Mercer International Inc. (MERC) Earnings

Management highlights

### Overall Financial Performance - Consolidated Q2 2026 operating EBITDA was negative $21 million, down from positive $8 million in Q1. The company reported a consolidated net loss of $76 million ($1.13 per share), which includes a $29 million non-cash inventory impairment charge driven by elevated fiber costs in Germany and low pulp prices. - Aggregate liquidity decreased by $37 million to $192 million at the end of Q2, consisting of $79 million in cash and $113 million in undrawn revolving credit capacity. Total capital expenditure for the quarter was $12 million, the majority of which was maintenance capital. ### Cost Reduction and Operational Initiatives - The company's One Goal 100 cost improvement program, which targets $100 million in cumulative profitability improvements by the end of 2026 (vs. a 2024 baseline), had delivered $54 million in total improvements through the first half of 2026 and remains on track to hit its full-year target. Management is actively pursuing additional operational improvements beyond the program's target. - In response to uneconomical fiber supply constraints in Germany, the company strategically reduced Q2 production at German pulp mills by approximately 26,000 tons, extended a Q3 maintenance shutdown at Rosenthal by 12 days (including 12 days of market-related curtailment), and slowed daily production at two German mills by 10%. - A comprehensive restructuring plan is being implemented at the loss-making Torgau solid wood mill: the product portfolio has been shifted to higher-value dimensional lumber for the U.S. market, operations moved from a four-shift to a three-shift system, and 100 positions were eliminated in July 2026 with an additional 250 positions to be cut by Q2 2027. Total restructuring costs are expected to be $3 million in 2026 and $3 million in 2027. ### Market Dynamics - Softwood pulp markets faced ongoing global economic headwinds in Q2, with Chinese NBSK net prices falling 4% quarter-over-quarter amid high mill inventories, while European NBSK list prices rose 2% and North American NBSK prices stayed flat. Hardwood markets improved due to tight supply, with North American hardwood prices up 12% in Q2 and Chinese prices flat. - U.S. lumber prices increased due to reduced Canadian lumber supply, while European lumber demand and pricing remain weak amid broader economic stagnation. Mass timber has a strong $151 million backlog, 70% of which consists of large hyperscaler data center projects, positioning it as a long-term growth driver for the company. - German fiber costs reached historically high levels due to supply disruptions from the war in Ukraine and strong competition for wood fiber from subsidized domestic wood pellet heating production, while Canadian fiber costs decreased 4% quarter-over-quarter due to lower demand from curtailed pulp mills. ### Capital Structure and Strategic Alternatives - A special committee of independent directors is actively evaluating strategic alternatives to enhance liquidity, address upcoming debt maturities, and strengthen the balance sheet. The committee has engaged external advisors and is in discussions with senior note holders and other capital structure stakeholders to reach a comprehensive long-term solution.

Guidance

- The One Goal 100 program remains on track to hit its target of $100 million in total profitability improvements (vs. a 2024 baseline) by the end of 2026. - Q3 2026 cash flow results are expected to be broadly similar to Q2 2026 results. 40 days of major maintenance shutdowns are scheduled for Q3, with incremental maintenance costs expected to run approximately $1.5 million per day. - German pulp mill fiber costs are expected to remain elevated in Q3, while German sawmill fiber costs will moderate as saw log availability improves, and Canadian fiber costs are expected to continue declining. - Seasonally slow demand and high existing inventory are expected to weigh on pulp pricing in Q3, but the market is expected to tighten in late 2026 and into 2027 due to the heavy northern hemisphere maintenance season and announced mill closures, which will reduce inventory and support higher prices. - U.S. lumber pricing is expected to remain volatile in the short term, with modest demand growth from the summer building season and reduced supply supporting improved pricing, while European lumber prices will stay flat in Q3. Long-term improvement in both markets depends on broader economic stabilization and lower interest rates. Torgau mill is expected to approach cash break-even by the end of 2027 and return to profitability the following year after full implementation of restructuring. - Mass timber production and sales are expected to be flat in Q3 before increasing meaningfully in Q4 due to project timing. - Modest downward pressure is expected on biofuel prices in Q3.

