Mercer International Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unaudited interim consolidated results; amounts below are U.S. dollars. Unless stated otherwise, financial amounts are in millions.
Business context and results
Mercer operates pulp and solid wood businesses, with manufacturing operations in Germany, Canada and the United States. First-quarter results reflected higher pulp sales volumes and lower production and freight costs, but weaker year-over-year pulp realizations, continued solid wood losses, higher interest expense and a non-cash loss on disposal of its Cariboo Pulp & Paper (CPP) joint venture interest.
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $553.4 | $522.7 |
| Operating loss | $0.4 | $20.1 |
| Net loss | $16.7 | $30.6 |
| Basic and diluted loss per share | $0.25 | $0.46 |
| Operating EBITDA, non-GAAP | $63.6 | $27.5 |
| Operating cash flow | $(29.2) | $(49.7) |
| Capital expenditures | $18.5 | $33.4 |
Financial position and liquidity
- Cash and cash equivalents were $274.3 at March 31, down from $314.0 at December 31, 2023. Working capital was $825.4.
- Long-term debt on the balance sheet was $1,615.2; total liabilities were $2,031.7 and shareholders’ equity was $573.6. Debt principal for senior notes and credit arrangements totaled approximately $1,588.1, before finance leases and other accounting adjustments.
- Management reported about $280.6 of availability under revolving credit facilities and aggregate liquidity of approximately $554.9. The company said it was in compliance with its debt covenants.
- Interest expense was $27.6, up from $19.0; cash interest paid was $34.7. The increase reflected the 12.875% senior notes issued in 2023 and higher revolver borrowings and rates.
- Operating cash use improved year over year, but a $63.7 increase in accounts receivable consumed cash in Q1 2024. Cash declined by $39.7 during the quarter.
Segment performance and changes versus prior year
- Pulp: Revenue increased 8% to $432.4 and operating income rose to $17.4 from $12.8. Pulp sales volume increased about 30%, while NBSK and NBHK average sales realizations fell about 14% and 22%, respectively. Production rose about 7%; there was no annual maintenance downtime in Q1 2024, compared with 10 days in Q1 2023.
- Solid wood: Revenue edged down to $119.0 from $121.0; operating loss narrowed to $13.7 from $27.1. Lumber sales volume fell about 13%, although average lumber realizations increased about 7%. Pallet revenue declined about 23%; manufactured-products revenue increased as mass timber operations ramped up.
- Consolidated revenue increased about 6%, primarily from higher pulp sales volumes. Lower fiber, chemical, energy and freight costs, plus lower depreciation and SG&A, helped results; lower pulp realizations and higher interest expense were offsets.
- Other comprehensive loss was $37.6, mainly from foreign-currency translation. Mercer reported a $37.5 non-cash reduction in translated net assets as the U.S. dollar strengthened; this reduced equity but did not affect net loss, Operating EBITDA or cash.
Unusual items, outlook and risks
- Mercer recognized a $23.6 non-cash loss on disposal of its 50% CPP joint venture interest because estimated proceeds, comprised of inventory, were below the disposal group’s carrying amount. Operating EBITDA is a non-GAAP measure that adds this loss back, among other adjustments; Mercer cautions that it is not a measure of liquidity or cash available.
- The sandalwood business remained classified as held for sale at March 31, with $33.6 of assets and $6.4 of associated liabilities. The related $33.7 non-cash impairment was recorded in 2023; a sale was expected within 12 months.
- For Q2 2024, management expected higher pulp realizations in the U.S. and Europe, stable prices in China, generally flat lumber prices in the U.S. and Europe, and stable mass timber and pallet prices. It expected pulp fiber costs to decrease, but solid wood fiber costs to rise modestly.
- Mercer expected 35 days of pulp mill maintenance downtime in Q2, representing approximately 60,800 ADMTs. Full-year 2024 capital expenditures were forecast at $95–$120, including high-return projects at Torgau and Mercer Spokane and maintenance projects.
- Management said cash, operating cash flow and available revolver borrowings were expected to fund business needs, capital requirements and quarterly dividends for the next 12 months. This is a forward-looking assessment, not a guarantee.
- Key disclosed risks include commodity-price and demand cyclicality, fiber and other input-cost changes, foreign-exchange and interest-rate exposure, substantial indebtedness, production disruptions, environmental regulation, and customer credit risk. Mercer reported routine litigation and an asbestos-removal obligation whose fair value could not yet be reasonably estimated; management did not expect pending or threatened claims to have a material adverse effect.
Important facts for investors to verify
- Whether pulp demand and realizations continue to improve, especially given lower year-over-year Q1 realizations and different conditions across China, Europe and North America.
- Whether the solid wood segment can further reduce losses amid weaker pallet demand and lower lumber volumes, and whether mass timber growth is sustainable.
- Receivables collection and operating cash generation, following the Q1 cash use and increase in accounts receivable.
- Debt-service capacity and refinancing exposure, including the 2026–2029 senior-note maturities and high coupon on the 2028 notes.
- Completion, proceeds and final accounting for the CPP dissolution and the planned sandalwood sale.
- Delivery of the $95–$120 million capital expenditure plan, Q2 maintenance schedule and management’s liquidity assumptions; future dividends remain subject to board approval.