Transcript • May. 8, 2026 2:00 PM • Mercer International Inc (MERC)
Transcript
May. 8, 2026 2:00 PM
Mercer International Inc (MERC)
Sean: that you want to build around and what might be considered non-core. And with respect to pulp capacity rationalization, does that need to wait for this process to play out? And maybe once the balance sheet's re-bolstered, you could look at permanent or indefinite closures as those I imagine are quite expensive. Any perspective there?
Juan Carlos Bueno: Yeah, Sean, thank you. Yes, obviously the committee is considering all the tips possible. So we're not looking only at whether it's reduction of assets, but we're looking at the entire picture, our entire capital structure. So we'll be looking, and that was the reason why we put out this consent solicitation. We were very pleased with the outcome. We got more than 80% consent. And the purpose is obviously to provide flexibility by broadening the types of transactions that we can undertake with bondholders. So that's part of the analysis that the special committee is going to be looking at, not only focusing on the assets, as you asked, but going beyond that, looking at every aspect of our capital structure. So that is the focus that we are having in recent times. And it is too premature to say whether it's this asset or that asset that we have in one or another category. Obviously, we've done the work. But as I mentioned, and I think I addressed this in the previous call last quarter, when we were asked about asset sales, and my comment at the time, which still remains, is given the current conditions of the market, asset sales are obviously a very difficult task. The valuation of the assets is very impacted by the current economic conditions. So it would be very difficult to claim a proper value from any asset sale that we could entertain at this point in time. Now that may change as time progresses and the market recovers as we expect it to recover over time. But that obviously puts a damp on what are the options that you have with immediate impact. So again, that's why it's important that we look at everything and not only at asset sales per se.
Sean: Okay, thanks for that detail. The fiber supply constraints in Germany, can you give perspective on how that's persisting into the second quarter and expectations through the year and beyond the maintenance schedule in the back half of the year?
Juan Carlos Bueno: suggest further curtailments might be necessary yeah i mean fiber costs in germany is is one of the major concerns uh that we've experienced so far and it's been happening it carried out through 2025 and it continues to be present in 2026 when you look at fiber increase overall for our german assets it was it was on the high single digits let's put it on average on Q4 versus Q1. And when you look at what we expect in Q2, it's going to be probably on average a little bit lower, but still some increase quarter on quarter. Now, this will be helped somehow because we're expecting lower cost of fiber for pulp mills in Canada. So one thing may wash out the other. But it is clearly one of the issues that we are facing is the situation of high-range Germany. Now, why this happened is associated with, at least in 2025, there was expectations of calamity harvesting that was going to be necessary, which did not happen. By the time this happened, already late in the summer, that everybody was evidenced that there was no need. It was already too late to harvest in the summer months. So that created kind of a vacuum of much lower levels of inventory than normal in the amount of wood that was available. That put some pressure upwards, obviously, in terms of price. And that's what we've seen, the combination of less availability and higher prices. Nowadays, we're combating those high prices and we've looked for other alternatives. We're buying further out. We're not just buying in Germany. 90% of our wood comes from Germany. We're buying further out. We're buying from Scandinavia, from the Balkans. We're buying from different countries and importing into our mills. That is helping with the availability, but that doesn't mean that the costs necessarily go down. We're exploring alternatives to keep increasing the amount of imports as a way to balance the market a bit in Germany. But again, that doesn't mean necessarily the costs are going down. So that's the situation that we're in, and we will continue working around it. We'll see how the harvest progresses later down this year.
Sean: Thanks very much for that detail. That's all I have for now.
Carmen: thank you ladies and gentlemen as a reminder if you do have a question simply press star 1 1 to get in the queue we have a question from the line of cole harthorn with jeffries please proceed good morning thanks for for taking my question i'd just like a
Cole Harthorn: a follow-up on the outlook for softwood pulp. I mean, if we think about the diverging markets at the moment, we've still got a lot of softwood inventory levels in China, whereas Europe and North America look slightly different. So I'd just like to hear your thoughts about, firstly, what's needed to kind of normalize those Chinese softwood inventories. Do we ultimately need capacity rationalization in Europe and Canada to sort that out. And then secondly, on Europe and North America, just how you see the softwood markets there. Thank you.
