ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of March 31, 2023, unless otherwise stated; (iv) our reporting currency is dollars and references to “€” mean euros and “C$” mean Canadian dollars; (v) “ADMTs” refers to air-dried metric tonnes; (vi) “m3” means cubic meters; (vii) “NBSK” refers to northern bleached softwood kraft; (viii) “NBHK” refers to northern bleached hardwood kraft; (ix) “MW” refers to megawatts and “MWh” refers to megawatt hours; (x) “Mfbm” refers to thousand board feet of lumber and “MMfbm” mean million board feet of lumber; and (xi) our lumber metrics are converted from cubic meters to Mfbm using a conversion ratio of 1.6 cubic meters to one Mfbm, which is the ratio commonly used in the industry.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figure.
The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2023 should be read in conjunction with our Interim Consolidated Financial Statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission, referred to as the “SEC”.
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 cross-laminated timber, referred to as “CLT”, and finger joint lumber), wood pallets, electricity, biofuels and wood residuals at our sawmills and other facilities in Germany and our Mercer Mass Timber facility in the United States.
Each segment offers primarily different products and requires different manufacturing processes, technology and sales and marketing.
Historically, we included our Mercer Mass Timber facility in our corporate and other segment. However, with our acquisition of the Torgau facility on September 30, 2022, we now include the Mercer Mass Timber facility within our solid wood segment, which has been reflected retroactively.
Current Market Environment
In the first quarter of 2023, our pulp, lumber and pallet sales realizations decreased in all of our key markets when compared to the fourth quarter of 2022 due to economic uncertainty resulting from high interest and inflation rates.
As we move into the second quarter, we currently expect downward price pressure on pulp as a result of lower demand from our customers due to inflationary pressures negatively impacting paper demand. For NBHK pulp we also currently expect additional downward pricing pressure from additional supply coming online.
As of March 31, 2023, third party industry quoted NBSK list prices in Europe and North America were approximately $1,350 per ADMT and $1,650 per ADMT, respectively and NBSK net prices in China were approximately $865 per ADMT. Prices for China are net of discounts, allowances and rebates.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
In our solid wood segment, we currently expect lumber prices to modestly increase in the second quarter due to the start of the residential construction season and we expect pallet prices to decrease as a result of continued uncertain economic conditions.
Our energy revenues also decreased in the first quarter of 2023 compared to the fourth quarter of 2022 due to lower energy prices in Germany as warm weather and strong natural gas storage levels took significant pressure off the market electricity price.
Fiber costs continued to increase for our Canadian mills in the first quarter of 2023 compared to the fourth quarter of 2022 due to reduced wood chip availability as a result of sawmill curtailments. For our German mills per unit fiber costs stabilized during the first quarter. For the second quarter of 2023, we currently expect lower per unit fiber costs for our pulp mills caused by increased wood chip availability as a result of stronger sawmill production and realizing the early benefits from using the Peace River wood room which was completed in the first quarter of 2023. In our solid wood segment, we currently expect stable per unit fiber costs.
At the end of the first quarter of 2023, our inventories increased to a high level of $531.4 million. The increase reflected, among other things, a build up of fiber in front of the recently upgraded wood room at our Peace River pulp mill and overall market conditions. We expect inventory levels to normalize in the second and coming quarters of 2023.
