Q3 2024 Earnings Summary
- MERC's mass timber business is experiencing strong growth, with sales expected to increase from $60 million last year to $100 million this year, and the company anticipates 20% annual growth over the next 5 years. With substantial unused capacity (currently using one shift out of three), MERC is well-positioned to capitalize on the growing mass timber market in North America.
- MERC's European pulp mills are operating at full capacity with contracted volumes and low inventories, ensuring stable sales and allowing the company to benefit from strong softwood pulp prices driven by supply constraints due to industry closures and curtailments.
- MERC expects improved EBITDA due to strong fundamentals in its softwood business, which accounts for 85% of sales, and is taking proactive steps to strengthen its balance sheet through debt reduction and the sale of non-core assets like Santanol.
- Elevated interest rates are causing delays in mass timber projects, with developers waiting for rates to decrease before proceeding. MERC expects 2025 to be similar to 2024, with significant growth not occurring until 2026, potentially limiting the growth of their mass timber segment in the near term. ,
- High leverage levels remain a concern, as MERC aims to reduce net debt to 2.5x EBITDA, but acknowledges that this will not happen overnight. With modest free cash flow prospects, there may be limited ability to deleverage quickly, raising concerns about financial flexibility. ,
- Increasing fiber costs in Europe due to the absence of Russian supply and inflation could pressure margins. While MERC has mitigated these costs so far, there is a risk that these strategies may become less effective, potentially impacting profitability if fiber costs continue to rise.
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Deleveraging Targets
Q: What's your net debt target and deleveraging plans?
A: Management aims to reduce net debt to 2.5× EBITDA over time. They expect improved EBITDA next year due to strong softwood sales, which account for 85% of sales. They're proceeding with the sale of Santanol, which will provide additional cash when concluded. -
Mass Timber Outlook
Q: How will mass timber demand evolve?
A: Mass timber demand is growing over 20% annually, expected to continue for the next five years. Despite current interest rates, they anticipate 2026 will be extremely busy for mass timber projects. Last year they invoiced $60 million, and expect about $100 million this year in mass timber sales. With three assets running at three shifts, they can deliver over $500 million. -
Impact of Potential US Tariffs
Q: How would US tariffs affect your lumber strategy?
A: If tariffs are imposed, it could strain US lumber shipments, but they've been shifting volumes to other markets like the improving UK market. Currently, 43% of lumber goes to the US, down from 60% in other quarters. They expect higher lumber prices ahead due to anticipated interest rate reductions boosting construction demand. -
Fiber Costs and Supply
Q: What are you seeing in fiber costs regionally?
A: Fiber costs have been relatively flat this quarter. In Canada, they're benefiting from their own woodroom at Peace River and sourcing from the US at Celgar, reducing reliance on high-cost BC wood chips. In Europe, strong logistics through Mercer Holz help maintain competitive fiber costs despite broader inflationary pressures. -
European Lumber Market Uptick
Q: What's driving strength in European lumber markets?
A: The uptick in demand is coming from the UK, where they've seen a good recovery with expectations for sustained growth. -
Competitor Downtime Impact
Q: Are you benefiting from competitors' downtime?
A: Their mills are running at full capacity with contracted volumes. Competitors' curtailments are not increasing their volumes but are supporting softwood pulp prices overall. They expect higher prices due to significant closures of capacity by others. -
Potential BC Port Strike
Q: How might a BC port strike affect you?
A: They've prepared contingency plans since July, arranging alternative logistics for both inbound raw materials and outbound shipments. They hope any strike is short-lived but are ready to manage disruptions.
Research analysts covering MERCER INTERNATIONAL.