ITEM 1A. RISK FACTORS
The statements in this "Risk Factors" section describe material risks to our business and should be considered carefully. You should review carefully the risk factors listed below, as well as those factors listed in other documents we file with the SEC. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995. Our disclosure and analysis in this annual report on Form 10-K and in our annual report to shareholders contain some forward-looking statements that set forth anticipated results based on management's current plans and assumptions. If any of the risks and uncertainties described in the cautionary factors described below actually occur or continue to occur, our business, financial condition and results of operations and the trading price of our common stock could be materially and adversely affected. Moreover, the risks below are not the only risks we face and additional risks not currently known to us or that we presently deem immaterial may emerge or become material at any time and may negatively impact our business, reputation, financial condition, results of operations or the trading price of our common stock.
Risks Related to our Business
Our business is highly cyclical in nature.
The forest products industry is highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn can cause material fluctuations in prices. The markets for our principal products, being pulp and lumber, 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.
Currently, we are aware of 2.7 million ADMTs of announced net pulp production capacity increases, primarily of hardwood kraft pulp in 2023. However, we cannot predict whether new capacity will be announced or will come online in the future. If any new capacity, particularly for NBSK pulp, is not absorbed in the market or offset by curtailments or closures of older, high-cost pulp mills, the increase could put downward pressure on pulp prices and materially adversely affect our results of operations, margin and profitability. Additionally, while NBHK pulp is not
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a direct competitor to NBSK pulp, if any future increases in pulp supply are not absorbed by demand growth, such supply could put downward pressure on NBSK pulp prices as well.
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. Both pulp and lumber prices have been and are likely to continue to be volatile and can fluctuate widely over time. Demand for CLT products is primarily driven by commercial and industrial construction demand and customers’ desire to take advantage of the characteristics and environmental attributes of CLT products.
A pulp producer's actual sales realizations are third party industry quoted list prices net of customer discounts, rebates and other selling concessions. Our sales realizations may also be affected by price movements between the order and shipment dates.
Global pulp and lumber markets have historically been characterized by considerable swings in prices which have and will result in variability in our earnings. Prices for pulp and lumber are driven by many factors outside our control. We have little influence over the timing and extent of price changes. 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 reduce 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.
Cyclical fluctuations in the price and supply of our raw materials, particularly fiber, could adversely affect our business.
Our main raw material is fiber in the form of wood chips, pulp logs and sawlogs. Fiber represented approximately 50% of our pulp cash production costs and approximately 75% of our lumber cash production costs in 2022. Fiber is a commodity and both prices and supply are cyclical. Fiber pricing is subject to regional market influences and our costs of fiber may increase in a region as a result of local market shifts. The cost of wood chips, pulp logs and sawlogs is primarily affected by the supply and demand for lumber. Demand for these raw materials is generally determined by the volume of pulp and paper products and solid wood products produced globally and regionally.
Governmental regulations related to the environment, forest stewardship and green or renewable energy can also affect the supply of fiber. In Europe, governmental initiatives to increase the supply of renewable energy have led to more renewable energy projects, including in Germany. Demand for wood residuals from such energy producers has generally put upward pressure on prices for wood residuals. In addition, the reduction in natural gas supply and increase in energy prices in Germany resulting from the Ukraine war has also increased both the demand and prices for wood chips and residuals. This has resulted in higher per unit fiber costs for our German mills.
Strong lumber markets in North America and particularly in the United States resulting from a recovery in U.S. housing starts and a robust home renovations market over the last few years resulted in increased sawmilling activity. This increased the supply of wood chips which are generally a lower cost than pulp logs. However, the lumber industry is highly cyclical and the slowdown in sawmilling activities in the last fiscal year has reduced the availability of both wood chips and pulp logs and put upward pressure on fiber costs. There is no assurance that sawmill activity will stabilize or not decline further or that fiber prices will not increase in the future.
Since 2016 and the expiry of a softwood lumber trade agreement, the United States and Canada have renewed a long standing trade dispute regarding lumber exports from Canada to the United States. In November 2016, a petition was filed by a coalition of U.S. lumber producers to the U.S. Department of Commerce and the U.S. International Trade Commission requesting an investigation into alleged subsidies provided to Canadian lumber producers. Since then, the U.S. Department of Commerce announced various countervailing and anti-dumping duty rates on Canadian softwood lumber and the United States and Canada have engaged in proceedings under the North American Free Trade Agreement and through the World Trade Organization. In August 2022, the U.S. Department of Commerce announced the results of its third administrative review, lowering the countervailing duty to 3.83% and the anti-dumping rate to 4.76%, for combined final duty rates of 8.59% for "all other" Canadian lumber producers. In January 2023, the U.S. Department of Commerce released the preliminary results of its fourth administrative review which
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indicated a further marginal reduction in the duty rate for "all other" Canadian lumber producers. It is uncertain when or if the United States and Canada may settle a new agreement and what terms or restrictions it may contain. Duties or other restrictions imposed on Canadian softwood lumber exports by the United States can negatively impact Canadian sawmill production in our Canadian pulp mills' supply area and result in reduced availability and increased costs for wood chips for our Canadian mills. While we believe this may be partially offset by increased wood chip supply from U.S. sawmills and pulp log availability, we cannot currently predict the effect on our Canadian mills' overall fiber costs.
Availability of fiber may be further limited by adverse responses to and prevention of wildfires, weather, insect infestation, disease, ice storms, wind storms, flooding and other natural causes. In addition, the quantity, quality and price of fiber we receive could be affected by man-made causes such as those resulting from industrial disputes, material curtailments or shut-down of operations by suppliers, government orders and legislation (including new taxes or tariffs). Any or a combination of these can affect fiber prices in a region.
The cyclical nature of pricing for fiber represents a potential risk to our profit margins if pulp and lumber producers are unable to pass along price increases to their customers or we cannot offset such costs through higher prices for our surplus energy.
Other than the renewable forest licenses of our Peace River mill, we do not own any timberlands or have any material long-term governmental timber concessions. We also currently have few long-term fiber contracts at our German operations. Fiber is available from a number of suppliers and prices are cyclical. Our fiber requirements have increased and may continue to do so as we expand capacity through capital projects, other efficiency measures at our mills and acquisitions. As a result, we may not be able to purchase sufficient quantities of fiber to meet our production requirements at prices acceptable to us during times of tight supply. An insufficient supply of fiber or reduction in the quality of fiber we receive would materially adversely affect our business, financial condition, results of operations and cash flows.
In addition to the supply of fiber, we are, to a lesser extent, dependent on the supply of certain chemicals and other inputs used in our production facilities. Any disruption in the supply of these chemicals or other inputs could affect our ability to meet customer demand in a timely manner and could harm our reputation. Any material increase in the cost of these chemicals or other inputs could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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.