FORM 10-Q
QUARTERLY REPORT - PAGE 21
Summary Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
(in thousands, other than per share amounts) |
|
|
Statement of Operations Data |
|
|
|
|
|
|
|
Pulp segment revenues |
|
$ |
400,401 |
|
|
$ |
485,931 |
|
|
Solid wood segment revenues |
|
|
121,014 |
|
|
|
104,797 |
|
|
Corporate and other revenues |
|
|
1,251 |
|
|
|
2,013 |
|
|
Total revenues |
|
$ |
522,666 |
|
|
$ |
592,741 |
|
|
|
|
|
|
|
|
|
|
Pulp segment operating income |
|
$ |
12,771 |
|
|
$ |
86,236 |
|
|
Solid wood segment operating income (loss) |
|
|
(27,069 |
) |
|
|
38,301 |
|
|
Corporate and other operating loss |
|
|
(5,823 |
) |
|
|
(2,186 |
) |
|
Total operating income (loss) |
|
$ |
(20,121 |
) |
|
$ |
122,351 |
|
|
|
|
|
|
|
|
|
|
Pulp segment depreciation and amortization |
|
$ |
27,399 |
|
|
$ |
27,684 |
|
|
Solid wood segment depreciation and amortization |
|
|
19,898 |
|
|
|
4,194 |
|
|
Corporate and other depreciation and amortization |
|
|
294 |
|
|
|
238 |
|
|
Total depreciation and amortization |
|
$ |
47,591 |
|
|
$ |
32,116 |
|
|
|
|
|
|
|
|
|
|
Operating EBITDA(1) |
|
$ |
27,470 |
|
|
$ |
154,467 |
|
|
Income tax recovery (provision) |
|
$ |
5,356 |
|
|
$ |
(24,236 |
) |
|
Net income (loss) |
|
$ |
(30,578 |
) |
|
$ |
88,897 |
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
Basic |
|
$ |
(0.46 |
) |
|
$ |
1.35 |
|
|
Diluted |
|
$ |
(0.46 |
) |
|
$ |
1.34 |
|
|
Common shares outstanding at period end |
|
|
66,421 |
|
|
|
66,132 |
|
|
(1)The following table provides a reconciliation of net income (loss) to operating income (loss) and Operating EBITDA for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
(in thousands) |
|
|
Net income (loss) |
|
$ |
(30,578 |
) |
|
$ |
88,897 |
|
|
Income tax provision (recovery) |
|
|
(5,356 |
) |
|
|
24,236 |
|
|
Interest expense |
|
|
19,047 |
|
|
|
17,464 |
|
|
Other income |
|
|
(3,234 |
) |
|
|
(8,246 |
) |
|
Operating income (loss) |
|
|
(20,121 |
) |
|
|
122,351 |
|
|
Add: Depreciation and amortization |
|
|
47,591 |
|
|
|
32,116 |
|
|
Operating EBITDA |
|
$ |
27,470 |
|
|
$ |
154,467 |
|
|
FORM 10-Q
QUARTERLY REPORT - PAGE 22
Selected Production, Sales and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
Pulp Segment |
|
|
|
|
|
|
|
Pulp production ('000 ADMTs) |
|
|
|
|
|
|
|
NBSK |
|
|
430.0 |
|
|
|
435.5 |
|
|
NBHK |
|
|
72.3 |
|
|
|
56.8 |
|
|
Annual maintenance downtime ('000 ADMTs) |
|
|
13.5 |
|
|
|
— |
|
|
Annual maintenance downtime (days) |
|
|
10 |
|
|
|
— |
|
|
Pulp sales ('000 ADMTs) |
|
|
|
|
|
|
|
NBSK |
|
|
378.6 |
|
|
|
505.1 |
|
|
NBHK |
|
|
57.4 |
|
|
|
49.9 |
|
|
Average NBSK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
Europe |
|
|
1,377 |
|
|
|
1,330 |
|
|
China |
|
|
891 |
|
|
|
899 |
|
|
North America |
|
|
1,675 |
|
|
|
1,527 |
|
|
Average NBHK pulp prices ($/ADMT)(1) |
|
|
|
|
|
|
|
China |
|
|
710 |
|
|
|
668 |
|
|
North America |
|
|
1,523 |
|
|
|
1,312 |
|
|
Average pulp sales realizations ($/ADMT)(2) |
|
|
|
|
|
|
|
NBSK |
|
|
849 |
|
|
|
812 |
|
|
NBHK |
|
|
809 |
|
|
|
695 |
|
|
Energy production ('000 MWh)(3) |
|
|
534.6 |
|
|
|
531.5 |
|
|
Energy sales ('000 MWh)(3) |
|
|
196.9 |
|
|
|
194.7 |
|
|
Average energy sales realizations ($/MWh)(3) |
|
|
122 |
|
(4) |
|
186 |
|
|
Solid Wood Segment |
|
|
|
|
|
|
|
Lumber |
|
|
|
|
|
|
|
Production (MMfbm) |
|
|
134.0 |
|
|
|
115.6 |
|
|
Sales (MMfbm) |
|
|
139.9 |
|
|
|
109.9 |
|
|
Average sales realizations ($/Mfbm) |
|
|
429 |
|
|
|
840 |
|
|
Energy |
|
|
|
|
|
|
|
Production and sales ('000 MWh) |
|
|
40.5 |
|
|
|
24.5 |
|
|
Average sales realizations ($/MWh) |
|
|
141 |
|
(4) |
|
211 |
|
|
Manufactured products(5) |
|
|
|
|
|
|
|
Production ('000 m3) |
|
|
0.8 |
|
|
|
5.5 |
|
|
Sales ('000 m3) |
|
|
4.3 |
|
|
|
5.6 |
|
|
Average sales realizations ($/m3) |
|
|
666 |
|
|
|
671 |
|
|
Pallets |
|
|
|
|
|
|
|
Production ('000 units) |
|
|
2,880.2 |
|
|
|
— |
|
|
Sales ('000 units) |
|
|
2,942.4 |
|
|
|
— |
|
|
Average sales realizations ($/unit) |
|
|
12 |
|
|
|
— |
|
|
Biofuels(6) |
|
|
|
|
|
|
|
Production ('000 tonnes) |
|
|
32.6 |
|
|
|
— |
|
|
Sales ('000 tonnes) |
|
|
25.8 |
|
|
|
— |
|
|
Average realizations ($/tonne) |
|
|
315 |
|
|
|
— |
|
|
Average Spot Currency Exchange Rates |
|
|
|
|
|
|
|
$ / €(7) |
|
|
1.0730 |
|
|
|
1.1216 |
|
|
$ / C$(7) |
|
|
0.7393 |
|
|
|
0.7897 |
|
|
(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. Incorporates the effect of pulp price variations occurring between the order and shipment dates.