Segment performance

1. Pulp Segment: Reported negative Q2 2026 EBITDA of $13 million. Production totaled 456,000 tons, a slight decrease from 466,000 tons in Q1 2026, and sales volumes fell to 450,000 tons from 471,000 tons in Q1. Softwood pulp realizations decreased slightly to $682 per ton, while hardwood pulp realizations improved to $607 per ton from $564 per ton in Q1. $26 million of the Q2 $29 million non-cash inventory impairment was allocated to pulp segment inventory. 2. Solid Wood Segment: Reported negative Q2 2026 EBITDA of $8 million. Lumber production increased 7% quarter-over-quarter to 124 million board feet, driven by improved saw log availability, while sales volumes decreased 11% quarter-over-quarter to 100 million board feet due to sales timing. Lumber sales realizations increased on the back of higher U.S. prices, with the Random Lengths U.S. Western SPF benchmark averaging $488 per thousand board feet (up $25 from Q1). Mass timber revenues increased more than 25% quarter-over-quarter, and production increased roughly 40%, supported by a strong $151 million order backlog. The remaining $3 million of the Q2 non-cash inventory impairment was allocated to this segment's inventory. 3. Electricity: Second quarter electricity sales totaled 206 gigawatt hours, 12 gigawatt hours lower than Q1 due to reduced pulp mill output, and average pricing fell to $117 per megawatt hour from $127 per megawatt hour in Q1.

Risks & headwinds

- The company added going concern disclosure to its financial statements due to the reclassification of both its Canadian and German revolving credit facilities as current liabilities. The Canadian facility matures in January 2027, and while management expects to renegotiate or replace it prior to maturity, there is uncertainty around successful refinancing. The German facility has a leverage ratio waiver through September 2026, but management expects to miss the required ratio in Q4 2026, creating near-term refinancing risk. - Persistent macroeconomic headwinds, geopolitical conflicts in Ukraine and the Middle East, and high energy, logistics, and fiber costs have extended and worsened industry market weakness beyond initial expectations, leading to negative EBITDA across both core segments in Q2. - German pulp mills are currently operating below cash break-even, with systemic fiber supply constraints driven by the war in Ukraine and competition for fiber from subsidized wood pellet heating production. - Uncertainty around the KUSMA trade agreement and potential new tariffs from the U.S. or its trading partners could create additional trade headwinds and reshape global commodity supply-demand dynamics. - Weak European economic conditions continue to depress demand for lumber and pallets, and high mortgage rates limit U.S. construction activity, creating ongoing downward pressure on solid wood segment results.

Analyst Q&A

• Q: Analyst Roger Spitz asked how far below cash break-even Mercer's German pulp mills are currently operating, to give context for what would be required to return them to break-even. /

  A: CFO Richard Short confirmed the mills are currently cash-negative, noting the entire pulp segment is currently ~$25 million negative. To reach a cash position that covers CapEx requirements, the segment would need around $35-$40 million in total improvement to get back to break-even, which provides an order of magnitude for the required change.

• Q: Spitz also requested an update on 2026 full-year expected cash flow items including cash interest, CapEx, cash taxes, and working capital flows. /

  A: Short stated that management expects Q3 2026 cash flow performance to be very similar to the performance posted in Q2 2026, which provides the requested near-term guidance.

• Q: Analyst Dhruva Rana asked for clarification on a reported $67 million full-year maintenance cost, noting no major maintenance shutdowns occurred in the first half of 2026, and asked what to expect for maintenance costs in the second half. /

  A: Short explained the $67 million reflects ongoing day-to-day maintenance, which is separate from extended full-mill major maintenance shutdowns. 40 days of major maintenance are scheduled for Q3, with incremental major maintenance costs expected to run approximately $1.5 million per shutdown day.

• Q: Analyst Sean Stewart asked how much of the solid wood segment's losses are concentrated at the Torgau mill, and what profitability uplift management expects from the ongoing Torgau restructuring. /

  A: CEO Juan Carlos Bueno confirmed the Torgau mill is the primary driver of the solid wood segment's current negative results. After $6 million in total restructuring costs ($3M in 2026, $3M in 2027), the restructuring is expected to deliver over $20 million in annual profitability improvements for the mill, with potential for larger gains. Management expects the mill to approach cash break-even in 2027 after full implementation, and reach positive cash flow the following year.