The global economy has been negatively impacted by increasing tension, uncertainty and tragedy resulting from Russia's invasion of Ukraine. The adverse and uncertain economic conditions resulting therefrom have and may further negatively impact global demand, cause supply chain disruptions and increase costs for transportation, energy and other raw materials. Furthermore, governments in the United States, the European Union, the United Kingdom, Canada and others have imposed financial and economic sanctions on certain industry segments and various parties in Russia. We are monitoring the conflict including the potential impact of financial and economic sanctions on the global economy and particularly the economies of Europe. Increased trade barriers, sanctions and other restrictions on global or regional trade could adversely affect our business, financial condition and results of operations. Although we have no operations in Russia or Ukraine, the destabilizing effects of Russia's invasion of Ukraine could have other adverse effects on our business, including transportation, logistics, fiber supply and energy availability. Further escalation of geopolitical tensions related to this military conflict and/or its expansion could result in loss of property, expropriation, cyberattacks, supply disruptions, plant closures and an inability to obtain key supplies and materials, as well as adversely affect both our and our customers’ supply chains and logistics, particularly in Europe.
In many cases, both our German operations and those of European customers depend on the availability of natural gas for use in their manufacturing operations. A very significant proportion of Germany's natural gas supply historically originated from Russia. There have been significant reductions in and disruptions to the natural gas supply to Europe and in particular Germany, resulting from sanctions, counter-measures by Russia, including restricting supply, other restrictions, damage to infrastructure, logistics and other factors related to the war. The Ukraine military conflict has had a destabilizing effect and materially and adversely impacted European and global natural gas and oil markets. Such material disruptions to the natural gas supply of Germany could adversely affect its availability to industry and
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our ability to operate our German pulp and lumber mills in the ordinary course which could adversely affect our business, results of operations and financial condition.
Additionally, both the European Union and Germany have adopted or proposed legislation in response to energy supply shortages and high energy prices, including price caps and "windfall" taxes on energy sales resulting from the war in Ukraine.
In addition, the effects of such military conflict could heighten and increase many of the other risks described in this Item 1A.
Inflation or a sustained increase in our key production and other costs would lead to higher manufacturing costs which could reduce our margins.
Our key production input costs are for fiber, chemicals and energy. Other material costs in our business include labor and transportation. The prices for fiber and energy can be volatile, are affected by inflation and can change rapidly. Additionally, our costs for chemicals and transportation are also subject to inflationary pressure. Also, our costs for service providers, contractors and labor may increase due to inflation and shortages of skilled labor.
Continued inflationary pressures would increase our manufacturing costs. If we are unable to pass along suchoperating costs increases to our customers, it could reduce our margins, contribute to earnings volatility and adversely affect our results of operations.
The ongoing COVID-19 pandemic could materially adversely affect our business, financial position and results of operations.
Since its initial outbreak in late 2019, the COVID-19 pandemic has resulted in significant and widespread global infections and fatalities. During the pandemic, various levels of governments globally have from time to time taken emergency and other measures to attempt to contain the virus, including travel restrictions, quarantines, business closures, shelter in place orders and other shutdowns and restrictions.
The impact of the pandemic and the global response thereto has, among other things, significantly disrupted global economic activity, negatively impacted gross domestic product, disrupted supply chains and caused volatility in financial markets. Various countries have suffered declines in gross domestic product growth, business activity and increases in unemployment.
The widespread roll-out of vaccines to aid in the prevention and spread of the COVID-19 virus has generally resulted in a reopening of most economies and a general discussion of whether to treat the COVID-19 virus as endemic and learn to live with it. However, certain countries, including China in particular have continued to impose selected quarantines and closures to try to stop the spread of the virus. The effect of such measures has been reduced economic activity both in China and globally as a result of the size of China's economy. Further, China is also an important market for pulp producers, including ourselves.
As demand for our products has principally historically been determined by general global macro-economic activities, demand and prices for our products have historically decreased substantially during economic slowdowns. A significant economic downturn may adversely affect our sales and profitability and may also adversely affect our customers and suppliers. Additionally, significant disruptions and volatility in financial markets could have a negative impact on our ability to access capital in the future.
Our products are an important constituent of many pandemic related high demand goods such as tissue and cleaning products and certain personal protective equipment. However, our mills could experience disruptions, downtime and closures in the future as a result of changes to existing government response measures, outbreaks of the virus among our employees or operations or disruptions to raw material supplies or access to logistics networks.
The magnitude and duration of the disruption and resulting decline in business activity that may result from the ongoing pandemic, new variants and/or resurgences is currently uncertain. The extent to which the pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict.
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We face intense competition in the forest products industry.
We compete with numerous forest products companies, some of which have greater financial resources. The trend toward consolidation in the forest products industry has led to the formation of sizable global producers that have greater flexibility in pricing and financial resources for marketing, investment, research and development, innovation, and expansion. Additionally, certain of our competitors are fully or more vertically integrated than we are and may have different priorities when operating their respective businesses. Because the markets for our products are highly competitive, actions by competitors can affect our ability to compete and the volatility of prices at which our products are sold.
The forest products industry is also capital intensive, and we require significant investment to remain competitive. Some of our competitors may be lower-cost producers in some of the businesses in which we operate. For example, the sizable low-cost hardwood grade pulp capacity in South America, which continues to grow as a result of ongoing investment and whose costs are thought to be very competitive, and the actions those mills take to gain market share, could continue to adversely affect our competitive position in similar grades. Failure to compete effectively could have a material adverse effect on our business, financial condition or results of operations.
Our business is subject to risks associated with climate change and social and government responses thereto.
Our operations and those of our suppliers are subject to climate change variations which can impact the productivity of forests, the abundance of species, harvest levels and fiber supply. Further, over the last few years, changing weather patterns and climate conditions due to natural and man-made causes have added to the frequency and unpredictability of natural disasters like wildfires, insect infestation of softwood forests, floods, rain, wind, snow and ice storms. One or a combination of these factors could adversely affect our fiber supply which is our largest cash production cost. There are differing scientific studies and opinions relating to the severity, extent and speed at which climate change is or may be occurring around the world. As a result, we are currently unable to identify and predict all of the specific consequences of climate change on our business and operations.
Further, governmental initiatives and social focus in response to climate change also have an impact on operations. Their demand for carbon neutral green energy has created greater demand and competition for the wood residuals and fiber that is consumed by our pulp mills as part of their production processes. This can drive up the cost of fiber for our mills.
If our fiber costs increase and we cannot pass on these costs to our customers or offset them through higher prices for our sales of surplus energy, it will negatively affect our operating margins, results of operations and financial position. If we cannot obtain the fiber required to operate our mills, we may have to curtail and/or shut down production. This could have a material adverse effect on our operations, financial results and financial position.
