Business Context and Reporting Period
Company: Mercer International Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Reporting Currency: Euros (€)
Operations: The Company 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 Stendal mill is 74.9% owned by Mercer, with the remainder held by a noncontrolling interest.
Key Financial Metrics
| Metric (in thousands of Euros) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenues | 139,572 | 186,816 |
| Operating Income (Loss) | (12,413) | 18,643 |
| Net Income (Loss) Attributable to Common Shareholders | (39,350) | 2,869 |
| Net Income (Loss) Per Share (Basic & Diluted) | (1.08) | 0.08 |
| Operating Cash Flow | 802 | 3,624 |
| Cash and Cash Equivalents (End of Period) | 41,236 | 69,735 |
| Total Debt (Current + Long-term) | 865,056 | 854,418 |
| Working Capital | 109,961 | 154,374 |
Note: Operating EBITDA for Q1 2009 was €1.1 million, compared to €32.8 million in Q1 2008.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25.3% to €139.6 million, driven primarily by a 28.0% drop in pulp revenues (€129.0 million vs. €179.1 million) due to the global economic crisis and depressed demand. Energy revenues increased 36.6% to €10.5 million due to higher biomass tariffs in Germany.
- Price Realizations: Average pulp sales realizations fell 26.1% to €377 per ADMT from €510 per ADMT in Q1 2008. List prices in Europe dropped from €586 to €449 per ADMT.
- Operating Loss: The Company recorded an operating loss of €12.4 million, a reversal from an operating income of €18.6 million in the prior year. This was caused by lower price realizations, reduced sales volume, and non-cash inventory provisions of €4.6 million.
- Non-Cash Charges: Significant non-cash losses impacted the bottom line, including a €15.0 million unrealized loss on interest rate derivatives (Stendal mill) and a €4.4 million unrealized loss on foreign exchange denominated debt.
- Accounting Change: Adoption of FAS 160 resulted in the reclassification of the noncontrolling interest in the Stendal mill. The noncontrolling shareholder was attributed €9.3 million of the Stendal mill's losses for the quarter.
Guidance, Outlook, Risks, and Contingencies
- Market Outlook: Management expects challenging pulp industry conditions to continue into the second quarter of 2009. The global recession has led to sustained depressed demand and price volatility.
- Liquidity Strategy: The Company is focused on maintaining business sustainability by reducing costs, cutting discretionary spending, and enhancing liquidity. Management believes current cash flows and available credit lines (approx. €31.5 million undrawn) are adequate for the next 12 months.
- Debt Amendments: On March 13, 2009, the Company amended the Stendal Loan Facility, deferring approximately €164 million of scheduled principal payments until maturity in 2017. This included deferring payments due in 2009, 2010, and 2011.
- Capital Projects: The Company is negotiating term financing for a "green" energy project at the Celgar mill, with expected costs of €24.7 million for the remainder of 2009. No assurance can be given that financing will be finalized on favorable terms.
- Credit Rating: Standard & Poor's lowered the Restricted Group's credit rating to B- and placed it on credit watch with negative implications due to the pulp market environment and potential liquidity issues.
- Legal and Environmental: The Company is involved in a property transfer tax dispute regarding the Celgar mill and other routine legal actions. Management does not believe these will have a material adverse effect.
Investor Verification Checklist
- Debt Covenant Compliance: Verify continued compliance with the Stendal Loan Facility's debt service cover ratio and leverage ratio covenants, which become effective in late 2009 and 2011 respectively.
- Derivative Exposure: Assess the impact of the €62.1 million liability for unrealized interest rate derivative losses and the sensitivity of earnings to further interest rate fluctuations.
- Financing for Celgar Project: Monitor the status of negotiations for the €24.7 million green energy project financing, as failure to secure it could impact capital expenditure plans.
- Noncontrolling Interest Dynamics: Review the impact of the FAS 160 adoption on the attribution of Stendal mill losses to the noncontrolling shareholder versus Mercer shareholders.
- Inventory Provisions: Evaluate the sustainability of pulp prices to determine if further non-cash inventory write-downs are necessary given the €4.6 million provision already taken.