Mercer International Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to Mercer International's Second Quarter 2023 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.

Speaker 1

Thank you. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the Q2 before turning the call over to Juan Carlos to provide further color into the markets, our capital plan

Speaker 2

is our strategic initiatives. Also for those of you

Speaker 1

that have joined today's call by telephone, there is presentation material that has been attached to the Investors 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 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 $69,000,000 compared to Q1's positive EBITDA of $27,000,000 After adjusting for a $51,000,000 non cash inventory impairment, EBITDA in Q2 was roughly negative $17,000,000 The EBITDA decrease in Q2 from Q1 is primarily due to the We also had more scheduled downtime at our pulp mills compared to Q1. In Q2, we had 60 days of scheduled downtime compared to 10 days in Q1. Our Pulp segment had negative quarterly EBITDA of $56,000,000 which after adjusting for the $51,000,000 non cash inventory impairment leaves a negative $5,000,000 result.

Speaker 1

Our solid wood segment EBITDA was negative $10,000,000 and was driven by poor lumber prices. You can find additional segment disclosures in our Form 10 Q, which can be found on our website and that of the SEC. In addition to the $51,000,000 non cash impairment charge, lower pulp prices resulted in a negative EBITDA impact of about $81,000,000 in Q2 is compared to Q1. In Q2, average NBSK and NBSK list prices were down in all our markets compared to is Q1 as economic uncertainty continued to negatively impact paper demand and was compounded by the impact of new South American hardwood capacity. In China, the Q2 average MBSK net price was $6.68 per tonne, down $2.23 relative to Q1.

Speaker 1

European NBS K List prices averaged $12.47 per tonne in the current quarter, is a decrease of $130 per tonne. The market price gap between MBSK and MBHK in China widened slightly to about $85 per tonne this quarter as the market struggled to digest new eucalyptus hardwood capacity from South America. In China, the Q2 average MBHK net price was $4.83 per tonne, down $2.27 or 32% compared to Q1. And the North American Q2 price was $12.77 per tonne, is down $246 As mentioned, lower pulp prices resulted in the recording of a $51,000,000 non cash inventory impairment in Q2, about $31,000,000 of which was against hardwood pulp and fiber inventories at the Peace River Mill and the remainder was against softwood pulp and fiber inventories is our Canadian pulp mills. The large hardwood component was a result of the mill having a significant volume of fiber in front of the mill in preparation for the start up of Peace River's new wood room.

Speaker 1

Certain pulp buyers took advantage of the low prices this quarter resulting in a strong pulp sales volume in Q2. Sales volumes increased roughly 100,000 tons We're 23% in Q2 relative to Q1. All our mills ran well this quarter, but we had significantly more scheduled downtime in Q2 is compared to Q1. In Q2, we had total of 60 days of downtime at our mills, which consisted of 25 days of planned maintenance is 35 days for market curtailment. In Q1, we had only 10 days of planned maintenance downtime.

Speaker 1

The increased scheduled maintenance downtime negatively impacted EBITDA by about $17,000,000 in Q2 when compared to Q1 and the market curtailments impact was a negative $21,000,000 After adjusting for the planned shuts and curtailments, pulp production was up almost 19,000 tonnes from the Q1. In Q2, the Rosenthal Mill recognized $17,000,000 to settle the business interruption insurance claim for its 2021 turbine downtime. This cash was subsequently received in July. The Stendal Mill received $5,000,000 worth of insurance proceeds related to its fire damaged woodyard insurance claim. The final repairs are scheduled to be completed in Q3.

Speaker 1

And I'll also point out that U. S. GAAP requires these insurance proceeds be recorded is operating results. For our solid wood segment, lumber pricing was modestly up in both the U. S.

Speaker 1

And European markets due to steady demand. The Random Lengths U. S. Benchmark for Western SPF 2 and better was $3.80 per 1,000 board feet at the end of Q2 compared to $3.61 at the end of Q1. Overall, lumber prices positively impacted EBITDA by approximately $2,000,000 compared to the Q1.