Juan Carlos Bueno: Yeah, Cole, very good question. I think when you look at what the different analysts that are following these pot markets say, everybody would tend to indicate that there should be additional curtailments happening. We know of some that are already obviously announced and in place, but they are clearly not enough. We know that Jotsono is down since end of March, and that basically that's about a 700,000-ton mill, and who knows until when that mill is going to be down. We know that Fiber Excellence shut down mills in France, and that's 280,000 tons that seem permanent. and in addition to what Canada did already late in the year, beginning of this year. So there are closures, and very rightfully so. We expect more curtailments to happen. We believe that the situation, especially in Canada with mills running at very low, if any, profitability at all, is just a recipe for additional curtailments. Yeah, I think that's the biggest lever that we see as an alternative to a significant shift would be a reduction in supply because demand continues to be relatively lackluster. There's nothing special about demand. China is producing a lot of integrated capacity. They've done a lot of the substitution that they were able to do. With the differential now between hardwood and softwood, maybe some of that substitution comes back. But again, it doesn't happen overnight. It will take a while for that to see the impact on the inventories that are in the channel. I think there's still a ways to go before we see those inventories reduced to a level that would allow a significant price increase. So I think those are the things that we're clinging on at this point in time.
Cole Harthorn: Maybe just as a follow-up on the wood cost dynamics, specifically in Germany, could you give a little bit of differentiation between the pulpwood side versus the saw log and the dynamics at play there? I know you mentioned availability is an issue, but going into the second quarter, one of the reasons for the cost inflation in Q1 was competition on the energy side, and I'm just wondering when do we get to a point where your prices have gone too far and the forest owners are doing a little bit of eye-gouging because no sawmills are really making money, as far as I can tell, across Europe at the current saw log prices. I'm just wondering how you see it. Thank you.
Juan Carlos Bueno: Absolutely. Yeah, the policy that Germany has in place right now to incentivize or incentivize the burning of wood for energy purposes is having an important impact in the price of wood chips, no doubt. We compete with those mills that are using, that are producing pellets, biofuels. We see that ourselves in Torgal. We are producers of pellets. We've seen, and I reported earlier in the call, our prices went up 15% Q and Q. So yeah, well, and everybody's seeing that benefit. Now we don't expect that high prices to continue into the year. They should be tapering off, but may still be elevated as pellet producers are expected to build inventory over the summer. So while the margins might not be as high as they were in the last part of the year and the beginning of the year, there's still pretty good margins and that will keep being an issue in terms of the wood that is available for the pulp mills as such. So that is a factor and will continue to be a factor. And obviously the other things that keep driving things up are the situations that have been prevalent already for the previous quarters. Now, in terms of the difference between how much it's impacting our pulp mills versus our sawmills, I would say it's more or less even. I would say it's probably a little bit higher, the impact, the negative impact that we expect on Q2 on the sawmills than it is on the pulp mills, but it's marginal. So it's a margin of error, nothing dramatic in that regard.
Cole Harthorn: And then just following up on the working capital, there was kind of a bigger outflow in Q1. I know you're doing your best to manage that, but just thinking about that into the second quarter, should we be assuming kind of neutral working capital from a cash flow or kind of positive, just wondering what actions you're taking? Because I imagine a lot of the increase was fiber related. Thank you.
Juan Carlos Bueno: Yeah, a lot of the increases is seasonal harvesting. As you all know, obviously during the winter, that's seasonal harvesting at its best. And even though we kept it very tight, it is obviously impacting our inventory levels. As we've gone through that peak of the cycle, What we expect in Q2 is a reduction in working capital. So not that it would remain at that level, but that it would succeed to more rational levels. And we're obviously putting a lot of pressure on keeping that as tight as possible. We're running our mills, our pot mills, with very, very low inventory ahead of the mill, very low fiber inventory. And we're probably going to keep it running that way for the foreseeable future and make sure that we keep our working capital inventories at its lowest possible.
Cole Harthorn: And then if you'll just allow me one more, you've talked about data centers and demand on the CLT side. Um, and I'm just wondering, you know, when do we start getting the first kind of cash inflows or kind of these projects actually progressing and you starting to make improved sequential deliveries and starting to get the cash from those is the first one. And then the second one is, um, We've seen Essity announced strategic review of its tissue business in Europe. They've got a lot of tissue capacity in Germany. I'm just wondering if there's any color you can give on supply to their business.
