Mercer International Aktie

Good morning, and welcome to Mercer International's First Quarter 2026 Earnings Conference Call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International; and Richard Short, Chief Financial Officer and Secretary.

I will now hand the call over to Richard Short. Please go ahead.

Thank you, Carmen. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the first quarter before turning the call to Juan Carlos to provide further color into the markets, our operations and our strategic initiatives. Also, for those of you who've joined today's call by telephone, there is presentation material that we have attached to the Investors section of our website.

But before turning to our results, I would like to remind you that we will make forward-looking statements in this morning's conference call according to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.

Our operating EBITDA for the first quarter was about $8 million, an increase of $28 million when compared with the fourth quarter's results. This improvement was primarily driven by the scheduling of our planned maintenance downtime and the successful implementation of our One Goal 100 program. Despite these gains, overall results were negatively impacted by rising fiber costs in both Germany and Canada, alongside weak demand and pricing for pulp and lumber.

The current quarter's EBITDA also includes a noncash inventory impairment charge of $22 million. In the first quarter, as a result of the high cost and weak markets for our products, we did not meet the leverage ratio covenant under our German revolving credit facility. In response, we successfully obtained a waiver from our lenders for this covenant covering the current quarter and the subsequent 2 quarters.

Based on our latest forecast and assumptions, which include expected pricing for our products and estimated production costs, we anticipate being compliant with the leverage ratio by the fourth quarter. Therefore, the outstanding balance in our German revolving credit facility remains classified as noncurrent as of March 31, 2026. In the first quarter, our Pulp segment reported quarterly EBITDA of $7 million, and our solid wood segment reported negative quarterly EBITDA of approximately $6 million. Additional segment disclosures are available in our Form 10-Q, which can be found on our website and that of the SEC.

Softwood pulp markets remained stable through the first quarter despite ongoing global economic headwinds. As a result, our softwood pulp sales realizations were only down slightly to $696 per ton from $702 per ton in the fourth quarter. In Q1, the European NBSK list price averaged $1,618 per ton, a $120 increase from the fourth quarter. However, this gain was offset by a higher discount rate. The NBSK net price in China saw a small increase to $685 per ton, $14 increase from the fourth quarter.

In North America, NBSK list prices remained stable in the first quarter when compared to the fourth quarter averaging $1,563 per ton. Hardwood markets in China and North America improved in the first quarter due to stronger demand and higher domestic fiber costs in China. As a result, our sales realizations improved to $564 per ton from $528 per ton in the fourth quarter. This quarter, the average price gap in China between softwood and hardwood pulp narrowed to approximately $90 per ton. The average net price for eucalyptus hardwood pulp in China in the first quarter was $595 per ton, which is an increase of $55 per ton in the fourth quarter.

In North America, the average list price was $1,338 per ton, up $140 per ton from the fourth quarter. As mentioned previously, the first quarter included a $22 million noncash inventory impairment, primarily driven by low pulp prices and higher fiber costs. Of this amount, approximately $17 million was attributed to softwood inventories and the remainder was against hardwood inventories. Pulp sales volumes in the first quarter were flat when compared to the fourth quarter at about 471,000 tons.

First quarter pulp production was steady at about 466,000 tons. However, when normalized for planned maintenance downtime, production volume is essentially flat as we strategically reduced production in our German mills because of fiber supply limitations. We do not have any planned maintenance in the first quarter compared to the fourth quarter when we had a total of 21 days of planned maintenance at our Stendal mill.

In the second quarter of 2026, we also do not have any days of planned maintenance downtime. For our solid wood segment, lumber sales realizations in the first quarter were flat in both the U.S. and Europe as weak demand was offset by reduced supply. The Random Lengths U.S. benchmark price for Western SPF #2 and Better averaged $463 per thousand board feet in the first quarter, an increase of $41 from $422 per thousand board feet in the fourth quarter.

Today, that benchmark price for Western SPF #2 and better is around $483 per thousand board feet, an $81 increase from the end of 2025. In the first quarter, lumber production increased by about 7% to 160 million board feet from the fourth quarter. This was primarily due to higher production after the holiday season. Similarly, lumber sales volumes increased to 112 million board feet or 9% in the fourth quarter, which mirrored the higher production.

Electricity sales for the first quarter totaled 217 gigawatt hours, which is about 16 gigawatt hours more than the fourth quarter due to the Stendal shut in the fourth quarter. Pricing also increased to about $127 per megawatt hour from $105 in the fourth quarter due to higher spot prices in Germany. Fiber costs for both our Pulp and solid wood segments increased in the first quarter compared to the fourth quarter. This increase was primarily driven by higher costs in Germany, resulting from supply constraints and strong demand, including seasonal demand for fiber from the biofuel industry.

In the second quarter of 2026, we are expecting stable fiber costs for both our German and Canadian mills as improved availability will be offset by continuing strong demand. Our mass timber operations within the solid wood segment had significantly higher revenues in the first quarter compared to the fourth quarter, reflecting our growing order book. Our current order book is expected to provide stable production for our facilities through 2026 and into 2027. We continue to make progress on our One Goal 100 program.

As a reminder, this initiative focuses on cost reduction and operational efficiencies with a target to improve our profitability by $100 million by the end of 2026, using 2024 as a baseline. We have realized approximately $41 million in cost and savings and reliability improvements, and we are on target to achieve our $100 million savings goal. In the first quarter, our aggregate liquidity decreased by $201 million to about $229 million, comprising $85 of cash and $144 million of undrawn revolvers.

This decrease in our liquidity is primarily due to the temporary EUR 70 million reduction in the availability of our German revolving credit facility as part of the terms of the recent waiver. In addition, higher working capital, driven by the seasonal increase in fiber inventory, scheduled senior note interest payments and higher receivables due to the timing of sales also contributed to the decrease.

We continue to focus on working capital management and expect a modest reduction in the second quarter. In the first quarter, we invested a total of $13 million of maintenance capital across our facilities. We reported a consolidated net loss of $52 million for the first quarter or $0.78 per share, which includes the inventory impairment of $22 million or $0.33 per share.

In the fourth quarter, we reported a net loss of $309 million, or $4.61 per share, which included aggregated noncash, long-lived asset and inventory impairments of roughly $239 million, or $3.57 per share. During the quarter, we launched a consent solicitation with our bondholders, the purpose of which was to provide flexibility with regards to the types of financing transactions the company may be able to engage in with our bondholders.

The solicitation received approval from over 80% of our bondholders. At this time, we do not have any specific amendment or transaction in mind and we have not engaged in any bondholder or ad hoc groups. That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thank you, Rich. Our Q1 results were positively impacted by reduced planned maintenance but were partially offset by higher fiber costs and reduced production due to European fiber constraints. Overall, I was pleased with how our mills ran in Q1. But at the same time, it was frustrating to have to slow down some of them due to either insufficient or too expensive fiber supply.

We continue to effectively manage our costs and continue to make progress on our One Goal 100 program. As Rich mentioned, we didn't meet the leverage ratio covenant of our German operating facility at the end of Q1 due to weak market conditions as commodity prices remained low, while fiber costs were high. As a result, we have successfully obtained a waiver for this covenant. Looking ahead, we expect our cost reduction initiatives, along with anticipated market improvements to have us back in compliance with this covenant in the fourth quarter.

In addition, we're evaluating strategic alternatives and financing options to enhance our liquidity and financial condition and to position Mercer for an eventual market recovery. The Board has appointed a special committee overseeing management's efforts along these lines. Our One Goal 100 program launched in Q2 2025, yielded about $30 million of concrete results for the full year '25, and another $11 million in Q1.

We are on track to achieve our goal of $100 million in improvements by the end of 2026. Now while achieving this goal is an important milestone, we continue to pursue additional improvements across all our operations to help compensate for the increased macroeconomic headwinds that the market is imposing on us, such as those brought forward by the war in the Middle East, which has compounded existing trade uncertainties related to the tariff-driven market volatility.

Late in Q1, we saw rising energy costs, primarily in the form of fuel surcharges on our logistics and an inflationary effect on chemical costs. While this impact was minimal on the current quarter, we expect these increases costs to move more meaningfully and impact Q2. We estimate it to be an increase of between $5 to $10 per ton of pulp on freight costs and around $5 per ton for chemicals. It's worth noting that [indiscernible] is to be renegotiating this summer, which may introduce an additional layer of trade uncertainty.

As it stands today, the only direct tariff we're facing is a 10% tariff on our European lumber imports into the U.S. This does, however, compare favorably to Canadian exports to the U.S., which are to the recently announced duty reductions will face an average combined tariff and duty rate of about 35%. These higher duty and tariff rates have caused Canadian lumber curtailment announcements. And even with the recent duty reductions, we expect more to come.

This is creating a reduced supply for residual chips for pulp mills and is putting pressure on fiber costs in Canada. We believe our Celgar mill is well positioned given its ability to access the U.S. fiber market and our ability to harvest and process whole logs. Nevertheless, we have experienced some fiber cost inflation but are starting to see some relief on this front in Q2.

As mentioned, our main import from the U.S. into Canada is wood chips for Celgar pulp mill, which today amounts for about 45% of the fiber consumption of the mill. We feel this is a competitive advantage. Pulp fiber costs were up roughly 10% relatively to Q4. In both Germany and Canada, our wood costs were up mainly due to supply constraints and higher costs on volumes available. We felt this fiber cost inflation in our sawmills as well. Overall, NBSK pulp markets improved modestly in the first quarter. European prices were up 8% in the quarter, although the increase was offset by higher discounts, while in North America and China, prices were stable.

Today, the softwood hardwood price differential has narrowed to about $70 per ton, an amount small enough that we may see some reverse substitution. This is all against the backdrop of generally weak paper prices, which continues to temper overall demand. Turning to hardwood prices in China and North America increased in the first quarter, driven by improving demand and higher domestic fiber costs in China.

Looking ahead, we expect to see some modest NBSK price improvements in Q2 across all markets with NBHK remaining fairly flat. However, trade uncertainty, combined with inflationary pressures brought on by high energy prices are an overhang on this business. until the uncertainty resulting from these macro effects is reduced, the supply/demand dynamic will be heavily influenced by the supply side.

In total, our pulp production was essentially flat at 465,000 tons compared to Q4. This result reflects overall production being steady after considering planned maintenance in Q4, given that we strategically curtailed roughly 20,000 tons at our German mills due to fiber constraints. Our lumber production was up almost 7% relatively to Q4, primarily due to reduced production during the holiday season.

Overall, we are pleased with our lumber production and are looking forward to the installation of advanced scanning technology at Torgau in Q2, which will allow us to better optimize our sales mix. Our solid wood segment continues to face headwinds from a weak European economy and the dampening impact of high mortgage rates in the U.S. However, the seasonal construction improvements in Q1 created modestly improved pricing in the U.S. lumber market. The stagnation of the European economy continues to dampen the demand for pallets. And the result of this adverse business environment and higher fiber costs are the main reasons behind the $6 million EBITDA loss of our solid wood segment in Q1.

Given the many economic forces affecting U.S. construction activity, U.S. lumber pricing will likely be volatile in the short term. We're expecting a modest demand increase through the spring in both North America and Europe, creating a slightly improved pricing environment. Any meaningful long-term improvement in either of the European or U.S. markets remains dependent on improved economic conditions and lower long-term interest rates.

In Q1, 42% of our lumber volume was sold in the U.S. Looking forward, we believe the U.S. lumber market will be driven by favorable homeowners demographics, which combined with reduced North American lumber capacity will create supportive supply-demand dynamics in the midterm. European shipping pallets market remained weak with pricing staying generally flat due to the overhang of the European economy, particularly in Germany.

We're experiencing generally stable pricing in the first half of 2026. Biofuel prices were up 15% in Q1 relative to Q4 due to seasonal demand. And as the weather warms up in Germany, we expect biofuel prices to come down but still stay higher relative to historical prices. Looking ahead to Q2, we expect fiber costs to stabilize for both our pulp and sawmill businesses. We expect this to be driven by modestly improved availability of fiber in Germany along with increased chip volumes from U.S. sources for our Celgar mill.

With regards to our mass timber business, revenues were up over [ 60% ] compared to Q4 and production was up over 20% as we begin to ramp up to a second shift at our facilities. Despite the increase in sales and production this quarter, both fell short of our expectations due to about a week of unplanned downtime at our Spokane facility resulting from a mechanical failure.

Our first quarter results were also impacted by costs associated with ramping up our facilities as we hire and train new employees. We expect our production and sales to increase significantly in Q2. Today, our mass timber backlog of projects sits at about $171 million and we continue to see a steady volume of incoming project inquiries, including large datacenter projects sponsored by hyperscalers, which make up roughly 60% of the backlog.

We feel our large production capacity and geographic footprint positions us very well for these types of projects. We remain bullish on this business as a growth engine for Mercer. In closing, market weakness is expected to persist in 2026. And as a result, our priority is on maintaining solid liquidity. To do this, our strategy continues to focus on cost reductions beyond our One Goal 100 program, reduced capital expenditures and other working capital measures, along with a commitment to rebalance our portfolio of assets that combined will improve our balance sheet.

Above all, we're committed to prudent financial management. And in light of the ongoing economic uncertainties and our focus on liquidity, our planned CapEx spend is about $60 million to $80 million in '26. This capital budget is focused on maintenance, environmental and safety projects. The headwinds facing our industry have proven to be both longer and more severe than many anticipated, and the impacts of the war in the Middle East only exacerbates global economic challenges.

However, I remain confident that our short-term strategy will allow us to weather the storm, and I also believe that the current market conditions validate our long-term strategy that focuses on transforming our pulp mills into biorefineries, with additional revenue streams that will balance our product mix but grant us further resilience during pulp down cycles.

As 2026 progresses, we will remain focused on those elements of our business that we can control on implementing our short-term strategy. Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.

[Operator Instructions]

First question is from Sean Steuart with TD Cowen.

Juan Carlos as the committee forms to look at options for bolstering liquidity, hoping you can provide some updated thoughts around your core assets that you want to build around and what might be considered noncore? And with respect to pulp capacity rationalization, does that need to wait for this process to play out and maybe look once the balance sheet rebolsters, you could look at permanent or indefinite closures as those, I imagine, are quite expensive. Any perspective there?

Yes, Sean, thank you. Yes, obviously, the committee is considering all alternatives possible. So we're not looking only at whether it's reduction of assets, but we're looking at the entire picture, our entire capital structure. So we'll be looking -- and that was the reason why we put out this consent solicitation. We were very pleased with the outcome. We've got more than 80% consent. And the purpose is obviously to provide flexibility by broadening the types of transactions that we can undertake with bondholders.

So that's part of the analysis that the special committee is going to be looking at not only focusing on the assets as you asked, but going beyond that, looking at every aspect of our capital structure. So that is the focus that we are having in recent times. And it is too premature to say whether it's this asset or that asset that we have in one or another category. Obviously, we've done the work. But as I mentioned, and I think I addressed this in the previous call last quarter, when we were asked about asset sales and my comment at the time, which remains is given the current conditions of the market, asset sales are obviously a very difficult task.