Speaker 1

Lumber prices have noticeably improved since the end of the quarter. Today, the benchmark as we move into the Q1 of 2019, we expect the Q1 of 2019 to be approximately $1,000 board feet, an increase of $47 from the end of the quarter. Lumber production was 122,000,000 board feet in the quarter, down almost 10% from our record first are: production due to minor production upsets early in Q2. Lumber sales volumes were also approximately 134,000,000 board feet, down 4% from the prior quarter. Electricity sales totaled 2 50 gigawatt hours in the quarter, which is up dollars per megawatt hour from $130 in Q1 due to reduced energy supply concerns in Europe.

Speaker 1

Our Mass Timber business continues to ramp up operations, resulting in revenue of $14,000,000 in Q2 compared to $6,000,000 in Q1. This business also has a growing order book that we expect to fulfill over the coming months. We reported a consolidated net loss is $98,000,000 for the Q2 or $1.48 per share compared to a net loss of $31,000,000 or $0.46 per share in Q1. After removing the impact of the non cash inventory impairment charge, the Q2 net loss is about $0.71 per share. We used about $87,000,000 of cash in Q2 compared to using $53,000,000 in Q1.

Speaker 1

Our cash usage in Q2 was primarily due to our acquisition of Structuralam's cross laminated timber and Glu Lam assets for about $82,000,000 The cash impact of our negative Q2 EBITDA was more than offset by reduced working capital in the form of lower inventory balances at our Canadian mills due to strong pulp sales and working capital management activities. We invested about $39,000,000,000 of capital in our mills in Q2. Looking ahead, we have reduced our expected CapEx spend to be about $130,000,000 in 2023. At the end of the quarter, our liquidity position totaled $446,000,000 comprised of $213,000,000 of cash is $233,000,000 of undrawn revolvers. And as you have noted in our press release, our Board has approved a quarterly dividend of $0.075 per share for shareholders of record on September 27, for which payment will be made on October 4, 2023.

Speaker 1

That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Speaker 2

Thanks, Rich. Q2 was a disappointing quarter for us is the market pulp prices deteriorated sharply across the world and in a very short period of time. As Rich mentioned, prices in China fell by more than $200 per ton for both hardwood and softwood. The rapid decline in pulp prices was led by hardwood pricing in China due to weaker economic recovery than expected with large pulp producer inventories and compounded with a ramp up of the new and large South American Eucalyptus Mills. Softwood on the other hand, its supply is gradually tightening due to the various curtailments and mill closure announcements around the world.

Speaker 2

Several pulp producers are extending their annual maintenance shots similar to what we did at Peace River in Q2. In addition to this, the recent British Columbia port strike as well as Canadian forest fires are also contributing to this tightening supply. On the demand side, European paper producers are still running at reduced capacity rates as the European economy continues to be burdened by the effects of the Ukraine war. And in China, while stimulus measures are being implemented, economic growth to date has been modest. Looking forward, we expect pulp prices to continue to be under pressure in Q3 as the traditionally weak summer months take hold.

Speaker 2

While hardwood and softwood pulp prices in China appear to have bottomed out in Q2, softwood is currently lagging behind in Europe And we expect to hit its floor price in Q3. This weak pulp pricing outlook for Q3 drove us to book the large non cash inventory impairment charge this quarter that Rich described earlier. As a result of the logistical issues created by the recent British Columbia port strike, we were forced to take a temporary 30 day curtailment at our Selgar Mill during the month of August. This is not a decision we made lightly, but we're optimistic the mill will clear its pulp inventory backlog and be able to run full by the end of this curtailment. Notwithstanding the port strike, we are seeing decreasing pricing pressure on freight costs, most notably container rates.

