pulp fiber.

In contrast, we’re seeing pulp fiber costs coming down in Canada due to reduced chip demand resulting from pulp mill curtailments. Similarly, we’re also starting to see German sawlog prices coming down due to weak European lumber demand after increasing in the second quarter. Our main import from the U.S. into Canada is wood chips for our Celgar pulp mill, which accounted for approximately 60% of the mill’s fiber consumption in the second quarter, and we feel this is a competitive advantage. Relative to the first quarter, pulp and sawmill fiber costs were up roughly 7% in Germany and down about 4% in Canada for the reasons just mentioned. Overall, NBSK pulp markets weakened modestly in the second quarter.

China net prices were down roughly 4% in the quarter as mill inventory levels remained high, while European list prices were up 2%. In North America, list prices were stable. Today, the softwood/hardwood price differential is about $76 per ton. Hardwood prices in North America increased 12% in the second quarter, while prices in China were essentially flat. Looking ahead, we expect seasonally slow pulp demand to weigh on pricing as the business works through the high mill inventory levels. In contrast, global NBHK supply constraints are expected to ease in Q3, putting additional pressure on pricing.

For the latter part of the year and into 2027, we expect the NBSK market to tighten as a consequence of the heavy maintenance season in the northern hemisphere, coupled with the mill closures that have been announced, which will reduce the inventory levels and create positive price pressure. Trade uncertainty combined with inflationary pressures brought on by high energy prices are expected to continue to impact this business. Until the macroeconomic factors stabilize, the supply side will heavily influence the supply-demand dynamic. Our pulp production was stable in Q2 compared to Q1. In total, we produced 456,000 tons in Q2 compared to 466,000 tons in Q1. Ongoing fiber constraints required us to strategically reduce production at our German pulp mills by approximately 26,000 tons in Q2. Our German mills will continue to operate at a reduced rate in the third quarter.

As part of our objective to keep all of our partners running reliably, we planned maintenance shutdowns during the second half of the year. Our remaining shut schedule is as follows: In Q3, Rosenthal will be shut down for 26 days, equivalent to 22,000 tons. Peace River will take 10 days or almost 14,000 tons. Stendal will only take a short four-day shut that is a bit less than 7,000 tons. The extended shut in Rosenthal includes 12 days of market-related curtailment. In Q4, Celgar will be down for 18 days, an equivalent of 23,000 tons. Our lumber production was up almost 7% relative to Q1. We’re encouraged with the performance of the new advanced scanning technology installed at Torgau this quarter, as this technology allows us to maximize the value of our dimensional lumber and into the U.S.

Our solid wood segment continues to face headwinds from a weak European economy and the dampening impact of high mortgage rates in the U.S. However, the reduced supply of Canadian lumber has created a supply-driven higher lumber prices in the U.S. market, a trend we believe will continue in the third quarter. The stagnation of the European economy continues to dampen pallet demand. This unfavorable business environment, combined with high fiber cost, drove the $8 million EBITDA loss of our solid wood segment in Q2. This segment’s earnings were also held back this quarter by unplanned downtime at our Conway facility, mass timber project delays, and incremental fixed costs associated with our transition to two shifts at our Conway facility. Looking ahead, we expect the full implementation of a second shift will create meaningful operating efficiencies.

Given the many economic forces affecting the U.S. construction activity, U.S. lumber pricing will likely continue to be volatile in the short term. We’re expecting a modest demand increase through the summer building season in North America, which, combined with reduced supply, will create an improved pricing environment. Prices in Europe are expected to stay flat in Q3, and any meaningful long-term improvement in either the European or U.S. markets remains dependent on improved economic conditions and lower long-term interest rates. In Q2, 43% of our lumber volume was sold into the U.S. Looking forward, we believe the U.S. lumber market will be driven by favorable homeowner demographics, which, combined with reduced North American lumber capacity, will create supportive supply-demand dynamics in the midterm. European shipping pallet markets remain weak, with pricing staying generally flat due to the overhang of the European economy, particularly in Germany.

We’re expecting generally stable pricing in the second half of 2026. Biofuel prices, on the other hand, were down 3% in Q2 relative to Q1. Seasonal demand softness typically drives a steeper decline in prices, but current market dynamics limited that this year. We expect modest downward pressure on biofuel prices in the third quarter. With regards to our mass timber business, revenues were up over 25% compared to Q1, and production was up by about 40%. We expect our production and sales to be flat in Q3 and increase meaningfully in Q4 due to the timing of projects. Today, our mass timber backlog of projects sits at about $151 million, and we continue to see a steady volume of incoming project inquiries, including large data center projects sponsored by hyperscalers, which make up roughly 70% of the backlog.

We feel our large production capacity and geographic footprint positions us very well for these type of projects, and we remain bullish on this business as a growth engine for Mercer. Thinking about Mercer overall, the headwinds facing our industry have proven to be both longer and more severe than many had anticipated. The impact of the war in the Middle East not only exacerbates global economic challenges. Market weakness is expected to persist during the rest of the year. As a result, our priority is on maintaining solid liquidity. To do this, our strategy continues to focus on cost reductions beyond our One Goal 100 program, reduce capital expenditure and other working capital measures along with a commitment to improve our capital structure in a way that supports our long-term business plan.

As 2026 progresses, we will remain focused on those elements of our business that we can control while executing on short-term strategic initiatives, while working in tandem with our financial advisors to improve our capital structure. I also believe that the current market conditions validate our long-term strategy that focuses on transforming our pulp mills into biorefineries with additional revenue streams that will balance our product mix and make Mercer much more resilient. Thanks for listening. I will now turn the call back to the operator for questions. Thank you.