(3)Does not include our 50% joint venture interest in the Cariboo mill, which is accounted for using the equity method.
(4)Energy sales realizations are net of the German energy windfall tax of $1.1 million for the pulp segment and $nil for the solid wood
segment.
(5)Manufactured products primarily includes finger joint lumber and CLT.
(6)Biofuels includes pellets and briquettes.
(7)Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.
FORM 10-Q
QUARTERLY REPORT - PAGE 23
Consolidated – Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Total revenues in the first quarter of 2023 decreased by approximately 12% to $522.7 million from $592.7 million in the same quarter of 2022 primarily due to lower pulp sales volumes and lower lumber and energy sales realizations partially offset by the inclusion of Torgau and higher lumber sales volumes and pulp sales realizations.
Costs and expenses in the first quarter of 2023 increased by approximately 15% to $542.8 million from $470.4 million in the first quarter of 2022 primarily due to higher fiber and chemical costs, the inclusion of Torgau and a non-cash inventory impairment of $15.2 million substantially related to hardwood inventory at the Peace River mill due to lower NBHK pulp prices and high production and logistics costs. These increases were partially offset by lower pulp sales volumes, the positive impact of a stronger dollar on our Canadian dollar and euro denominated costs and expenses and the receipt of €7.0 million ($7.5 million) in insurance proceeds in the current quarter relating to the July 2022 fire at our Stendal mill.
In the first quarter of 2023, cost of sales depreciation and amortization increased by approximately 48% to $47.5 million from $32.1 million in the same quarter of 2022 due to the inclusion of Torgau.
Selling, general and administrative expenses increased by approximately 53% to $34.0 million in the first quarter of 2023 from $22.2 million in the same quarter of 2022 primarily because of the inclusion of Torgau.
In the first quarter of 2023, operating loss was $20.1 million from operating income of $122.4 million in the same quarter of 2022 primarily due to higher per unit fiber and chemical costs, lower lumber and energy sales realizations, lower pulp sales volumes and the non-cash impairment substantially related to hardwood inventory partially offset by higher pulp sales realizations and the positive impact of a stronger dollar.
Interest expense in the first quarter of 2023 increased to $19.0 million from $17.5 million in the same quarter of 2022 due to borrowings on our German revolving credit facility and higher interest rates.
In the first quarter of 2023, other income was $3.2 million compared to $8.2 million in the same quarter of 2022. Other income in the first quarter of 2023 is primarily due to interest earned on cash and in the first quarter of 2022 other income is primarily as a result of foreign exchange gains on dollar denominated cash held at our operations, as the dollar strengthened in the quarter.
During the first quarter of 2023, we had an income tax recovery of $5.4 million or an effective tax rate of 15% due to not recognizing a tax recovery for certain entities with a net loss before tax and in the comparative quarter of 2022, we had an income tax provision of $24.2 million or an effective tax rate of 21%.
For the first quarter of 2023, net loss was $30.6 million, or $0.46 per share, compared to net income of $88.9 million, or $1.35 per basic share and $1.34 per diluted share in the same quarter of the prior year.
In the first quarter of 2023, Operating EBITDA decreased to $27.5 million from $154.5 million in the same quarter of 2022 primarily due to higher per unit fiber and chemical costs, lower lumber and energy sales realizations, lower pulp sales volumes and the non-cash impairment substantially related to hardwood inventory partially offset by higher pulp sales realizations and the positive impact of a stronger dollar.