Other risks to our business from climate change include:
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a greater susceptibility of northern forests to disease, fire and insect infestation, which could diminish fiber availability;
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the disruption of transportation systems and power supply lines due to more severe storms;
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the loss of fresh water transportation for logs and pulp due to lower water levels;
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decreases in the quantity and quality of processed water for our mill operations;
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the loss of northern forests in areas in sufficient proximity to our mills to competitively acquire fiber; and
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lower harvest levels decreasing the supply of harvestable timber and, as a consequence, wood residuals.
Any of these natural disasters could also affect woodlands or cause variations in the cost of raw materials, such as fiber or restrict or negatively impact our logistics and transportation of goods and materials. Changes in precipitation could make wildfires more frequent or more severe, and could adversely affect timber harvesting and the supply of fiber to our operations. The effects of global, regional, and local weather conditions, and climate change, including
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the costs of complying with evolving climate change regulations and transition costs relating to a low carbon economy could also adversely impact our results of operations.
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.
We market and sell pulp, lumber and other solid wood products with specific designations to certain globally recognized forest management and chain of custody standards as well as product specifications to meet customers’requirements. Our ability to conform to new or existing guidelines for certification depends on a number of factors, many of which are beyond our control, such as: changes to the standards or the interpretation or the application of the standards; the collaboration of our suppliers in the timely sharing of product information; the adequacy of government-implemented conservation measures; and in Canada the existence of or potential territorial disputes between First Nations peoples and governments. If we are unable to offer certified products, or to meet commitments to supply certified product or meet the product specifications of our customers, it could adversely affect the marketability of our products and our ability to compete with other producers.
Our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such capital requirements.
Our business is capital intensive and requires that we regularly incur capital expenditures to maintain our equipment, improve efficiencies and, as a result of changes to environmental regulations that require capital expenditures, bring our operations into compliance with such regulations. In addition, we may approve projects in the future that will require significant capital expenditures. Increased capital expenditures could have a material adverse effect on our cash flow and our ability to satisfy our debt obligations. If our available cash resources and cash generated from operations are not sufficient to fund our operating needs and capital expenditures, we would have to obtain additional funds from borrowings or other available sources or reduce or delay our capital expenditures. Our indebtedness could adversely limit or impair our ability to raise additional capital. We may not be able to obtain additional funds on favorable terms or at all. If we cannot maintain or upgrade our equipment as may be required from time to time, we may become unable to manufacture products that compete effectively. An inability to make required capital expenditures in a timely fashion could have a material adverse effect on our growth, business, financial condition or results of operations.
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.
Trends in non-print media are expected to continue to adversely affect demand for traditional print media, including for printing, writing and graphic papers. Neither the timing nor the extent of these trends can be predicted with certainty. Our paper, magazine, book and catalog publishing customers could increase their use of, and compete with, non-print media, including multimedia technologies, electronic storage and communication platforms which could further reduce their consumption of papers and in turn their demand for market pulp. The demand for such paper products has weakened significantly over the last several years and has accelerated since the COVID-19 pandemic as confinement and work from home has altered consumer habits, which could become permanent and further negatively impact the demand for market pulp.
Fluctuations in prices and demand for lumber could adversely affect our business.
The financial performance of the Friesau mill and Torgau facility depends on the demand for and selling price of lumber, which is subject to significant fluctuations. The markets for lumber are highly volatile and are affected by economic conditions in Europe, Asia and the United States, the strength of housing markets and the home renovations activity in such regions, the growing importance of the Asian market, changes in industry production capacity, changes in inventory levels and other factors beyond our control. Additionally, interest rates have a significant impact on residential construction and renovation activity, which in turn influence the demand for and price of lumber.
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Our solid wood segment lumber products are vulnerable to declines in demand due to competing technologies or materials.
Our lumber products may compete with alternative products. For example, plastic, wood/plastic or composite materials may be used by builders as alternatives to the lumber products produced by our solid wood segment. Changes in the prices for oil, chemicals and other products can change the competitive position of our solid wood segment lumber products relative to available alternatives and could increase substitution of those products for our solid wood segment products. If use of these alternative products grows, demand for and pricing of our solid wood segment products could be adversely affected.
We may experience material disruptions to our production.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our pulp, lumber and energy sales and/or negatively impact our results of operations. Any of our mills could cease operations unexpectedly due to a number of events, including:
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unscheduled maintenance outages;
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prolonged power failures;
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equipment failures;
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employee errors or failures;
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design error or contractor error;
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chemical spill or release or industrial fire;
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explosion of a boiler;
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disruptions in the transportation infrastructure, including roads, bridges, railway tracks, tunnels, canals and ports;
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fires, floods, earthquakes, windstorms, pest infestations, severe weather conditions or other natural catastrophes affecting our production of goods or the supply of raw materials like fiber;
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prolonged supply disruption of major inputs;
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labor difficulties;
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capital projects that require temporary cost increases or curtailment of production; and
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other operational problems.
Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If any of our facilities were to incur significant downtime, our ability to meet our production capacity targets and satisfy customer requirements would be impaired and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Acquisitions may result in additional risks and uncertainties in our business.
In order to grow our business, we may seek to acquire additional assets or companies. For example, on September 30, 2022, we acquired the Torgau facility for approximately $263.2 million. Our ability to pursue selective and accretive acquisitions, including the Torgau facility, is dependent on management's ability to identify, acquire and develop suitable acquisition targets in both new and existing markets. In pursuing acquisition and investment opportunities, we face competition from other companies having similar growth strategies, many of which may have substantially greater resources than us. Competition for these acquisitions or investment targets could result in increased acquisition or investment prices, higher risks and a diminished pool of businesses or assets available for acquisition.
Acquisitions also frequently result in recording of goodwill and other intangible assets, which are subject to potential impairments in the future that could have a material adverse effect on our operating results. Furthermore, the costs of integrating acquired businesses (including restructuring charges associated with the acquisitions, as well as other
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acquisition costs, such as accounting fees, legal fees and investment banking fees) could significantly impact our operating results.
Although we perform diligence on the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. We may not be able to ascertain the value or understand the potential liabilities of the acquired businesses and their operations until we assume operating control of the assets and operations of these businesses.
Furthermore, acquisitions could entail a number of risks, including:
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diversion of management's attention from our ongoing business;
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difficulty integrating the operations, including financial and accounting functions, sales and marketing procedures, technology and other corporate administrative functions of the combined operations;
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increased operating costs;
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exposure to substantial unanticipated liabilities;
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difficulty in realizing projected synergies, efficiencies and cost savings;
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exposure to facilities with different health and safety standards than ours and difficulty in integrating their practices to our standards;
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difficulty maintaining relationships with present and potential customers, distributors and suppliers due to uncertainties regarding service, production quality and prices; and
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problems retaining key employees.
If we are unable to address any of these risks, our results of operations and financial condition could be materially adversely affected.
We are subject to risks related to our employees.