The valuation of the assets is very impacted by the current economic conditions. So it would be very difficult to claim proper value from any asset sale that we could entertain at this point in time. Now that may change as time progresses and the market recovers as we expect it to recover over time. But that obviously puts a damp on what are the options that you have immediate with immediate impact.

So again, that's why it's important that we look at everything and not only asset sales per se.

Okay. The fiber supply constraints in Germany, can you give a perspective on how that's persisting into the second quarter and expectations through the year? And beyond the maintenance schedule in the back half of the year, does this suggest further curtailments might be necessary?

Yes. I mean fiber costs in Germany is one of the major concerns that we've experienced so far and it's been happening. It carried out through 2025, and it continues to be present in 2026. When you look at fiber increase overall for our German assets, it was on the high single digits. Let's put it on average on Q4 versus Q1.

And when you look at what we expect in Q2, it's going to be probably on average, a little bit lower but still some increase quarter-on-quarter. Now this will be helped somehow because we are expecting lower cost of fiber in -- for pulp mills in Canada. So one thing may wash out the other but it is clearly one of the issues that we are facing is the situation of fiber in Germany.

Now why this happened is associated with -- at least in 2025, there was expectations of calamity harvesting that was going to be necessary, which did not happen by the time this happened already late in the summer that everybody was evidence that there was no need. It was already too late to harvest in the summer months. So that created kind of a vacuum of much lower levels of inventory than normal in the amount of wood that was available.

That put some pressure upwards. Obviously, in terms of price and that's what we've seen in the combination of less availability and higher prices. Nowadays, we're combating those higher prices, and we've looked for other alternatives. We're buying further out. We're not just buying in Germany. 90% of our wood comes from Germany. We're buying further out, we're buying from Scandinavia, from the [ Balkans ]. We're running from different countries, importing into our mills. That is helping with the availability, but that doesn't mean that the cost necessarily go down.

We're exploring alternatives to keep increasing the amount of imports as a way to balance the market a bit in Germany. But again, that doesn't mean necessarily the costs are going down. So that's the situation that we're in, and we will continue working around it. We'll see how the harvest progresses later down this year.

[Operator Instructions] We have a question from the line of Cole Hathorn with Jefferies.

I just like a follow-up on the outlook for softwood pulp. I mean if we think about the diverging markets at the moment, we still got a lot of softwood inventory levels in China, whereas Europe and North America look slightly different. So I'd just like to hear your thoughts about, firstly, what's needed to kind of normalize those -- the Chinese softwood inventories. Do we ultimately need capacity rationalization in Europe and Canada to sort that out.

And then secondly, on Europe and North America, just how you see the softwood markets there?

Cole, very good question. I think when you look at what the different analysts that are following these pulp markets say, everybody would tend to indicate that there should be additional curtailments happening. We know of some that are already obviously announced and in place, but they are clearly not enough. We know that [indiscernible] is down since March -- end of March. And that basically about a 700,000 ton mill. And who knows until when that mill is going to be down. We know that Fiber Excellence shut down mill in France, and that's 280,000 tons that seem permanent and in addition to what Canada did already late in the year beginning of this year.

So there are closures and very rightfully so, we expect more curtailments to happen. We believe that the situation, especially in Canada with mills running at very low, if any, profitability at all is just a recipe for additional curtailments. So yes, I think that's the biggest lever that we see as an alternative to a significant shift would be a reduction in supply because demand continues to be relatively lackluster.

There's nothing special about demand. China is producing a lot of integrated capacity. They've done a lot of the substitution that they were able to do with a differential now between hardwood and softwood, maybe some of that substitution comes back. But again, it doesn't happen overnight. It will take a while for that to see the impact on the inventories that are in the channel. I think there's still a ways to go before we see those inventories reduced to a level that would allow a significant price increase. So I think those are the things that we're clinging on at this point in time.

Then maybe just as a follow-up on the wood cost dynamics, specifically in Germany. Could you give a little bit of differentiation between kind of the pulpwood side versus the sawlog and the dynamics that at play there? I know you mentioned availability is an issue. But going into the second quarter, one of the reasons for the cost inflation in Q1 was competition on the energy side.

And I'm just wondering when do we get to a point where your prices have gone too far, and the forest owners are doing a little bit of eye gauging because no sawmills are really making money as far as I can tell across Europe at the current sawlog prices. I'm just wondering how you see it.

Absolutely. Yes, the policy that Germany has in place right now to incentivize the burning of wood for energy purposes is having an important impact in the price of wood chips, no doubt. We compete with those mills that are using -- that are producing pellets in biofuels. We see that ourselves in Torgau. We are producers of pellets. We've seen, and I reported earlier in the call, our prices went up 15% Q-on-Q.

So yes, well, and everybody is seeing that benefit. Now we don't expect that high prices to continue into the year. They should be tapering off but may still be elevated as pellet producers are expected to build inventory over the summer. So while the margins might not be as high as they were in the last part of the year and the beginning of the year, there's still pretty good margins, and that will keep being an issue in terms of the wood that is available for the pulp mills as such.

So that is a factor and we'll continue to be a factor. And obviously, the other things that keep driving things up are the situations that have been prevalent already for the previous quarters. Now in terms of the difference between how much is impacting our pulp mills versus our sawmills, I would say it's more or less even. I would say it's probably a little bit higher. The impact -- the negative impact that we expect in Q2 on the sawmills that it is on the pulp mills, but it's marginal. So it's a margin of error, nothing dramatic in that regard.

And then just following up on the working capital. There was a kind of a bigger outflow in Q1. I know you're doing your best to manage that. But just thinking about that into the second quarter, should we be assuming kind of neutral working capital from a cash flow or kind of positive? Just wondering what actions you're taking? Because I imagine a lot of the increase was fiber related. .

Yes. A lot of the increase is seasonal harvesting. As you all know, obviously, during the winter, that's the seasonal harvesting at its best. And even though we kept it very tight, it is obviously impacting our inventory levels. As we've gone through that peak of the cycle, what we expect in Q2 is a reduction in working capital. So not that it would remain at that level, but that it would succeed to more rational levels. And we're obviously putting a lot of pressure in keeping that as tight as possible. We're running our mills, our pulp mills with very, very low inventory ahead of the mill, very low fiber inventory. And we're probably going to keep it running that way for the foreseeable future to make sure that we keep our working capital inventories at as low as possible.

And then if you'll just allow me one more. You've talked about data centers and demand on the CLT side. And I'm just wondering, when do we start getting the first kind of cash inflows or kind of these projects actually progressing and you're starting to make improved sequential deliveries and starting to get the cash from those is the first one. .

And then the second one is, we've seen [ Essity ] announced strategic review of its tissue business in Europe. They've got a lot of tissue capacity in Germany. I'm just wondering if there's any color you can give on supply to their business?

Absolutely. Yes, first, on mass timber. As I said at the beginning of the call, we're very excited with how that business is progressing, growing 60% quarter-on-quarter was fantastic. That business is a business that, from a cash perspective, it handles itself pretty well because when we sign a contract we get already down payment for the majority of the projects before we start putting it up or building or manufacturing it.

So that provides kind of a positive cash flow cycle for that business, different from what we do in the other businesses where it's basically out of pocket totally and then you recover only after you have sold your inventory. That's not the case in mass timber. So it is a cash, for example, last year, we lost, our EBITDA was negative, but cash was almost neutral. Right now, we're looking into a second half of the year where the bulk of the projects or about 60% of the projects will be hyperscalers.

Those will provide us higher margins. And there, we see a second half of the year with better margins than the first half. From a cash flow perspective, I think we'll be positive throughout the year. but it will obviously be much better in the second half just from a pure EBITDA perspective. So that's in terms of mass timber. Back to your question on Essity. We've heard -- we read the news earlier about their decision to do a strategic analysis of the tissue and what they're going to do with it and what that will mean if they're going to rationalize or consolidate or sell or I don't know what they're going to do.

It's too early for us to anticipate anything we -- Essity is a customer that we serve, and we obviously look forward to continue serving them or serving those mills whoever they end up being the owners if it wasn't to be Essity going forward. But it's too early to say anything on that regard.

[Operator Instructions] Our next question, it comes from Amit Prasad with RBC Capital Markets.

It's Amit on for Matt. I appreciate the quantification on chemical and freight costs, but you also called out a substitution opportunity for cellulose-based products given the energy shock which specific end markets are you seeing this demand emerge? And is it a 2026 revenue contributor or more of a medium-term structural shift? .

The substitution that we're seeing, Amit, was basically linked to the fact that the price gap between hardwood and softwood, which used to be $200, $250 in 2025 is now -- has now shrunk to about $70. And with that kind of differential between the 2 fibers, if you're running your paper machines at high speeds or with a decent level of utilization, then it justifies the use, again, of softwood over hardwood. So that's where we see the potential substitution kicking back. I'm not thinking we're not planning for that to be reversing entirely of what was lost but there is clearly some space where for particular customers that will be interesting for them to go back to the higher usage of softwood because it would be better for them financially at the end of the day.

So it is not necessarily so much linked to some of the other factors. Yes, obviously, there's freight costs, and I think that would make certain fiber more expensive than others. But even without the impact of the Iran war, we were already seeing that gap being reduced between the 2 fibers. We have some advantages depending on where the freight is coming depending on the distance. Obviously, we have -- we may have some advantages from that point of view. But again, that's the icing on the cake. That's not the main reason why the main reason is fundamentally, that gap has shrunk already.

Perfect. And I guess 1 follow-up for me. Can you quantify the incremental profit from the new scanning technology at Torgau once it's operational? And how does capturing the value uplift translate to incremental EBITDA? .

Absolutely. In the case of Torgau, the scanning technology of what it allows us to do is to make sure that we can participate in the U.S. market that we're very actively participating on [ Friesau ]. Right now, because it's a non-grade [indiscernible] then the market that we have access to is limited. And the value might be high, but the volumes are not high, so it's -- you have to scramble to move that product around. The moment that we have access to being able to produce and sell #2 for the U.S., then obviously, that -- and complementing what we already have in Friesau. In Torgau, we produce a lot of pine then that is, again, a complement to our portfolio, and it adds to the picture that the capacity that we can sell higher volumes than what we're able to move with a non-grade [ stamp ].

Thank you. And this will conclude our Q&A session, and I'll pass it back to Juan Carlos Bueno for closing comments.

Okay. Thank you, Carmen, and thank you all for joining our call. Rich and I are available to talk more at any time. So don't hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in July. Bye for now.

This concludes our conference. Thank you for participating, and you may now disconnect.

Good morning, and welcome to Mercer International's Fourth Quarter 2025 Earnings Conference Call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International; and Richard Short, CFO and Secretary.

I will now hand the call over to Richard Short.

Thanks, Shannon. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the fourth quarter before turning the call to Juan Carlos to provide further color into the markets, our operations and our strategic initiatives. Also, for those of you that have joined today's call by telephone, there is presentation material that we have attached to the Investors section of our website.

But before turning to our results, I would like to remind you that we will make forward-looking statements in this morning's conference call. According to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission. Our operating EBITDA for the fourth quarter was negative $20 million, up $8 million when compared to the third quarter's results. This change in performance was largely due to stable production across all our mills and the benefits of our One Goal One Hundred program.

Over market headwinds, including pricing, weak demand and elevated fiber costs in both Germany and Canada continued to weigh on our overall results. The current quarter's EBITDA also includes a noncash inventory impairment of $23 million. In the fourth quarter, we recognized total noncash impairment charges against our long-lived assets of $216 million or $3.22 per share. $204 million of this was against the assets of the Peace River mill, a requirement under U.S. GAAP that reflects the ongoing weakness in the hardwood pulp market. We also recorded a $12 million impairment in our solid wood segment related to the sale of obsolete equipment. Given the challenging hardwood pulp market conditions, there are a number of strategic initiatives underway with the goal of returning the Peace River mill to profitability. These include expanding softwood pulp production, exploring government support for incremental energy generation and a carbon capture project. Unfortunately, U.S. GAAP does not allow for the inclusion of these initiatives in the impairment assessment. Juan Carlos will provide more detail on these initiatives shortly.

Our pulp and solid wood segments both reported negative quarterly EBITDA of $11 million in the fourth quarter. Additional segment disclosures are available in our Form 10-K, which can be found on our website and that of the SEC. In the fourth quarter, NBSK markets weakened due to the same uncertainty of the global economy. As a result, our softwood sales realizations decreased to $702 per tonne, down from $728 per tonne in the third quarter. The NBSK net price in China saw a small decline to $671 per tonne, a $19 decrease from the third quarter. We observed a more significant drop in the North American NBSK list price, which averaged $1,568 per tonne in the fourth quarter, a reduction of about $132 from the third quarter.

The European NBSK list price remained stable at an average of $1,498 per tonne. Hardwood markets in China showed improvement in the fourth quarter largely due to stronger demand and increased domestic fiber costs. Meanwhile, demand and pricing in North America remains steady. Overall, our hardwood sales realizations were flat at $528 per tonne compared to the third quarter. The average price gap in China between softwood and hardwood pulp narrowed by $56 per tonne this quarter to approximately $130 per tonne. The average net price for eucalyptus hardwood in the fourth quarter was $540 per tonne, which is an increase of $37 from the third quarter. In North America, the average list price was flat compared to the third quarter at $1,198 per tonne.

As mentioned previously, the fourth quarter included a $23 million noncash inventory impairment primarily driven by low pulp prices and high fiber costs. Of this amount, approximately $15 million was attributed to software inventories and the remainder was against hardwood inventories. Pulp sales volumes in the fourth quarter increased by 20,000 tonnes to 472,000 tonnes. Pulp production remains relatively stable in the fourth quarter at 460,000 tonnes. However, if we adjust for planned downtime, our production volume improved by about 20,000 tonnes. We had a total of 21 days of planned maintenance at our Stendal mill in the fourth quarter, which reduced production by 42,000 tonnes compared to the third quarter when we had a total of 20 days of planned downtime at the Celgar and Rosenthal mills, which reduced production by about 21,000 tonnes.

In the first half of 2026, we do not have any planned maintenance downtime. In Q3, Rosenthal will be down for 14 days and Peace River will be down for about 10 days. In Q4, Celgar will be down for 20 days. Overall, we expect to see almost 50 days less planned maintenance downtime compared to 2025. Our solid wood segment lumber pricing -- sorry, for our solid wood segment, lumber pricing in the fourth quarter modestly decreased compared to the third quarter in the U.S. as weak demand was only partially offset by reduced supply. In Europe, pricing was stable in the fourth quarter compared to the third quarter. The Random Lengths U.S. benchmark price for Western SPF #2 and better averaged $422 per thousand board feet in the fourth quarter, a decrease from $477 per thousand board feet in the third quarter. Today, that benchmark price for Western SPF #2 and better is around $448 per thousand board feet, a $46 increase from the end of 2025.

