Q1 2024 Earnings Summary
- Mercer International expects pulp prices to improve further in the second half of the year due to sustained supply constraints and increasing demand in Europe and North America, which should positively impact their financial performance.
- The company anticipates significant growth in its mass timber business, with sales projected to almost double in 2024 to $100 million to $120 million, and expects the business to achieve EBITDA margins above 20% at maturity.
- Mercer is investing in strategic, high-return capital projects at their Torgau and Spokane mills, with expected payback periods of less than three years, positioning the company to benefit when lumber markets rebound.
- Weak demand in European lumber markets may negatively impact the company's Solid Wood segment. The European economy remains slow, with no significant improvement expected in the next couple of quarters. This prolonged weakness could suppress lumber prices and demand.
- Recent pulp price increases are primarily driven by temporary supply constraints rather than strong underlying demand. Supply constraints have caused pulp prices to surge, but demand recovery, especially in Europe and China, is not as strong as desired. This reliance on supply-side factors may make pulp prices vulnerable if supply issues are resolved.
- Fiber supply challenges in British Columbia could pose long-term risks to operations. Tight fiber supply in the region has led to capacity reductions by industry peers. Although the company is mitigating this by sourcing chips from the U.S., reliance on external sources could impact costs and supply stability for the Celgar mill.
-
Mass Timber Projects
Q: What is the expected pickup in manufactured product sales and EBITDA?
A: We have two very large mass timber projects currently in production, which will keep us busy this quarter, with one extending into early 2025. These projects are boosting our order book, and we anticipate mass timber sales for 2024 to be around $100 million to $120 million, nearly double last year's $60 million. In Q2, we expect mass timber profitability to improve significantly. At maturity, with at least two shifts running, we're aiming for EBITDA margins north of 20%. -
Pulp Market Outlook
Q: How sustainable is the current pulp price momentum?
A: Supply constraints are a major driver of the recent surge in pulp prices, and we foresee further improvements in the second half of the year. Another closure has been announced, removing 300,000 tonnes from the market. Demand has improved in Europe and North America, though not as strongly as we'd like, while China's demand remains less robust. We are cautiously bullish on price increases in the coming months. -
Returns on Capital Projects
Q: What returns are expected from the Torgau and Spokane projects?
A: We're investing in optimizing our Torgau and Spokane mills, aiming for payback periods of less than three years. At Torgau, we're freeing up capacity to produce lumber alongside pallets, significantly increasing lumber volume. In Spokane, improvements in sorting lines and press capacity will drive costs down. These investments position us to benefit when lumber prices improve, which we anticipate by the end of next year. -
Pulp Capacity Reduction Impact
Q: How does the pulp capacity reduction in BC affect you?
A: The recent announcement of pulp capacity reduction in British Columbia comes as no surprise due to tight fiber supply. At our Celgar mill, we're mitigating this by leveraging our strategic location near the U.S. border to source 30% to 50% of our fiber from the U.S. at competitive costs. This strategy reduces pressure from the tight fiber situation in BC. -
European Lumber Demand
Q: What is the outlook for European lumber demand?
A: The European lumber market remains very weak, especially in Germany. We don't expect significant changes in the next couple of quarters. However, we've seen some momentum from the resurgence of the U.K. and Ireland markets. Our cost-competitive mill allows us to pivot to the U.S. market, where last year almost 50% of our sales went. This year, sales to the U.S. are a bit lower due to improvements in the U.K. and Ireland.
Research analysts covering MERCER INTERNATIONAL.