The majority of our employees are unionized and we have collective agreements in place with our employees at all of our mills, other than the Peace River mill, Mercer Mass Timber facility and Torgau facility, which are non-union. Although we have not experienced any material work stoppages in the past, there can be no assurance that we will be able to negotiate acceptable collective agreements or other satisfactory arrangements with our employees upon the expiration of our collective agreements. This could result in a strike or work stoppage by the affected workers. The registration or renewal of the collective agreements or the outcome of our wage negotiations could result in higher wages or benefits paid to union members. Many of the employment positions in our operations require technical or other operating training and/or experience. Changing demographics may make it more difficult for us to recruit skilled employees in the future. Accordingly, we could experience a significant disruption of our operations or higher ongoing labor costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, whenever we seek to reduce the workforce at any of our mills, the affected mill's labor force could seek to hinder or delay such actions, we could incur material severance or other costs and our operations could be disrupted.
We are dependent on key personnel.
Our future success depends, to a large extent, on the efforts and abilities of our executive and senior mill operating officers. Such officers are industry professionals, many of whom have operated through multiple business cycles. The loss of one or more of our officers could make us less competitive, which could materially adversely affect our business, financial condition, results of operations and cash flows. We do not maintain key person life insurance for any of our executive or senior mill operating officers.
In addition, by nature of the industries in which we operate, many of our employees are professionals who require specialized knowledge and skills, including various categories of engineers and licensed trade persons and equipment operators. Any inability to attract, train and retain such employees could adversely affect our business and results of operations.
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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.
We review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Should the markets for our products deteriorate or should we decide to invest capital differently or should other cash flow assumptions change, it is possible that we will be required to record non-cash impairment charges in the future that could have a material adverse effect on our results of operations.
Our insurance coverage may not be adequate.
We have obtained insurance coverage that we believe would ordinarily be maintained by an operator of facilities similar to our mills. Our insurance is subject to various limits and exclusions. Damage or destruction to our facilities could result in claims that are excluded by, or exceed the limits of, our insurance coverage. Additionally, the weak global and financial markets have also reduced the availability and extent of credit insurance for our customers. If we cannot obtain adequate credit insurance for our customers, we may be forced to amend or curtail our planned operations which could negatively impact our sales revenues, results of operations and financial position.
We rely on third parties for transportation services.
Our business primarily relies upon third parties for the transportation of products to our customers, as well as for the delivery of our raw materials to our mills. Our products and raw materials are principally transported by truck, barge, rail and sea-going vessels, all of which are highly regulated. Increases in transportation rates can also materially adversely affect our results of operations.
Further, if our transportation providers fail to deliver our products in a timely manner, it could negatively impact our customer relationships and we may be unable to manufacture pulp or lumber in response to customer orders or sell them at full value. Also, if any of our transportation providers were to cease operations, we may be unable to replace them at a reasonable cost. The occurrence of any of the foregoing events could materially adversely affect our results of operations.
Failures or security breaches of our information technology systems could disrupt our operations and negatively impact our business.
We use information technologies to manage our operations and various business functions. We rely on various technologies to process, store and report on our business and to communicate electronically between our facilities, personnel, customers and suppliers as well as for administrative functions and many of such technology systems are dependent on one another for their functionality. We also use information technologies to process financial information and results of operations for internal reporting purposes and to comply with regulatory, legal and tax requirements. We rely on third party providers for some of these information technologies and support. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products is highly dependent on our technology systems. Despite our security design and controls and other operational safeguards, and those of our third party providers, our information technology systems may be vulnerable to a variety of interruptions, including during the process of upgrading or replacing hardware, software, databases or components thereof, natural disasters, terrorist attacks, telecommunications failures, computer viruses, cyberattacks, hackers, unauthorized access attempts and other security issues or may be breached due to employee error, malfeasance or other disruptions. Any such interruption or breach could result in operational disruptions or the misappropriation of sensitive data that could subject us to civil and criminal penalties, litigation or have a negative impact on our reputation. There can be no assurance that such disruptions or misappropriations and the resulting repercussions will not negatively impact our cash flows and materially affect our results of operations or financial condition.
In addition, many of our information technology systems, such as those we use for administrative functions, including human resources, payroll, accounting and internal and external communications, as well as the information technology systems of our third-party business partners and service providers, whether cloud-based or hosted in proprietary servers, contain personal, financial or other information that is entrusted to us by our customers and personnel. Many of our information technology systems also contain proprietary and other confidential information related to our business, such as business plans and research and development initiatives. To the extent we or a third party were to
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experience a material breach of our or such third party's information technology systems that results in the unauthorized access, theft, use, destruction or other compromises of our customers’ or personnel’s data or confidential information stored in such systems, including through cyberattacks or other external or internal methods, it could result in a violation of applicable privacy and other laws, and subject us to litigation and governmental investigations and proceedings, any of which could result in our exposure to material liability.
We have limited control over the operations of the Cariboo mill.
Our 50% ownership interest in the Cariboo mill is through an unincorporated joint venture partnership. The ownership and operation of such mill is subject to an underlying agreement and its day-to-day operations are principally conducted by our joint venture partner. Joint venture partnerships generally involve special risks, including that the business and strategic interests of the joint venture partner and ourselves may not coincide or that the joint venture partner may be unable to meet its economic or other obligations thereunder. We have limited control over the actions of the joint venture partner in respect of the Cariboo mill, including any non-performance, default or bankruptcy of such party. Any non-performance by our joint venture partner or other actions taken by the joint venture partner in connection with the day-to-day operation of the Cariboo mill may adversely affect our results of operations and financial condition.
Risks Related to our Debt
Our level of indebtedness could negatively impact our financial condition, results of operations and liquidity.
As of December 31, 2022, we had approximately $1,346.5 million of indebtedness outstanding. We may also incur additional indebtedness in the future. Our high debt levels may have important consequences for us, including, but not limited to the following:
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our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favorable to us or at all;
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a significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes;
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increasing our vulnerability to current and future adverse economic and industry conditions;
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a substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations;
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our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general;
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causing us to offer debt or equity securities on terms that may not be favorable to us or our shareholders;
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limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; and
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our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness.
The indentures that govern our Senior Notes, and our credit facilities contain restrictive covenants which impose operating and other restrictions on us and our subsidiaries. These restrictions will affect, and in many respects will limit or prohibit, our ability to, among other things, incur or guarantee additional indebtedness, pay dividends or make distributions on capital stock or redeem or repurchase capital stock, make investments or acquisitions, create liens and enter into mergers, consolidations or transactions with affiliates. The terms of our indebtedness also restrict our ability to sell certain assets, apply the proceeds of such sales and reinvest in our business.
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Certain of the agreements governing our indebtedness have covenants that require us to maintain prescribed financial ratios and tests. Failure to comply with such covenants could result in events of default and could have a material adverse effect on our liquidity, results of operations and financial condition.