Speaker 2

As a result of uncertain market conditions, we have taken proactive actions to reduce our planned CapEx by roughly 40% is, as we now expect to land at around $130,000,000 for the full year. At the same time, we have focused on reducing our inventories aggressively over the Q2 of the year and we'll continue to enforce discretionary spending cuts and cost cutting measures across the company. Our mills ran very well in the quarter, although some plant maintenance downtime negatively impacted production relatively to the Q1. In addition, we saw a modest decline in both fiber and chemical costs. Our remaining 2023 annual Mill maintenance schedule includes Rosenthal being down for 14 days in Q3, reducing production by about 14,000 tons.

Speaker 2

Stenda will have a 3 a short 3 day shut and Celgar will have a 26 day major maintenance shut in Q4 are roughly 41,000 tons of production in total. Our 2nd quarter lumber results reflected mixed markets, But on average, both the U. S. And European markets were up slightly compared to Q1. While high interest rates continue to weigh on housing starts, we have witnessed a positive partial recovery of lumber prices in the U.

Speaker 2

S. With SPF benchmark prices recovering about 30% of lost value since early June through mid July, although they have corrected slightly over the last 2 weeks. We continue to believe that low lumber channel inventories, the large number of sawmill curtailments, relatively low housing stock, recent Canadian forest fires and constructive homeowners, homeowner demographics will put positive pressure on the supply demand fundamentals As such, in Q2, our lumber sales volumes were weighted slightly more towards the U. S. Relative to the European markets.

Speaker 2

The integration of Torgau continues to progress well. Although shipping pallet markets remain weak, prices and demand for heating pallets are growing strong. Once the European economy shows strong signs of recovery, we expect pallet prices to return to normal levels, allowing this asset to deliver significant shareholder value, not only backed by improved business conditions for pallets, but also by increased lumber production capabilities. As we have previously reported, we recently closed on the acquisition of StructureLab. We're very pleased to have added its assets to our mass timber portfolio.

Speaker 2

We now have roughly 35% of North American mass timber production capacity and a much larger geographic footprint, which gives us competitive access to the entire North American market. The integration of this business is ongoing. Since the addition of the Structuralam assets, we have seen a noticeable escalation of customer interest in our mass timber offerings, with inquiries doubling over the previous month's average. Included in these inquiries are some marquee projects And we will have more to say about this in the coming months. Moving on to pulpwood.

Speaker 2

In Q2, we saw prices decrease overall. In Germany, we worked through our high inventory high cost inventory, while demand for fiber remains strong for our Canadian mills. Looking ahead, we expect further modest declines in pulpwood at our German mills, though we are seeing early signs of increased demand from the energy market, which negative impact our fiber costs for chips. Similarly, we are expecting the fiber costs at our Canadian mills to decline modestly in Q3. During the quarter, we commissioned our new lignin extraction pilot plant, which is a large step towards being able to begin commercialization of lignin.

Speaker 2

We're excited about the future prospects of this product, a sustainable alternative to fossil fuel based products such as in Adhesives and Advanced Battery Elements, to only name a few. This aligns perfectly with our strategy, which involves expanding into green chemicals and products that are compatible with the Circular Carbon Economy. As our world becomes more sensitive to reducing carbon emissions, We believe that products like lignin, mass timber, green energy, lumber and pulp are all products that will play an increasingly important role is 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 has the potential to be transformative to the Wood Products Industry. We're committed to our 2,030 carbon reduction targets and believe our products form part of the climate change solution.

Speaker 2

In fact, we believe that in the fullness of time, demand for 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, but to bring more balance to our business, lumber and mass timber will grow more quickly over time. In closing, looking forward to Q3, we will be laser focused on the continuous reduction of cost, CapEx and working capital while we navigate this period of low pulp prices. We will also work on rebalancing our assets in line with the execution of our strategic plan and we'll continue to manage our cash and liquidity prudently. Thanks for listening.

Speaker 2

And now, I will turn the call back to the operator for questions. Thank you.

Operator

Please standby while we compile the Q and A roster. Our first question comes from the line of Sean Steuart of TD Securities.