In fourth quarter, lumber production decreased by about 6% to 109 million board feet from the third quarter. This was primarily due to reduced sawlog availability and reduced production during the holiday season. Similarly, lumber sales volumes decreased to 103 million board feet, a drop of about 7% from the third quarter, which mirrored the lower production. Electricity sales in the fourth quarter totaled 202 gigawatt hours and pricing was about $105 per megawatt hour, which is about the same as the third quarter. Fiber costs, both our pulp and solid wood segments were relatively steady in the fourth quarter compared to Q3. In the first quarter of 2026, we are expecting fiber costs to increase in both Canada and Germany caused by supply constraints resulting from reduced sawmilling activity. In addition, Germany will also be impacted by seasonal demand for fiber from the biofuel industry.

Our mass timber operations within the solid wood segment had modestly higher revenues in the fourth quarter compared to the previous quarter. In Q4, the elevated interest rates in the U.S. continued to be a drag in overall market momentum. However, our mass timber business has developed a healthy order book. Today, the order book totals about $163 million, which compares nicely to our order book of approximately $80 million at the end of Q3. We currently expect our 2026 mass timber revenue to be about $120 million. We continue to make progress on our One Goal One Hundred program. As a reminder, this initiative focuses on cost reduction and operational efficiencies with a target to improve our profitability by $100 million by the end of 2026 using 2024 as a baseline. We realized approximately $30 million in cost savings and reliability improvements in 2025.

In the fourth quarter, our aggregate liquidity improved by over $54 million to $430 million, comprised of about $187 million of cash and $243 million of undrawn revolvers. This improvement in our liquidity was the direct result of our working capital management and cost reduction activities. In the fourth quarter, we invested a total of $14 million of maintenance capital across our facilities. We reported a consolidated net loss of $309 million for the fourth quarter or $4.61 per share, which includes the noncash long-lived asset and inventory impairments, which aggregate to roughly $239 million or $3.57 per share. In the third quarter, we reported a net loss of $81 million or $1.21 per share.

That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. Our operating results continue to be undermined by significant market headwinds. The ongoing down cycle conditions forced us to recognize noncash asset impairments, including a write-down of our Peace River Mills fixed assets. And while these noncash impairments will understandably dominate headline results, the fact is that underlying operational performance improved quarter-over-quarter. Cost reductions, efficiency improvements and working capital reductions contributed to the $54 million improvement in our liquidity, and we remain focused on improving the controllable drivers of performance. This focus is highlighted through our One Goal One Hundred program launched in Q2. It has yielded about $30 million of concrete results for the full year, and we're on track to achieve our goal of $100 million in improvements by the end of 2026 when compared to our 2024 baseline.

As Rich mentioned, the noncash impairment of our Peace River mill was the result of us being subject to U.S. GAAP rules. Unfortunately, these rules do not allow us to take into account [indiscernible] very important projects that our team has been working on for a couple of years already. Our carbon capture project and the expansion of the mill's fire energy output with support of the government projects that will be transformative for the mill. Previously, we had announced our plans to install our carbon capture demonstration unit at our Peace River mill in the fourth quarter as part of a joint development project with Svante Technologies.

I'm pleased to report that the pilot plant is operating and the results so far are very encouraging, both in terms of the efficiency as well as purity of the CO2 being captured. The results of the 6-month testing period of this demonstration unit will be instrumental in our decision-making process for future phases of this project. This venture is not only important for the Peace River mill, but will be one of the steps in our journey to transform our pulp mills into bio refineries with multiple sustainable revenue streams.

Now turning to the overall business environment. The trade war headwinds have created an unprecedented level of market uncertainty that persists even though current tariffs appear to be stable for now. We're expecting further tariff uncertainty as CUSMA is to be renegotiated in June this year. The majority of the trade-related impacts we have faced are due to the indirect impacts of tariffs and trade uncertainty. As it stands today, the only tariff barrier we're facing is a 10% tariff on our European lumber imports into the U.S. This does, however, compare favorably to Canadian imports, which today face an average combined tariff and duty rate of approximately 50% varying by company. As a result, we have already seen Canadian lumber curtailment announcements and expect more to come. This is creating a reduced supply of residual chips for pulp mills and is putting pressure on fiber costs. We feel our Celgar mill is well positioned given its ability to access the U.S. fiber market and our ability to harvest and process whole logs. Nonetheless, we are experiencing some fiber cost inflation as expected.

As mentioned, our main import from the U.S. into Canada is wood chips for our Celgar pulp mill, which today amounts to about 45% of the fiber consumption of the mill. We feel this is a competitive advantage for us, and we have the ability to grow this percentage going forward, if required. Most importantly, there are no counter tariffs applied to this fiber. Our EBITDA of negative $20 million reflects 21 days of planned maintenance downtime at our Stendal mill, low prices in most of our markets and high fiber costs. Overall, NBSK pulp markets weakened in the fourth quarter, including in North America, reflecting the indirect effects of the evolving tariff environment. Specifically, North American fluff pulp, previously shipped to China primarily for [indiscernible] applications is now subject to a 10% tariff. Consequently, Chinese manufacturers are pivoting to other products and displaced North American fluff pulp is now being redirected into paper applications, adding supply pressure and weighing on the North American market. Chinese NBSK prices were also under pressure as weak paper prices push certain producers to opportunistically substitute and run their machines more slowly. Meanwhile, European NBSK prices were relatively stable.

Now turning to hardwood. Prices in China increased in the fourth quarter, driven by improving demand and higher domestic fiber costs. Meanwhile, in North America, hardwood prices were flat. Looking ahead, we expect to see some modest NBSK and NBHK price improvements in Q1 in both Europe and China while North America is expected to be stable. However, trade uncertainty continues to be an overhang on this business and until trade restrictions are reduced, the supply/demand dynamic will be heavily influenced by the supply side. In total, our pulp production was flat at 460,000 tonnes compared to Q3. This result reflects an overall production improvement given that we lost roughly 42,000 tonnes due to Stendal's Q4 planned maintenance shut compared to only 21,000 tonnes of planned downtime in Q3.

Our lumber production was down about 6% relative to Q3 due to reduced production during the holiday season and the availability of sawlogs. Overall, we are pleased with our lumber production. Pulp fiber costs were essentially flat relatively to Q3. In Canada, our wood cost didn't change, but in Germany, the increased demand for pulp logs and sawmill residuals and lower supply of sawlogs push fiber prices up slightly for both our pulp and sawmills. Looking ahead to Q1, we expect fiber costs to increase meaningfully for both our pulp and sawmill businesses. Our pulp business will be impacted by reduced [indiscernible] residual availability and our German pulp mills will also face increased seasonal competition for wood chips from biofuel producers and reduce [indiscernible] chip supply. In Germany, we expect harvesting levels to improve as the lumber market improves. While in Canada, lower fiber availability will keep price pressure on fiber unless the demand side of the equation changes.

The business environment for solid wood segment was consistent with Q3. It continues to be held back by a weak European economy and the impact of high mortgage rates, with seasonal construction slowdown in Q4, creating modestly weaker pricing in the U.S. lumber market. The stagnation of the European economy continues to dampen the demand for pallets, and the result of this very adverse business environment is the main reason behind the $11 million EBITDA loss of our solid wood segment in Q4. Given the many economic forces affecting U.S. construction activity, U.S. lumber pricing could be volatile in the short term, while demand is expected to remain weak in Q1. In contrast, we expect modest upward pricing pressure in the European market primarily due to increasing sawlog prices. Any meaningful long-term improvement in either the European or U.S. markets remains dependent on improved economic conditions and lower long-term interest rates.

Our flexible sawmill production capabilities enable us to be competitive in all lumber markets. We intend to continue to maintain a strong presence in Europe and the U.S., while serving the quality sensitive Japanese market. In Q4, 41% of our lumber volume was sold in the U.S. Looking forward, we believe the U.S. lumber market will be driven by favorable homeowners demographics This, combined with reduced North American lumber capacity will create a supportive supply-demand dynamic in the midterm. European shipping pallets markets remain weak with pricing staying generally flat due to the overhang of the European economy, particularly in Germany, and we're expecting generally stable pricing in the first half of 2026. Biofuels were up almost 10% relative to Q3 due to seasonal demand and the prices may still increase slightly.

With regards to our mass timber business, revenues were up roughly 6% compared to Q3. We continue to see a steady volume of incoming project inquiries in terms of both number and total dollar value of projects. As a reminder, the projects we are bidding on and winning today are meant to be constructed in average about 9 months from now or well into 2026. We expect '26 revenues to be more than double what we had in 2025 or above $120 million. As a result, we will begin ramping our Conway facility to 2 shifts in early Q2 and expect to do the same at Spokane in late in the year. Today, our mass timber backlog of project sits at about $163 million, practically twice of where we were at the end of Q3. It is clear that a large portion of the growing interest in mass timber is coming from data center hyperscalers. The appeal to this group is the speed of construction, which can be about 1/3 shorter than traditional construction methods as well as the carbon sequestration benefits that only mass timber brings.

More importantly, to Mercer, is that our industry is leading North American capacity that -- to Mercer is that our industry-leading North American capacity leaves us well positioned to meet this growing demand. As a result, we're confident in this business being a growth engine for Mercer in the short term. We have roughly 30% of North American cross-laminated timber production capacity, a broad range of product offerings, including design assist and installation services and a large geographic footprint with manufacturing sites in the Northwest as well as the Southeast, giving us competitive access to the entire North American market.

In closing, market weakness is expected to persist in 2026 and as a result of our priority is on maintaining strong liquidity. To do this, our strategy includes further cost reductions, lower capital expenditures and other working capital measures, along with a commitment to rebalance our portfolio of assets that combined will improve our balance sheet. Above all, we are committed to prudent financial management. In light of the ongoing economic uncertainties and our focus on liquidity, our planned CapEx spend is about $60 million to $80 million in 2026. And this capital budget is focused on maintenance, environmental and safety projects.

A headwinds facing our industry have proven to be both longer and more severe than many anticipated. However, our experienced management team has navigated through previous commodity downturns, and I'm confident that our short-term strategy will allow us to weather this storm. I also believe that the current market conditions validate our long-term strategy that focuses on transforming our pulp mills into buy refineries with additional revenue streams that can not only help balance our product mix, but grab us further resilience during pulp down cycles. Our work on our lignin project pilot plant in Rosenthal is a great example. As is the carbon capture pilot plant in Peace River and the work that we're doing in Stendal on sustainable aviation fuel. As 2026 progresses, we will remain focused on those elements of our business, that we can control while implementing our short-term strategy.

Thank you for listening, and I will now turn the call back to the operator for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Roger Spitz with Bank of America.

The first question, Rich, is, can you say how much headroom that you have under any of your maintenance covenants as of December 31?

Yes. So we've got -- I don't have the number in front of me, but we're comfortable that we're well under the covenants at the end of the quarter. But we will expect them to get tighter as the year progresses, given the weak outlook.

Great. And then secondly, I don't know if you want to comment in addition to 2026 CapEx, but cash interest, cash taxes and any working capital view inflow or outflow?

So we're expecting taxes to be negligible this year, interest to be around $120 million. And you heard Juan Carlos with the CapEx number, $60 million to $80 million.

I'm sorry, I misspoke. I was talking about working capital inflow or out.

It will be a net outflow probably around $150 million at this point.

It will be an outflow of $100 million to $150 million? What would be driving that?

We're going to have -- well, obviously, it's the interest, the CapEx and probably a small net outflow on working capital for the year.

Okay. I was just thinking working capital itself as opposed to some taxes and CapEx. Are you including that in when you gave the $100 million to $150 million?

Yes.

Our next question comes from the line of Sean Steuart with TD Cowen.

Hoping you can give us some updated thoughts on potential asset recycling opportunities as a measure to, I guess, expedite potential deleveraging of the balance sheet. And with some flexibility on available liquidity here, any thoughts on asset closure potential and maybe costs that would be associated if you're taking potential pulp lines down.

Yes, Sean. In terms of acid sales or restructuring. This is a subject that we have been analyzing and working on for quite some time now. Obviously, we are very conscious that on the very tough conditions that we're working on right now. The possibility of claiming reasonable value for any particular asset in this cycle is not the right time. But we are obviously looking into that as we focus on our core assets and see our way through this trough. But that is in the center of our debt reduction plans without a doubt.

Okay. And with respect to the buildup of the order file for mass timber, that's encouraging. Can you give us a sense of expected margins associated with that uplift in sales?

Yes. What I can say in that sense is when you look at 3 25, which was relatively low as we were basically working with small projects all around that year, even though it was a low sales result, it was a neutral cash flow. So the business was able not to be a drag despite the fact that it was still low on sales. Now for this year, obviously, we expect that to change with sales, as we said, north of $120 million and positive profitability and obviously, with a contribution to cash.

So we're still in the single digits as this business has the potential to grow up significantly with the asset base that we have, considering that this $120 million that we're talking about is with Conway ramping up 2 ships only around April or so in the second quarter, and spoken only ramping up to the 2 shifts maybe by the end of the year. So for the majority of the year, we would be running, let's say, on average, 1.5 shift. So again, still single digits under that. But once we are running in 2 shifts on both facilities, obviously, we'd be looking at a double-digit profitability for that business. and we're very encouraged by the growth that we're looking at.

Not just withstanding the fact that we have $163 million in the order book that we mentioned earlier. A part of that is obviously going to happen in 2026. But we already have quite an important piece of business for 2027 in that order book. So again, it's filling up very nicely, and we're very confident of the growth that we will have in this business.

[Operator Instructions] Our next question comes from the line of [ Edward Brucker ] with Barclays.

My first one is on Peace River. Is there any thought to potentially closing the mill? And if so, what is the timing of doing something like that? And are there any approvals from the government or hurdles that you have to go through too closely like that?

Well, on Peace River, what we're working on is our transition from less hardwood to more softwood. That is a center and foremost because we believe that we can extract much more value from the mill if we produce softwood over hardwood. And we're well underway in that road. Remember, this was a mill that was 80-20 to hardwood. Right now, it's 70-30. And by the end of this year, we expect it to be 50-50. And it makes a big difference because we make money on softwood. We don't make money on hardwood. Obviously, depending on the price of hardwood.

Beyond that, when you look into the work that we have been doing, we mentioned these energy projects. Those would be very important contributors to the bottom line of Peace River. There's government support for those and also the carbon capture, which is further down the line, that's probably 2 years ahead of us or 3 years ahead of us, and that would be another important contribution to the profitability of the mill. So we do have a way through for this mill and are working actively with the government to support these projects to support the mill so that we can keep it and make this vision a reality.

Got it. And then my second question, just given the difficult market environment as well as potential cash burn for 2026. Any new thoughts on productivity with the maturity wall coming up in 2027 and then also, I guess, in 2028 as well?

Sorry, Edward. How are we thinking about the '28 and '29. Is that your question?

Yes, in the revolver maturity ahead of that.

