MERC

Good morning, and welcome to Mercer International 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. For those of you that have joined today's call by telephone, there is presentation material that we have attached to the investor section of our website. Before turning to our results, I would like to remind you that we'll 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 non-cash inventory impairment charge of $22 million. In the first quarter, as a result of the high costs 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 two quarters. Based on our latest forecast and assumptions, which include expected pricing for our products and estimated production costs, we anticipate being in compliance with the leverage ratio by the fourth quarter.

Therefore, the outstanding balance on our German revolving credit facility remains classified as non-current as of March 31st, 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. This gain was offset by a higher discount rate. The NBSK net price in China saw a small increase to $685 per ton, a $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. 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 non-cash inventory impairment, primarily driven by low pulp prices and high 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 was essentially flat as we strategically reduced production at our German mills because of fiber supply limitations. We did 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 number two 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 number two 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% from the fourth quarter, which mirrored the higher production. Electricity sales for the first quarter totaled 217 GW hours, which is about 16 GW 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 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 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 million 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 non-cash, 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 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 One Hundred 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 for overseeing management's efforts along these lines. Our One Goal One Hundred program, launched in Q2 2025, yielded about $30 million of concrete results for the full year 2025 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 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-$10 per ton of pulp on freight costs and around $5 per ton for chemicals. It's worth noting that CUSMA is to be renegotiated 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 our 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. 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 tonnes compared to Q4.

This result reflects overall production being steady after considering plant maintenance in Q4, given that we strategically curtailed roughly 20,000 tonnes 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. 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 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 homeowner demographics, which combined with reduced North American lumber capacity, will create supportive supply-demand dynamics in the mid-term.

European shipping pallets market remain weak, with pricing staying generally flat due to the overhang of the European economy, particularly in Germany. We are experiencing generally stable pricing in the first half of 2026. Biofuel prices were up 15% in Q1 relative to Q4 due to seasonal demand. 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 about $171 million, and we continue to see a steady volume of incoming project inquiries, including large data center 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. 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 One Hundred Program, reduce 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. In light of the ongoing economic uncertainties and our focus on liquidity, our planned CapEx spend is about $60 million-$80 million in 2026. 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. 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 this 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 while implementing our short-term strategy. Thanks for listening, and I will now turn the call back to the operator for questions. Thank you.

Thank you so much. As a reminder, to ask a question, simply press star one one on your telephone and wait for your name to be announced. To remove yourself, press star one one again. One moment. First question is from Sean Steuart with TD Cowen. Please proceed.

Thanks. Good morning, everyone. 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 why what might be considered non-core. With respect to pulp capacity rationalization, does that need to wait for this process to play out and maybe look once the balance sheet's rebolstered, you could look at permanent or indefinite closures, as those I mention are quite expensive. Any perspective there?

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

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. That is the focus that we are having in recent times. 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. As I mentioned, I addressed this in the previous call last quarter, when we were asked about asset sales, and my comment at the time, which still 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. It would be very difficult to claim a 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 with immediate impact. Again, that's why it's important that we look at everything and not only at asset sales per say.

Okay, thanks for that detail. The fiber supply constraints in Germany, can you give 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?

Yeah. 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. When you look at what we expect in Q2, it's gonna be probably on average a little bit lower, but still, some increase, quarter-on-quarter. Now, this will be helped somehow because we're expecting lower cost of fiber for pulp mills in Canada. One thing may wash out the other.

It is clearly one of the issues that we are facing is the situation of fiber in Germany. Why this happened is associated with, at least in 2025, there was expectations of calamity harvesting that was gonna be necessary, which did not happen by the time this happened already late in the summer that everybody was evidenced that there was no need. It was already too late to harvest in the summer months. That created kind of a vacuum of much slower, 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 see in the combination of less availability and higher prices. Nowadays, we're combating those higher prices, 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 buying further out. We're buying from Scandinavia, from the Balkans. We're buying from different countries and importing into our mills.

That is helping with the availability, 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. Again, that doesn't mean necessarily the costs are going down. That's the situation that we're in, we will continue working around it. We'll see how the harvest progresses later down this year.

Thanks very much for that detail. That's all I have for now.