Howard, Conference Call Moderator, Mercer International: Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 11 again. Again, if you have a question or comment, please press star 11 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Roger Spitz from Bank of America. Mr. Spitz, your line is open.

Roger Spitz, Analyst, Bank of America: Thank you very much. Hopefully you can hear me. I just wanted to ask two questions. One is, from the sound of it sounds like the German mills are well below cash breakeven. Can you give us a sense of how far that is so we can understand what it will take to get them back to breakeven if they are in fact below cash breakeven?

Richard Short, Chief Financial Officer and Secretary, Mercer International: Yeah. Roger, this is Richard. They are negative cash. Order of magnitude, overall the pulp segment was negative, like $25 million, I believe. To get on top of the CapEx, it probably needs to be another $30 million, get us to $35 million or $40 million in total in terms of an improvement. Does that give you an order of magnitude?

Roger Spitz, Analyst, Bank of America: It does. Helpful. Thank you. Also, can you give an update of your 2026 cash flow items? You gave that, I think, on the Q4 call of cash interest, CapEx, cash taxes, working capital inflow, outflow. Any guidance you can provide there?

Richard Short, Chief Financial Officer and Secretary, Mercer International: I think our Q3 expectation is to be pretty similar to Q2.

Roger Spitz, Analyst, Bank of America: You mean on the cash flow items for CapEx and interest and taxes, working capital?

Richard Short, Chief Financial Officer and Secretary, Mercer International: Yep.

Roger Spitz, Analyst, Bank of America: Got it. Okay. Thanks very much, Rich.

Howard, Conference Call Moderator, Mercer International: Thank you. Our next question or comment comes from the line of Dhruv Rana from Energy. Your line is now open.

Dhruv Rana, Analyst, Energy: Yeah. Hi. My question was regarding the maintenance cost. It shows around $67 million. You mentioned there was no maintenance done for the first six months. Is this for the whole year that the maintenance cost has been mentioned?

Richard Short, Chief Financial Officer and Secretary, Mercer International: Yes. I think the way to think about that maintenance cost is that’s an OpEx, sort of an ongoing non-capital cost. What we were talking about is not having major maintenance shuts. We didn’t take the mill down for an extended period of time to do what we call major maintenance. The number that you see in there is just day-to-day maintenance. Maybe to make the distinction. In a major shut, we take all the machines down. We go in and inspect, check pipe thickness, and replace motors and things like that, where you need to take the whole mill down to do, whereas the rest of it, you can isolate mill pieces and do regular maintenance, as we think about it.

Dhruv Rana, Analyst, Energy: We can expect in the next six months also, there will be a maintenance cost, similar or more amount related to maintenance?

Richard Short, Chief Financial Officer and Secretary, Mercer International: Yeah. We’re going to have about 40 days of major maintenance downtime. We’re going to take three of the mills down this quarter and do all this maintenance. I guess when you think about order of magnitude of incremental cost, think about one and a half million dollars per day of cost. That’s the order of magnitude.

Dhruv Rana, Analyst, Energy: Okay. My second question was related to energy. Since we use all the waste material for generating energy, how do we calculate the energy cost for our production? Is it related to the sale price of energy? It seems to be rising every year. Is it related to the selling price?

Richard Short, Chief Financial Officer and Secretary, Mercer International: Yeah. The major energy usage at our mills is natural gas, at least at the pulp mills. There’s electricity used at the sawmills. All of our mills, with the exception of our mass timber mills, are energy self-sufficient. We produce our own electricity. To answer your question, yes, we’re paying market prices for natural gas. As the price of that gas goes up, due to the Middle East war, for example, we’re paying those market prices.

Dhruv Rana, Analyst, Energy: Thank you.

Howard, Conference Call Moderator, Mercer International: Thank you.

Dhruv Rana, Analyst, Energy: That’s all from me.

Howard, Conference Call Moderator, Mercer International: Our next question or comment comes from the line of Sean Steuart from TD Cowen. Mr. Steuart, your line is now open.

Sean Steuart, Analyst, TD Cowen: Thanks. Good morning. Just one question. The Torgau restructuring, trying to understand the puts and takes with, I suppose, layoff costs near term, but I guess the bigger question is how concentrated are the wood product losses to that asset? And as the footprint changes, what is the expected uplift in contributions or I guess lower losses coming from that asset specifically?

Juan Carlos Bueno, President and Chief Executive Officer, Mercer International: Absolutely, Sean. Yes, obviously, we have some costs associated with severance as obviously a massive amount of people will be leaving the company or some of them have already left. We believe that the cost is around $3 million this year and $3 million next year. When you think about the whole process being implemented by the second quarter of next year, already the mill would be headed towards profitability. It is right now, as you well indicated, a big factor behind the negative results of the wood product segment. But the turnaround that these actions that we are taking on restructuring for Torgau could be really significant, in excess of $20 million for the mill, and with potential to be even higher than that, much higher than that. So our goal at the end of the day is for the mill to be positive next year, profitability-wise.

It will be, we believe, almost breakeven in terms of cash flow, and for the following year being positive on cash flow once you have a full year behind you of absolute implementation.

Sean Steuart, Analyst, TD Cowen: Okay. That’s all I had. Thanks for the context.

Howard, Conference Call Moderator, Mercer International: Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. I’m showing no additional questions in the queue at this time. I would like to turn the conference back over to Juan Carlos Bueno for any closing remarks.

Juan Carlos Bueno, President and Chief Executive Officer, Mercer International: Okay. Thank you, Howard. Thanks to all of you for joining our call, and obviously, Rich and I are available to talk more at any time, so don’t hesitate to call either one of us. Otherwise, we look forward to speaking to you again on our next earnings calls in October. Bye for now.

Howard, Conference Call Moderator, Mercer International: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speaker stand by.