Mercer International Inc. Reports Third Quarter and Nine Months 2022 Results

Mercer International Inc. reported third quarter 2022 Operating EBITDA of $140.9 million similar to $148.1 million in the third quarter of 2021 and $145.1 million in the second quarter of 2022.

Selected Highlights

• Third quarter net income of $66.7 million and Operating EBITDA* of $140.9 million
• Record year to date net income of $227 million and Operating EBITDA* of $440.4 million
• Expanded German solid wood business with the acquisition of HIT Torgau

In the third quarter of 2022, net income was $66.7 million (or $1.01 per basic share and $1.00 per diluted share) compared to $69.1 million (or $1.05 per basic share and $1.04 per diluted share) in the third quarter of 2021 and net income of $71.4 million (or $1.08 per basic share and $1.07 per diluted share) in the second quarter of 2022.

In the first nine months of 2022, Operating EBITDA increased by 40% to $440.4 million from $313.9 million in the same period of 2021. In the first nine months of 2022, net income increased to $227.0 million (or $3.43 per basic share and $3.41 per diluted share) from $96.5 million (or $1.46 per share) in the same period of 2021.

Mr. Juan Carlos Bueno, the Chief Executive Officer, stated: “I am pleased with our third quarter operating results. Strong energy and pulp prices combined with favorable foreign exchange movements and lower planned major maintenance were the main factors behind our operating results relative to the second quarter.

We are excited about the addition of the HIT Torgau mill to the Mercer group. This acquisition will increase our lumber capacity to almost one billion board feet and diversifies our product offering with the addition of both pallets and wood pellets. The Torgau mill acquisition also brings additional green energy production capacity to our business. Since the acquisition closed on September 30^th, we have focused on integrating this business and also ensuring we begin capitalizing on the estimated $16 million of annual synergies that we have identified.

Total pulp production in the current quarter decreased by approximately 11% compared to the same quarter of 2021, primarily due to lower production at our Stendal mill, which had a fire in its woodyard. The fire resulted in the mill being down for most of July, and after its restart, it has operated at approximately 90% of its capacity. We currently expect to install replacement equipment at our Stendal mill in the fourth quarter of 2022 and first quarter of 2023. We maintain property and business interruption insurance for the Stendal mill and we expect the property damage and business interruption to be covered.

Our Friesau sawmill ran well in the third quarter, but significantly weaker lumber prices in the United States negatively impacted both sales prices and volumes compared to the prior quarter of 2022.

The negative impact of increased key production costs such as fiber, energy and chemicals in the third quarter is expected to continue in the fourth quarter of 2022. In particular, fiber costs in Germany increased because of materially higher demand for wood for energy purposes. Our production costs are primarily incurred in euros and Canadian dollars. However, our pulp and a material portion of our lumber sales are priced in dollars. During the third quarter of 2022, the dollar continued to strengthen against the euro and the Canadian dollar which had a positive impact on our euro and Canadian dollar denominated costs and expenses and partially offset the negative impact of such inflationary pressures. The strengthening of the dollar increased our operating income by approximately $13.8 million compared to the prior quarter of 2022 and by approximately $37.0 million compared to the third quarter of 2021.

Looking forward to the fourth quarter, we currently expect pulp prices and demand to remain generally strong with some modest price declines as a result of inflationary pressures negatively impacting paper demand. Lumber demand and prices are expected to be generally similar to the third quarter due to continued economic uncertainty caused by inflation and higher interest rates.

Strong energy demand and prices in Germany are expected to continue in the fourth quarter of 2022. In October, 2022, in response to restricted energy supply and price increases, the EU implemented a temporary mandatory cap on market revenues at €180 per MWh for intra-marginal generators such as renewables, nuclear and lignite producers. The cap applies to both electricity traded in the market as well as bilateral trading and will be in effect from December 1, 2022, to June 30, 2023.”

Mr. Bueno concluded: “With our expanded solid wood operations and product lines combined with our world-class assets, we believe we are well positioned to enhance value for our stakeholders going forward.”

Consolidated – Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Total revenues in the third quarter of 2022 increased by approximately 13% to $532.8 million from $469.7 million in the same quarter of 2021 primarily due to higher energy and pulp sales realizations partially offset by lower sales volumes and lower lumber sales realizations.

In the third quarter of 2022, energy and chemical revenues increased by approximately 169% to $71.2 million from $26.5 million in the same quarter of 2021 primarily as a result of higher energy prices in Germany, which were more than triple those in the same quarter of 2021. In the third quarter of 2022, our average energy sales realizations in Germany were approximately €388 per MWh compared to about €104 per MWh in the comparative quarter of 2021.

Costs and expenses in the third quarter of 2022 increased by approximately 19% to $424.1 million from $356.0 million in the third quarter of 2021 driven by higher key production costs, such as fiber, chemicals and energy, and higher freight costs. Such cost increases were partially offset by the positive impact of a stronger dollar on our euro and Canadian dollar denominated costs and expenses.

In the third quarter of 2022, Operating EBITDA decreased by approximately 5% to $140.9 million from $148.1 million in the same quarter of 2021 primarily due to higher per unit fiber costs, higher other production and freight costs and lower sales volumes partially offset by higher energy and pulp sales realizations and the positive impact of a stronger dollar.