Thank you. Ladies and gentlemen, as a reminder, if you do have a question, simply press star 11 to get in the queue. We have a question from the line of Cole Hathorn with Jefferies. Please proceed.

Good morning. Thanks for taking my question. I'd just like a follow-up on the outlook for softwood pulp. I mean, if we think about the diverging markets at the moment, we've still got a lot of softwood inventory levels in China, whereas, you know, Europe and North America look slightly different. I'd just like to hear your thoughts about, firstly, what's needed to kind of normalize those Chinese softwood inventories. Do we ultimately need capacity rationalization in Europe and Canada to sort that out? Then secondly, on Europe and North America, just how you see the softwood markets there. Thank you.

Yeah, 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, and but they are clearly not enough. We know that Joutseno is down since March, end of March, and that basically that's about a 700,000 ton mill, and who knows until when that mill is gonna be down. We know that Fibre Excellence shut down mills 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.

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. Yeah, 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. 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. I think those are the things that we're, that we're clinging on at this point in time.

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 pulp wood side versus the sawlog and the dynamics at play there? I know you mentioned, you know, availability is an issue, but, you know, going into the second quarter, and one of the reasons for the cost inflation in Q1 was competition on the energy side. 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 gouging because no sawmills are really making money, as far as I can tell, across Europe at the current saw log prices. I'm just wondering how you see it. Thank you.

Absolutely. 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 producing pellets, 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. Well, everybody's 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.

While the margins might not be as high as they were in the last part of the year and the beginning of the year, they're 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. That is a factor and will continue to be a factor. Obviously, the other things that keep driving things up are the situations that have been prevalent already for the previous quarters.

In terms of the difference between how much it's 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 on Q2 on the sawmills than it is on the pulp mills, but it's marginal. It's, it's a margin of error. Nothing dramatic in that regard.

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, you know, what actions you're taking, because I imagine a lot of the increase was fiber related. Thank you.

Yeah. A lot of the increase is seasonal harvesting. As you all know, obviously during the winter there's that's seasonal harvesting at its best. 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.

Not that it would remain at that level, but that it would succeed to more rational levels. We're obviously putting a lot of pressure on keeping that as tight as possible. We're running our mills, our pulp mills with very low inventory, ahead of the mill, very low fiber inventory. We're probably gonna keep it running that way for the foreseeable future and make sure that we keep our working capital inventories at its lowest possible.

If you'll just allow me one more. You've talked about data centers and demand on the CLT side. I'm just wondering, you know, when do we start getting the first kind of cash inflows or kind of these projects actually progressing and you starting to make improved well, sequential deliveries and starting to get the cash from those is the first one. The second one is, we've seen Essity announce 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, you know, 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 manufacturing it. That provides a 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.

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 now hyperscalers. Those will provide us higher margins, therefore 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, it will obviously be much better in the second half, just from a pure EBITDA perspective. That's in terms of Mass Timber. Back to your question on Essity.

We read the news earlier about their decision to do a strategic analysis of the tissue, and what they're gonna do with it, and what that will mean, if they're gonna rationalize or consolidate or sell or I don't know what they're gonna do. It's too early for us to anticipate anything. [SCA] 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 [SCA] going forward. It's too early to say anything on that regard.

Thank you.

Thank you. One moment for our next question. It comes from Amit Prasad with RBC Capital Markets. Please proceed.

Hey, it's Amit. I'll be quick. Thanks for taking my questions. 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, has now shrunk to about $70. With that kind of differential between the two 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. That's where we see the potential substitution kicking back.

I'm not thinking, or we're not planning for that to be reversing entirely what was lost, but there is clearly some space 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. It is not necessarily so much linked to some of the other factors. Yes, obviously there's freight costs and things 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 two fibers. We have some advantages depending on where the freight is coming, depending on the distance. Obviously, we may have some advantages from that point of view. 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. Thanks for the color. I guess one follow-up for me. Can you quantify the incremental profit from the new scanning technology at Torgau once it's operational? How does capturing the value uplift translate to incremental EBITDA? Thank you.

Absolutely. In the case of Torgau, the scanning technology, 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 with Friesau. Right now, because it's a non-grade stamp, the market that we have access to is limited. The value might be high, but the volumes are not high, so you have to scramble to move that product around.

