Business Context and Reporting Period
Company: Mercer International Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Six months ended June 30, 2009 (Unaudited)
Business Overview: Mercer operates three NBSK pulp mills (Rosenthal, Celgar, and Stendal) with a consolidated annual production capacity of approximately 1.5 million air-dried metric tonnes (ADMTs). The company operates in a highly cyclical industry heavily influenced by global economic conditions, pulp prices, and foreign exchange rates.
Key Financial Metrics
All figures in thousands of Euros (€) unless otherwise noted.
| Metric | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | 298,456 | 363,467 |
| Operating Income (Loss) | (22,149) | 24,859 |
| Net Income (Loss) | (60,084) | 3,993 |
| Net Loss Attributable to Common Shareholders | (50,826) | 3,740 |
| Net Loss Per Share (Basic & Diluted) | (1.40) | 0.10 |
| Operating Cash Flow | 35,549 | 9,429 |
| Cash and Cash Equivalents (End of Period) | 62,100 | 83,295 |
| Total Debt (Current + Long-term) | 850,425 | 854,418 |
| Working Capital | 80,229 | 154,374 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 17.9% to €298.5 million, driven primarily by a 20.9% drop in pulp revenues (€276.6 million vs. €349.7 million) due to lower price realizations (€372/ADMT vs. €498/ADMT). This was partially offset by a 58.7% increase in energy revenues (€21.9 million) due to higher biomass tariffs in Germany.
- Operating Loss: The company reported an operating loss of €22.1 million compared to operating income of €24.9 million in the prior year. This shift was caused by lower pulp prices and higher fiber costs relative to revenue, despite a 13.2% reduction in overall fiber costs.
- Net Loss: Net loss attributable to common shareholders widened significantly to €50.8 million from a net income of €3.7 million. This was influenced by an unrealized loss of €7.6 million on interest rate derivatives (compared to a gain of €12.7 million previously) and a €9.3 million loss attributed to the noncontrolling interest in the Stendal mill.
- Cash Flow Improvement: Operating cash flow improved to €35.5 million from €9.4 million, largely due to a €25.1 million decrease in receivables and a €27.5 million decrease in inventories.
Guidance, Outlook, and Risks
- Market Outlook: Management notes that global economies continue to experience volatility and that pulp industry conditions remain challenging. The company expects fiber prices to level off for the Celgar mill but anticipates upward pricing pressure for German mills due to harvesting curtailments.
- Liquidity: Management believes cash flow from operations, available cash, and borrowings will be adequate to meet liquidity needs for the next 12 months. However, the company is actively working to reduce costs and discretionary spending.
- Debt Restructuring:
- Exchange Offer: On July 13, 2009, the company commenced an exchange offer for its 8.5% Convertible Senior Subordinated Notes due 2010, offering common stock and new 3% notes in exchange.
- Refinancing: The company received a commitment to refinance the Rosenthal mill credit facility with a new €25 million revolving facility and a €4.4 million term loan.
- Credit Ratings: Following the exchange offer, Moody's lowered the Probability of Default Rating to Ca, and S&P lowered the corporate credit rating to CC, with S&P indicating a potential downgrade to SD (Selective Default) upon completion of the exchange.
- Government Funding: The company is reviewing the Celgar Energy Project in light of the Canadian government's "Green Transformation Program." While the company believes it qualifies for significant funding, no specific rules have been released, creating uncertainty regarding the project's scope and timing.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with debt covenants given the recent credit rating downgrades and the ongoing exchange offer.
- Exchange Offer Success: Monitor the acceptance rate of the July 2009 exchange offer for the 8.5% convertible notes to assess the impact on the capital structure and future interest obligations.
- Pulp Price Realizations: Track NBSK pulp list prices and actual sales realizations, as profitability is highly sensitive to price volatility in the current recessionary environment.
- Celgar Energy Project: Confirm the status of the Green Transformation Program funding and its impact on the capital expenditure timeline for the Celgar mill.
- Derivative Exposure: Review the impact of interest rate fluctuations on the unrealized gains/losses associated with the Stendal mill's interest rate swaps.