Speaker 3

Thank you. Good morning. A couple of questions. Let's start with CapEx. Can you give us a little more detail on the reduction to the budget?

Speaker 3

What specific projects are you foregoing or delaying? And are we right to think about this as taking measures to preserve liquidity, flexibility in the balance sheet, that's the main driver of this decision. Is that the right assumption?

Speaker 1

Yes, Sean, it's Richard. So yes, to answer your second question, that's correct. We're just trying to be conservative with our cash. I guess the way we're sort of thinking about is we're sort of taking our CapEx back to an MOB level. So Some of the strategic initiatives that we had scheduled are now being deferred to a later year, hopefully 2024.

Speaker 3

And any specific projects that you're taking out of

Speaker 1

budget pushing? Yes.

Speaker 2

So our March of

Speaker 1

October, we had a couple of Initiatives there, we were going to do this year, so we're going to defer those. That is to get the wood infeed changed around at the beginning at the start of the plant. Some work at Toricau as well with the woodyard and installation of a planer. Those are the ones that are actually going to hurt the most. We were excited about those projects, but we're going to defer those for another year.

Speaker 2

The only thing, Sean, about those, as Sid relates to the one in Spokane and the delay of that, one of the considerations that we had was obviously the fact that with Structural Lung coming in, that obviously gives us still a strong push to continue growing. So it doesn't hurt necessarily, it just delays Further growth, but it doesn't hinder us from continuing the path of growth as such. So those are the kind of considerations that we had when we looked at those things. Guys. Okay.

Speaker 3

Thanks for that. And then following on that, the Wood Products segment, I saw some CLT volume, which is encouraging. The previous indication was you expect that business want to contribute positive EBITDA this year and I want to confirm that's still the expectation. And then more broadly speaking with products, it looks like you've lost relative ground to the European comps. Can you give us a sense of how concentrated these losses are at Torgau?

Speaker 3

And is this really just a pallet pricing issue? Any other measures you can take To bridge the gap with your competitors in that region.

Speaker 2

Absolutely. When it comes to your first question, yes, we still stand by understanding that we will be positive by the end of the year is in the Mastenber business. So that business is growing pretty well. We have an order book that has continued to rally up and the amount of interest since we acquired Structuraland has just incredibly increased. So we have something it's working pretty, pretty well is I guess what I'm saying here.

Speaker 2

Now as far as Sorgao, yes, you're right, the pallet prices have come down significantly from where they were last year, And this is what's basically dragging the results down when you look at the whole lumber business. That is probably the most single significant factor of all. As yes, lumber prices were not strong, whether they were still weak, nothing dramatic versus Q1. We see that it's going to be improving in Q3. But yes, the pallet prices are still dragging down.

Speaker 2

And even though we're the largest pallet producer in Europe, volumes are still holding. But With price being down, it creates a hit.

Speaker 1

Sean, maybe just to add to that. So we haven't been able to achieve the synergies we were targeting when we first acquired Tor Galb just because the markets have

Speaker 2

been so low. So that's

Speaker 1

Part of the equation as well. So there's $16,000,000 at least of synergies that we're still targeting.

Speaker 2

Okay. Guys. Okay. That's all

Speaker 3

I have for right now. I will get back in the queue.

Operator

Thank you. Our next question comes from the line of Matthew McAller of RBC.

Speaker 4

Hi, thanks. Good morning. Just building on that last question, I was wondering if you could talk about what kind of improvement in pricing, maybe in percentage terms, you would need to see a return to what you consider more normal levels for pallet pricing. And then just wondering if you're the largest producer of pellets in Europe, whether you plan to reduce production at all to help the market find balance?