Right. Okay. So the revolvers were talking to the banks, the banking groups for both currently underway. The 2028 and '29, we've got some runway there. So we're happy with that given where we are in the cycle. And we've been talking with our investors. So I think we're comfortable with where we are with those.

And maybe if I could, just to pivot a little bit. I just wanted to clarify that our expectations around working capital for this year, I think I misunderstood Roger's question. Expect a modest cash outflow from working capital in 2026.

Our next question comes from the line of Cole Hathorn with Jefferies.

I'd like to follow up on the market dynamics from here? And if we stick to softwood pulp to begin with, we've started to see some supply disruptions with Indonesia reducing harvesting permits, which might impact the hardwood pulp market. We've seen hardwood pulp narrow the gap to softwood quite nicely. I know inventory levels are still high, but we've also got in Europe, SCA out with the price hike. I'm just wondering how do you see the outlook for the market? Is there more scope for upward pressure now that the gap to hardwood has narrowed?

Cole, I think you're absolutely right. These latest developments in Indonesia are very significant. The impact or the known impact of April riyal taking 150,000 tonnes out of the market as downtime is important. The uncertainty, whether AP, [ OK ], 1.4 million mill start-up might be delayed. It's also important because that could take away 650,000 tonnes of hardwood in 2026. So yes, there's all this impact of raising chip prices in Vietnam and China. And that is happening as we speak, as you will point out.

And given that, as you said, now the delta reported that the delta between hardwood and softwood was 130 at the end of the quarter, well, it's now 100. So with hardwood pushing up, we do believe that there's a pretty like likelihood that we will see improved prices beyond what we have in our forecast or at least much quicker than what we anticipated. We understand that we're now getting into the Chinese New Year. We understand that, that means everything slows down a bit. and we have to wait until after New Year's to see what the effect is. But I think if anything else, those very, very recent developments tend to indicate a potential upward pressure on prices for both hardwood and internally then for softwood piggybacking on it. So yes, it's rather positive.

Hope we see that reflect in the future in the next couple of weeks. Shifting on to the lumber side and particularly, I'm thinking about Europe, you called out higher sawlog costs and also pulpwood cost, well, I suppose, wood chip costs for the pulp mills. It's always less clear how would cost dynamics develop. I'd just like a little bit more color. What are you seeing into Q1? Is this just lack of harvesting that's driving up sawlogs and wood chips and pulpwood? And do you see any kind of turn in this market? Or is this kind of a structure we should be higher for longer? And the reason I ask that is you've obviously got the Nordic sawlog and pulpwood prices coming down. So I'm just wondering how the Central Eastern European wood basket is performing.

Yes. Yes, that's a very interesting dynamic as we're living it right now. Let me start with one of the elements that have a big impact on all of this, and that's the German energy policy. They incentivate the burn of wood for energy purpose for pellet production and those kind of things. And what that creates is obviously a huge market for pellets biofuels because the winter has been as hard as it has been, the prices of pellets have increased dramatically.

And therefore, they're able to pay any price for residuals, whether it's wood chips or sawlogs, they're in the lookout for anything they can buy. That has an impact on us because when we say wood chips for our pulp mills, where we're now competing with these absurd pellet prices and values that they can pay that are obviously much higher than what we normally pay. So that is one of the elements that is impacting right now. our wood costs in Germany. Now when it comes to the pulp logs or the other residuals that we buy from other sawmills, that is dependent on the harvesting in Germany. And the level of calamity that Germany was expecting last year did not happen. So the harvest that was planned did not happen. And the result of that was a significant shortfall in terms of availability of sawlogs totally in the market.

So there you have it. We have less output from sawmills, many of them running at slower speeds or cutting shifts. We suffered the consequences of it. And Friesau, we had to slow down production at times during the quarter because there was simply not enough wood to go by. Again, as a result of this much, much lower harvesting levels. And that creating a pinch. So that are the 2 main issues behind the fiber dynamic that we see in Germany. It's been different in Scandinavia. There's been a big storm over there, a big need to pick up what was left over of that storm. So a bigger inflow of fiber. Now the fact that Scandinavia will have now lower prices would at least allow for a little bit less pressure from Scandinavia as they were obviously looking at Germany or surrounding countries for supply before. Now they have plenty to work with what they have over there. So that eases a little bit of the pressure that we will get in our home turf.

But overall, it's still a very tough business environment. That's why we're expecting fiber prices to increase until we see proper harvest levels come back. And after we get through the seasonal aspect of bio pellets biofuels. Obviously, we're in the middle of winter, one that winter passes the demand for pellets we see, and obviously, prices will naturally come down. That's a normal cycle for pellets. So that's a little bit of the pressure points.

That's helpful. And maybe if I just run forward with that, hopefully, the cost your pulp mills come down in the summer period as pellet demand declines and hopefully harvesting volumes increase for the sawlogs. But I suppose the other dynamic is base of your products? Potentially, we get pulp prices higher, which would be supportive. But on the lumber side, we have some green shoots, I suppose, with like IFO commentary in Germany. There is off of very low base construction industry is looking a little bit better. Is there anything to call out there? Are you seeing any lead indicators on the chemical side or the auto side or anything on the construction that's giving a little bit more confidence maybe into the second quarter into the summer period as well?

That's a very good question, Cole. And probably one of the things that we -- that everybody speaks about is in the case of Germany, the investment that the company has decided to make in a matter of defense with very significant increases versus what they had budgeted in previous years. That is something that will move the German economy as a whole. That is something that we believe will have some impact. However, that impact is not going to be all of a sudden, that's a relatively slower pace of growth that we will see coming, but an important one for a country that has been stagnant and stack in a recession for already 3 years. So which again, is very uncommon for Germany.

So we do see that there's a little bit of hope in that regard that there's a little bit of improvement coming. But it's not something that would happen overnight. We just see a gradual improvement over there, whether it's in construction activity. Obviously, we keep an eye very much on the U.K. That's a market that we serve quite a bit. That has been very good for us and where we dedicate a lot of resources and energy. Our prices in U.K. tend to be higher than what they are in Germany. So that's a market we privilege. Just as a market in Japan, we do as much business in Japan as we can. That's obviously the margins where there are even better, and we're able to deliver the high-quality product that they need.

The U.S. remains to be the valve when prices are high and they are trending higher, we can pivot to the U.S. And we've done that many times before. I think in times that we sell more volumes to the U.S., we're close to 60%, 55% or more volume into the U.S. We're right now at 41%. But the prices over there are increasing. And despite this 10% tariff that we have, as we've mentioned before, we believe we're pretty competitive into that market. So I think there's some positive momentum on prices overall in lumber for the year. That's what we would intend to expect.

Our next question comes from the line of [ Dominic Jester ] with Aperture.

Could you comment on the extension of your 2 RCF, how those discussions going with lenders and when you're expecting those to be concluded?

We know these are going to be more expensive. I think the banks have the are things that they want to change in the indentures. But I'd say, overall, the conversations are going well.

That's helpful. And do you have any indication of when you're hoping to set this lot up, timing-wise?

Yes. That's a good question. Before the end of Q2, for sure.

Understood. And then one final question. Anything on size, you can comment? Will there be the same size as the current facilities? Any additional color would be helpful.

Yes. I think that's one thing we're talking about. So I think there is a bit of a push to reduce overall capacity slightly, but not to a level that we're uncomfortable with, but obviously more liquidity for us is better.

Our next question is a follow-up from Cole Hathorn with Jefferies.

I just wanted to ask around the point you made around pellets and the energy consumption. We're seeing industries lobby more and more to prevent imports and trade barriers. And when there's a dislocation and it does seem like the priority of use should first be for wood, saw on wood products than kind of the downstream pulp industries before you get into energy. Is there any lobbying ongoing by the pulp and paper industry to prioritize that to keep your raw materials a little bit lower rather they get put out by energy? That's the first one.

And secondly, there's been a lot of debate now around lower CO2 costs in Europe and the CO2 prices come down. Does that position you a little bit more favorably? Or is it not really an item of consideration?

Cole, very important questions. And the answer to the first one is absolutely yes. What we are absolutely contrary to the policy of the German government of promoting the use of wood for my fuel purposes straight off. It doesn't make any sense in our minds. We're privileged very much the fact that we need to extract the highest value of the harvest that we make. And it should only be based on residuals that the pellet industry should operate on. And there's been a lot of lobbying effort on that end.

Unfortunately, there's a lot of forces that are not necessarily aligned. There are other interests from other parties that are contrary to ours. But we stand by our belief that from a pure environmental perspective and value capture perspective, and the right thing to do is what we're promoting and what we're advocating for. In terms of the CO2, as you say, yes, that's another part of the equation that we emphasizing that we have a line of communication with government on a regular basis to make sure that the fact that we have biogenic carbon in our operations that we have electricity that we generate by biomass sources, it's all taken into consideration when looking at all these CO2 emissions and credits and whatnot. And we are actively advocating for the proper allocation of those credits and the maintenance of those credits over time rather than a reduction of them precisely on the back of the type of business that we run. That is very much in line with what the government is pushing for in terms of environment protection.

And then I have a question from an investor here that we're asking to everyone that has saw in web business in Europe. They weren't able to give me a perfect answer, and I hope you can just kind of add some color to it. It might be too far out. But what we're seeing at the moment is we're seeing steel prices move up higher because of [ CBAM ] plus we're seeing import tariffs on steel driving ultimately steel prices higher. We're also seeing cement prices higher.

Historically, there always used to be this good correlation between sawn wood, lumber, steel and cement because you're all involved in the construction materials space. Do you see longer term any form of kind of pricing umbrella that might shift the industry to use more wood, considering it is only 5% of building materials outside of the Nordics in Europe? Is there something that you are tangibly seeing now or something that you see in the future? Or is this just too long dated positive to be relative in near-term thinking?

I think, Cole, that the evolution of the use of wood for construction substituting steel and concrete is something that we will see coming that is already happening. It just happens to be a very small fraction of the pie. Obviously, steel and concrete is the bread and butter of the construction industry and has been for decades and changing that shift takes time.

But when you look at Europe, in particular, let's talk about mass timber in Europe where we do not participate, but that's a business that grows double digit per year. It's growing, I think, at 11% per year now. So there is an important growth on that element. And that, again, is substituting concrete and steel. When you look at that same growth in North America, we're talking about 22%, 24% per year. So -- and that's why we leave so much in the future of our mass timber business in North America because there's a tremendous push for it, and there's all the reasons whether it's in construction cost, environmental, just speed of construction, the amount of labor that you need.

I think about North America right now with all the political environment that we're facing, deportations and whatnot, labor for construction is a very significant issue. And we offer a solution for that problem. The amount of labor that is needed for mass timber construction is absolutely a fraction of what normal construction projects with concrete and steel would demand. So there is an alternative. There is a solution it is more cost effective without any doubt to produce with -- to construct or build with mass timber, but it takes time for developers, architectures, architects to understand mass timber. This is not something that everybody knows about. It's something that only with time and experience, people will believe and catch up on it. But again, the 20% growth year-over-year is already proof that there is a good chance that we'll see that market flourish. And that umbrella, as you say, shifting a little bit and giving some space for mass timber to develop and substitute traditional construction methods.

And this concludes the question-and-answer session. I would now like to hand the call back over to Juan Carlos Bueno for closing remarks.

Okay. Thank you, Shannon, and thanks to all of you for joining our call. Rich and I are available to talk more at any time. So don't hesitate to call one of us. And otherwise, we look forward to speaking to you again on the next earnings call in May. Bye for now.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Good morning, and welcome to Mercer International's Third Quarter 2025 Earnings Conference Call. On this call today is Juan Carlos Bueno, Mercer's President and Chief Executive Officer; and Richard Short, Mercer's Chief Financial Officer and Secretary.

I will now hand the call over to Richard.

Thanks, Michelle. Good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the third quarter before turning the call to Juan Carlos to provide further color into the markets, our operations and our strategic initiatives. Also, for those of you that have joined today's call by telephone, there is presentation material that we have attached to the Investors section of our website.

But before turning to our results, I would like to remind you that we will be making forward-looking statements in this morning's conference call. According to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.

This quarter, our EBITDA was negative $28 million, including a $20 million noncash inventory impairment, a decrease from negative EBITDA of $21 million in the second quarter. One of the key drivers of our results was negative pressure on pulp pricing and demand from global economic and trade uncertainty. We had lower sales realizations for both softwood and hardwood pulp, which negatively impacted EBITDA by roughly $15 million, and was also a key factor behind our noncash inventory impairment charge. In the third quarter, our pulp segment had negative quarterly EBITDA of $13 million, while the solid wood segment had negative EBITDA of $9 million. Additional segment disclosures are available in our Form 10-Q, which can be found on our website and that of the SEC.

Third quarter average published prices for NBSK and NBHK pulp decreased across all our markets compared to the second quarter. This decrease was due to weakened demand caused by a sustained uncertain global economic and trade environment. The price decline in China was further impacted by an oversupplied paper market and the increase in integrated pulp production. NBSK pulp prices faced additional pressure from the increased substitution of softwood with lower-cost hardwood. In the third quarter, the NBSK net price in China was $690 per tonne, a decrease of $44 from the second quarter. The European NBSK list price averaged $1,497 per tonne, a decrease of $56 from the prior quarter, while the North American NBSK list price decreased $120 in the second quarter, averaging $1,700 per tonne. The market price gap between NBSK and NBHK in China was about $190 per tonne this quarter, a slight decrease from the roughly $200 in the second quarter. In China, the third quarter average NBHK net price was $503 per tonne, down $30 compared to the second quarter, and the North American third quarter price was $1,203, down $107 per tonne.

As mentioned previously, the third quarter included a $20 million noncash inventory impairment, primarily driven by lower pulp prices. Of this amount, approximately $15 million was attributed to hardwood inventories and the remainder was primarily against softwood inventories.

Pulp sales volumes in the third quarter increased by 26,000 tonnes to 453,000 tonnes. Pulp production in the third quarter was -- of 459,000 tonnes was flat compared to the second quarter. We had 20 days of planned maintenance downtime in the third quarter compared to 23 days in the second quarter. In the fourth quarter of 2025, we had 18 days of planned maintenance downtime at our Stendal mill.

For our solid wood segment, lumber pricing in the third quarter was relatively stable compared to the second quarter in both the U.S. and European markets, as reduced supply offset relatively weak demand. The Random Lengths U.S. benchmark price for Western SPF #2 and better averaged $477 per thousand board feet in the third quarter, a modest increase from $472 per thousand board feet in the second quarter. Today, that benchmark price for Western SPF #2 and better is around $460 per thousand board feet, a modest increase from the beginning of 2025.

In the third quarter, lumber production decreased by about 4% to 150 million board feet from the second quarter due to planned maintenance at our Friesau mill. Lumber sales volumes also decreased to 110 million board feet, down about 9% from the second quarter, reflecting the lower production and timing of sales.

