MERCER INTERNATIONAL INC

Results of Operations

General

We have two reportable operating segments:

•

Pulp – consists of the manufacture, sale and distribution of pulp, electricity and chemicals at our pulp mills.

•

Solid Wood – consists of the manufacture, sale and distribution of lumber, manufactured products (including CLT, glulam and finger joint lumber), wood pallets, electricity, biofuels and wood residuals at our sawmills and other facilities in Germany and our mass timber facilities in North America.

Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.

Markets for kraft pulp are global, cyclical and commodity based. Our financial performance depends on a number of variables that impact sales and production costs. Sales and production results for kraft pulp are influenced largely by the market price for kraft pulp, fiber costs and foreign currency exchange rates. Kraft pulp prices are highly cyclical and primarily determined by the balance between supply and demand. Pricing and demand are influenced by global macroeconomic conditions, changes in consumption and industry capacity, the level of customer and producer inventories and fluctuations in exchange rates. The third-party industry quoted average European list prices for NBSK pulp between 2015 and 2024 have fluctuated between a low of $790 per ADMT in 2016 to a high of $1,635 per ADMT in 2024. In the same period, third-party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $820 per ADMT in 2016 to a high of $1,620 per ADMT in 2022.

Our pulp sales realizations are based on third-party industry quoted list prices, net of customer discounts, rebates and other selling concessions. Our sales to China and Asia are generally based closer to third-party industry quoted prices, which are quoted on a net basis, inclusive of discounts, allowances, rebates and other selling concessions.

The market for lumber is cyclical and generally driven by macroeconomic conditions, producer inventories and fluctuations in exchange rates. As a key construction material, the pricing and demand for lumber is significantly influenced by the number of housing starts, especially in the U.S. In the U.S., third-party industry quoted monthly average western spruce/pine/fir (“WSPF”) 2 x 4 #2&Btr prices between 2015 and 2024 have fluctuated between a low of $245 per Mfbm in 2015 to a high of $1,604 per Mfbm in 2021. Similarly, the demand for CLT is primarily driven by the wood construction market and government policies focused on a low-carbon economy.

European and U.S. lumber markets differ. In the European market, lumber is generally customized in terms

(55)

of dimensions and finishing, whereas the U.S. market is driven primarily by demand from new housing starts and home renovation activities and dimensions and finishing are generally standardized and competition is primarily price driven.

Energy and chemical production and sales are key revenue sources for us. Further initiatives to increase our generation and sales of renewable energy, chemicals and other by-products will continue to be a key focus for us. Such further initiatives may require additional capital spending.

Energy and chemicals are by-products of our pulp and lumber production and the volumes generated and sold are primarily related to the rate of production. Prices for our energy and chemical sales are generally stable and unrelated to cyclical changes in pulp or lumber prices.

Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips, pulp logs, sawlogs and lumber. Fiber costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber costs could affect producer profit margins if they are unable to pass along price increases to pulp, lumber, pallet and biofuel customers or purchasers of surplus energy.

Our financial performance is also impacted by changes in the dollar to euro and Canadian dollar exchange rates. Changes in currency rates affect our operating results because most of our operating costs at our German mills are incurred in euros and those at our Canadian mills are in Canadian dollars. These costs do not fluctuate with the dollar to euro or Canadian dollar exchange rates. Thus, an increase in the strength of the dollar versus the euro and the Canadian dollar decreases our operating costs and increases our operating margins and income from operations. Conversely, a weakening of the dollar against the euro and the Canadian dollar tends to increase our operating costs and decrease our operating margins and income from operations. Our energy, chemical, pallet, biofuel, wood residual and European lumber sales are made in local currencies and, as a result, decline in dollar terms when the dollar strengthens and increase when the dollar weakens.

As a corollary to changes in exchange rates between the dollar and the euro and Canadian dollar, a stronger dollar generally increases costs to our customers and results in downward pressure on pulp prices. Conversely, a weakening dollar generally supports higher pulp pricing. However, there is invariably a time lag between changes in currency exchange rates and prices. This lag can vary and is not predictable with any precision.

Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average per unit cost by spreading fixed costs over more units. Higher operating rates also permit us to increase our generation and sales of surplus renewable energy, chemicals and biofuels. Our production levels are also dependent on, among other things, the number of days of maintenance downtime at our mills.

Unexpected maintenance downtime can be particularly disruptive in our industry.

Selected 2024 Highlights

In 2024, we:

•

refinanced our 2026 Senior Notes using cash on hand and proceeds from an add-on offering of our existing 2028 Senior Notes, thereby extending the maturity of our earliest senior notes to 2028, and decreased our long-term debt by over $100.0 million;

•

exited the CPP joint venture, which allowed us to direct resources to areas aligned with our long-term focus; and

•

successfully completed two large-scale mass timber building projects in the U.S.

(56)

Current Market Environment

We currently expect NBSK pulp prices to modestly increase in all our markets in the first half of 2025 as a result of stable demand and continued supply constraints. For NBHK pulp prices, we currently expect a modest increase in the first half of 2025 due to stable demand.

In our solid wood segment, we currently expect U.S. lumber prices to increase slightly in the first half of 2025 as a result of limited supply. In Europe, we currently expect lumber prices to modestly increase due to stronger demand driven by improved economic conditions in certain European countries. We currently expect mass timber prices to decrease in the first half of 2025 as the relatively high interest rate environment continues to soften demand. Pallet prices are expected to be generally stable in the first half of 2025.

Demand and pricing for our products may be further impacted by ongoing developments regarding U.S. trade policies involving Canada and the European Union. See Item 1. “Risk Factors” for further information.

Summary Financial Highlights

(1)

Segment Operating EBITDA is a measure of segment profit or loss presented in our financial statements under GAAP. Refer to the segment information note in our consolidated financial statements for more information.

(2)

Operating EBITDA and Operating EBITDA margin are non-GAAP measures. See “Non-GAAP Financial Measures” for their descriptions, limitations and why we consider them to be useful measures. The following table provides a reconciliation of net loss to operating income (loss) and Operating EBITDA for the years indicated:

(57)

Selected Production, Sales and Other Data

(1)

Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates.

(2)

Sales realizations after customer discounts, rebates and other selling concessions.

(3)

Does not include our 50% joint venture interest in CPP, which is accounted for using the equity method. In 2024, we disposed of this interest.

(4)

(5)

(6)

Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.

(58)