Our ability to repay or refinance our indebtedness will depend on our future financial and operating performance. Our performance, in turn, will be subject to prevailing economic and competitive conditions, as well as financial, business, legislative, regulatory, industry and other factors, many of which are beyond our control. Our ability to meet our future debt service and other obligations may depend in significant part on the extent to which we can successfully implement our business strategy. We cannot assure you that we will be able to implement our strategy fully or that the anticipated results of our strategy will be realized. Over the next several years, we will require financing to refinance maturing debt obligations (unless extended), and such refinancing may not be available on favorable terms or at all.
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.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing the company on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading could limit our access to credit markets, increase our cost of financing and have an adverse effect on the market price of our securities, including our Senior Notes.
We are exposed to interest rate fluctuations.
Interest on borrowings under our revolving credit facilities are at "floating" rates. As a result, increases in interest rates will increase our costs of borrowing and reduce our operating margins.
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.
As demand for our products has principally historically been determined by general global macro-economic activities, demand and prices for our products have historically decreased substantially during economic slowdowns. A significant economic downturn may affect our sales and profitability. Further, our suppliers and customers may also be adversely affected by an economic downturn. Additionally, restricted credit and capital availability restrains our customers’ ability or willingness to purchase our products, resulting in lower revenues. Depending on the severity and duration, the effects and consequences of a global economic downturn could have a material adverse effect on our liquidity and capital resources, including our ability to raise capital, if needed, and otherwise negatively impact our business and financial results.
In addition, financial uncertainties and other events in our major international markets, including inflation and other market factors, may negatively impact the global economy and consequently, our results of operations.
We are exposed to currency exchange rate fluctuations.
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.
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Further, while a strengthening dollar generally lowers our costs and expenses in Germany and Canada, it increases the cost of pulp to our customers and generally puts downward pressure on pulp prices and reduces our energy, chemical, pallet, biofuel, wood residual and European lumber sales revenues as they are sold in euros and Canadian dollars.
Although we report in dollars, we hold certain assets and liabilities, including our mills, in euros and Canadian dollars. 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 recognized in other comprehensive income (loss) and do not affect our net earnings, operating income or Operating EBITDA.
Certain intercompany dollar advances between Mercer Inc. and its foreign subsidiaries are held in euros and Canadian dollars. Mercer Inc. holds some cash in foreign currencies and certain foreign subsidiaries hold some cash and other balances in dollars. When such advances, cash and other balances are translated into the applicable local currency at the end of each reporting period, the gains or losses thereon are reflected in net earnings.
Globally, central banks have raised interest rates in response to high inflation rates which could dampen macro-economic conditions and business activity which could reduce demand for our products.
As a result of higher than acceptable rates of inflation, many central banks globally have raised interest rates through 2022 and may continue to do so in the future to reduce the rate of inflation.
Such interest rate increases can, among other things, dampen macro-economic conditions and business activity and lead to a recession. Such weakened economic activity could reduce demand and prices for our products which could reduce our margins and adversely affect our results of operations.
In addition, the effects of rising interest rates and a weakening of global economic activity could heighten and increase many of the other risks described in this Item 1A.
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.
The rise of economic nationalist sentiments, trade protectionism and geo-political security has led to increasing political uncertainty and unpredictability throughout the world. Additionally, there can be no assurance that additional or new trade tensions and tariffs will not arise between various trade partners. These potential developments, market perceptions concerning these and related issues and the attendant regulatory uncertainty regarding, for example, the posture of governments with respect to international trade or national security issues, could have a material adverse effect on global trade and economic growth which, in turn, can adversely affect our business, results of operation and financial condition.
Increased trade protectionism could materially adversely affect our business. If the current global economy or outlook is undermined by downside risks and there is a prolonged economic downturn, governments may resort to new or enhanced trade barriers to protect their domestic industries against imports, thereby depressing demand. Changes in the trade policies of the U.S. and other countries, such as the announcement of unilateral tariffs on imported products, have already triggered retaliatory actions from affected countries, resulting in "trade wars" that could have a material adverse effect on global trade and economic growth.
International security issues and adverse developments in respect thereof such as the current Russian invasion of Ukraine and potentially western security alliances could materially adversely affect global trade and economic activity.
Protectionist developments or adverse international political tensions or developments, or the perception they may occur, may have a material adverse effect on global economic conditions, and may significantly reduce global trade. Increasing trade protectionism in the markets could increase the risks associated with exporting goods to such markets. These developments could have a material adverse effect on our business, results of operations and financial condition.
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We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a new pandemic, terrorist attacks or natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a new pandemic or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks or natural disasters, could create economic and financial disruptions and could lead to operational difficulties (including travel limitations) that could impair our ability to manage or operate our business and adversely affect our results of operations.
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.
Our operations are subject to numerous environmental laws and regulations as well as permits, guidelines and policies relating to the protection of the environment. These laws, regulations, permits, guidelines and policies govern, among other things:
•
discharges to land, air, water and sewers;
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waste collection, storage, transportation and disposal;
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hazardous waste;
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dangerous goods and hazardous materials and the collection, storage, transportation and disposal of such substances;
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the clean-up of unlawful discharges;
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land use planning;
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municipal zoning; and
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employee health and safety.
In addition, as a result of our operations, we may be subject to remediation, clean-up or other administrative orders or amendments to our operating permits, and we may be involved from time to time in administrative and judicial proceedings or inquiries. Future orders, proceedings or inquiries could have a material adverse effect on our business, financial condition and results of operations. Environmental laws and land use laws and regulations are constantly changing. New regulations or the increased enforcement of existing laws could have a material adverse effect on our business and financial condition. In addition, compliance with regulatory requirements is expensive, at times requiring the replacement, enhancement or modification of equipment, facilities or operations. There can be no assurance that we will be able to maintain our profitability by offsetting any increased costs of complying with future regulatory requirements.
We are subject to liability for environmental damage at the facilities that we own or operate, including damage to neighboring landowners, residents or employees, particularly as a result of the contamination of soil, groundwater or surface water and especially drinking water. The costs of such liabilities can be substantial. Our potential liability may include damages resulting from conditions existing before we purchased or operated these facilities. We may also be subject to liability for any offsite environmental contamination caused by pollutants or hazardous substances that we or our predecessors arranged to transport, treat or dispose of at other locations. In addition, we may be held legally responsible for liabilities as a successor owner of businesses that we acquire or have acquired. Except for Stendal and the Mercer Mass Timber facility, our facilities have been operating for decades and we have not done invasive testing to determine whether or to what extent any such environmental contamination exists. As a result, these businesses may have liabilities for conditions that we discover or that become apparent, including liabilities arising from non-compliance with environmental laws by prior owners. Because of the limited availability of insurance coverage for environmental liability, any substantial liability for environmental damage could materially adversely affect our results of operations and financial condition.
We have incurred, and we expect to continue to incur, significant capital, operating and other expenditures as a result of complying with applicable environmental laws and regulations.