Electricity sales for the quarter totaled 204 gigawatt hours, a 6% decrease from the second quarter due to planned turbine maintenance at the Rosenthal and Celgar mills. Third quarter pricing increased to about $106 per megawatt hour, up from $90 in the second quarter, driven by higher spot prices in both Canada and Germany.

Fiber costs for both our pulp and solid wood segments were flat in the third quarter compared to the second quarter. Overall fiber costs remained high in Germany with strong sawlog demand and constrained supply, while in Canada, demand was stable. Our mass timber operations within the solid wood segment had stable revenues in the third quarter compared to the second quarter as the elevated interest rates in the U.S. continue to impact project timelines and overall market momentum. However, despite the headwinds, our mass timber business has developed a healthy order book as we continue to see growing interest in mass timber and expected improvement -- and we expect to improve results in 2026.

We continue to make progress on our One Goal One Hundred program. As a reminder, this initiative focuses on cost reduction and operational efficiencies with a target to improve our profitability by $100 million by the end of 2026, using 2024 as a baseline. We currently expect to realize approximately $30 million in cost savings and reliability improvements by the end of 2025. Juan Carlos will provide more details on our progress on this initiative.

We reported a consolidated net loss of $81 million for the third quarter or $1.21 per share compared to a net loss of $86 million or $1.29 per share in the second quarter.

In the third quarter, we consumed about $48 million of cash compared to $35 million in the second quarter. This increase was primarily driven by lower EBITDA. In the third quarter, we invested a total of $30 million in capital across our facilities. These investments were primarily for maintenance, but also included upgrades to the log yards at Friesau and Torgau. The upgrades are expected to enhance efficiencies, positioning us favorably for improvements in the solid wood market. At the end of the third quarter, our strong liquidity position totaled $376 million, comprised of about $98 million of cash and $278 million of undrawn revolvers.

That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. This quarter's operating results were disappointing, mainly due to trade uncertainty, which created significant industry headwinds such as China increasing its paper exports to Europe, thus negatively impacting European paper producers. The economic uncertainty created by tariffs and trade disputes is negatively impacting demand for both paper and lumber. Another factor this quarter was the $200 price gap between hardwood and softwood pulp, which incentivizes certain customers to use more hardwood in their furnish. In spite of these factors, demand for softwood pulp has been steady, but weak hardwood pricing is holding softwood prices down despite strong overall softwood fundamentals.

In addition, the ongoing trade disputes are putting downward pressure on the U.S. dollar, which negatively affects our operating results. This U.S. dollar weakness increased our operating costs by almost $11 million compared to Q2. While these uncontrollable factors create significant macroeconomic headwinds for our business, we continue to focus on the things we can control. In this sense, we have made good progress on our mill reliability, and our cost control initiatives are gaining traction.

As a reminder, in the second quarter, we launched a company-wide program aimed at identifying $100 million in cost savings and profitability improvement opportunities by the end of 2026 when compared with 2024. We have named this program One Goal One Hundred. Currently, we expect to achieve $30 million of cost and reliability-related savings by the end of 2025. This initiative also includes targeting working capital reductions of $20 million, as well as $20 million in CapEx reductions relative to our previous 2025 guidance. A significant part of the One Goal One Hundred program relates to reliability improvements that, combined with additional cost savings expected to be realized next year, gives us high confidence that we will reach our $100 million target by the end of 2026. In parallel, our working capital and CapEx reduction plans are tracking as planned.

The trade war has created an unprecedented level of uncertainty in the markets in general. However, we are beginning to have clarity on the direct impacts of tariffs on our business. During the quarter, the U.S. Department of Commerce concluded their Section 232 review on lumber. European lumber is now subject to a 10% tariff, as is Canadian lumber. The 10% incremental tariff on Canadian lumber brings the total duty and tariff impact to about 50% on average for Canadian lumber. As a result, we have already seen Canadian lumber curtailment announcements, and we expect more to come. This will create a reduced supply of residual chips for pulp mills and will inevitably create pressure on fiber costs. We feel, however, that our Celgar mill is well positioned, given its ability to access the U.S. fiber market and our ability to harvest and process whole logs. Nonetheless, we expect to see some cost inflation. On the other hand, our Peace River mill's hardwood supply will not be impacted. Today, our pulp shipments to the U.S. from Canada are not impacted by tariffs as pulp is CUSMA compliant. As mentioned, our main import from the U.S. into Canada is wood chips for our Celgar pulp mill, which today amounts to about 45% of the fiber consumption of the mill. We have the ability to grow this percentage slightly going forward if required. Most importantly, there are no counter tariffs applied to this fiber.

Our EBITDA of negative $28 million reflects 20 days of planned downtime, maintenance downtime, including 16 days at our Rosenthal mill and lower pulp prices in all markets. Overall, pulp markets weakened significantly in the third quarter. Seasonality-driven weak paper demand, combined with low fiber costs in China, contributed to this weakening. We believe these market dynamics have also encouraged opportunistic pulp substitution in some paper grades as paper producers are running their machines more slowly, given the overcapacity. In addition, we believe pulp destocking by paper producers is putting additional pressure on pulp prices. At present, we believe paper producers' pulp inventories are low, supported by the availability of prompt delivery pulp.

Looking ahead, we expect to see some modest NBSK price improvements late in Q4 and into Q1 of 2026 as the impact of the announced European NBSK curtailments impact Chinese port stock and the [Technical Difficulty]

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Richard, I see that you have rejoined. Are you able to hear me, sir?

Yes.

Yes.

Okay. Sir, you may proceed.

Thank you, Michelle. Apologies for the disconnect. We don't know exactly what happened. So I'll repeat the last statement. Looking ahead, we expect to see some modest NBSK price improvements late in Q4 and into Q1 of 2026 as the impact of the announced European NBSK curtailments impact Chinese port stock and the impact of delisting of low-quality Russian pulp from Shanghai Futures Exchange is realized.

Despite the recent announcement of trade deals, the global trade landscape continues to be unclear. We expect this trade uncertainty will persist at least through the near term, likely keeping commodity prices subdued. However, we remain optimistic that once trade clarity returns, markets will begin to normalize.

In total, our pulp production was flat at almost 460,000 tonnes compared to Q2. As part of our objective to keep all of our pulp mills running reliably, we planned major maintenance shutdowns at all mills throughout the year. Our Q4 shut schedule has [indiscernible] down for 18 days, or about 36,000 tonnes. Our lumber production was down slightly relative to Q2 by about 4% due to maintenance that was scheduled at our Friesau mill. Overall, we are pleased with our lumber production. And even though the ramp-up of our Torgau mill incremental lumber capacity has been slower than anticipated, we do expect to realize the increased annual capacity rate of about 100,000 cubic meters of dimensional lumber, or roughly 65 million board feet, by the end of the year.

Pulp fiber costs were essentially flat relative to Q2. In Germany, reduced demand for pulp logs pushed fiber prices down modestly, while in Canada, costs were up slightly due to increased logistic costs. However, on the sawlog side, reduced supply due to limited harvesting pushed our fiber costs up as expected compared to Q2. Looking ahead to Q4, we expect fiber costs to increase for both our pulp and sawmill businesses. Our pulp business will be impacted by reduced sawmill residual availability. And our German pulp mills will also face increased seasonal competition for wood chips from biofuel producers, while our German sawmilling business adapts to the impact of reduced harvesting levels. In Germany, we expect harvesting levels to improve as the lumber market improves, while in Canada, lower fiber availability will keep prices under pressure on fiber unless the demand side of the equation changes.

The business environment for our solid wood segment was consistent with Q2. Our solid wood segment continues to be held back by a weak European economy and the impact of high interest rates on the construction industry and high mortgage rates despite some modest price improvements on certain grades in the U.S. lumber market. This segment is also facing the impact of higher wood costs in the short term. As a result, our solid wood segment posted a negative EBITDA of $9 million in Q3 with essentially flat lumber pricing and sustained weak demand for pallets. Given the many economic forces affecting U.S. construction activity, U.S. lumber pricing could be volatile in the short term. Currently, weak housing construction due to high mortgage rates is a headwind, but the implementation of significantly higher antidumping and countervailing duties is expected to push lumber prices up as the resulting production capacity reductions begin to materialize. However, the market has been slow to react due to large volumes of lumber being shipped prior to the implementation of the higher duties and tariffs. In contrast, we expect modest upward pricing pressure in the European market, primarily due to increasing sawlog prices. However, any meaningful long-term improvement in either the European or U.S. markets remain dependent on improved economic conditions and lower interest rates.

The cost-competitive configuration we have in Friesau gives us the flexibility to maintain a strong presence in Europe and the U.S., while also serving a quality-sensitive Japanese market. In Q3, 44% of our lumber volume was sold in the U.S. as we continue to optimize our mix for products and target markets to current conditions. Looking forward, we believe the U.S. lumber market will be driven by favorable homeowner demographics. [ Additionally ], factors that we believe will improve lumber market dynamics include potential Canadian sawmill curtailments in the aftermath of higher softwood lumber duties and relatively low housing stock. Combined, we expect these factors will put sustained positive pressure on the supply-demand balance of this business in the short to midterm.

European shipping pallet markets remain weak with pricing staying generally flat due to the overhang of the European economy, particularly in Germany. However, once the economy begins to recover, we expect pallet prices to recover towards more historical levels, allowing Torgau to deliver significant shareholder value. We're optimistic we will see that recovery start in 2026. As a reminder, a $1 per pallet increase or roughly 10% will put our pallet business into a clear positive cash flow position. Heating pallets prices were flat relative to Q2. We expect demand and prices to be slightly higher in Q4 due to higher seasonal demand and supply concerns as a result of higher German fiber costs.

With regards to our mass timber business, we continue to see a steady volume of incoming project inquiries. In the last 2 quarters, the potential sales volumes of these inquiries have been about $400 million and equate to well over 100 projects per quarter. And as a result, our order book continues to grow. The projects we're bidding on and winning today are meant to be constructed about 9 months from now or well into 2026. We expect revenue will start picking up momentum now to the point that we're planning on ramping up one of our facilities to 2 shifts in the early part of 2026. Today, our mass timber backlog of projects sits at about $80 million.

We remain confident that the environmental, economic, speed of construction and aesthetic benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe. We're also seeing increasing interest for data center construction applications in an effort to reduce the carbon footprint of these facilities. This is exciting for us because we're well positioned to capture this growth due to the location of our industry-leading North American capacity and our technical capabilities. As a result, we are highly confident in this business being a growth engine for Mercer.

We have roughly 30% of North American cross-laminated timber production capacity, a broad range of product offerings, including design assist and installation services, and a large geographic footprint with manufacturing sites in the Northwest, as well as the Southeast, giving us competitive access to the entire North American market. In light of the ongoing economic uncertainties, our planned CapEx spend is about $100 million in 2025. This capital budget is heavily weighted to maintenance, environmental and safety projects that includes both Torgau's lumber expansion project and Celgar's recently completed woodroom project. While we're still early in our planning, we expect 2026 CapEx to be meaningfully lower than our 2025 spend as we prioritize our liquidity through this trough.

We're in the process of conducting a FEL-2 engineering review for a potential carbon capture project at our Peace River mill. This project is a few years away from potential completion, but we're excited about the prospective economic benefits such a venture could bring to this mill. We remain committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. We also believe that products like mass timber, green energy, lumber, pulp and lignin will play important roles in displacing carbon-intensive products, products like concrete and steel for construction or plastic for packaging. In addition, the potential demand for sustainable fossil fuel substitutes is significant and has the potential to be transformative to the wood products industry. As a result, we remain bullish on the long-term value of our products and what they can bring to society and our stakeholders.

Overall, our Q3 operating results were disappointing, driven by a number of industry headwinds. These headwinds are expected to persist in the fourth quarter. And as a result, we're taking further actions as liquidity remains our top priority. While we have made good progress on advancing our One Goal One Hundred program and remain committed to rebalancing our portfolio of assets, we're also implementing decisive measures to support our liquidity position. These steps include further cost reductions, capital expenditure reductions and other working capital measures that combined will improve our balance sheet. Above all, we are committed to prudent financial management.

Finally, the headwinds facing our industry have proven to be both longer and more severe than many anticipated. Global trade tensions haven't helped in this regard. However, our experienced management team has navigated through previous commodity downturns, and we have strong assets in our portfolio that will allow us to weather the storm. I am also encouraged by the fact that today's weak commodity cycle is validating our long-term strategic plan, which revolves around transforming our pulp mills into biorefineries with additional revenue streams that can not only help balance our product mix but grant us further resilience during the pulp down cycles. As such, we have made very good progress on this transformation with our lignin pilot plant in Rosenthal, a carbon capture pilot plant in Peace River and the work that we're doing in Stendal on sustainable aviation fuel. We will navigate through these turbulent times and implement our strategic plan by transforming our pulp mills into biorefineries.

Thanks again for listening, and I will now turn the call back to the operator for questions. Thank you.

[Operator Instructions] The first question comes from Sean Steuart with TD Cowen.

Juan Carlos, I appreciate all the points on cost savings initiatives, working capital reductions and lower CapEx. Wondering if you can give some perspective on thinking around potential asset sales to expedite deleveraging on the balance sheet. Anything under consideration? And can you give us a sense of the scale?

Absolutely, Sean. Yes, we've been looking at this in detail for the last few months. At this point, we're not at liberty to disclose anything. We do recognize, however, that the current market environment is not ideal for us for divestitures.

Okay. And on the broader softwood pulp market, it's an extended trough. Mill inventories still look really high. We're closer to the bottom [indiscernible]. Can you give perspective on how much capacity you think needs to be taken out permanently to right-size the industry to what demand will normalize to over the next few years?

Yes, Sean, it's a very good question, not easy to answer with a precise number. We do see -- we have seen along the year several mills curtailing and curtailing for extended period of time. We know about a few in Finland specifically that were down for probably more than 6 months of the year. And while those are important steps, they do not end up making the impact or having the impact as an announcement of a full closure will have as they are obviously temporary situations. We do think that given how long this trough has been and even though we do believe that we're, as you said, in the bottom of the price curve, there should be closures of pulp mills. We wouldn't be surprised if either some of the Finnish mills or the Canadian mills that have bigger situations or bigger problems to deal with access to fiber would be going belly-up.

The situation in Canada is obviously very complicated in the back of the additional tariffs. We've seen the announcements of several closures of sawmills, which -- as we already know and have said, that puts pressure on fiber on a market that is already tight on fiber, particularly in BC. I think that gains a significant -- very strong significance. So we see those conditions in BC at least deteriorating significantly with the introduction of these tariffs and additional countervailing duties. As we said, in the case of Celgar, because of our location and because of our strategy, the fact that we're less dependent on that BC fiber gives us that edge. But obviously, that's not the case for many others in the interior of the province. So yes, again, in Germany, we have the advantage of having a forest around us. And even though the costs are going up, it's still fiber that we can access and have assets that are very competitive and they can still make money in these conditions, different from the Finnish mills or the Swedish mills that are facing very, very high wood costs in their normal traditional fiber baskets.

And the next question will come from Sandy Burns with Stifel.

