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Mercer International operations going steady, as per recently released Q3 2022 results

Mercer International reported its third-quarter 2022 Operating EBITDA of $140.9 million. This is similar to $148.1 million in the third quarter of 2021 and $145.1 million in the second quarter of 2022.

In the third quarter of 2022, the company’s net income was $66.7 million (or $1.01 per basic share and $1.00 per diluted share) This was comparable to $69.1 million (or $1.05 per basic share and $1.04 per diluted share) in the third quarter of 2021 and net income of $71.4 million (or $1.08 per basic share and $1.07 per diluted share) in the second quarter of 2022.

In the first nine months of 2022, Operating EBITDA increased by 40 percent to $440.4 million from $313.9 million in the same period of 2021. In the first nine months of 2022, net income increased to $227 million (or $3.43 per basic share and $3.41 per diluted share) from $96.5 million (or $1.46 per share) in the same period of 2021.

“I am pleased with our third quarter operating results. Strong energy and pulp prices combined with favourable foreign exchange movements and lower planned major maintenance were the main factors behind our operating results relative to the second quarter,” said CEO Juan Carlos Bueno, in a press statement.

He further added, “We are excited about the addition of the HIT Torgau mill to the Mercer group. This acquisition will increase our lumber capacity to almost one billion board feet and diversifies our product offering with the addition of both pallets and wood pellets. The Torgau mill acquisition also brings additional green energy production capacity to our business. Since the acquisition closed on September 30, we have focused on integrating this business and also ensuring we begin capitalizing on the estimated $16 million of annual synergies that we have identified.

Total pulp production in the current quarter decreased by approximately 11 percent compared to the same quarter of 2021 primarily due to lower production at our Stendal mill which had a fire in its woodyard. The fire resulted in the mill being down for most of July and after its restart, it has operated at approximately 90 percent of its capacity. We currently expect to install replacement equipment at our Stendal mill in the fourth quarter of 2022 and the first quarter of 2023. We maintain property and business interruption insurance for the Stendal mill and we expect the property damage and business interruption to be covered.

The negative impact of increased key production costs such as fibre, energy and chemicals in the third quarter is expected to continue in the fourth quarter of 2022. In particular, fibre costs in Germany increased because of materially higher demand for wood for energy purposes. Our production costs are primarily incurred in euros and Canadian dollars. However, our pulp and a material portion of our lumber sales are priced in dollars. During the third quarter of 2022, the dollar continued to strengthen against the euro and the Canadian dollar which had a positive impact on our euro and Canadian dollar denominated costs and expenses and partially offset the negative impact of such inflationary pressures. The strengthening of the dollar increased our operating income by approximately $13.8 million compared to the prior quarter of 2022 and by approximately $37.0 million compared to the third quarter of 2021.

Looking forward to the fourth quarter, we currently expect pulp prices and demand to remain generally strong with some modest price declines as a result of inflationary pressures negatively impacting paper demand. Lumber demand and prices are expected to be generally similar to the third quarter due to continued economic uncertainty caused by inflation and higher interest rates.

Strong energy demand and prices in Germany are expected to continue in the fourth quarter of 2022. In October, 2022, in response to restricted energy supply and price increases, the EU implemented a temporary mandatory cap on market revenues at €180 per MWh for intra-marginal generators such as renewables, nuclear and lignite producers. The cap applies to both electricity traded in the market as well as bilateral trading and will be in effect from December 1, 2022 to June 30, 2023.”

Pulp segment

In the third quarter of 2022, pulp segment operating income increased by approximately 10 percent to $110.0 million from $99.9 million in the same quarter of 2021. This was primarily due to higher sales realizations and the positive impact of a stronger dollar, partially offset by higher per unit fibre costs, higher other production and freight costs and lower sales volumes.

Pulp revenues in the third quarter of 2022 increased by approximately six percent to $395.5 million from $374.3 million in the same quarter of 2021 due to higher sales realizations partially offset by lower sales volumes.

In the third quarter of 2022, third party industry quoted average list prices for NBSK pulp increased from the same quarter of 2021 primarily as a result of low customer inventory levels. Our average NBSK pulp sales realizations increased by approximately eight percent to $911 per ADMT in the third quarter of 2022 from approximately $847 per ADMT in the same quarter of 2021.

Energy and chemical revenues increased to a record $61.2 million in the third quarter of 2022 from $22.5 million in the same quarter of 2021 due to higher sales realizations. During the third quarter of 2022, we benefitted from strong energy demand and higher energy prices in Germany.

In the third quarter of 2022 compared to the same quarter of 2021, the company had a positive impact of approximately $32.6 million in operating income due to foreign exchange, primarily as a result of the effect of the stronger dollar on costs and expenses.

Costs and expenses in the third quarter of 2022 increased by approximately 17 percent to $346.7 million from $296.9 million in the third quarter of 2021 primarily due to higher per unit fibre, chemical, energy and freight costs. The higher costs were partially offset by the positive impact of a stronger dollar and lower pulp sales volumes.

In the third quarter of 2022, per unit fibre costs increased by approximately 32 percent from the same quarter of 2021 due to higher per unit fibre costs for all of our mills. Our German mills had higher per unit fibre costs as a result of strong demand from other wood consumers such as heating pellet manufacturers. For the company’s Canadian mills, per unit fibre costs increased due to strong demand in the mills’ fibre baskets and for our Celgar mill a decrease in the availability of wood chips due to regional sawmill curtailments. We currently expect per unit fibre costs to increase in the fourth quarter of 2022 with an increase in Germany due to continued strong demand and generally flat per unit fibre costs in Canada.