Operating Results by Business Segment
None of the income or loss items following operating income (loss) in our Interim Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management.
FORM 10-Q
QUARTERLY REPORT - PAGE 24
Pulp Segment – Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Pulp revenues |
|
$ |
369,656 |
|
|
$ |
446,911 |
|
Energy and chemical revenues |
|
$ |
30,745 |
|
|
$ |
39,020 |
|
Depreciation and amortization |
|
$ |
27,399 |
|
|
$ |
27,684 |
|
Operating income |
|
$ |
12,771 |
|
|
$ |
86,236 |
|
Pulp revenues in the first quarter of 2023 decreased by approximately 17% to $369.7 million from $446.9 million in the same quarter of 2022 due to lower sales volumes partially offset by higher sales realizations.
Energy and chemical revenues decreased by approximately 21% to $30.7 million in the first quarter of 2023 from $39.0 million in the same quarter of 2022 as a result of lower energy sales realizations.
Total pulp production modestly increased to 502,372 ADMTs in the first quarter of 2023 from 492,288 ADMTs in the same quarter of 2022 primarily due to stable production at all of our mills.
In the first quarter of 2023, our pulp mills had ten days of annual maintenance downtime (approximately 13,500 ADMTs). In the comparative quarter of 2022, we had no annual maintenance downtime.
In the second quarter of 2023, our pulp mills currently have a total of 38 days of annual maintenance downtime (approximately 42,700 ADMTs). Our Peace River mill currently has 20 days of scheduled maintenance downtime (approximately 30,100 ADMTs) and nine days of market downtime (approximately 13,500 ADMTs) which may be extended to shift more production at the mill to NBSK from NBHK.
We estimate that annual maintenance downtime in the first quarter of 2023 adversely impacted our operating income by approximately $4.7 million, comprised of approximately $0.8 million in direct out-of-pocket expenses and the balance in reduced production.
Total pulp sales volumes decreased by approximately 21% to 435,973 ADMTs in the first quarter of 2023 from 555,035 ADMTs in the same quarter of 2022 primarily as a result of lower demand as a result of inflationary pressures negatively impacting paper demand.
In the first quarter of 2023, third party industry quoted average list prices for NBSK pulp increased in Europe and North America and were flat in China from the same quarter of 2022. Average third party industry quoted list prices for NBSK pulp in Europe and North America were approximately $1,377 per ADMT and $1,675 per ADMT, respectively, in the first quarter of 2023 compared to approximately $1,330 per ADMT and $1,527 per ADMT, respectively, in the same quarter of 2022. Average third party industry quoted NBSK net prices in China were approximately $891 per ADMT in the first quarter of 2023 compared to approximately $899 per ADMT in the same quarter of 2022.
Prices quoted for China are net of discounts, allowances and rebates whereas quoted prices for Europe and North America are before applicable discounts, allowances and rebates.
Our average NBSK pulp sales realizations increased by approximately 5% to $849 per ADMT in the first quarter of 2023 from approximately $812 per ADMT in the same quarter of 2022 as a result of higher list prices.
In the first quarter of 2023 compared to the same quarter of 2022, we had a positive impact of approximately $18.5 million in operating income due to foreign exchange, primarily as a result of the effect of the stronger U.S. dollar on our Canadian dollar and euro denominated costs and expenses.
Costs and expenses in the first quarter of 2023 modestly decreased to $388.0 million from $399.7 million in the first quarter of 2022 primarily due to lower pulp sales volumes, the positive impact of a stronger dollar and the receipt of
FORM 10-Q
QUARTERLY REPORT - PAGE 25
€7.0 million ($7.5 million) in insurance proceeds in the current quarter relating to the July 2022 fire at our Stendal mill partially offset by higher per unit fiber and chemical costs. The first quarter of 2023 included a non-cash inventory impairment of $15.2 million which substantially related to hardwood inventories at the Peace River mill.
In the first quarter of 2023 per unit fiber costs increased by approximately 43% from the same quarter of 2022 due to higher per unit fiber costs for all of our mills. Our German mills had higher per unit fiber costs as a result of strong demand from other wood consumers such as heating pellet manufacturers in response to energy shortages caused by the war in Ukraine. For our Canadian mills, per unit fiber costs increased due to strong demand in the mills' fiber baskets and for our Celgar mill a decrease in the availability of wood chips because of regional sawmill curtailments. We currently expect per unit fiber costs to decrease in the second quarter of 2023 with a decrease in Germany due to less demand for wood for energy purposes and in Canada as a result of increased wood chip availability from increased sawmill production and realizing the early benefits from using the Peace River wood room which was completed in the first quarter of 2023.