The moment that we have access to being able to produce and sell number twos 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 and the capacity that we can sell higher volumes than what we're able to move with a non-grade stamp.

Perfect. Thank you. That is all I had. I will turn it over.

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

Okay. Thank you, Carmen. 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 Inc. Fourth Quarter 2025 Earnings Conference Call. On the call today is Juan Carlos Bueno, President and Chief Executive Officer of Mercer International Inc., 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 would 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 $20,000,000, up $8,000,000 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 100 program. However, market headwinds, including pricing, weak demand, and elevated fiber costs in both Germany and Canada, continue to weigh on our overall results. The current quarter’s EBITDA also includes a non-cash inventory impairment of $23,000,000. In the fourth quarter, we recognized total non-cash impairment charges against our long-lived assets of $216,000,000, or $3.22 per share. $204,000,000 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 $12,000,000 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 $11,000,000 in the fourth quarter. Additional segment disclosures are available in our Form 10-Ks, which can be found on our website and that of the SEC. In the fourth quarter, NBSK markets weakened due to the sustained uncertainty of the global economy. As a result, our softwood sales realizations decreased to $707 per ton, down from $728 per ton in the third quarter. The NBSK net price in China saw a small decline to $601 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 ton 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 ton. 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 remained steady. Overall, our hardwood sales realizations were flat at $528 per ton quarter.

The average price gap in China between softwood and hardwood pulp narrowed by $56 per ton this quarter to approximately $130 per ton. The average net price for eucalyptus hardwood in the fourth quarter was $540 per ton, 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 ton. As mentioned previously, the fourth quarter included a $23,000,000 non-cash inventory impairment primarily driven by low pulp prices and high fiber costs. Of this amount, approximately $15,000,000 was attributed to softwood inventories and the remainder was against hardwood inventories. Pulp sales volumes in the fourth quarter increased by 20,000 tons to 472,000 tons. Pulp production remained relatively stable in the fourth quarter at 460,000 tons. 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 tons. In 2026, we do not have any planned maintenance downtime in Q1. 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. 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 Number 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 Number 2 and Better is around $448 per thousand board feet, a $46 increase from the fourth quarter of 2025. In the fourth quarter, lumber production decreased by about 6% to 109,000,000 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 103,000,000 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 for both our pulp and solid wood segments were relatively steady in the fourth quarter compared to Q3. In Q1 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 on overall market momentum. However, our mass timber business has developed a healthy order book. Today, the order book totals about $163,000,000, which compares nicely to our order book of approximately $80,000,000 at the end of Q3. We currently expect our 2026 mass timber revenue to be about $120,000,000. 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 $100,000,000 by 2026 using 2024 as a baseline. We realized approximately $30,000,000 in cost savings and improvements in 2025. In the fourth quarter, our aggregate liquidity improved by over $54,000,000 to $430,000,000, comprised of about $187,000,000 of cash and $243,000,000 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 $ million of maintenance capital across our facilities. We reported a consolidated net loss of $309,000,000 for the fourth quarter, or $4.61 per share, which includes the non-cash long-lived asset and inventory impairments, which aggregate to roughly $239,000,000, or $3.57 per share. In the third quarter, we reported a net loss of $81,000,000, or $1.21 per share. That ends my overview of the financial results. I will now turn the call over to Juan Carlos. Thanks, Rich. Our operating results continue to be undermined by significant market headwinds. The ongoing downcycle conditions forced us to recognize non-cash

