Business Overview and Operational Highlights

Mercer International Inc. (MERC) is a global forest products company with a diversified business model spanning pulp, lumber, and emerging green product lines. As the industry navigates complex market conditions, Mercer's strategic agility and commitment to operational excellence have positioned the company to capitalize on evolving opportunities.

Mercer International Inc. was founded in 1991, initially focusing on establishing pulp production facilities in Germany and Canada. The company weathered early challenges such as fluctuations in pulp prices and changes in the global economy while steadily growing its pulp production capacity. In the 2010s, Mercer expanded its operations by acquiring sawmills and mass timber production facilities in North America, diversifying its product offerings beyond pulp.

Throughout its history, Mercer has demonstrated resilience in the face of industry cycles and market disruptions. The company has strategically grown its production capabilities, diversified its product mix, and adapted to changing trade environments. Mercer has faced challenges such as tariff disputes between the U.S., Canada, and Europe, which impacted its lumber exports. In response, the company adjusted its sales strategies and supply chains to navigate these trade issues.

More recently, in 2023, Mercer disposed of its investment in the Cariboo Pulp Paper joint venture, taking a non-cash loss on the transaction. This move was part of the company's efforts to optimize its portfolio and focus on its core pulp and solid wood operations. Additionally, Mercer recognized a non-cash goodwill impairment charge related to its Torgau facility in Germany in 2024, due to challenging market conditions in the European lumber and pallet sectors.

Today, Mercer operates four pulp mills, six sawmills, and several mass timber facilities across Germany, the United States, and Canada. The company's annual production capacity stands at 2.1 million tonnes of pulp, 960 million board feet of lumber, and 210,000 cubic meters of cross-laminated timber (CLT) and other engineered wood products.

In fiscal year 2024, Mercer reported consolidated revenue of $2.04 billion and a net loss of $85.1 million, or $1.27 per share. While the year presented operational challenges, the company's diversified business model and focus on cost optimization enabled it to generate $243.7 million in Operating EBITDA, a significant improvement from the $17.5 million achieved in 2023.

Pulp Segment Performance

Mercer's pulp segment remains a cornerstone of the business, contributing $106 million in EBITDA in the fourth quarter of 2024. The company's softwood pulp sales realizations averaged $794 per tonne during the period, down modestly from the near-record prices achieved earlier in the year. In contrast, hardwood pulp prices weakened as the market absorbed increased capacity, with the company's hardwood sales realizations declining to $578 per tonne.

Despite the lower pricing, the pulp segment benefited from the company's strategic focus on operational reliability and cost control. Mercer's pulp production volumes increased in the fourth quarter, reaching 467,000 tonnes, as the company avoided planned maintenance downtime compared to the previous quarter.

In the third quarter of 2024, pulp segment revenues increased by approximately 7% to $373.27 million from $348.85 million in the same quarter of 2023, primarily due to higher pulp sales realizations partially offset by lower sales volumes. Pulp production decreased by approximately 13% to 415.84K air-dried metric tonnes (ADMTs) in the third quarter of 2024 compared to 479.92K ADMTs in the same quarter of 2023, mainly due to the disposal of the Cariboo Pulp Paper (CPP) joint venture investment, unplanned downtime at the Peace River mill, and slower than normal maintenance start-up at the Stendal mill, partially offset by the port strike related curtailment at the Celgar mill in the third quarter of 2023. Total pulp sales volumes decreased by approximately 8% to 448.86K ADMTs in the third quarter of 2024 from 487.20K ADMTs in the same quarter of 2023, primarily due to the lower production.

Solid Wood Segment Navigates Challenges

Mercer's solid wood segment, which includes lumber, engineered wood products, and biofuels, faced a more challenging environment in 2024. The segment reported a negative EBITDA of $5 million in the fourth quarter, as weak European economies and high-interest rates dampened demand for construction materials.

Lumber sales volumes increased by 14% quarter-over-quarter to 124 million board feet, driven by stronger demand in the U.S. market. However, overall lumber pricing remained under pressure, with the benchmark Western SPF price averaging $435 per thousand board feet in the fourth quarter, up from $366 in the previous quarter.

The company's mass timber business continued to show promise, with an order book of $36 million at the end of 2024. However, the segment's performance was hampered by the completion of several large projects in the third quarter, leading to a decrease in production volumes in the fourth quarter.

In the third quarter of 2024, solid wood segment revenues increased by approximately 5% to $125.10 million from $119.55 million in the same quarter of 2023, primarily due to higher manufactured products revenues, partially offset by lower revenues from other products. Lumber production increased by approximately 30% to 122.50 million board feet (MMfbm) in the third quarter of 2024 from 94.40 MMfbm in the same quarter of 2023, mainly due to lower planned maintenance downtime and higher production at the Torgau facility. Lumber sales volumes decreased by approximately 5% to 108.80 MMfbm in the third quarter of 2024 from 114.70 MMfbm in the same quarter of 2023 as a result of the timing of sales.

Navigating Tariff Uncertainties and Positioning for the Future

One of the key challenges facing Mercer in 2025 is the potential impact of trade tariffs. The company's pulp exports to the U.S. and lumber exports from Germany to the U.S. could be subject to additional duties, which could affect the company's competitive positioning and profitability.