Segment Results

Pulp

In the third quarter of 2022, pulp segment operating income increased by approximately 10% to $110.0 million from $99.9 million in the same quarter of 2021 primarily due to higher sales realizations and the positive impact of a stronger dollar, partially offset by higher per unit fiber costs, higher other production and freight costs and lower sales volumes.

Pulp revenues in the third quarter of 2022 increased by approximately 6% to $395.5 million from $374.3 million in the same quarter of 2021 due to higher sales realizations partially offset by lower sales volumes.

In the third quarter of 2022, third-party industry quoted average list prices for NBSK pulp increased from the same quarter of 2021 primarily as a result of low customer inventory levels. Our average NBSK pulp sales realizations increased by approximately 8% to $911 per ADMT in the third quarter of 2022 from approximately $847 per ADMT in the same quarter of 2021.

Energy and chemical revenues increased to a record $61.2 million in the third quarter of 2022 from $22.5 million in the same quarter of 2021 due to higher sales realizations. During the third quarter of 2022, we benefitted from strong energy demand and higher energy prices in Germany.

In the third quarter of 2022 compared to the same quarter of 2021, we had a positive impact of approximately $32.6 million in operating income due to foreign exchange, primarily as a result of the effect of the stronger dollar on costs and expenses.

Costs and expenses in the third quarter of 2022 increased by approximately 17% to $346.7 million from $296.9 million in the third quarter of 2021 primarily due to higher per unit fiber, chemical, energy and freight costs. The higher costs were partially offset by the positive impact of a stronger dollar and lower pulp sales volumes.

In the third quarter of 2022 per unit fiber costs increased by approximately 32% from the same quarter of 2021 due to higher per unit fiber costs for all of our mills. Our German mills had higher per unit fiber costs as a result of strong demand from other wood consumers such as heating pellet manufacturers. For our Canadian mills, per unit fiber costs increased due to strong demand in the mills’ fiber baskets and for our Celgar mill a decrease in the availability of wood chips due to regional sawmill curtailments. We currently expect per unit fiber costs to increase in the fourth quarter of 2022 with an increase in Germany due to continued strong demand and generally flat per unit fiber costs in Canada.

Solid Wood

In the third quarter of 2022, operating income decreased by approximately 84% to $2.9 million from $17.9 million in the same quarter of 2021 primarily due to higher per unit fiber costs and other production costs, lower lumber sales realizations and sales volumes partially offset by higher energy and wood residuals sales realizations.

Average lumber sales realizations decreased by approximately 13% to $605 per Mfbm in the third quarter of 2022 from approximately $692 per Mfbm in the same quarter of 2021 due to lower demand in the European market. Demand in both the European and U.S. markets is being negatively impacted by concerns over rising interest rates, inflationary pressures and a weaker economic outlook.

Fiber costs were approximately 70% of our lumber cash production costs in the third quarter of 2022. In the third quarter of 2022, per unit fiber costs modestly increased compared to the same quarter of 2021. Higher per unit fiber costs in euros due to strong fiber demand in Germany were partially offset by the positive impact of a stronger dollar on our euro denominated fiber costs. We currently expect per unit fiber costs to modestly increase in the fourth quarter of 2022.

Consolidated – Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Total revenues for the nine months ended September 30, 2022 increased by approximately 32% to $1,697.9 million from $1,284.3 million in the nine months ended September 30, 2021 primarily due to higher sales realizations and higher pulp sales volumes.

In the nine months ended September 30, 2022, energy and chemical revenues increased by approximately 137% to $165.2 million from $69.7 million in the same period of 2021 primarily as a result of higher energy prices in Germany, which were more than double those in the same period of 2021. In the nine months ended September 30, 2022, our average energy sales realizations in Germany were approximately €241 per MWh compared to about €89 per MWh in the comparative period of 2021.

Costs and expenses in the nine months ended September 30, 2022 increased by approximately 27% to $1,352.8 million from $1,067.7 million in the nine months ended September 30, 2021 primarily due to higher per unit fiber, freight, energy and chemical costs and a higher pulp sales volume partially offset by the positive impact of a stronger dollar on our euro and Canadian dollar denominated costs and expenses.

In the nine months ended September 30, 2022, Operating EBITDA increased by approximately 40% to $440.4 million from $313.9 million in the same period of 2021 primarily due to higher sales realizations, the positive impact of a stronger dollar and higher pulp sales volumes partially offset by higher per unit fiber costs and higher other production and freight costs.

Liquidity

As of September 30, 2022, we had cash, cash equivalents and a term deposit aggregating $362.3 million and approximately $258.9 million available under our revolving credit facilities providing us with aggregate liquidity of about $621.2 million.

Quarterly Dividend

A quarterly dividend of $0.075 per share will be paid on December 29, 2022 to all shareholders of record on December 21, 2022. Future dividends will be subject to Board approval and may be adjusted as business and industry conditions warrant.

For the full third quarter results, click here.

About Mercer International

Mercer International Inc. is a global forest products company with operations in Germany, the USA and Canada with a consolidated annual production capacity of 2.3 million tonnes of pulp, 960 million board feet of lumber, 140 thousand cubic meters of CLT, 17 million pallets and 150,000 metric tonnes of wood pellets. To obtain further information on the company, please visit its website at www.mercerint.com.

Contact:

Jimmy S.H. Lee – Chairman – (604) 684-1099

Source: Mercer International, Inc.