Speaker 1

Well, just in terms of the pricing one, Matthew, probably about 10% or maybe 15%. So we're talking about $11 or $12 a unit. That's where they're trading today. They need to probably go up to about 15 to be sort of a breakeven level. And then sorry, I missed your second

Speaker 2

Yes. On the volume, yes, we've curtailed a little bit of volume, because normally we could produce roughly 17,000,000 pallets and we're producing shorter from that, maybe around 13,000,000. So yes, we are taking measures to try to reduce the amount of supply in the market as a way to hold prices at a more reasonable level. And that is part of

Speaker 1

our plan to reduce pallet production and increase lumber production there. So that's

Speaker 4

Great. Thanks. That's helpful. And then just could you talk a bit more about what the Structural Am acquisition does for you strategically and to the extent you can, what kind of capital plans you might have for that business with the short and medium term, I know you talked about the wood in feed. I think that was probably in Spokane.

Speaker 4

And then maybe what your expectations are around trajectory for revenue and contribution over that business or for that business over the next year or 2?

Speaker 2

Absolutely. Yes, but Structural and what it gives us, 1st and foremost is the opportunity to be able to participate of the Southeast American market, which we know is obviously a very important growth market for us. And it also gives us the opportunity to I'll add GluLam to our offering. So we had already, cross laminated timber in Spokane And now we're adding more cross laminated timber plus GluLam. So that is in essence what the play is from a portfolio and a geographic coverage point of view.

Speaker 2

Now on top of that, we are now being able to work not only Southern Yellow Pine, but also as we were working before SPF out of Spokane. So we also have a mix of different types is of raw materials that are commonly used, whether it's in the Southeast or the Northwest. So we're able is to serve our customers depending on what their needs and desires are, and that has played out very well. One of the investment projects that we had in Spokane lined up was exactly around adding glulam capacity. We have deferred some of those investments because now obviously we have acquired and are able to run Gluem out of Conway in Arkansas, very efficiently.

Speaker 2

So that's a little bit of how things play out. And that is one of the reasons why we wanted this so much And we thought it was such a good play, not only because we were buying it out of bankruptcy, obviously at a very at a high discount, Because it will allow us to already immediately start participating on that market, being able to offer both Lululemon and CLT to our customers, Because that's obviously what the market demands in most of the cases when we receive inquiries. Now in terms of growth, we see this business growing very quickly beyond $100,000,000 in revenue. So we're aiming for that in a very short period of time, and that's obviously very positive from a profitability point of view, if already being small as we are right now, now getting into bigger numbers, then obviously the profitability increases in a very significant way. So that's about Mastinber.

Speaker 4

Great. Thanks very much. And then last one for me. Do you expect any impacts to your Peace River Mill either over the near term or longer term from the wildfires in Alberta?

Speaker 2

We are in terms of our own FMA, we didn't suffer major losses as a consequence of that. So the impact the direct impact is negligible. Now What I can say though is there was a tremendous amount of losses around softwood and that obviously impacts sawmills in the region and other businesses in the region. We are increasing at the same time our softwood capabilities in Peace River, so we're running more softwood than we normally do. Obviously, these two situations combined create a bit of a crunch When we're adding more softwood and there's been softwood fires that affected the region, that hinders our ability to do more softwood as we would like to do.

Speaker 2

But despite that, we are being able to drive higher campaigns or longer campaigns of softwood, which benefit us in the long run. We still make decent profit with softwood in Peace River, and we shy away from hardwood, which is obviously where we struggle the most. Even though in hardwood, we're already at breakeven at the current prices of hardwood. So it's we believe that going forward with hardwood prices slowly picking up in China, we will get back to the black on hardwood in Peace River.

Speaker 4

Okay. Thanks very much. That's all for me. I'll turn it back.

Operator

Thank you. Our next question comes from the line of Cole Hathorn of Jefferies.

Speaker 1

Guys. Good

Speaker 5

morning. Thanks for taking my question. I'd just like a little bit of color on what you're seeing in kind of the cost of fiber and pulpwood In Europe, particularly around your German Mills. And could you just put that in reference to What's happening up in the Nordics? I mean the Nordic wood pulpwood costs have been higher and they're probably going to be higher for longer.