Transportation costs decreased by approximately 26% to $35.4 million in the first quarter of 2023 from $47.9 million in the same quarter of 2022 primarily as a result of lower pulp sales volumes.
In the first quarter of 2023, depreciation and amortization modestly decreased to $27.4 million from $27.7 million in the same quarter of 2022 due to the positive impact of a stronger dollar.
In the first quarter of 2023, pulp segment operating income decreased to $12.8 million from $86.2 million in the same quarter of 2022 primarily as a result of higher per unit fiber and chemical costs, lower pulp sales volumes and the non-cash inventory impairment of $15.2 million partially offset by higher pulp sales realizations and the positive impact of a stronger dollar.
Solid Wood Segment – Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Lumber revenues |
|
$ |
60,039 |
|
|
$ |
92,366 |
|
Energy revenues |
|
$ |
5,695 |
|
|
$ |
5,177 |
|
Manufactured products revenues(1) |
|
$ |
5,804 |
|
|
$ |
3,764 |
|
Pallet revenues |
|
$ |
36,175 |
|
|
$ |
— |
|
Biofuel revenues(2) |
|
$ |
8,135 |
|
|
$ |
— |
|
Wood residuals revenues |
|
$ |
5,166 |
|
|
$ |
3,490 |
|
Depreciation and amortization |
|
$ |
19,898 |
|
|
$ |
4,194 |
|
Operating income (loss) |
|
$ |
(27,069 |
) |
|
$ |
38,301 |
|
(1)Manufactured products primarily includes finger joint lumber and CLT.
(2)Biofuels includes pellets and briquettes.
In the first quarter of 2023, lumber revenues decreased by approximately 35% to $60.0 million from $92.4 million in the same quarter of 2022 primarily due to lower sales realizations partially offset by higher sales volumes. In the first quarter of 2023, both U.S. and European realized lumber prices were lower because of decreased demand as a result of higher interest rates and an uncertain economic outlook compared to the same quarter of 2022. The U.S. market accounted for approximately 54% of our lumber revenues and approximately 50% of our lumber sales volumes in the first quarter of 2023. The majority of the balance of our lumber sales were to Europe.
Energy and wood residuals revenues in the first quarter of 2023 increased by approximately 25% to $10.9 million from $8.7 million in the same quarter of 2022 primarily due to the inclusion of Torgau.
Pallet revenues of $36.2 million and biofuel revenues of $8.1 million in the first quarter of 2023 are from the inclusion of Torgau.
FORM 10-Q
QUARTERLY REPORT - PAGE 26
Manufactured products revenues increased to $5.8 million in the first quarter of 2023 from $3.8 million in the first quarter of 2022 primarily due to the inclusion of Torgau.
In the first quarter of 2023, lumber production increased by approximately 16% to a record 134.0 MMfbm from 115.6 MMfbm in the same quarter of 2022 as a result of record production at our Friesau mill and the inclusion of Torgau.
Lumber sales volumes increased by approximately 27% to 139.9 MMfbm in the first quarter of 2023 from 109.9 MMfbm in the same quarter of 2022 primarily due to higher production and increasing demand as a result of lower prices.
Average lumber sales realizations decreased by approximately 49% to $429 per Mfbm in the first quarter of 2023 from approximately $840 per Mfbm in the same quarter of 2022 as a result of lower demand in both the U.S. and European markets. Demand was negatively impacted by concerns over rising interest rates, inflationary pressures and an uncertain economic outlook.
Fiber costs were approximately 80% of our lumber cash production costs in the first quarter of 2023. In the first quarter of 2023, per unit fiber costs for lumber production increased by approximately 6% compared to the same quarter of 2022. Higher per unit fiber costs were due to strong fiber demand in Germany. We currently expect stable per unit fiber costs in the second quarter of 2023.
In the first quarter of 2023, depreciation and amortization increased to $19.9 million compared to $4.2 million in the same quarter of 2022 as a result of the inclusion of Torgau. Torgau’s amortization included $8.3 million for the order backlog intangible asset acquired, which is now fully amortized.