Juan Carlos Bueno: Absolutely. Yes, first on Mastember. As I said at the beginning of the call, we're very excited with how that business is progressing. Growing 60% quarter-on-quarter was fantastic. that business is a business that, from a cash perspective, it handles itself pretty well because when we sign a contract, we get already down payment for the majority of the projects before we start putting it up or building or manufacturing it. So that provides kind of a positive cash flow cycle for that business, different from what we do in the other businesses where it's basically out-of-pocket totally, and then you recover only after you have sold your inventory. That's not the case in mass timber. So it is a cash. For example, last year we lost. Our EBITDA was negative, but cash was almost neutral. Right now we're looking into a second half of the year where the bulk of the projects or about 60% of the projects will be now hyperscalers. Those will provide us higher margins, and therefore we see a second half of the year with better margins than the first half. From a cash flow perspective, I think we'll be positive throughout the year, but it will obviously be much better in the second half, just from a pure EBITDA perspective. So that's in terms of mass timber. Back to your question on On SCT, we read the news earlier about their decision to do a strategic analysis of the tissue and what they're going to do with it and what that will mean, if they're going to rationalize or consolidate or sell or I don't know what they're going to do. It's too early for us to anticipate anything. SCT is a customer that we serve, and we obviously look forward to continue serving them or serving those mills wherever they end up being the owners if it wasn't to be SED going forward. But it's too early to say anything on that regard.
Carmen: Thank you. Thank you. One moment for our next question. It comes from Amit Prasad with RBC Capital Markets. Please proceed.
Amit Prasad: Hey, it's Amit on for Matt. Thanks for taking my questions. Appreciate the quantification on chemical and freight costs. but you also called out a substitution opportunity for cellulose-based products given the energy shock. Which specific end markets are you seeing this demand emerge, and is it a 2026 revenue contributor or more of a medium-term structural shift?
Juan Carlos Bueno: The substitution that we're seeing was basically linked to the fact that the price gap between hardwood and softwood, which used to be $200, $250 in 2025, has now shrunk to about $70. And with that kind of differential between the two fibers, if you're running your paper machines at high speeds or with a decent level of utilization, then it justifies the use, again, of softwood over hardwood. So that's where we see the potential substitution kicking back. I'm not thinking or we're not planning for that to be reversing entirely what was lost But there is clearly some space where for particular customers that will be interesting for them to go back to the higher usage of softwood because it would be better for them financially at the end of the day. So it is not necessarily so much linked to some of the other factors. Yes, obviously there's freight costs and things that would make certain fiber more expensive than others. But even without the impact of the Iran war, we were already seeing that gap being reduced between the two fibers. We have some advantages depending on where the freight is coming, depending on the distance. Obviously, we may have some advantages from that point of view. But again, that's... The icing on the cake, that's not the main reason why. The main reason is fundamentally that gap has shrunk already.
Amit Prasad: Perfect. Thanks for the call. And I guess one follow-up for me. Can you quantify the incremental profit from the new scanning technology at Torgao once it's operational? And how does capturing the value uplift translate to incremental EBITDA? Thank you.
Juan Carlos Bueno: Absolutely. In the case of Torgao, the scanning technology, what it allows us to do is to make sure that we can participate in the U.S. market that we're very actively participating on with 3Cell. Right now, because it's a non-grade stamp, then the market that we have access to is limited. And the value might be high, but the volumes are not high, so you have to scramble to move that product around. The moment that we have access to products being able to produce and sell number twos for the U.S., and complementing what we already have in Freesal. In Torga, we produce a lot of pine. Then that is, again, a complement to our portfolio, and it adds to the picture and the capacity that we can sell higher volumes than what we're able to move with a non-grade standpoint.
Amit Prasad: Perfect. Thank you. That's all I had. I'll turn it over.
Carmen: Thank you. And this will conclude our Q&A session. And I'll pass it back to Juan Carlos Bueno for closing comments.
Juan Carlos Bueno: Okay. Thank you, Carmen. And thank you all for joining our call. Rich and I are available to talk more at any time, so don't hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in July. Bye for now.
Carmen: This concludes our conference. Thank you for participating and you may now disconnect.