I'm hoping you could talk a little bit more about the substitution issues that you mentioned this quarter. I mean, it's certainly been an ongoing issue for the industry. Would you say, the increase, is it more region-specific or end user specific? And maybe tied into that also, at what differential do you think that substitution then may abate?

Yes, Sandy, very good question. As you well said, substitution has been going on for several years now. This is not a new concept. This is not something that we have not seen before. That's part of the growth that we all see in hardwood is on the back of substitution. And yes, that's a reality and has been with us for several years. What is probably different this time around is that over the past few years, I think everybody has -- or paper producers of all kinds have taken their furnace to what they believe would be their limits on taking advantage of those price differentials between the 2 fibers. Now, as that differential has grown significantly and well above what we've seen in previous years, then that kind of puts it to another level and another test of, okay, we thought we've done everything. Can we do anything more? And I think that's what we've seen happening not only in Europe, we've seen that happening in China as well, where that price differential of $200 per tonne would allow them to -- would allow some of the producers to say, okay, well, now we're going to use less softwood and add more chemicals. Or now that, again, there's a lot of capacity out there with machines running slowly, then that gives them the opportunity also to reduce the amount of softwood naturally. So those additional measures of adding chemicals or doing -- or taking things beyond the limits is what we see with this $200 price.

Now, it does have an impact, and we've discussed this with certain customers. It does have an impact on the end quality of the product. So there's limits to that. If you think about a paper towel that you buy, traditionally, if they were to just reduce even further the softwood, then the absorbency of the paper towel would not be the same. The properties would not be the same, and the customers would understand that the product has changed and the quality has deteriorated. So there is a limit to it. What we've seen in terms of substitution recently with this $200 gap is about 2%. That's how we've measured it. When we look at our European customers and how much has gone, as we talk to them about how much they have changed, that's the dimension of it, 2% given this $200. But again, as you said at the beginning, this is on top of the substitution that has already been taking place for several years, which is, I think, on percentages much bigger than that.

So do we see that maintaining? Well, we already are starting to see the gap closing a little bit. Hardwood is gaining some traction. There is some order around how hardwood producers are being able to push prices up. Still very little, $20 here and there, but it's a trend that is obviously encouraging. If we close that gap to the $170s, $150s, then that -- the use of chemicals and the use of these things, these extreme measures, we don't see them continuing, and there could be more of a going back to where we were before the $200 gap.

And I guess, related to that, whether Mercer or other NBSK producers like just further discounted NBSK to close the gap and then at least get the volume, although at much lower margins?

Obviously, when hardwood prices are that low, it puts a cap on softwood. When you think about a year ago, what everybody was talking about was that the softwood market was very tight and that there was no reason for softwood prices to deteriorate because it was just very, very tight. Then we got into a situation where hardwood continued to drop -- continue to drop and it pulls softwood down naturally. So I think that's a big element of the whole equation. It doesn't pull it completely down, and that's why the gap increases so much because there's some resilience in pulp. Otherwise, it would fall just as hardwood falls. It maintains certain value in it, and that's why that gap increases to $200 precisely because there's that inherent value in the softwood fiber. So we do feel that obviously, it's independent decisions on producers, whether they want to sacrifice price for volume. We have our own policy on it, and we know that we can sell everything that we produce. We have very good relationship with customers for many, many years, and that gives us that confidence and doesn't put us in a situation where we're forced to do things that we shouldn't be doing from a price perspective. So yes, that's about that.

Okay. And maybe a last one for me, shifting gears on the liquidity front, you mentioned asset sales. Any other liquidity-enhancing actions you could be considering? And I know, on the last call, in terms of minimum liquidity, you felt it was a long way from being uncomfortable. How are you feeling about it now? Have you maybe had to start discussions with banks about maintaining liquidity during this rough period for the company and industry?

Yes. We've started some of those discussions. We started discussions. For example, we have revolving facilities that are due in '27 that need to be renewed. We've started those conversations, and those are going very well. There's no reason to believe that we won't be able to renew those if we decide to go for that. Also, looking at the senior notes coming in '28 and '29, there's still runway for them, but we're not necessarily waiting for all that runway to expire. We're acting upon those things. So yes, we're looking at all the things that we have to do preemptively so that we don't let time go by and take us by surprise. We know that it's a complicated market that we're dealing with. We know that asset divestitures is part of the options that are out there. As I mentioned before, anybody would say today that probably the conditions are not the best for you to go out and try to sell something. Nonetheless, obviously, we look at options and are actively working on things, looking at what can be done on that end. But in the meantime, it's all about reducing the other things that we can reduce that are significant, focusing on working capital, and there's good progress that we've made. Same thing on CapEx. There's still room for us to reduce CapEx and focus basically on maintenance and leave some of those growth projects for later. So yes, there's things that we can do other than the usual cost reductions that are obviously in full motion already since the second quarter.

And the next question will come from Hamir Patel with CIBC Capital Markets.

Juan Carlos, you indicated looking at reducing CapEx. What do you -- for 2026, what sort of range of CapEx outcomes that you could see?

Hamir, it's Rich. We're sort of starting around $75 million, but we're looking to see if we can reduce that as well. So that's probably the ballpark we're going to play in for next year.

Great. And then, I guess, related to that, how should we think about the planned shuts for 2026? And is there any sort of maybe room to stretch some of those out?

Yes. In fact, for example, in 2026, we won't have a shut in Stendal. Stendal is under an 18-month cycle, an 18-month cycle that we're actually reviewing whether it could be a 2-year cycle. We were actually thinking about that for this particular year, but we decided to keep the 18 months. Otherwise, we wouldn't be having a shutdown right now. So, that is good news for 2026, no shutdown in Stendal. On the other mills, Celgar is on an 18-month shutdown. And Peace River, we're looking to also moving a little bit beyond the traditional 12 months that we have for that mill. So yes, we're stretching things on shutdowns for next year.

And the next question will come from Matthew McKellar with RBC Capital Markets.

Just one for me. How would you describe the industry supply-demand balance in North American mass timber right now? And with recent changes in capacity and the demand inflection we're seeing, what are your expectations for how that trends into 2026?

Thank you, Matthew. As I was mentioning, or we were mentioning before, we're pretty excited about how we see mass timber developing. The amount of project inquiries, the amount of biddings that we're participating that I already talked about is very encouraging. Probably the biggest element there, and I think it's of incredible significance, is the AI data centers and all the transformative AI investments that are coming through. To give you some order of magnitude, when you think about the hyperscalers, I'm talking about the Googles, the Amazons, the Metas, those companies, the Amazons, their plan for the next 4 years includes a $2.6 trillion investment in construction of data centers. So this is a massive amount of business that is going to come into North America. I don't think that right now, there is capacity installed that would be able to not even get close to serving the demand that will be coming. When we see the actions from other competitors, we see already the addition of some capacity coming next year, which will be very well absorbed with the market growing -- if you think for a minute, our own results, we were going to be moving from $50 million -- let's say, let's call it, $60 million this year to $130 million next year of sales. And we're going to be doing second shift now in one of our mills and probably in one of our other assets as well during the course of the year. It just proves that there is an incredible demand that we will need to serve, and we all would need to shape up and do our best.

Keep in mind, and this is important, over the last couple of years, as Europe has been more mature and those mills in Europe are running or have been running at full capacity for now several years, they've seen opportunities to direct some of their volumes to North America. Even though they're shipping across the Atlantic at very high cost, it has been a good business for them. It keeps them running at full speed rather than slowing down. Well, now what they are seeing is that they have to pay 15% tariff, and their currency is 15% more expensive now. So, that puts them at a lower competitiveness versus where they were just a year ago. That is significant because that means there's going to be less product coming from Europe, more pressure on North American producers to cope with that demand that is -- that will continue to grow at a very good pace. Again, the way these -- we have obviously very good connections with some of these hyperscalers. We're active with some of the projects that they're bringing to the market. We have gained some of those projects already. We have secured some of those projects. Those are part of our backlog and part of our order book. So yes, it's very encouraging. That's all I can say for that. And again, AI being a very, very significant driver for this.

[Operator Instructions] The next question comes from Cole Hathorn with Jefferies.

I've got 3 on my side. I'll take them one by one. The first on any items that you're expecting into the fourth quarter around kind of energy rebates and things like that from the German government for kind of energy-consuming industries. I'm just wondering if there's anything that we should be thinking about for your business for the fourth quarter, which might be positive. [Technical Difficulty]

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Richard, I see that you have rejoined. Are you able to hear me?

Yes.

Yes. Sorry, folks.

You may proceed.

Apologies, Cole. I don't know what's happening today, but anyway.

No problem. Let me start again.

Reflection of the markets.

Richard, maybe you could help with one on any rebates or items that we should think about on the energy side in your German business. Is there anything like that we should expect in the fourth quarter?

No, no rebates.

Then, following on, on Germany on the lower -- well, elevated wood costs, you're referring to kind of the sawlog prices. Could you give a little bit of color on what you're seeing on the wood chips on that side?

Absolutely, Cole. On the wood chips, the situation is, right now, the pallets or the biofuels are being sold at pretty good price levels. They're above EUR 300 per tonne. That means that the pallet producers are able to buy wood chips at much higher prices than what we are able to buy. And therefore, they're taking obviously a significant piece of the equation and putting a lot of pressure on us when we go to those same sawmills and ask for our chips. So, that is basically what's creating that increased volatility in prices for wood chips for pulp specifically. It's the impact of wood pallets. That's -- we'll have to wait and see how the winter plays out. If those conditions will persist or if it's a milder winter, those conditions will reverse quickly. We've seen these fluctuations before. We don't see them as structural changes. It's one business taking advantage of a very particular situation.

And then, we've seen West Fraser Timber, unfortunately, closing a sawmill in British Columbia [indiscernible] announcing it yesterday. I'm just wondering how many do you need to see close before you kind of have that tipping point where too many wood chips are removed from the British Columbia market and we see a pulp mill really under pressure?

I think that situation is already there, to be honest with you. Sometimes, I'm astonished by the fact that we haven't heard of any pulp closure because the situation in chip access is incredibly tight. You remember that 2 years ago, we divested Cariboo. We had 50% on Cariboo, together with West Fraser. And the reason for our divestiture from that business was precisely because we didn't see a future there in terms of fiber supply. As I said earlier in the call, it's completely different for Celgar because we have the U.S. as a very significant source that we can play at even higher levels than what we're doing already. So we're very limited to the dependence on British Columbia itself. But that's -- we're probably 1 of maybe 2 sawmills -- 2 pulp mills that have that luxury. The rest are stuck with BC chips. And yes, there's incredible amount of pressure on them already.

And then, I've got a more challenging question, but I've been asked to ask it, around potential financing and government support from Canada, I mean, considering tariffs and industries like the paper and packaging industry in British Columbia that's under pressure. Have you investigated any opportunities to access much lower-cost financing from either the regional or kind of federal government there?

We do a lot of lobbying as part of our industry associations. We are very, very active through the associations, as well as through direct contacts we have with, for example, Minister Parmar or even Premier Eby. So we do have interactions that -- where we bring to the table some of the issues that obviously are important for us. However, be reminded that since we -- most of the efforts that the BC government have put out are in favor of the lumber industry because, obviously, with all the tariff situation, that is the core of the focus. Beyond steel, beyond auto, beyond those things that we know are heavy in those conversations, lumber is the element. And then, that goes into sawmills, of which we have none. So we don't have access to particular credit lines or something that are more geared towards the lumber business, the sawmills that are in very difficult situation. Now, with the counter tariffs adding up, with countervailing duties adding up and now additional tariffs, all these measures that the government have made public, they will benefit, hopefully, some of those sawmill companies. But again, we're not privy to those as our business is not [ through sawmilling ].

I show no further questions in the queue at this time. I would now like to turn the call back to Juan Carlos for closing remarks.

Okay. Thank you, Michelle, and thanks to all of you for joining our call. Rich and I are available, obviously, to talk more at any time. So don't hesitate to call one of us. Otherwise, we look forward to speaking to you again at our next earnings call in February. Bye for now.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good morning, and welcome to Mercer International's Second Quarter 2025 Earnings Conference Call. On the call today is Juan Carlos Bueno, Mercer's President and Chief Executive Officer; and Richard Short, Mercer's Chief Financial Officer and Secretary. I will now hand the call over to Richard.

Thank you, Michelle, and good morning, everyone. Thanks for joining us today. I will begin by touching on the financial and operating highlights of the second quarter, before turning the call over to Juan Carlos to provide further color into the markets, our operations and our strategic initiatives. .

Also, for those of you that are joined today's call by telephone, there is presentation material that we have attached to the Investors section of our website. But before turning to our results, I would like to remind you that we will make forward-looking statements in this morning's conference call. According to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.

This quarter, our EBITDA was negative $21 million, a significant decrease from Q1's positive EBITDA of $47 million. The key drivers of the lower results included a negative foreign exchange impact from a weaker dollar, primarily on our euro and Canadian dollar denominated costs and expenses, which reduced EBITDA by approximately $26 million relative to Q1.

Lower pulp prices in China negatively impacted EBITDA by roughly $8 million and led to a noncash hardwood inventory impairment of $11 million. We also incurred higher fiber costs for both our pulp and solid wood segments. Our Pulp segment had negative quarterly EBITDA of $10 million in Q2, and our solid wood segment had negative EBITDA of $5 million.

You can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. In the second quarter, our NBSK pulp sales realizations decreased compared to the first quarter due to the ongoing uncertain global trade environment impacting demand from China.

In North America, NBSK published prices modestly increased due to both stable demand and supply constraints, while in Europe, prices were stable. In Q2, the NBSK net price in China was $734 per tonne, a decrease of $59 from Q1. The North American NBSK list price averaged $1,820 per tonne, an increase of $67 from Q1. The European NBSK list price averaged $1,553 per tonne, flat compared to Q1. Hardwood sales realizations remain largely unchanged in Q2 compared to Q1 as lower prices in China were offset by higher prices in North America.

The North American NBHK average Q2 list price was $1,310 per tonne, up $42 from Q1. In China, the Q2 average net price for NBHK was $533 per ton, a decrease of $45 from Q1. As a result, the average price gap between NBSK and NBHK in China for the quarter was about $200 per tonne, a gap we anticipate will be sustained in the second half of 2025.

In addition, lower Chinese hardwood prices resulted in us recording an $11 million noncash inventory write-down this quarter. Pulp sales volumes in the second quarter decreased by 51,000 tonnes to 427,000 tonnes. This decrease due to weaker demand caused by the ongoing uncertainties in the global trade landscape. Pulp production was flat in Q2 compared to Q1. We had 23 days of planned maintenance downtime in Q2 compared to 22 days in Q1. But we also had a total of 6 days of downtime related to a slow start-up from Celgar's Q1 shut.

