Mercer International’s 2026 Q2 Call: Torgal Mill Timelines, Maintenance Cost Signals Clash

Date of Call: Aug 7, 2026

Financials Results

• EPS: Net loss of $1.13 per share in Q2, up from a loss of $0.78 per share in Q1.

Guidance:

• Expect fibre costs at German pulp mills to remain elevated in Q3, then moderate later; Canadian mills to see lower costs.
• NBSK market expected to tighten in H2 due to mill closures, creating positive price pressure.
• U.S. lumber pricing to be volatile short-term but supportive supply-demand dynamics expected midterm; European prices flat in Q3.
• Biofuel prices expected to be modestly pressured in Q3.
• Mass timber production and sales to flatten in Q3, increase meaningfully in Q4.
• Overall, market weakness expected to persist, with priority on maintaining liquidity and improving capital structure.

Business Commentary:

Financial Performance and Challenges:

• Mercer International reported a consolidated net loss of $76 million for Q2 2026, or $1.13 per share, compared to a net loss of $52 million, or $0.78 per share, in Q1 2026.
• The losses were attributed to weak operating results, a $29 million non-cash inventory impairment charge, and challenging market conditions, including high fiber costs and global economic headwinds.

Pulp Segment Performance:

• The pulp segment reported negative quarterly EBITDA of $13 million, primarily due to higher fiber costs in Germany and a decrease in NBSK net prices in China.
• The decrease in pulp prices and increased fiber costs were driven by global economic uncertainty and supply constraints, impacting overall profitability.

Solid Wood Segment and Lumber Market:

• The solid wood segment reported negative quarterly EBITDA of $8 million, with lumber sales volumes decreasing by 11% from Q1 2026.
• The decline was due to weak European economic conditions, high fiber costs, and reduced supply, although there were improved prices in the U.S. market.

Strategic Initiatives and Cost Management:

• Mercer International is actively evaluating strategic alternatives to enhance liquidity and strengthen its balance sheet, including engaging with financial advisors and stakeholders.
• The company is focused on cost reduction initiatives, such as the One Goal 100 program, to offset high fiber costs and improve operational efficiency amid challenging market conditions.

Energy and Fiber Cost Impact:

• Fiber costs for the pulp mills increased significantly, with costs up roughly 7% in Germany and down 4% in Canada.
• The increase in German fiber costs was due to low harvesting levels, high energy prices, and strong demand for wood pellets, while Canadian costs decreased due to reduced demand.

Sentiment Analysis:

Overall Tone: Negative

• Management described Q2 results as 'extremely disappointing' and 'well below cash break-even.' They cited 'ongoing global economic headwinds,' 'persistent economic uncertainty,' and the need to 'actively evaluate strategic alternatives' due to liquidity concerns. The tone focused on cost-cutting, mill restructuring, and a challenging macro environment.

Q&A:

• Question from Roger Spitz (Bank of America): Can you give an update on the 2026 cash flow outlook?
  Response: Q3 cash flow expectations are similar to Q2.

• Question from Roger Spitz (Bank of America): Can you give a sense of how far the German pulp mills are from breakeven?
  Response: They are well below cash break-even; roughly $35-40M in total improvement needed for the pulp segment to reach cash flow positivity.

• Question from Roger Spitz (Bank of America): Can you give an update on 2026 cash flow guidance?
  Response: Q3 expectations similar to Q2 for cash flow items (CapEx, interest, taxes, working capital).

• Question from Dhruva Rana (Firm not specified): Regarding maintenance costs, is the $67M figure for the whole year?
  Response: The $67M is for major maintenance, with about 40 days of downtime expected in the next six months. Incremental cost is roughly $1.5M per day.

• Question from Dhruva Rana (Firm not specified): How is the sale price of energy calculated?
  Response: They pay market prices for natural gas; rising gas prices (e.g., due to the Middle East War) increase their costs.

• Question from Sean Stewart (TD Cowan): How concentrated are the wood product losses to the Torgal asset, and what is the expected uplift from restructuring?
  Response: Restructuring for Torgal could yield savings exceeding $20M, with a goal for the mill to be profitable next year and near cash-break even in the following year.

