Q2 2024 Earnings Summary
- Mercer's mass timber business is expected to grow significantly, with sales projected to double to $110 million in 2024 from 2023, and EBITDA margins anticipated to reach between 10% and 20% in the long run as production scales up and additional shifts are added.
- The Torgau mill expansion is expected to increase timber capacity by 25% by mid-2025, adding approximately 240,000 cubic meters of capacity, which will allow Mercer to optimize its product mix and potentially increase shipments to higher-priced markets like the U.S., thereby improving revenues and margins.
- Softwood pulp market remains tight, with demand to capacity ratio expected to reach 93% next year, unlike the hardwood pulp market which is oversupplied; this tight supply situation positions Mercer to benefit from stronger softwood pulp prices as demand picks up post-summer season, potentially leading to price recovery in Q3 and Q4.
- The ongoing weakness in the European lumber and pallet markets, particularly in Germany, is negatively impacting Mercer's performance, with only timid signs of improvement expected, possibly not until the second half of 2025. This prolonged downturn has already led to a $34 million goodwill impairment related to the Torgau facility in Q2 2024.
- Mercer's mass timber business, although EBITDA positive since Q4 last year, currently operates at low single-digit margins due to running only one shift. Significant margin improvement relies on scaling up to two or three shifts, which depends on market conditions and economic stability. Therefore, the near-term profitability from this segment may remain limited.
- Potential increased competition in the pulp market from new hardwood pulp innovations, such as Suzano's hybrid products designed to compete with softwood pulp, could threaten Mercer's softwood pulp demand and prices. While Mercer is confident in customer loyalty, the threat of substitution may impact future revenues.
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Pulp Market Outlook
Q: What is the current state of the pulp market, especially in Asia and Europe?
A: Management explained that hardwood pulp prices have dropped by about $100 due to oversupply from Suzano's 2.6 million tonnes and Liangxiang's 1.7 million tonnes projects in China. In contrast, softwood pulp remains tight, with a demand-to-capacity ratio expected to reach 93% next year, while hardwood drops to 86%. Softwood prices have decreased by less than $50, and they believe prices will likely remain at this level. They expect demand to pick up after the summer, potentially recovering some lost ground in Q3, though not significantly. -
Mass Timber Business Profitability
Q: Is the mass timber business EBITDA positive, and what are the margin expectations?
A: The mass timber business became EBITDA positive in Q4 of last year and remained strong this quarter. Management expects sales to double in 2024 compared to 2023, aiming for around $110 million by year-end. They project long-term EBITDA margins between 10% and 20%, aiming for 20% or more. Currently, margins are in the low single digits due to running only one shift, but they anticipate improvement as they add more shifts and better utilize capacity. -
Germany Economic Conditions
Q: Are there signs of improvement in Germany's economy, particularly affecting lumber and pallet prices?
A: Improvement is still very timid, with Germany lagging behind the rest of Europe. This situation makes management more conservative about prospects for lumber and pallet prices in the short term. They anticipate signs of improvement starting in the second half of 2025, acknowledging a lag between interest rate cuts and economic impact. -
Deleveraging Strategy
Q: Any updates on asset divestitures to expedite deleveraging?
A: The only asset currently for sale is Santanol, and the process is ongoing. Management does not expect any further write-downs on this asset. -
Lumber Shipments to U.S.
Q: How will the completion of Torgau projects affect lumber shipments to the U.S.?
A: Upon completion of the Torgau projects in mid-2025, they expect a 25% increase in timber capacity, adding around 200,000 cubic meters of wood and 240,000 cubic meters of planed lumber capacity. The percentage of lumber shipped to the U.S. will fluctuate between 40% and 60%, depending on market conditions. This quarter, 39% of lumber shipments went to the U.S., down from 55% a few quarters back, due to stronger demand in the U.K. and Ireland. -
Order File Timing and Impact on Prices
Q: Will order file timing lags affect Q3 average price realization for pulp?
A: Management indicated that they primarily sell spot in Asia and sell mills out every month in Europe, with low inventories across the board. Delivery times vary: 1–2 weeks in Europe and 30–60 days in Asia. They suggested using an average lag of 45 days for modeling purposes , implying that some price changes may not fully impact Q3 results and could bleed into Q4. -
Threat from Suzano's New Pulp
Q: How significant is the threat from Suzano's new hybrid pulp to NBSK?
A: Management does not see this as a significant threat. They believe substituting established softwood pulp with an unknown grade will be challenging. Their strong, long-standing customer relationships and tailored technical support make substitution less likely in their key markets. They anticipate such products may find space in less demanding markets where quality is more flexible, like China.