In the third quarter of 2025, we had a total of 18 days of planned maintenance downtime. This includes 14 days at our Rosenthal mill and 4 days at our Celgar mill. For our solid wood segment, realized lumber prices increased about 10% in the second quarter compared to the first quarter. This was primarily due to higher realized prices in the European market, a result of reduced supply and steady demand, while realized prices in the U.S. market were essentially flat.

The Random Lengths U.S. benchmark price for Western SPF #2 and better averaged $472 per 1,000 board feet in Q2, down from $492 per thousand board feet in Q1. Today, that benchmark for Western SPF #2 and better is around $533 per thousand board feet, an increase of about $90 from the beginning of 2025. In Q2, lumber production decreased to about 120 million board feet or 6% from Q1 due to planned maintenance at our Friesau mill.

Lumber sales volumes also decreased to 121 million board feet, down about 8% from Q1, reflecting the lower production. Electricity sales for the quarter totaled 216 gigawatt hours, an 8% decrease from Q1 due to planned maintenance downtime at the Stendal mill. Q2 pricing decreased to about $90 per megawatt hour from $112 in Q1 caused by lower spot prices in Germany.

Fiber costs for both our Pulp and solid wood segments increased in Q2 compared to Q1 due to strong demand in Germany and higher logistics costs in Western Canada. Our mass timber operations within the solid wood segment had lower revenues in Q2 compared to Q1 as the prevailing market uncertainty is impacting project time lines and overall market momentum. However, we believe this is a temporary headwind, and we continue to see strong and growing underlying interest in mass timber and expect improved results going into 2026.

In Q1, we announced our One Goal, One Hundred program. This initiative focuses on cost reduction and operational efficiencies with a target to improve our profitability by $100 million by the end of 2026 using 2024 as a baseline. To date, we have approximately $5 million in cost savings with an anticipated total of $25 million of cost savings for 2025. We also expect our implemented operational efficiencies to further improve profitability. Juan Carlos also provide more details on our progress on this initiative.

We reported a consolidated net loss of $86 million for the second quarter or $1.29 per share compared to a net loss of $22 million or $0.33 per share in the first quarter. In Q2, we consumed $35 million of cash compared to $3 million in Q1. This increase was primarily driven by lower EBITDA, partially offset by a $21 million decrease in our net working capital excluding noncash items, due in part to working capital reductions from our One Goal, One Hundred initiative.

In Q2, we invested a total of $24 million in capital across our facilities. These investments include upgrades to the log yards at Friesau out and Torgau. These strategic projects are expected to enhance efficiencies, positioning us favorably for improvements in the solid wood market. At the end of Q2, our strong liquidity position totaled $438 million, comprised of about $146 million of cash and $292 million of undrawn revolvers.

That ends my overview of the financial results. I'll now turn the call over to Juan Carlos.

Thanks, Rich. Trade uncertainty resulting from tariffs and global trading disputes was the main driver behind our disappointing Q2 results. This is despite the fact that our products are now being tariffed up to this point. Market uncertainty, coupled with excess supply of cheap hardwood fiber locally has caused Chinese demand for imported hardwood pulp to weaken resulting in an 8% decrease in prices with a single knockdown effect on softwood when compared to Q1.

In addition, trade disputes have caused the U.S. dollar to weaken dramatically against the euro and Canadian dollar. This U.S. dollar weakness created almost $26 million of negative EBITDA for us relative to Q1. All these uncontrollable factors create significant macroeconomic headwinds for our business. We continue to focus on the things we can control. For example, we're beginning to see improvements in our reliability as our mills ran well this quarter.

Early in the second quarter, we launched a company-wide program aimed at identifying $100 million in cost savings and profitability improvement opportunities by the end of 2026 when compared with 2024. Our organization has actively embraced this program, which is known internally as One Goal, One Hundred. At the end of Q2, we achieved $5 million of cost savings and have already identified an additional $20 million by the end of this year.

This initiative also includes targeting working capital reductions of $20 million as well as another $20 million in CapEx reductions. Beyond this, we have started to unlock some significant reliability improvements that combined with additional cost savings next year gives us high confidence that we will reach our $100 million target by the end of 2026.

In parallel, our working capital and CapEx reduction plans are tracking exactly as planned. The trade war has created an unprecedented level of uncertainty in the markets in general. As a reminder, on average, we sell about 200,000 tonnes of pulp into the U.S. annually. About half of this volume is hardwood pulp. We also export from Germany about 200 million board feet of lumber to the U.S. Today, these products do not have any tariffs applied to them.

However, lumber is subject to Section 232 review by the U.S. Department of Commerce. So it is unclear if tariffs will be applied at some point in time. This reviews to be completed before the end of the year, but we expect decisions will be made beforehand. In contrast, our main import from the U.S. into Canada is woodchips for our Celgar pulp mill, which today amounts to about 45% of the fiber consumption of the mill. There are no counter tariffs currently applied to this fiber.

As I previously mentioned, our businesses are being impacted by the secondary effects of tariffs as this uncertain business environment directly affects the regular trade flows of the commodities we produce and forces delaying construction projects that we aim to serve. In addition to the above, the weaker dollar has an immediate effect on our cost basis on our receivable balances. With this global economic uncertainty in the background, our Board has taken the difficult decision to suspend our dividend.

We view the suspension as temporary, but prudent from a capital allocation standpoint as we focus on debt reduction and navigate the uncertainty impacting our industry. Our Board of Directors remains committed to a competitive dividend as the market uncertainty dissipates on our balance sheet strengthens. Our EBITDA of negative $21 million reflects a heavy maintenance quarter. Our Peace River mill was down for 20 days. Stendal took a short 3-day shut. And as a reminder, Celgar's Q1 shut had 6 days of slow start up in Q2. In Q2, the combined effect of uncontrollable negative market impacts, including a weakening of the U.S. dollar and pulp pricing and the associated hardwood inventory impairment reduced our EBITDA by almost $45 million compared to Q1.

These were the results of the indirect impact of tariffs and trade uncertainty. Even though we carried good momentum during Q1, the strength changed very quickly as we entered into Q2. Midway through the quarter, the Chinese market weakened dramatically on concerns and uncertainty on tariff costs and the availability of export markets. Today, pulp prices in China appear to have hit the floor. Given that we're now in the seasonally low summer period, we don't expect pulp prices to regain any positive momentum until the fourth quarter.

While some trade agreements are beginning to take shape, the global trade landscape continues to be unclear. We will continue to work on mitigation strategies and remain flexible to manage through the uncertainty. In the meantime, we continue to maintain an open dialogue with our customers, government officials and our industry associations and are prepared to take swift action redirecting products to other geographies as necessary and adjusting our operations accordingly depending on the scenario that actually plays out once the dust settles and the tariff [indiscernible] is completed.

Turning to the pulp markets. Softwood pricing is expected to remain weak through the summer months. However, we are confident that overall demand for softwood will be steady in the midterm, which when combined with reduced supply will create some upward pricing pressure in most markets in the fourth quarter of 2025 and into 2026. In the second quarter, hardwood pricing remained weakened significantly in China due to weak paper demand and increased domestic pulp supply.

Conversely, hardware pricing in North America was resilient due to steady demand. As we have highlighted in previous calls, we believe that the ability of paper makers to substitute hardwood pulp in the place of softwood pulp is limited as most of the substitution options have already been exhausted, and understand that while customers will continue to push the limits given the wide gap that still persists between the 2 fibers, only a marginal amount will still be possible.

In total, our pulp production was flat at almost 460,000 tonnes compared to Q1. Our lumber production was down slightly relative to Q1 by about 6% due to planned maintenance at our Friesau mill. Overall, we are pleased with our lumber production and look forward to the incremental lumber production at our Torgau mill going forward. As a reminder, we expect the increased annual capacity to be about 100,000 cubic meters of dimensional lumber or roughly 65 million board feet.

In Q2, our overall pulp fiber costs were up slightly relative to Q1. In Germany, we saw increased demand for sawlogs which pushed up the price of sawmill chips while in Canada, costs were up slightly due to the increased logistic costs. The increased demand for sawlogs in Germany also pushed the price of fiber up for sawmilling business.

Looking ahead to Q3, we expect fiber costs to modestly decrease for our pulp business and increase by about 10% for solid wood business as harvesting levels in Germany are very low due to lack of calamity wood. The business environment for solid wood segment remains consistent with Q1. Our solid wood segment continues to be held back by a weak European economy and the impact of high interest rates on the construction industry, despite some modest price improvements on certain grades in the U.S. lumber market.

As a result, our solid wood segment posted a negative EBITDA of $5 million in Q2 with higher European lumber pricing not offsetting the sustained weak demand for pallets. Looking ahead, we feel -- we are seeing the beginning of improved economic recovery growth in Germany and Europe in general, which we believe will bring improved pellet pricing. As a reminder, on per pallet increase or roughly 10%, we'll put this business into a very positive cash flow position.

Given the economic forces affecting the U.S. construction activity, U.S. lumber pricing would be volatile in the short term. Currently, weak housing construction due to high mortgage rates is a headwind, but the expected implementation of significantly higher antidumping and countervailing duties is expected to push lumber prices up.

It may also result in the curtailment of some Canadian sawmills, which could create additional pricing tailwinds. In contrast, we expect modest upward pricing pressure in the European market, primarily due to increasing sawlog prices. However, any meaningful long-term improvement in either the European or U.S. markets will be dependent on improved economic conditions and lower interest rates.

The cost competitive configuration we have in Friesau gives us the flexibility to have a strong presence in Europe, the U.S. and the quality sensitive Japanese market. In Q2, 40% of our lumber volume was sold in the U.S. as we continue to optimize our mix of products and target markets to current conditions.

Looking forward, we believe the U.S. lumber market will be driven by favorable homeowner demographics. Additionally, factors that we believe will improve lumber market dynamics include potential Canadian sawmill curtailments in the aftermath of higher softwood lumber duties and relatively low housing stock. Combined, we expect these factors will put sustained positive pressure on the supply-demand balance of this business in the midterm.

Shipping pallet markets remained weak with the pallet pricing staying generally flat due to the overhang of the European economy, particularly in Germany. Once the economy begins to show signs of recovery, we expect pallet prices to recover towards more historical levels allowing Torgau to deliver significant shareholder value. Heating pellet prices were up in Q2, which is unusual given the seasonality of this product, but higher German fiber costs created supply constraints and drove prices up. We expect demand and prices to be slightly lower in Q3.

With regard to our mass timber business, we have seen steady growth in the number of incoming projects increased. In the last 2 quarters, the potential sales volumes of these inquiries have exceeded $400 million and equates to well over 100 projects per quarter. And as a result, our order book is growing. The projects we are bidding on and winning today are meant to be constructed 9 months from now, well into 2026.

Orders -- well, our work orders for Q3 remained weak, revenue will start picking up momentum in Q4 to the point that we're planning on ramping up one of our facilities to 2 shifts in the early part of next year. Today, our mass timber backlog of projects sits at about $68 million. We remain confident that the environmental, economic speed of construction aesthetics benefits of mass timber will allow this building product to grow in popularity at a pace similar to what happened in Europe.

As such, we're highly confident in this business being a growth engine for Mercer. We are well positioned to take advantage of that market growth as we have roughly 30% of North American cross laminated timber production capacity, a broad range of product offerings, including design [ assist ] and installation services and a large geographic footprint with manufacturing sites in the Northwest as well as Southeast giving us competitive access to the entire North American market.

As part of our objective to keep all of our partners running reliably, we planned major maintenance shutdowns at all mills throughout the year. Our remaining shut schedule is as follows: In Q3, Rosenthal will be down for 14 days or about 14,300 tonnes and Celgar will take 4 days or 5,300 tonnes. In Q4, Stendal will be down for 18 days or 37,100 tonnes. In light of recent economic uncertainty, we have reduced planned CapEx and now expect to spend about $100 million on capital projects in 2025. This capital budget is heavily weighted to maintenance, environmental and safety projects and includes both Torgau's [ lumber ] expansion project and Celgar's recently completed woodroom project.

We're currently conducting a FEL-2 engineering review for a potential carbon capture project at our Peace River mill. We have a lot of work to do given where we are in the project, but we're excited about the potential that such a venture could have on the economics of this mill. As we look forward, we believe that products like mass timber, green energy, lumber, pulp and lignin will play increasingly important roles in displacing carbon-intensive products.

Products like concrete and steel for construction or plastic for packaging. Furthermore, the potential demand for sustainable fossil fuel substitutes is very significant and has the potential to be transformative to the wood products industry.

We remain committed to our 2030 carbon reduction targets and believe our products form part of the climate change solution. In fact, we believe that demand for our low carbon products will dramatically increase as the world looks for solutions to reduce its carbon emissions. We remain bullish on the long-term value of pulp and are committed to better balance our company through our growth in our lumber and [ mass timber ] businesses.

Overall, our Q2 operating results were disappointing, and equally frustrating given the cause for a weak earnings lies in this uncertain business environment created by global trade challenges. We believe our businesses have strong fundamentals and when combined with our debt reduction strategy, we are poised to create significant shareholder value. We will continue to pursue the benefits of our One Goal, One Hundred program and continue to improve the reliability of our mills to strengthen our resilience. We remain committed to increasing shareholder value by reducing our leverage through aggressive cost reduction programs, strong reliability and prudent capital management. Thanks for listening, and I will now turn the call back to Michelle for questions. Thank you.

[Operator Instructions] And our first question comes from Roger Spitz with Bank of America.

can you provide any information on other cash flow items like 2025 cash taxes and perhaps all the way through 2025 operating cash flow less the $100 million of CapEx.

Roger, it's Richard. So we expect our tax for the year to be about $20 million, $25 million cash tax. And then I'm not -- so our CapEx, we mentioned we're targeting $100 million, interest probably around $110 million and working capital should be slightly negative, if not flat for the year. Does that answer your question?

I'm sorry, [ outflow to cash ]. .

Yes. Yes, just a modest negative, yes. .

Sure. I think you just said cash tax of $25 million, but you've already kind of there in the first 2 quarters. Now

Yes

Or did I mishear you? .

No, you're right, it's about $25 million for the year. .

Okay. Got it. And my other question is, regarding the German revolver facility, can you remind us of the -- any maintenance covenants under that? And what kind of headroom you have given where you are as of June 30, [ draw ]?

Yes, there's no maintenance covenants, and we have lots of headroom. The number escapes me, but it exceeds $100 million, probably like $150 million, $200 million-ish, so there's lots of capacity there. I just don't have the number off the top of my head But you're seeing covenants... .

[indiscernible]

Not all, but most.

Our next question comes from Sean Steuart with TD Cowen.

I want to follow up on the balance sheet. Rich, I guess, just perspective on what -- given the capital intensity of the business and the exposure to maintenance downtime schedules, what's the minimum liquidity level you guys are comfortable with as sort of the baseline going forward? And then a follow-up on that. You're talking about flat to slightly negative working cap changes this year, but one, Carlos, you mentioned an opportunity to bring working cap down further as a part of broader cash management initiatives. Can you give a little bit of perspective on longer-term opportunities to bring working capital down.