Transportation costs in the first quarter of 2023 increased by approximately 55% to $17.7 million from $11.4 million in the same quarter of 2022 primarily due to the inclusion of Torgau and higher lumber sales volumes.
In the first quarter of 2023, operating loss was $27.1 million compared to operating income of $38.3 million in the same quarter of 2022 primarily due to lower sales realizations.
Liquidity and Capital Resources
Summary of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Net cash from (used in) operating activities |
|
$ |
(49,650 |
) |
|
$ |
68,810 |
|
Net cash used in investing activities |
|
|
(32,624 |
) |
|
|
(26,790 |
) |
Net cash from financing activities |
|
|
28,099 |
|
|
|
24,609 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
703 |
|
|
|
(1,534 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
(53,472 |
) |
|
$ |
65,095 |
|
We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for fiber, labor and chemicals. Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and sales and the payment of payables and expenses.
FORM 10-Q
QUARTERLY REPORT - PAGE 27
Cash Flows from (used in) Operating Activities. Cash used in operating activities was $49.7 million in the three months ended March 31, 2023 compared to $68.8 million generated in the comparative period of 2022. A decrease in accounts receivable provided cash of $11.3 million in the three months ended March 31, 2023 and an increase in accounts receivable used cash of $52.1 million in the same period of 2022. An increase in inventories used cash of $86.4 million in the three months ended March 31, 2023 and $1.7 million in the same period of 2022. An increase in accounts payable and accrued expenses provided cash of $0.3 million in the three months ended March 31, 2023 and a decrease in accounts payable and accrued expenses used cash of $0.6 million in the same period of 2022.
Cash Flows used in Investing Activities. Investing activities in the three months ended March 31, 2023 used cash of $32.6 million primarily related to capital expenditures of $33.4 million. In the three months ended March 31, 2023, capital expenditures primarily related to upgrades to the wood rooms at our Canadian mills and maintenance and optimization projects at our German mills. Investing activities in the three months ended March 31, 2022 used cash of $26.8 million primarily related to capital expenditures of $33.3 million. In the three months ended March 31, 2022, we received the final payment of $6.4 million of insurance proceeds for our property damage claim related to the Peace River recovery boiler.
We have lowered our estimated planned annual capital expenditures for 2023 to between $150 million and $180 million.
Cash Flows from Financing Activities. In the three months ended March 31, 2023, financing activities provided cash of $28.1 million. In the three months ended March 31, 2023, we borrowed approximately $30.1 million under our revolving credit facilities. In the three months ended March 31, 2022, financing activities provided cash of $24.6 million. In the first quarter of 2022, we borrowed $30.5 million under our revolving credit facilities and we received $1.1 million in government grants to partially finance innovation and greenhouse gas emission reduction capital projects at our Canadian mills.
Balance Sheet Data
The following table is a summary of selected financial information as of the dates indicated:
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|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Cash and cash equivalents |
|
$ |
300,560 |
|
|
$ |
354,032 |
|
Working capital |
|
$ |
813,165 |
|
|
$ |
800,114 |
|
Total assets |
|
$ |
2,740,475 |
|
|
$ |
2,725,037 |
|
Long-term liabilities |
|
$ |
1,534,924 |
|
|
$ |
1,508,192 |
|
Total shareholders' equity |
|
$ |
822,873 |
|
|
$ |
838,784 |
|
Sources and Uses of Funds
Our principal sources of funds are cash flows from operations and cash and cash equivalents on hand. Our principal uses of funds consist of operating expenditures, capital expenditures and interest payments on our senior notes.
The following table sets out our total capital expenditures and interest expense for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
|
|
(in thousands) |
|
|
Capital expenditures |
|
$ |
33,429 |
|
|
$ |
33,293 |
|
|
Cash paid for interest expense(1) |
|
$ |
33,240 |
|
|
$ |
32,073 |
|
|
Interest expense(2) |
|
$ |
19,047 |
|
|
$ |
17,464 |
|
|
(1)Amounts differ from interest expense, which includes non-cash items. See supplemental disclosure of cash flow information from our Interim Consolidated Statements of Cash Flows included in this report.
(2)Interest on our senior notes due 2026 is paid semi-annually in January and July of each year. Interest on our senior notes due 2029 is paid semi-annually in February and August of each year.
FORM 10-Q
QUARTERLY REPORT - PAGE 28
As of March 31, 2023, we had cash and cash equivalents of $300.6 million and approximately $255.4 million available under our revolving credit facilities and as a result aggregate liquidity of about $556.0 million.