Speaker 5

So just some color around what you're seeing in Germany and then relate that to do you have kind of an improved cost advantage versus some of the Nordic peers there? Thank you.

Speaker 2

Absolutely, Carl. Thank you. Yes, it's very important, the point that you bring up in the Nordics. Obviously, they're suffering from the fact that with Russia being out of the equation, the cost of fiber has obviously escalated significantly and we've seen the impact of those by Listening to the news of mill closures in Finland and whatnot. Now when it comes to our German mills, the situation is quite different.

Speaker 2

We have an increased beetle infestation that is currently developing in Germany. There is additional wood that is being made available as a result of these increased beetle infestation. We see actually a very significant increase of harvest as a consequence of this, and this will carry on for most likely already in the coming quarters. So in Q3, we'll already start seeing some of that. Is Q4, the same thing and we think it's going to be sustained for the rest of next year.

Speaker 2

So for 2024, we expect log prices to come down in Germany at a significant level and the same thing already beginning in later part of this year. So the prognosis for us is favorable, very favorable on the back of the beetle infestation in Germany, And which puts us at an advantage versus other geographies.

Speaker 5

And then maybe just following up on that point. From the pulp side, I imagine it's helpful reducing your wood raw materials cost, but from a sawmill perspective, is there any kind of further kind of processing costs that needs to be thought about For the beetle invested wood or not really?

Speaker 2

No, no. And as a matter of fact, it's equally positive, if not so the same or even more, because it's a direct the first one to be benefit is the sawmill. Pub blogs will follow. So the first benefited would be Torghao and Frisau directly. So both mills will enjoy much lower prices for sawn timber for sawn for sawlogs, excuse me, in Q4 and already in 2024.

Speaker 5

And then if you allow me On your mass timber business, could I better understand the commerciality here? Am I right in assuming that your scale gives you quite a significant advantage going forward. I mean, Store Enzo, one of your competitors has always called out is The ability and reliability to supply cross laminated timber from multiple sites to bigger projects. So from a commercial perspective, do you expect to see greater interest from your customers? And related to that commerciality, Should we think about mass timber as being kind of a more stable volume and pricing business versus traditional number?

Speaker 5

Or can't we really make that assumption from a kind of profitability and pricing perspective? Thank you.

Speaker 2

No. Absolutely, Carl. Absolutely. When you look At Mass Timber, this is not a commodity business. So this is this has a very different dynamic What we see in pulp or lumber, despite being part of the same construction industry, The dynamics are very different.

Speaker 2

The margins are very different. These products are tailor made for customers. And obviously, we look at them from a project on project basis, where we're replacing concrete and steel. So it's again, the parameters under which we look at this business and evaluate it are very different. The fact that we have 35% of North American installed capacity gives us an edge.

Speaker 2

It gives us a more competitive cost to work with that allows us to bid for projects that Since North America may not have the capacity to support and Europe is bringing products in from across the ocean, we're able to already compete also with the Europeans that have taken advantage of that situation and the fact North America is just developing. So yes, that puts us at an advantage with very modern facilities that we have, the Conway facility is probably the most modern facility in North America and not very far away from Spokane, where Spokane was. So yes, having the good facilities, highly competitive, properly dispersed in a geographic fashion it's just a tremendous tool to have.

Speaker 1

Thank

Operator

you. Thank you. Our next question comes from the line of CJ Baldani, a Principal.

Speaker 6

Hi, thanks for taking my question. Following up on the last question and your answer, could you talk about the margin profile of the business and kind of what you might expect and over what time frame?

Speaker 2

Yes. Well, we don't disclose specific Margins for our products. One thing that I can say though, CJ, is when you look at Spokane, one of the things that we have been working on precisely was how can we fill up the plant, how can we ramp it up and so forth. I can say already that the plant is running full. It's been running full already for the last couple of months.