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Further, enactment of new environmental laws or regulations, changes in existing laws or regulations or the interpretation of these laws and regulations might require significant capital expenditures. We may be unable to generate sufficient funds or access other sources of capital to fund unforeseen environmental liabilities or expenditures.
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.
In Germany, our mills sell surplus green energy at market prices or certain of our mills have the option to sell at fixed prices or tariffs pursuant to the Renewable Energy Act. However, in our last fiscal year all of our German mills primarily sold their surplus green energy at market prices in order to realize upon favorable market pricing. The fixed price tariff for our Stendal mill expires in 2024, for our Friesau mill expires in 2029 and for our Torgau facility's four cogeneration power plants range from 2029 to 2034.
In October 2022, the Council of the European Union formally adopted emergency measures to address high energy prices resulting from the war in Ukraine. The Council implemented a Regulation containing temporary measures including a mandatory cap on market revenues at €180 per MWh hour for inframarginal generators such as renewables, nuclear and lignite producers. This cap applies to both electricity traded in a centralized marketplace, as well as electricity traded bilaterally.
On December 16, 2022, the German government approved a "windfall" profits tax on energy producers to take effect from December 1, 2022 until June 30, 2023, with a possible extension until April 30, 2024. The windfall profits tax is equivalent to 90% of the revenue above a "baseline" threshold for energy producers. The windfall profits tax was approved by the European Union on December 21, 2022 and was published in Germany's Federal Law Gazette on December 23, 2022.
The effect of the foregoing legislation will reduce our revenues and after tax income for surplus green energy sales during the applicable periods.
Further, we cannot predict if either Germany or the European Union will adopt further legal measures in response to the energy shortages and high prices resulting from the Ukraine conflict in the future.
Further, the availability of tariffs and other incentives for our green energy production activities is dependent, to a large extent, on political and policy developments relating to environmental concerns in the regions in which we operate. We cannot currently predict the scope of any such measures, whether they will provide similar economic incentives as under the tariffs, when, if at all, they will be implemented or their potential application and impact on the expiry of their existing tariffs for certain of our German mills.
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.
As a result of our international sales and operations, we are subject to trade and economic sanctions and other restrictions imposed by the United States, Canada and other governments or organizations, including prohibitions in the United States against foreign competitors’ (including our operating subsidiaries) receipt of certain unlawful foreign governmental benefits. We are also subject to the U.S. Foreign Corrupt Practices Act of 1977, the Canadian Corruption of Foreign Public Officials Act and other anti-bribery laws that generally bar bribes or unreasonable gifts to governments or officials. Changes in trade sanction laws could restrict our business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in modifications to compliance programs. Violations of these laws or regulations could result in sanctions including fines, loss of authorizations needed to conduct our international business, the imposition of tariffs or duties and other penalties, which could adversely impact our business, operating results and financial condition.
In 2021, the European Commission commenced a cartel investigation into the wood pulp sector in Europe to investigate if there was an infringement of European Union competition law. In October 2021, the Commission conducted inspections of several European pulp producers, including our German operations. The matter is currently in the investigation stage and we are cooperating with the investigation and expect to engage with the European Commission if the investigation continues. We are unable to predict the timing of, and what further actions, if any,
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the Commission may pursue. If the Commission were to pursue actions against such European pulp producers, including our German operations, and ultimately there was a non-appealable determination of an infringement of European competition law, it could impose significant financial penalties on such producers, including us, that could have a material adverse effect on us and our business.
Risks Related to Ownership of our Shares
The price of our common stock may be volatile.
The market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described above and the following:
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actual or anticipated fluctuations in our operating results or our competitors’ operating results;
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announcements by us or our competitors of new products, capacity changes, significant contracts, acquisitions or strategic investments;
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our growth rate and our competitors’ growth rates;
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the financial market and general economic conditions;
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changes in stock market analyst recommendations regarding us, our competitors or the forest products industry generally or lack of analyst coverage of our common stock;
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sales of common stock by our executive officers, directors and significant shareholders;
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changes in accounting principles; and
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changes in laws and regulations.
In addition, there has been significant volatility in the market price and trading volume of securities of companies operating in the forest products industry that often has been unrelated to the operating performance of particular companies. Some companies that have had volatile market prices for their securities have had securities litigation brought against them. If litigation of this type is brought against us, it could result in substantial costs and would divert management's attention and resources.
A small number of our shareholders could significantly influence our business.
There are a few significant shareholders of our common stock who own a substantial percentage of the outstanding shares of our common stock. These few significant shareholders, either individually or acting together, may be able to exercise significant influence over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of the company or our assets. This concentration of ownership may make it more difficult for other shareholders to effect substantial changes in the company, may have the effect of delaying, preventing or expediting, as the case may be, a change in control of the company and may adversely affect the market price of our common stock. Further, the possibility that one or more of these significant shareholders may sell all or a large portion of their common stock in a short period of time could adversely affect the trading price of our common stock. Also, the interests of these few shareholders may not be in the best interests of all shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own the Stendal, Rosenthal, Celgar, Peace River pulp mills, the Friesau sawmill and their underlying properties and have a 50% joint venture interest in the Cariboo pulp mill. We also own the Mercer Mass Timber facility and its underlying property near Spokane, Washington and sandalwood plantations in Western Australia. We also acquired as of September 30, 2022, a timber processing and value-add pallet production facility in Torgau, Germany and a wood processing facility in Dahlen, Germany that produces garden products.
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Stendal Mill. The Stendal mill is situated on a 335 acre site that is part of a larger 3,090 acre industrial park near the town of Arneburg in the state of Saxony-Anhalt, approximately 185 miles north of the Rosenthal mill and 80 miles west of Berlin. The mill is adjacent to the Elbe River and has access to harbor facilities for water transportation. The mill is a single line mill with a current annual design production capacity of approximately 740,000 ADMTs of kraft pulp. The Stendal mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly being generated is sold to the regional power grid. The facilities at the mill include:
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an approximately 740,000 square feet fiber and roundwood storage area;
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debarking and chipping facilities for pulp logs;
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a fiber line, which includes 12 SuperBatchTM digesters and bleaching facilities;
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a pulp machine, which includes a dryer, a cutter and two baling lines;
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an approximately 105,000 square feet finished goods storage area;
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a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln;
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a fresh water plant;
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a wastewater treatment plant; and
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a power station with two turbines capable of producing 148 MW of electrical power.
Rosenthal Mill. The Rosenthal mill is situated on a 230 acre site in the town of Rosenthal am Rennsteig in the state of Thuringia, approximately 185 miles south of Berlin. The Saale River flows through the site of the mill. In late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp. It is a single line mill with a current annual production capacity of approximately 360,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the mill include:
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an approximately 425,000 square feet fiber storage area;
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debarking and chipping facilities for pulp logs;
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an approximately 700,000 square feet roundwood yard;
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a fiber line, which includes a Kamyr continuous digester and bleaching facilities;
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a pulp machine, which includes a dryer, a cutter and a baling line;
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an approximately 60,000 square feet finished goods storage area;
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a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln;
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a fresh water plant;
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a wastewater treatment plant; and
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a power station with a turbine capable of producing 57 MW of electrical power from steam produced by the recovery boiler and a power boiler.