asset impairments, including a write-down of our Peace River mill’s fixed assets. And while these non-cash 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 $54,000,000 improvement in our liquidity, and we remain focused on improving the controllable drivers of performance. This focus is highlighted through our One Goal 100 program. Launched in Q2, it has yielded about $30,000,000 of concrete results for the full year, and we are on track to achieve our goal of $100,000,000 in improvements by 2026 when compared to our 2024 baseline. As Rich mentioned, the non-cash 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 two 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 a carbon capture demonstration unit at our Peace River mill in the fourth quarter as part of a joint development project with Svante Technologies. I am 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 six-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 biorefineries with multiple sustainable revenue streams. 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 are expecting further tariff uncertainty as CUSMA is to be renegotiated in June. 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 are 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 $20,000,000 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 diaper 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 pushed 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 tons compared to Q3. This result reflects an overall production improvement given that we lost roughly 42,000 tons due to Stendal’s Q4 planned maintenance shut compared to only 21,000 tons 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 relative to Q3. In Canada, our wood cost did not change, but in Germany, the increased demand for pulp logs and sawmill residuals and lower supply of sawlogs pushed fiber prices up slightly for both our pulp and sawmills. Looking ahead to Q1, we expect fiber cost to increase meaningfully 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 and reduced sawmill 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 our 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 $11,000,000 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., 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 homeowner 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 are expecting generally stable pricing in 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 nine months from now, or well into 2026. We expect 2026 revenues to be more than double what we had in 2025, or above $120,000,000. As a result, we will begin ramping our Conway facility to two shifts in early Q2 and expect to do the same at Spokane late in the year. Today, our mass timber backlog of projects sits at about $163,000,000, practically twice 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 a third shorter than traditional construction methods, as well as the carbon sequestration benefits that only mass timber brings. More importantly to Mercer International Inc. is that our industry-leading North American capacity leaves us well positioned to meet this growing demand. As a result, we are confident in this business being a growth engine for Mercer International Inc. 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, 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 $60,000,000 to $80,000,000 in 2026, and 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. However, our experienced management team has navigated through previous commodity downturns, and I am 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 biorefineries, with additional revenue streams that can not only help balance our product mix, but grant us further resilience during pulp downcycles. 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 are 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. I will now turn the call back to the operator for questions. Thank you.

Thank you. To ask a question, please press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. Please standby while we compile the Q&A roster. We will now open for questions. Our first question comes from the line of Roger Spitz with Bank of America. Your line is now open. Yes. Thank you very much. Hopefully, you can hear me okay.

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

Yeah. So we have got—yeah. I do not have the number in front of me, but we are comfortable that we are well under the covenants at the end of the quarter, but we will expect them to tighten as the year progresses given the weak outlook.

Great. And then secondly, I do not 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 are expecting taxes to be negligible this year, interest to be around 120, and you heard Juan Carlos with the CapEx number 60 to 80.

I am sorry. I must have misspoke. I was thinking about working capital inflow or outflow.

Oh, it will be a net outflow, probably around $100,000,000 to $150,000,000 at this point.

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

We are going to have—well, obviously, it is the interest, the CapEx, and probably a small net outflow on working capital for the year.

Oh, okay. I was just thinking working capital itself as opposed to for some taxes and CapEx. Are you including that in when you gave the 100 to 150?

Yep.

Okay. So I have got to net that out. Okay. Got it. Thank you very much.

Thank you. Our next question comes from the line of Sean Steuart with TD Cowen. Your line is now open.

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 are taking potential pulp lines down.

Yes, Sean. In terms of asset sales or restructuring, it is a subject that we have been analyzing and working on for quite some time now. Obviously, we are very conscious that in the very trough conditions that we are working in 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 at the center of our debt reduction plans without a doubt.

Okay. Thanks for that detail. And with respect to the build-up of the order file for mass timber, which is 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 2025, which was relatively low, 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 $120,000,000

and

positive profitability and, obviously, with the contribution to cash. So we are 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 $120,000,000 that we are talking about is with Conway ramping up to two shifts only around April or so in the second quarter, and Spokane only ramping up to the two shifts maybe by the end of the year. So for the majority of the year, we would be running, let us say, on average, a shift and a half. So, again, still single digits under that. But once we are running in two shifts on both facilities, obviously, we would be looking at a double-digit profitability for that business. And we are very encouraged by the growth that we are looking at. Notwithstanding the fact that we have $163,000,000 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 is filling up very nicely, and we are very confident of the growth that we will have in this business.

Okay. That is great detail. Thanks for the context. That is all I have.

Thank you. As a reminder, to ask a question at this time, please—next question comes from the line of Edward Bruckner with Barclays.

Hey. Thanks for taking the question this morning. 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 to close a mill like that.