To mitigate these risks, Mercer has developed contingency plans to redirect product flows, optimize its supply chain, and leverage its global footprint. The company is also closely engaged with industry associations and government officials to stay informed and advocate for policies that support the industry's long-term sustainability.

Looking ahead, Mercer remains focused on strengthening its operational reliability, driving cost efficiency, and strategically investing in growth opportunities. The company plans to complete several high-return projects in 2025, including the expansion of its Torghao lumber facility and the optimization of its Spokane mill, which are expected to enhance the company's competitiveness and profitability.

Furthermore, Mercer is actively exploring opportunities in the emerging bioeconomy, with the continued development of its lignin extraction pilot plant at the Rosenthal mill. This initiative aligns with the company's commitment to sustainability and the transition to a low-carbon economy.

Financial Position and Capital Allocation

As of the end of 2024, Mercer maintained a strong liquidity position, with $489 million in available cash and undrawn revolving credit facilities. The company's leverage profile also improved during the year, as it refinanced its 2026 senior notes and used cash on hand to reduce its long-term debt by over $100 million.

Mercer's capital allocation strategy remains focused on maintaining a disciplined approach to investments, with a planned capital expenditure budget of $100 million to $120 million for 2025. The company's priorities include sustaining the reliability and efficiency of its existing assets, as well as selectively pursuing growth opportunities that align with its strategic objectives.

Mercer's board of directors has approved a quarterly cash dividend of $0.075 per share, underscoring the company's commitment to shareholder returns while preserving financial flexibility.

In fiscal year 2024, Mercer reported consolidated revenue of $2.04 billion and a net loss of $85.1 million. The company generated operating cash flow (OCF) of $19.05 million and free cash flow (FCF) of -$60.54 million.

For the fourth quarter of 2024, Mercer reported revenue of $488.4 million, net income of $16.7 million, OCF of -$54 million, and FCF of -$100 million. Compared to the third quarter of 2024, revenue increased 3.5% and net income improved from a loss of $17.6 million, primarily due to no planned maintenance downtime, a strong US dollar, and higher MBSK sales volumes, partially offset by modestly lower pulp pricing.

Across both segments, Mercer's Operating EBITDA, a non-GAAP measure, increased by approximately 35% to $50.45 million in the third quarter of 2024 from $37.53 million in the same quarter of 2023, primarily due to higher pulp and manufactured products sales realizations, partially offset by higher costs and expenses and lower pulp sales volumes as a result of unplanned downtime.

While the company does not break out geographic market performance, it is noted that the US accounts for around 50% of the company's lumber sales volume and 38% of its Q4 2024 lumber sales. Europe and China are other major markets for the company's pulp and lumber products.

Liquidity

Mercer's strong liquidity position is a key factor in its ability to navigate market uncertainties and pursue strategic initiatives. The company's $489 million in available cash and undrawn revolving credit facilities provide a solid foundation for operational flexibility and potential investment opportunities. This robust liquidity profile enables Mercer to maintain its operational resilience while also positioning itself to capitalize on market opportunities as they arise.

As of September 30, 2024, Mercer reported the following key liquidity metrics:

• Debt/Equity ratio: 3.44

• Cash on hand: $185 million
• Available credit lines: $304 million undrawn revolvers
• Current ratio: 3.55
• Quick ratio: 2.14

These metrics demonstrate Mercer's strong financial position and ability to meet its short-term obligations while maintaining flexibility for future investments and market challenges.

Industry Trends and Future Outlook

The pulp and lumber industries are highly cyclical, with prices and demand fluctuating based on global macroeconomic conditions and industry capacity. Mercer notes that the lumber industry has seen reduced allowable cut limits, low housing stock, and potential wood shortages that could create positive long-term pressure on supply-demand dynamics.

Looking ahead to 2025, Mercer expects:

• Modest higher lumber prices in both the US and Europe due to limited supply and increased demand.

• Fiber costs to remain stable for the pulp business, with about a 10% increase for the solid wood business in Q1 2025.
• Capital spending to be between $100 and $120 million, focused on maintenance, environmental, and safety projects.
• 78 days of planned downtime across their pulp mills, compared to 57 days in 2024.

The company anticipates softwood pulp pricing to remain strong in 2025, with demand expected to be steady. However, hardwood pulp pricing weakened in Q4 2024 as the market absorbed new capacity. In the solid wood segment, Mercer expects the construction market to remain challenging in 2025, though they are seeing significant pent-up demand that could drive growth for the mass timber business.

Mercer's priority for 2025 will be on reducing leverage through cost reduction programs, operational reliability, and prudent capital management. This focus aligns with the company's long-term strategy of maintaining financial flexibility while pursuing sustainable growth opportunities.

Conclusion

Mercer International's diversified business model, operational excellence, and strategic agility have enabled the company to navigate the complex market dynamics of 2024 and position itself for long-term success. Despite facing headwinds in its solid wood segment and uncertainties surrounding trade policies, Mercer's focus on cost optimization, asset reliability, and sustainable growth initiatives have positioned the company to capitalize on emerging opportunities in the global forest products industry.

As Mercer continues to adapt to the evolving market landscape, investors should closely monitor the company's ability to leverage its competitive advantages, execute on its strategic priorities, and deliver sustainable value for its shareholders. The company's strong liquidity position, coupled with its strategic focus on operational efficiency and market responsiveness, provides a solid foundation for navigating the challenges and opportunities that lie ahead in the dynamic forest products industry.