Celgar Mill. The Celgar mill is situated on a 400 acre site near the city of Castlegar, British Columbia. The mill is located on the south bank of the Columbia River, approximately 375 miles east of the port city of Vancouver, British Columbia, and approximately 20 miles north of the Canada-U.S. border. The city of Seattle, Washington is approximately 405 miles southwest of Castlegar. The Celgar mill is a single line mill with a current annual production capacity of approximately 520,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the Celgar mill include:
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an approximately 450,000 square feet fiber storage area and approximately 440,000 square feet log storage;
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•
a woodroom containing debarking and chipping facilities for pulp logs;
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a fiber line, which includes a dual vessel hydraulic digester, a two stage oxygen delignification system and a four stage bleach plant;
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two pulp machines, which each include a dryer, a cutter and a baling line;
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an approximately 28,000 square feet on-site finished goods storage area and an approximately 29,000 square feet off-site finished goods storage area;
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a chemical recovery line, which includes a recovery boiler, evaporation plant, recausticizing plant and lime kiln;
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a wastewater treatment system; and
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a power station with two turbines capable of producing approximately 100 MW of electrical power.
Peace River Mill. The Peace River mill is situated on a 791 acre site near the town of Peace River, Alberta, approximately 305 miles north of Edmonton, Alberta. The mill has an annual production capacity of approximately 475,000 ADMTs of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is sold to the regional power grid. The facilities at the Peace River mill include:
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an approximately 1,130,000 square feet fiber storage area and approximately 2,700,000 square feet log storage;
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an approximately 189 railcar siding/storage capacity;
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a fiber line which includes a dual vessel hydraulic digester, a single stage oxygen delignification system and a four stage bleach plant;
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a pulp machine which includes a dryer, cutter and two baling lines;
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an approximately 56,000 square feet on-site finished goods storage area;
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a chemical recovery line which includes a recovery boiler, evaporation plant, recausticizing plant and a lime kiln;
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a fresh water treatment plant;
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a wastewater treatment system; and
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two turbines capable of producing approximately 70 MW of electrical power.
Friesau Mill. The Friesau mill is situated on a 150 acre site in the town of Saalburg-Ebersdorf, Germany, approximately 185 miles south of Berlin and only 10 miles from the Rosenthal mill. It is a two line sawmill with an annual production capacity of approximately 550 MMfbm of lumber on a continuously operating basis. The mill also sells electrical power to the regional power grid. The mill is self-sufficient in thermal power. The facilities at the Friesau mill include:
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an approximately 1,000,000 square feet roundwood storage area;
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three log debarking and two sorting lines;
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two Linck sawlines;
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42 lumber kilns capable of matching sawmill production;
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two continuous kilns;
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three planer lines;
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an approximately 663,800 square feet finished goods storage area; and
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a biomass fueled cogeneration power plant capable of producing 13 MW of electrical power.
Torgau Facility. The Torgau site is situated on a 270 acre site in the town of Torgau, Germany, approximately 70 miles south of Berlin and approximately 95 miles north of the Friesau and Rosenthal mills. It is an integrated
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production site with two sawmills (with two lines each) with an annual lumber capacity of approximately 410 MMfbm and a pallet production capacity of 17 million pallets and two biofuel plants (wood pellets and briquettes) with a total capacity of 230,000 metric tons. The mill also sells electrical power to the regional power grid. The mill is self-sufficient in thermal power. The facilities at the Torgau mill include:
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five logyards totaling approximately 1,000,000 square feet with log debarking and sorting lines;
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four sawlines (one Linck, one EWD and two Hew sawlines with Kallfass sorting lines) and one milling line;
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EPAL pallet production with eight Coralli and one Storti line;
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two progressive kilns and nine drying kilns capable of matching pallet and sawmill production;
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one planer line;
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pellet production with six Münch presses as well as two Salmatec presses;
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briquette production with 12 lines (Nielsen);
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two storage silos for pellets with a total capacity of 5,000 cubic tonnes; and
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four biomass fueled cogeneration power plants capable of producing 15 MW of electrical power.
Mercer Torgau also owns a wood processing facility in Dahlen, Germany that produces garden products.
Mercer Mass Timber Facility. The Mercer Mass Timber facility is situated on 54 acres of land near Spokane, Washington. Mercer Mass Timber has an annual production capacity of approximately 140,000 m3 or 13 million square feet of 5-ply panels annually. Its facilities include:
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a Transverse High Grader sorting line;
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a Lineal High Grader Sorting Line;
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a finger joining line;
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a continuous kiln;
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a pneumatic CLT press;
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three CNC machines; and
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three Gilbert planers.
Santanol. Santanol owns and leases approximately 2,500 hectares of Indian sandalwood plantations and a processing and extraction plant in Western Australia.
ITEM 3. LEGAL PROCEEDINGS
In 2021, the European Commission opened a cartel investigation into the wood pulp sector in Europe to investigate if there was an infringement of European Union competition law. In October 2021, the Commission conducted inspections of major European pulp producers including our German operations. We are cooperating with the investigation. As the matter is currently in the investigation stage, we cannot predict the timing of the same and what further actions, if any, the European Commission may pursue or what the outcome of any such actions may be.
We are also subject to routine litigation incidental to our business. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)
Market Information. Our shares are quoted for trading on the NASDAQ Global Select Market under the symbol “MERC”.
(b)
Shareholder Information. As of February 14, 2023, there were approximately 170 holders of record of our shares and a total of 66,167,191shares were outstanding.
(c)
Dividend Information. On February 16, 2023, our board of directors declared a quarterly dividend of $0.075 per share to be paid to holders of our common stock on April 5, 2023 to shareholders of record on March 29, 2023.
In 2022, our board of directors approved four quarterly dividend payments of $0.075 per share each, the first being paid on April 6, 2022, the second being paid on July 7, 2022, the third being paid on October 5, 2022 and the fourth being paid on December 29, 2022.
The further declaration and payment of dividends is at the discretion of our board of directors and will depend upon various factors, including our earnings, financial condition, restrictions imposed by our credit facilities and the terms of any other indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by our board of directors. The indentures governing our Senior Notes and our credit facilities limit our ability to pay dividends or make other distributions on capital stock. See Item 1. “Business – Description of Certain Indebtedness”.