Well, maybe I'll touch on that first. So we've got some initiatives around inventory, specifically wood inventory that will continue to push our working capital down. This is sort of an ongoing thing with the mills, managing those inventories. So we're confident that we'll get our our One Goal, One Hundred target hit. .

And then, sean, sorry, your first question...

Just minimum available liquidity that you're comfortable with, just given the capital intensity inherent in the business.

Yes. We're a long way from being uncomfortable, I would say. So we've -- I don't know if I have a minimum number in mind, but we're not even close to that. When we look out and we look at the levers that we can still pull around CapEx, we've talked before, Sean, about the the MOB is probably like $60 million or $70 million a year. And we could probably push that down if we needed to.

So I mean I think we've got, yes, plenty of room, not worried about liquidity at all at this point.

Our next question comes from Sandy Burns with Stifel, Nicolaus.

You mentioned how you had to take the write-down on the hardwood pulp side in the quarter. Just given how it looks like based on the production versus sales numbers on the softwood side, your softwood inventories are probably at elevated levels. Maybe, one, can you comment if you would agree with that or how you view your softwood inventory levels and maybe related do you think there is the potential risk to have to take a noncash write-down on those inventories as well.

I can take that, at least the impairment part of it, yes, we're not close to taking any impairments on softwood inventories Inventory levels, I would say, are slightly elevated primarily in Canada, just due to the slower Chinese sales. But I wouldn't say we're uncomfortable with the inventory levels at this point.

Okay. And then also maybe just to discuss your current liquidity. You discuss the covenants under the German revolver. I guess under the Canadian revolver, anything that may start to -- you're getting close on or may trip up in the next quarter or so, given current conditions?

No. So that covenant -- sorry that revolver has a springing covenant that kicks in once you hit a certain threshold of borrowing, which again, we're not sort of when [indiscernible] you'd sort of top out on the overall facility. But again, not even close to that at this point. So yes, no concerns.

Okay. And then lastly, just a follow-up on your previous comment, the $60 million to $70 million. Is that more like the maintenance CapEx level you're referring to?

Exactly -- Sorry. Yes -- sorry, I used the term MOB, maintenance of business.

[Operator Instructions] And our next question comes from Matthew McKellar with RBC Capital Markets.

First, could you just talk through what you would expect to catalyze pulp prices gaining some momentum as we kind of get into the latter part of the year? Have you already seen enough production to come out of the market to put it in a more balanced position? Or what are you looking for there? .

Absolutely. Thanks for your question. Yes, we believe that there is positive momentum coming into the later part of the year as it comes to pulp prices. This is on the back of restocking after the low summer season process that we go through year after year. So as demand picks up, we do see that inventories will come down and there would be a need for restocking. Now in the particular case of softwood, we do see the market being tight in terms of supply.

In previous years, there's been several mill closures and capacity that have come down. We've seen some announcements of also additional closures in recent times, particularly in Finland or curtailments that will take some volumes out of the market as well. So when you add everything up, we do believe that once demand comes picking up from the low summer season, we would start feeling the pressure of the tight supply, and that would drive prices up for the second -- for the latest part of the year, let's say, end of Q3 and coming into Q4.

For hardwood, it's a bit different because obviously, there is some excess capacity. But at the same time, as always, after the low summer season kicks in and we see some of the restocking happening, it would naturally go up again. Not materially, not significantly. We're not expecting a hockey stick on hardwood. We expect probably a better recovery on softwood than we see on hardwood in the later part of the year.

Great. I'd like to ask just quickly about this carbon capture plant at Peace River as well. Is there anything you could share at this point, recognizing the project is pretty early stages, around how meaningful the project could be financially to Mercer? Or how we should think about a potential capital commitment there, if any? .

absolutely . As I mentioned earlier, we're very excited about how that project is progressing. And despite the fact that we're still a couple of years away from it becoming a reality, the fact is that we have completed FEL-1 with very good results, we're in the middle of FEL-2, we will go into feed already by the beginning of next year. So it's progressing in a very favorable way. Now the impact that this project may have on the mill is very significant because when we look at the potential revenue stream that can come out of that, it would be tied to about 500,000 tonnes of CO2 that we can capture.

And given where the prices of CO2 credits are, we can easily come up with a number that is close or north of $100 million per year of revenue. And given how this project works, the costs associated with that revenue is very low. So it's a highly profitable venture for the mill. And obviously, it would be a very significant upgrade to the financials of the asset itself. It basically becomes a biorefinery with a prime product, if you see -- if you put it that way that is are those carbon credits.

And remember that, that market when we negotiate those carbon credits, those contracts are 10-year contracts. So that means that the mill would have a guaranteed revenue for 10 years of $100 million per year. So that is why we see this as something that is strategically important for Peace River and for Mercer as a whole because it opens the door of what we can do with carbon capture in other mills as well.

Now to the second part of your question around the capital requirement for it, it is obviously an expensive project. But when I say expenses, it's probably north of $500 million. However, the beauty of this is that it is one of these type of projects are incredibly supported by the government and by the state of Alberta. So we expect no less than 60% of it to be covered by grants. And then the remaining 40% or 35% that we're seeing would be up to us.

And in this particular case, this is a joint venture that we're doing with a company called Sante and that's a 50-50 venture. So basically, half of that would be on us when you bring it down it's a much smaller -- it's probably less than $100 million, what would be our share of the pie. So it becomes a bit-sized project with a very, very quick payback given the revenue stream that comes out of it.

Great. And if I could just fit in 1 more on Wood Products. Could you please remind us if Torgau is configured to produce lumber for the U.S. markets? And how that $65 million board feet of incremental production plus maybe duties on Canadian lumber pushing higher could affect the geographical sales mix through the balance of the year.

And and then it sounds like you have visibility to mass timber revenue picking up in Q4. What kind of magnitude are we talking about? And how do you think about the time line to get back to that revenue run rate we saw kind of Q2, Q3 of last year.

Absolutely. Yes. On Torgau, it is equipped and capable to supply the U.S. market. As a matter of fact, that is already happening. So we have basically pine 2x4s and [ stubs ] coming out of Torgau into the U.S. market, and it actually complements very nicely the offer that we have from SPF with Friesau. So that has actually come on in a very positive way.

So we expect to see that capacity continue to grow. As we were saying by the end of this year, we should be around 100,000 cubic meters of plane lumber being produced at Torgau and that should escalate the capacity that we have right now installed is about 250,000 cubic meters. So we still have a way to go in order to capture value from Torgau.

And if I can remind everybody that was the thesis from we invested in Torgau was the fact that despite of it being a pellet mill, we wanted to invest in it so that it could become a much more stronger sawmill from a lumber, [ plain ] lumber perspective. And that's what we're doing, and that's what we're proving right now that the mill is capable of doing that. And gradually will continue to increase as time progresses. So we're satisfied with the way that is progressing and obviously look forward to having that full capacity of [ plain ] lumber out of Torgau.

And which a big part of it goes into the U.S. Now it will be an advantage when we think about the position that we are in producing out of Germany, both at Friesau and Torgau and we compare with the position that the Canadian sawmill industry is relative to the U.S. with a countervailing duties and the antidumping duties going up. obviously, that puts our German product in a much more competitive position relative to the Canadians.

So for us, regardless of what happens with tariffs, we're obviously now much more competitive than the Canadians from that point of view. So that's something that is obviously very eager for us to to continue in that direction.

And to your second question on mass timber Yes, the order book is picking up steam as we go through. As one of the things that is probably important to explain as how this is different from what we saw last year, is the fact that last year, we had some very significant projects, [ Lazard ] projects. We had the Walmart campus, which was a very big mega project. And we had also the Google project. So there were 2 very large projects that commanded a big part of the revenue. And those projects are obviously very productive and we're very efficient for us.

So that pushed our results very nicely in last year. This year as the year has come, the weight has come, those megaprojects are not there. So what we've seen is an incredible amount of growth on the smaller projects, and that's what has built up the momentum this year. Just an incredible amount of growth in smaller projects.

And we do expect some of those mega projects to come back in '26 and '27. There's very good progress with several of them, given the reputation that we built for ourselves with some of the ones that we delivered, we're highly confident that we'll get back on those mega project trends in '26 on top of the growth that we're seeing already on the smaller projects that we're picking up. So that's why we're very, very confident about the growth potential for this in 2026.

Our next question comes from Cole Hathorn with Jefferies..

I just like to follow up on the pulp market. I mean, we've seen Metsä Fibre take software downtime. We're seeing UPM take some software downtime in the Nordics, which hopefully reduces inventory levels and you talk about some potential recovery in the fourth quarter and into 2026. But I'm actually wondering what the lumber duties due to some of the Canadian sawmills and ultimately, the pulp mills. With the lumber duties at the moment, does this put some sawmills at risk, which reduces the available fiber to some of these -- of your competitor pulp mills.

Are we potentially going to see further supply disruptions in Canada now that we've got these lumber duties. I just like your thoughts around that and who's better placed versus not?

Perfect. I appreciate the call and the question. And yes, you're absolutely right in the diagnosis that you put forward. we share your opinion that with the countervailing duties going the way they have increased, that will put a lot of strain on sawmills in Canada. We would not be surprised if as a consequence of this increment in the countervailing duties and antidumping duties that more sawmills may need to close and shut down. .

And with that, obviously, what that would put is a lot more pressure on fiber or access to chips in BC in particular. That obviously doesn't play well for any of the mills located in D.C. We feel we're very lucky that we are located, where we are located, that we have put in place a strategy 2 years ago to look at sourcing from the U.S. rather than depending on BC. As I mentioned in the call earlier, 45% of our fiber is coming from the U.S.

We have potential to increase that if we need, and it is very competitive fiber. So for us, we don't suffer. We're very well positioned, and we won't suffer if there is further closures of sawmills and whatnot in comparison to others. I think that any other pulp mill in BC in particular, especially those that are further up north they would suffer the consequence directly, and there could be potential for a pulp mill closure or further curtailment in Canada and not only in Finland, like we've seen.

So yes, that all goes back to some of the reasons why we think that from a pricing perspective for softwood, the trend, no matter how you look at it, is upwards because from a supply perspective, there's going to be further and further constraints. And obviously, if fiber prices go up, that will also push breakeven prices for pulp mills go up and that kind of sets a little bit of the floor at what softwood can settle.

So we see it today. The $700 is probably the floor price right now for softwood just as it's a little bit below $500 for hardwood. So for our mills, again, Celgar are pretty much okay under that circumstance. And in Peace River, obviously, since we have our [ FMA ], we have no problem with access to fiber. It's pretty much the country have more fiber than what we need.

And then maybe expanding on that. I mean I agree with kind of the $700 a tonne kind of cost curve support levels and if there was an exits in Canada, it would be material for the softwood markets to impact pricing. But if I look at your business in Europe, you are second to first cost quartile in Europe. Is there any kind of disclosure you can give on the relative profitability levels of your pulp operations in Europe versus Canada, just to kind of give a feel for where you are in Europe versus Canada.

What the profitability like is in Europe? And maybe just frame the value of those European pulp mills. I mean, we had Metsä Fibre that recently built their expanded pulp mill, but the replacement value of those 2 European assets would be bordering $2 billion. I'm just wondering how you see the value of that European pulp mill system.

If you can give any kind of color there, that would be helpful.

Absolutely. Well, we have a very large pulp mill in Stendal. We're talking 740,000 tonnes of softwood capacity and Rosenthal being probably [ 370,000 ] or so. So one very large and one average size pulp mill. However, that average size pulp mill Rosenthal is an incredibly efficient pulp mill. It runs like clockwork. So when it comes to the competitiveness of it, it is up there and very, very, very high.

We feel very confident about the profit stream that comes from Rosenthal, even in times like these, we're well below our breakeven point is well below where the market sits nowadays. So those assets are very competitive.

Celgar, very similar to Rosenthal. It has demonstrated and last year was testament to that. The profitability of Celgar last year was just as equivalent as Rosenthal, so very, very resilient, still positive even with pulp prices at the levels that they are right now. So when it comes to softwood, even with the prices that we see today, our mills -- all of our mills are profitable.

And obviously, Stendal being the largest is obviously we take advantage of those economies of scale and it becomes incredibly resilient. Now hardwood is a different story because obviously, we're located in Alberta and further far markets, logistic costs are more expensive to get the pulp out of there. And we're talking aspen pulp, not eucalyptus grown in Brazil.

So obviously, our competitiveness on hardwood is different than when it comes to softwood. In terms of valuation, I wouldn't be able to give you a number that would -- it would be a guess at this point in time. But we're very confident about the high value of the assets that we have in both [indiscernible]. Again, the value comes not only from the potential that they are offering today, but what they can also bring in the future. We talk about lignin out of Rosenthal. That could be a very significant revenue stream for the mill. We have a pilot plant that is running. We have plans to build the commercial plant probably starting in 2027. That's what we aim for to have a project for commercial facility of lignin. That could generate 3x as much value than what we get on energy revenues today.

In Stendal, we have a similar project looking also at gasification of [ black liquor ] and the potential that, that can bring and the fallback position being lignin on both assets. And in Stendal, we have the possibility of CO2 capture which is what we're doing in Peace River as we mentioned. So there's a lot of potential in the assets beyond what we're doing, and that's why we see them incredibly more valuable than just thinking of them as pure pulp assets. We see them strategically as by refineries, and we want to develop them that way.

And then finally, if you permit me, I mean, we've heard a lot in Europe around Germany infrastructure spending, an improvement into 2026. I'm just wondering how you think about your pellets and lumber business, in particular, exposed to any form of either infrastructure spending or kind of recovery spending if the German government does give tax deductions like they're giving in the U.S. for accelerated depreciation, et cetera. Will Mercer be a beneficiary there? And then maybe, Richard, just a quick one. Are you expecting any energy rebates in your business in 4Q at all from Germany? .

Yes, on Germany, what we can see is that as you will mention, this push from the government for further spending is obviously very good news for the country as a whole. It would generate a lot of push for the economy. And if we have that push for the economy that it immediately translates into benefits for industry moving goods and if goods are being moved, then pallet prices -- pellet prices should go up because pellet demand will obviously pick up naturally.

So -- and we are very sensitive, very sensitive to any price increase in pellet prices, as I mentioned before. So we're very energized by the policies that the current government has laid out and what that would mean for the German economy recovering, although we recognize that even though they have been announced already and that they are in place already, it doesn't have an immediate effect. So we do see a gradual improvement more into the second half of '26 than earlier than that. We wish it was faster, but I think these things will take time to [ simmer ] into into all the economy and the different industries as well. Rich, I'll pass it on to the second part. .

Yes. So no, we're not expecting any energy rebates in Germany or Europe in general. Yes.

I'm showing no further questions. I'd like to turn the call back over to Juan Carlos for closing remarks.

Well, thank you, Michelle, and thanks to you all for joining our call. Rich and I are available to talk more at any time. So don't hesitate to call one of us. Otherwise, we look forward to speaking to you again on our next earnings call in November. Bye for now.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.