We currently consider the majority of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. income tax has been provided on such earnings. However, if we were required to repatriate funds to the United States, we believe that we currently could repatriate the majority thereof without incurring any material amount of taxes as a result of our shareholder advances and U.S. tax reform. However, it is currently not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. Substantially all of our undistributed earnings are held by our foreign subsidiaries outside of the United States.
Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp and lumber pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facilities, will be adequate to finance the capital requirements for our business including the payment of our quarterly dividend during the next 12 months.
In the future we may make acquisitions of businesses or assets or commitments to additional capital projects. To achieve the long-term goals of expanding our assets and earnings, including through acquisitions, capital resources will be required. Depending on the size of a transaction, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.
Debt Covenants
Certain of our long-term obligations contain various financial tests and covenants customary to these types of arrangements. See our annual report on Form 10-K for the fiscal year ended December 31, 2022.
As of March 31, 2023, we were in full compliance with all of the covenants of our indebtedness.
Off-Balance Sheet Arrangements
As of March 31, 2023, we did not have any off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).
Contractual Obligations and Commitments
There were no material changes outside the ordinary course to any of our material contractual obligations during the three months ended March 31, 2023.
Foreign Currency
As a majority of our assets, liabilities and expenditures are held or denominated in euros or Canadian dollars, our consolidated financial results are subject to foreign currency exchange rate fluctuations.
We translate foreign denominated assets and liabilities into dollars at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in other comprehensive income (loss) and do not affect our net earnings.
As a result of the weakening of the dollar versus the euro as of March 31, 2023, we recorded a net non-cash increase of $18.7 million in the carrying value of our net assets, consisting primarily of our property, plant and equipment denominated in euros. This non-cash increase does not affect our net loss, Operating EBITDA or cash but is reflected in our other comprehensive income and as an increase to our total equity. As a result, our accumulated other comprehensive loss decreased to $161.5 million.
Based upon the exchange rate as of March 31, 2023, the dollar has weakened by approximately 2% against the euro and was flat against the Canadian dollar since December 31, 2022. See "Quantitative and Qualitative Disclosures about Market Risk".
FORM 10-Q
QUARTERLY REPORT - PAGE 29
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of the recording of assets, liabilities, revenues, and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increases, these judgments become even more subjective and complex.
Our significant accounting policies are disclosed in Note 1 to our audited annual financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2022. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis using currently available information, management reviews its estimates, including those related to accounting for, among other things, pension and other post-retirement benefit obligations, deferred income taxes (valuation allowance and permanent reinvestment), depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, the allocation of the purchase price in a business combination to the assets acquired and liabilities assumed, legal liabilities and contingencies. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.
We have identified certain accounting policies that are the most important to the portrayal of our current financial condition and results of operations.
For information about both our significant and critical accounting policies, see our annual report on Form 10-K for the fiscal year ended December 31, 2022.
Cautionary Statement Regarding Forward-Looking Information
The statements in this report that are not reported financial results or other historical information are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.
Generally, forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", or words of similar meaning, or future or conditional verbs, such as "will", "should", "could", or "may", although not all forward-looking statements contain these identifying words. Forward-looking statements are based on expectations, forecasts and assumptions by our management and involve a number of risks, uncertainties and other factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, the following:
Risks Related to our Business
•Our business is highly cyclical in nature;
•cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business;
•our business, financial condition and results of operations could be adversely affected by disruptions in the global and European economies caused by Russia's invasion of Ukraine;
•inflation or a sustained increase in our key production and other costs would lead to higher manufacturing costs which could reduce our margins;
•the ongoing COVID-19 pandemic could materially adversely affect our business, financial position and results of operations;
•we face intense competition in the forest products industry;
FORM 10-Q
QUARTERLY REPORT - PAGE 30
•our business is subject to risks associated with climate change and social and government responses thereto;
•if we are unable to offer products certified to globally recognized forestry management and chain of custody standards or meet customers’ product specifications, it could adversely affect our ability to compete;
•our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements;
•trends in non-print media and changes in consumer habits regarding the use of paper have and are expected to continue to adversely affect the demand for market pulp;
•fluctuations in prices and demand for lumber could adversely affect our business;
•our solid wood segment lumber products are vulnerable to declines in demand due to competing technologies or materials;
•we may experience material disruptions to our production;
•acquisitions may result in additional risks and uncertainties in our business;