Contradiction Point 1

Torgal Mill Restructuring Timeline

Inconsistent timeline for mill profitability and cash flow breakeven, impacting expectations for operational turnaround.

Sean Stewart (TD Cowan) - Sean Stewart (TD Cowan)

2026Q2: The goal is for the mill to become profitable in 2027 and reach cash flow breakeven in 2028. - Juan Carlos Bueno(CEO)

How concentrated are the wood product losses from the Torgal mill restructuring and layoffs, and what is the expected uplift in contributions as the operational footprint changes? - Sean Steuart (TD Cowen)

2026Q2: The turnaround plan expects to deliver... with the goal of reaching profitability (cash flow nearly breakeven) by the second quarter of 2027 and positive cash flow the following year. - Juan Carlos Bueno(CEO)

Contradiction Point 2

Treatment and Communication of Major Maintenance Costs

Contradiction on whether major maintenance costs are included in the annual figure, affecting financial predictability.

Dhruva Rana (Morgan Stanley) - Dhruva Rana (Morgan Stanley)

2026Q2: The $67 million figure reflects annual maintenance costs... Major maintenance shutdowns involve significant incremental costs... and are considered separately from the ongoing maintenance expense. - Juan Carlos Bueno(CEO) and Richard Short(CFO)

Is the $67 million in maintenance costs for the full year, and how are energy costs calculated and their relation to the sale price of energy? - Cole Hathorn (Jefferies)

2026Q1: What are the working capital expectations for Q2?... A reduction is expected in Q2 as the company aims to keep fiber inventory as low as possible. - Juan Carlos Bueno(CEO)

Contradiction Point 3

Cash Flow and Working Capital Outlook

Guidance for 2026 cash interest, taxes, and working capital shifts from specific to vague, affecting financial planning.

Roger Spitz (Bank of America) - Roger Spitz (Bank of America)

2026Q2: Regarding cash flow, Q3 expectations are similar to Q2 for items like CapEx, interest, taxes, and working capital. - Richard Short(CFO)

How far are the German pulp mills from breakeven, what steps are needed to return them to profitability, and can you provide an update on 2026 cash flow guidance? - Roger Spitz (Bank of America)

20260213-2025 Q4: Expects taxes to be negligible, interest payments around $120 million, and CapEx of $60–$80 million. Overall, expects a net working capital outflow of approximately $150 million for the year. - Richard Short(CFO)

Contradiction Point 4

Strategy Regarding Asset Restructuring/Closure

Stance on potential mill closure shifts from analyzing sales to focusing on internal turnaround, impacting strategic priorities.

Sean Stewart (TD Cowan) - Sean Stewart (TD Cowan)

2026Q2: The Torgal mill is the primary driver of losses in the solid wood segment. Restructuring costs are estimated at around $3 million in severance, with the full implementation expected by Q2 2027. The goal is for the mill to become profitable in 2027 and reach cash flow breakeven in 2028. - Juan Carlos Bueno(CEO)

What is the impact of the Torgal mill restructuring and layoffs on the concentration of wood product losses from this asset and the expected uplift in contributions as the footprint changes? - Sean Steuart (TD Cowen)

20260213-2025 Q4: The company is analyzing asset sales/restructuring but believes it is not the right time to claim reasonable value for assets in the current cycle. It remains a focus for future debt reduction plans. - Juan Bueno(CEO)

Contradiction Point 5

Maintenance Cost Clarification

Conflicting statements on whether $67M is the full-year figure, affecting operational cost transparency.

Dhruva Rana (Morgan Stanley) - Dhruva Rana (Morgan Stanley)

2026Q2: The $67 million figure reflects annual maintenance costs, which are primarily non-capital, day-to-day expenses. - Juan Carlos Bueno(CEO) and Richard Short(CFO)

Are the $67 million maintenance costs for the full year, and how are energy costs calculated and tied to energy sale prices? - Dhruv Rana (Energy)

2026Q2: The $67 million is the full-year operational (non-capital) maintenance cost, distinct from major planned maintenance shutdowns. - Richard Short(CFO)