Well, on Peace River, what we are working on is our transition from less hardwood to more softwood. That is central and foremost because we believe that we can extract much more value from the mill if we produce softwood over hardwood. And we are well underway on that road. Remember this was a mill that was 80/20 to hardwood. Right now, it is 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 do not make money on hardwood, obviously depending on the price of hardwood. Beyond that, when you look into the work that we are doing or that we have been doing, we mentioned these energy projects. Those would be very important contributors to the bottom line of Peace River. There is government support for those. And also the carbon capture, which is further down the line. That is probably two years ahead of us, or three 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.

So, Edward, how are we thinking about the ‘28s and ‘29s? Is your question?

Well, yeah, and the revolver maturity ahead of that. Right. Okay.

So the revolvers—we are talking to the banks, the banking groups for both the ‘28s and ‘29s. We have got some runway there, so we are happy with that given where we are in the cycle. We have been talking with our investors, so I think we are comfortable with where we are with those. And maybe if I could just 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.

Got it. Thank you.

Thank you.

Next question comes from the line of Cole Hathorn with Jefferies. Your line is now open.

Good morning. Thanks for taking my question. I would just like to follow up on the market dynamics from here. And if we stick to

softwood pulp to begin with,

we started to see some supply disruptions with, you know, Indonesia,

reducing harvesting permits, might impact the hardwood pulp market. We have seen hardwood pulp

narrow the gap to softwood quite nicely. I know inventory levels are still high,

but we have also got in Europe SCA out with a price hike. I am 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 are absolutely right. These latest developments in Indonesia are very significant. The impact, or the known impact, of APRIL/RGE taking 150,000 tons out of the market as downtime is important. The uncertainty, whether APP’s 1.4 million mill startup might be delayed, also important because that could take away 650,000 tons of hardwood in 2026.

So, yes, there is

all this impact of rising chip prices in Vietnam and China, and that is happening as we speak, as you well point out. And given that, as you said, now the delta—we reported that the delta between hardwood and softwood, $130 at the end of the quarter—well, it is now $100. So with hardwood pushing up, we do believe that there is a pretty likelihood that we will see improved prices beyond what we have in our forecast, and/or at least much quicker than what we anticipated. We understand that we are 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, inherently then, for softwood piggybacking on it. So, yeah, it is rather positive.

Let us hope we see that reflect in the futures in the next couple of weeks. Shifting on to the lumber side and particularly, I am thinking about Europe. Now you called out higher sawlog costs and also pulpwood cost, well, I suppose wood chip cost for the pulp mills. It is always less clear how wood cost dynamics develop. I would just like a little bit more color. What are you seeing into Q1? Is this just lack of harvesting that is driving up sawlogs and

and wood chips and pulpwood.

And do you see any kind of turn in this market, or is this a kind of a structurally we should be higher for longer? And the reason I ask that is you have obviously got the Nordic sawlog and pulpwood prices coming down. So I am just wondering how the Central Eastern European wood basket is performing. Yeah.

Yeah, Cole, that is a very interesting dynamic as we are living it right now. Let me start with one of the elements that have a big impact on all of this, and that is the German energy policy. They incentivize the burn of wood for energy purposes, for pellet production, and those kinds of things. And what that creates is obviously a huge market for pellets and biofuels. Because the winter has been as hard as it has been, the prices of pellets have increased dramatically, and therefore they are able to pay any price for residuals, whether it is wood chips or sawdust. They are on the lookout for anything they can buy. That has an impact on us because when we buy wood chips for our pulp mills, we are 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 chip 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 in Friesau, 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 those are the two main issues behind the fiber dynamic that we see in Germany. It has been different in Scandinavia. There has 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 is still a very tough business environment. That is why we expect fiber prices to increase until we see proper harvest levels come back and after we get through the seasonal aspects of biopellets and biofuels. Obviously, we are in the middle of winter. Once that winter passes, the demand for pellets recedes, and prices will naturally come down. That is a normal cycle for pellets. So that is a little bit of the pressure points.

That is helpful. And maybe if I just run forward with that, hopefully, the cost to your pulp mills come down in the summer periods as the pellet demands decline and hopefully harvesting volumes increase. For the sawlogs, I suppose the other dynamic is price 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 a very low base, construction industries 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 is giving a little bit more confidence maybe into the second quarter, into the summer period as well.