•we are subject to risks related to our employees;
•we are dependent on key personnel;
•if our long-lived assets become impaired, we may be required to record non-cash impairment charges that could have a material impact on our results of operations;
•our insurance coverage may not be adequate;
•we rely on third parties for transportation services;
•failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business;
•we have limited control over the operations of the Cariboo mill;
Risks Related to our Debt
•our level of indebtedness could negatively impact our financial condition, results of operations and liquidity;
•changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities;
•we are exposed to interest rate fluctuations;
Risks Related to Macro-economic Conditions
•a weakening of the global economy, including capital and credit markets, could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;
•we are exposed to currency exchange rate fluctuations;
•globally, central banks have raised interest rates in response to high inflation rates which could dampen macroeconomic conditions and business activity which could reduce demand for our products;
FORM 10-Q
QUARTERLY REPORT - PAGE 31
•political uncertainty, an increase in trade protectionism or geo-political conflict could have a material adverse effect on global macro-economic activities and trade and adversely affect our business, results of operations and financial condition;
•we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a new pandemic, terrorist attacks or natural disasters;
Legal and Regulatory Risks
•we are subject to extensive environmental regulation and we could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations;
•we sell surplus green energy in Germany and are subject to changing energy legislation in response to high prices and energy shortages resulting from the war in Ukraine;
•our international sales and operations are subject to applicable laws relating to trade, export controls, foreign corrupt practices and competition laws, the violation of which could adversely affect our operations;
Risks Related to Ownership of our Shares
•the price of our common stock may be volatile; and
•a small number of our shareholders could significantly influence our business.
Given these uncertainties, you should not place undue reliance on our forward-looking statements. The foregoing review of important factors is not exhaustive or necessarily in order of importance and should be read in conjunction with the risks and assumptions including those set forth under "Part II. Other Information – Item 1A. Risk Factors" and in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the fiscal year ended December 31, 2022. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.
Cyclical Nature of Business
Revenues
The pulp and lumber businesses are highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn can materially affect prices. Pulp and lumber markets are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro-economic conditions and levels of industry capacity. Pulp and lumber are commodities that are generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.
Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends. Certain integrated pulp and paper producers have the ability to discontinue paper production by idling their paper machines and selling their pulp production on the market, if market conditions, prices and trends warrant such actions.
FORM 10-Q
QUARTERLY REPORT - PAGE 32
Demand for each of pulp and lumber has historically been determined primarily by general global macro-economic conditions and has been closely tied to overall business activity. Pulp and lumber prices have been and are likely to continue to be volatile and can fluctuate widely over time.
The third party industry quoted average European list prices for NBSK pulp between 2013 and 2023 have fluctuated between a low of $790 per ADMT in 2016 to a high of $1,500 per ADMT in 2022. In the same period, third party industry quoted average North American list prices for NBHK pulp have fluctuated between a low of $770 per ADMT in 2013 to a high of $1,620 per ADMT in 2022.
As a key construction material, the pricing and demand for lumber is also significantly influenced by the number of housing starts, especially in the United States. In the U.S., third party industry quoted monthly average western spruce/pine/fir (WSPF) 2 x 4 #2&Btr prices between 2013 and 2023 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 increased government policies focused on a low-carbon economy.
Our mills and operations voluntarily subject themselves to third-party certification as to compliance with internationally recognized, sustainable management standards because end use paper and lumber customers have shown an increased interest in understanding the origin of products they purchase. Demand for our products could be adversely affected if we, or our suppliers, are unable to achieve compliance, or are perceived by the public as failing to comply, with these standards or if our customers require compliance with alternate standards for which our operations are not certified.
A pulp producer's actual sales price realizations are net of customer discounts, rebates and other selling concessions. Accordingly, prices for pulp and lumber are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the prices for pulp and lumber, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations and cash flows could be materially adversely affected.
Costs
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 and sawlogs. Wood chip, pulp log and sawlog costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical. Higher fiber prices could affect producer profit margins if they are unable to pass along price increases to pulp and lumber customers or purchasers of surplus energy.
Currency
We have manufacturing operations in Germany, Canada and the United States. Most of the operating costs and expenses of our German mills are incurred in euros and those of our Canadian mills in Canadian dollars. However, the majority of our sales are in products quoted in dollars. Our results of operations and financial condition are reported in dollars. As a result, our costs generally benefit from a strengthening dollar but are adversely affected by a decrease in the value of the dollar relative to the euro and to the Canadian dollar. Such declines in the dollar relative to the euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
FORM 10-Q
QUARTERLY REPORT - PAGE 33