Speaker 2

And with the order book that we have, that plant is going to run full with what we have already in hand through the end of the year easily With the projects that we're about to sign off and sign contracts for, which is quite significant, it's probably twice as much as what we have in our order book, that plant will be running at full already through at least half of next year. Right now on one shift, running full and Conway ramping up that obviously puts us in a good situation from a cost perspective and make sure that we drive in good results from to the bottom line. That's why we say that despite of it being still a small business today, by the end of the year, it's going to be already cash positive or profitable EBITDA and obviously the prospects are very good for the coming year.

Speaker 6

Okay. Are you having to use price to kind of Grow and scale up your business or can you kind of do it without making concessions on price?

Speaker 2

No, as a matter of fact, it's quite the opposite. And just to illustrate a little bit on that particular subject, When we picked up Structural M and we looked at some of the things that they had been working on and we went to bid for those projects or rebid for those projects because obviously they were canceled altogether. We end up looking at our cost position and what we should be able to bid for and all of our bids came much higher than what Structuralim had bid for them initially. So if anything, for those projects that were That had already been secured by Structuralon before their bankruptcy and that had been halted because obviously they ran out of money And had to put a stop on everything, when we picked up some of those things and restarted the conversations from scratch, what the surprise to them obviously was the fact that not only had they been going through a supplier that had went bankrupt, but the fact that the new owner is coming with a much higher price than what they had thought for their project initially. So if anything, we apply very strict demands in terms of what we expect for profitability of our products and are not willing to just Give concessions to make ourselves through into the business, not at all, pretty much the country.

Speaker 6

And you rebid those despite having a cost position that was no worse or even better?

Speaker 2

Correct. And to the vast majority, we're executing and in process of signing contracts for all of those. Yes.

Speaker 1

I guess.

Speaker 6

Okay. And then lastly, could you talk a little bit about working capital over the back half of the year given all the moving Parts in your different businesses and the ramp up of CLT?

Speaker 2

Yes, absolutely. On working capital, we continue to exercise all austerity measures to make sure that we bring inventories down for either fiber or pulp. We're aiming to significantly continue those efforts and bring at least $50,000,000 of further reductions in working capital to the remainder of the year. So yes, that's a big area of focus for us and it's across all businesses.

Speaker 6

Great. Thank you for answering my questions.

Speaker 2

Thanks, CJ.

Operator

Thank you. I would now like to turn the conference back to Juan Carlos Bueno for closing remarks. Sir?

Speaker 2

Okay. Thank you, Latif, and thanks to you all for joining our call. Rich and I are available to talk more at any time, so don't hesitate to call any one of us. Otherwise, we look forward to speaking to you again on our next earnings call in November. Bye for now.

Operator

This concludes today's conference call. Thank you for participating. You may now

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Key Takeaways

  • Q2 EBITDA was negative $69 million (about –$17 million excluding a $51 million non-cash inventory impairment), primarily due to lower pulp prices and 60 days of scheduled mill downtime versus 10 days in Q1.
  • Global pulp prices plunged in Q2 (China down ~$2.23/tonne, Europe down $130/tonne, North America down $246/tonne), triggering a $51 million impairment that overshadowed a 23% increase in sales volume.
  • Solid wood EBITDA fell $10 million on weak lumber prices despite modest gains versus Q1, while Mass Timber revenue doubled to $14 million after acquiring Structuralam’s CLT and GluLam assets for $82 million, raising North American capacity to ~35%.
  • Consolidated net loss widened to $98 million ($1.48/share) from $31 million, with $87 million of cash used in Q2—driven by the acquisition—and the company cut full-year CapEx to $130 million, ending the quarter with $446 million of liquidity and a $0.075/share dividend.
  • Looking ahead, management expects continued Q3 pulp price pressure, has enforced cost, CapEx and inventory cuts, and is advancing a lignin pilot plant as part of its shift into green chemicals and carbon-neutral products.
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Earnings Conference Call
Mercer International Q2 2023
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