That is a very good question, Cole. And probably one of the things that

everybody speaks about is, in the case of Germany, the investment that the country has decided to make in matters of defense, with very significant increases versus what had been 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 is a relatively slower pace of growth that we will see coming, but an important one, for a country that has been stagnant and stuck in a recession for already three years, which, again, is very uncommon for Germany. So we do see that there is a little bit of hope in that regard, that there is a little bit of improvement coming, but it is not something that would happen overnight. We just see a gradual improvement over there, whether it is in construction activity. Obviously, we keep an eye very much on the U.K. That is 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 the U.K. tend to be higher than what they are in Germany, so that is a market we privilege. Just as the market in Japan, we do as much business in Japan as we can, as obviously the margins there are even better, and we are 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 have done that many times before.

I think in

in

times that we sell more volumes to the U.S., we are close to 60%, 55 or more of volume into the U.S. We are right now at 41%. But the prices over there are increasing, and despite this 10% tariff that we have, as we mentioned before, we believe we are pretty competitive into that market. So I think there is some positive momentum on prices overall in lumber for the year. That is what we would tend to expect.

Thank you. I will get back in the queue.

Thank you. Our next question comes from the line of Dominic Gerster with Aperture. Your line is now open.

Hi there.

Thank you for taking my question. Could you please comment on the extension of your

two RCFs, how those discussions are going with lenders, and when you are expecting those to be concluded.

Well, we know these are going to be more expensive.

I think the banks have their things that they want to change in the indentures, but I would say, overall, the conversations are going well.

Thank you. That is helpful. And do you have any indication of when you are hoping to set this up?

Timing wise?

That is a good question, but before the end of Q2, for sure.

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

Yeah. I think that is one thing we are talking about. I think there is a bit of a push to reduce overall capacity slightly, but not to a level that we are uncomfortable. But, obviously, more liquidity for us is better.

Understood. Thank you.

Thank you. Our next question is a follow-up from Cole Hathorn with Jefferies. Your line is now open.

Thanks for taking the follow-up. I just wanted to ask around the point you made around pellets and the energy

consumption.

We are seeing industries lobby more and more to prevent imports and trade barriers. And when there is a dislocation, it does seem like the priority of use should first be for wood sawn wood products, then 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 than get pushed out by energy? It is the first one. And secondly, there has 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 was it not really an item of consideration?

Cole, very important questions, and the answer to the first one is absolutely yes. We are absolutely contrary to the policy of the German government of

promoting

the use of wood for biofuel purposes straight off. It does not make any sense in our minds. We privilege very much the fact that we need to extract the highest value of the harvests that we make, and it should only be based on residuals that the pellet industry should operate on. And there has been a lot of lobbying effort on that end. Unfortunately, there are a lot of forces that

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, the right thing to do is what we are promoting and what we are advocating for. In terms of the CO2, as you say, yes, that is another part of the equation that we emphasize and 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 is 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 are asking to everyone that has sawn wood business in Europe that were not 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 are seeing at the moment is we are seeing steel prices move up higher because of CBAM, plus we are seeing import tariffs on steel driving ultimately steel prices higher. We are also seeing cement prices higher. Historically, there always used to be this good correlation between sawn wood, lumber, steel, and cement because you are all involved in the construction material 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 that you see in the future? Or is this just a too long-dated positive to be relative in your near-term thinking?

I think 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 ship takes time. But when you look at Europe in particular, let us talk about mass timber in Europe where we do not participate. That is a business that grows double digit per year. It is 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 are talking about 22% to 24% per year. And that is why we believe so much in the future of our mass timber business in North America, because there is a tremendous push for it, and there are all the reasons, whether it is in construction cost, environmental, just the speed of construction, the amount of labor that you need. Think about North America right now with all the political environment that we are 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 now without any doubt to construct or build with mass timber, but it takes time for developers and architects to understand mass timber. This is not something that everybody knows about. It is 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 will 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.

Thank you.

Thank you. 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. Reach out. IR are available to talk more at any time, so do not 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.