Mercer International Reports First Quarter 2020 Results

"The outbreak of the COVID-19 pandemic in the first quarter has presented a number of challenges and I am proud that our people have risen to meet these head on." – David Gandossi, CEO, Mercer International Inc.

May 1, 2020 - Mercer International Inc. [on April 30] reported first quarter 2020 Operating EBITDA decreased to $57.0 million from $123.8 million in the first quarter of 2019 and increased from negative $34.2 million in the fourth quarter of 2019.

In the first quarter of 2020, net loss was $3.4 million (or $0.05 per share) compared to net income of $51.6 million (or $0.79 per basic share and $0.78 per diluted share) in the first quarter of 2019 and a net loss of $72.7 million (or $1.11 per share) in the fourth quarter of 2019.

"The outbreak of the COVID-19 pandemic in the first quarter has presented a number of challenges and I am proud that our people have risen to meet these head on," said David M. Gandossi, CEO of Mercer International.

"Our pulp products are an important constituent of many pandemic related high demand goods such as tissue and cleaning products and certain personal protective equipment. Accordingly, we have implemented a number of new and important health and safety measures at our operations to protect our employees and to allow our mills to operate responsibly and efficiently. We are constantly monitoring our operations and guidance from governmental and health organizations to ensure we take appropriate and necessary actions to protect our people.

"The current working environment and resultant work changes have not been easy and I want to thank all our employees for working cooperatively to implement new procedures to keep safety at the forefront and for looking out for one another. Despite these new procedures, our mills continued to run well in the first quarter of 2020.

"Despite weak product pricing, our solid first quarter financial results reflect strong production, effective cost control, steady demand for both pulp and lumber and favorable currency movements. On the pulp side, we experienced modest price increases off trough price levels in the fourth quarter of 2019 as demand was generally steady. Overall, our sales volumes were held back slightly as we worked through pandemic related logistical challenges early in the quarter. On the lumber side, our recent sawmill upgrades allowed us to take advantage of strong demand and upward pricing momentum in the U.S. market to report record quarterly operating income for our wood products segment.

"As we manage through the current global business uncertainty, we are working to lower our costs and working capital usage and conservatively managing liquidity. As a result, we have reduced our 2020 planned capital expenditures to about $90 million and reduced our quarterly dividend to $0.065 per share."

Consolidated - Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

In the first quarter of 2020, our operating EBITDA increased to $57.0 million from negative $34.2 million in the fourth quarter of 2019 and decreased from $123.8 million in the same quarter of 2019. The increase in the current quarter compared to the prior quarter is primarily due to lower maintenance costs, the positive impact of a stronger dollar on our dollar denominated cash and receivables held at our operations and higher sales volumes. The decrease compared to the same quarter of 2019 is primarily due to lower pulp sales realizations partially offset by lower per unit fiber costs and the positive impact of a stronger dollar.

SEGMENT RESULTS

Pulp: Lower fiber costs more than offset by lower sales realizations

In the first quarter of 2020, pulp segment operating income decreased to $21.4 million from $93.5 million in the same quarter of 2019. The decrease was primarily due to lower pulp sales realizations partially offset by the positive impact of a stronger dollar and lower per unit fiber costs. In the current quarter of 2020, the NBSK pulp realized sales price decreased by approximately 26% to $561 per ADMT from $757 per ADMT in the same quarter of the prior year due to high producer inventory levels and market uncertainty as COVID-19 spread through China. NBSK sales volumes decreased by approximately 6% to 438,326 ADMTs in the current quarter from 466,893 ADMTs in the same quarter of 2019 due to logistics issues early in the current quarter related to closures, restrictions and other effects related to the COVID-19 pandemic.

Our Canadian pulp mills recorded a non-cash write down of our inventory carrying values of $5.7 million in the current quarter as a result of lower pulp sales realizations and high fiber costs.

Per unit fiber costs decreased in the current quarter by approximately 12% from the same quarter of 2019 primarily due to lower per unit fiber costs for our German mills. In Germany, per unit fiber costs benefitted from the continuing availability of beetle damaged wood. Per unit fiber costs in Canada were flat but remained at historically high levels due to strong fiber demand in the mills' fiber procurement areas.

Wood Products: Record operating income due to record production and lower fiber costs

In the first quarter of 2020 the wood products segment operating income increased to a record $5.6 million compared to $1.6 million in the same quarter of 2019. The increase was primarily due to record production and lower per unit fiber costs. Production increased by approximately 5% to 116.4 MMfbm of lumber in the current quarter from 110.7 MMfbm in the same quarter of 2019 primarily due to capital improvements at the mill. In the current quarter per unit fiber costs decreased by approximately 25% from the same quarter of 2019 primarily as a result of the continuing availability of beetle damaged wood.

Average lumber sales realizations decreased by approximately 3% to $348 per Mfbm in the first quarter of 2020 from approximately $359 per Mfbm in the same quarter of 2019 primarily due to lower pricing in Europe partially offset by higher pricing in the U.S. market. European lumber pricing declined due to an increase in the supply of lumber processed from beetle damaged wood which generally obtains lower prices. U.S. lumber pricing increased due to strong demand in the current quarter.

Current Market Environment

Although there is a great deal of global business uncertainty resulting from the COVID-19 pandemic and its effect and societal responses are evolving and can change quickly, in the second quarter we are currently expecting to see steady pulp demand from tissue and hygiene producers but a weakening in demand from printing and writing paper producers.

On the pulp supply side, in the upcoming quarter, we are currently expecting certain mills to curtail production as a result of fiber shortages resulting from sawmill downtime. Further, some pulp mills have announced some sporadic curtailments resulting from COVID-19. Additionally, various pulp mills globally have delayed their annual maintenance schedules as a result of the current pandemic. This is expected to curtail production in the later part of the year or early part of next year.

On the lumber side, we are currently expecting weakening lumber markets and lower lumber sales realizations in the second quarter of 2020 due to a drop in housing starts and business slowdowns and disruptions resulting from the pandemic in our major markets.

About Mercer International

Mercer International Inc. (Nasdaq: MERC) is a global forest products company with operations in Germany and Canada with consolidated annual production capacity of 2.2 million tonnes of pulp and 550 million board feet of lumber. For further information, visit: www.mercerint.com.