(d)
Equity Compensation Plans. The following table sets forth information as of December 31, 2022 with respect to the shares of our common stock that may be issued under our existing equity compensation plans:
Plan Category
Equity compensation plans approved by shareholders — (1) — 2,762,934 (2)
Equity compensation plans not approved by shareholders — — —
(1)
Excludes 34,699 outstanding restricted shares, 50,000 restricted stock units, and 11,554 deferred stock units all of which vest in 2023 and 3,484,154 outstanding performance share units, 1,085,404 of which had vested as of December 31, 2022. The underlying shares of common stock relating to the vested performance share units will be issued in February 2023. Of the remaining 2,398,750 performance share units, 1,117,284 will vest in 2023 and 1,281,466 will vest in 2024. The actual number of shares of common stock issued in respect of the performance share units will vary from 0% to 200% of performance share units granted, based upon achievement of performance objectives established for such awards.
(2)
Represents the number of shares of our common stock remaining available for issuance under the 2022 Stock Incentive Plan, which replaced the 2010 Stock Incentive Plan, and the remaining shares available to be issued under the 2010 Stock Incentive Plan, which replaced two previous plans, as of December 31, 2022.
In May 2022, the Company adopted an amended and restated stock incentive plan (the “2022 Stock Incentive Plan”) which provides for stock options, restricted stock units, which under the prior plan were called “restricted stock rights”, deferred stock units, restricted shares, performance shares, performance share units, and stock appreciation rights to be awarded to employees, consultants and non-employee directors. The 2022 Stock Incentive Plan replaced the Company’s 2010 stock incentive plan (the “2010 Stock Incentive Plan”). However, the 2010 Stock Incentive Plan will govern prior awards until all awards granted under the 2010 Stock Incentive Plan have been exercised, forfeited, cancelled, expired, or otherwise terminated in accordance with the terms thereof. The Company may grant up to a maximum of 2.5 million common shares under the 2022 Stock Incentive Plan, plus the number of common shares remaining available for grant pursuant to the 2010 Stock Incentive Plan.
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(e)
Performance Graph. The following graph shows a five-year comparison of cumulative total shareholder return, calculated on an assumed dividend reinvested basis, for our common stock, the S&P SmallCap 600 Index, a group of peer companies, referred to as the “Peer Group”, and Standard Industrial Classification Code Index or “SIC” (SIC Code 2611 - pulp mills), referred to as the “SIC Code Index”. The graph assumes $100 was invested in each of our common stock, the S&P SmallCap 600 Index, the Peer Group and the SIC Code Index on December 31, 2017. Data points on the graph are annual.
Comparison of Cumulative Total Return
Assumes $100 Invested December 31, 2017
Assumes Dividends Reinvested
Fiscal Year Ending December 31, 2022
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The Peer Group is comprised of Borregard ASA, Canfor Pulp Products Inc., ENCE Energia y Cellulosa SA, Resolute Forest Products Inc., Rottneros RROS, Stora Enso Oyj, UPM-Kymmene Oyj, West Fraser Timber Co. Ltd., Rayonier Advanced Materials Inc. and Suzano S.A.
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NON-GAAP FINANCIAL MEASURES
This annual report on Form 10-K contains “non-GAAP financial measures”, that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with the generally accepted accounting principles in the United States, referred to as “GAAP”. Specifically, we make use of the non-GAAP measures “Operating EBITDA” and “Operating EBITDA margin”.
Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA margin is Operating EBITDA expressed as a percentage of revenues. We use Operating EBITDA and Operating EBITDA margin as benchmark measurements of our own operating results and as benchmarks relative to our competitors. We consider them to be meaningful supplements to operating income as performance measures primarily because depreciation expense and non-recurring capital asset impairment charges are not actual cash costs and depreciation expense varies widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of our operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or operating income as a measure of performance, or as an alternative to net cash from (used in) operating activities as a measure of liquidity. Operating EBITDA and Operating EBITDA margin are internal measures and therefore may not be comparable to other companies.
Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (v) the impact of non-recurring impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our performance and by relying primarily on our GAAP financial statements.
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ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of our operations for the years ended December 31, 2022 and 2021 is based upon and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. Please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2021 for a discussion of our results of operations for 2020 and financial position as of December 31, 2020. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” and Item 1A. “Risk Factors”.
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 in Germany and Canada.
•
Solid Wood – consists of the manufacture, sale and distribution of lumber, manufactured products (including CLT and finger joint lumber), wood pallets, electricity, biofuels and wood residuals at our sawmills and other facilities in Germany and the United States.
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 macro-economic 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 2013 and 2022 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.
Our pulp sales realizations are third party industry quoted list prices, net of customer discounts, rebates and other selling concessions. Our sales to China are closer to a net price with significantly lower or little discounts and rebates.
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 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 2022 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.
European and U.S. lumber markets differ. In the European market, lumber is generally customized in terms 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.
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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 and sawlogs. Wood chip, pulp logs and sawlog 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 and lumber prices. Conversely, a weakening dollar generally supports higher pulp and lumber 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 2022 Highlights
In 2022, we:
•
achieved record net income of $247.0 million and record Operating EBITDA of $536.5 million driven primarily by higher pulp and energy sales realizations;
•
significantly expanded our solid wood business through the acquisition of the Torgau facility;
•
enhanced our liquidity by establishing the New German Facility with a principal amount of €300.0 million and a five-year term; and
•
built up the engineering and design team and enhanced the operations at Mercer Mass Timber to position it to bid on major construction projects and fill out its order book.
Current Market Environment
We currently expect modestly declining NBSK pulp prices in Europe and North America in the first half of 2023 as a result of lower demand due to inflationary pressures negatively impacting paper demand. In China we currently expect modestly higher NBSK pulp prices in the first part of 2023 due to China's reopening after lifting of COVID-19 restrictions and the seasonal demand increase after the lunar new year. For NBHK pulp we currently expect prices to decrease in the first half of 2023 due to additional supply coming online.
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In our solid wood segment, we currently expect lumber prices to modestly increase in the first half of 2023 due to producer curtailments, low customer inventory levels and the start of the construction season. These positive impacts will be partially offset by lower demand caused by continued economic uncertainty due to inflation and higher interest rates.
We currently expect pallet prices to be stable in the first half of 2023 as a result of continued economic uncertainty offset by modestly stronger lumber demand.
Summary Financial Highlights
Year Ended December 31,
(in thousands, other than percent and per share amounts)
Statement of Operations Data
Corporate and other operating loss (18,938 ) (11,233 )
Pulp segment depreciation and amortization $ 112,058 $ 115,293
Solid wood segment depreciation and amortization 31,170 15,784
Corporate and other depreciation and amortization 925 1,122
Operating EBITDA margin(2) 24 % 27 %
Loss on early extinguishment of debt $ — $ (30,368 ) (3)
Net income per common share
Common shares outstanding at period end 66,167 66,037
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
See “Non-GAAP Financial Measures” for a description of Operating EBITDA and Operating EBITDA margin, their limitations and why we consider them to be useful measures.
The following table provides a reconciliation of net income to operating income and Operating EBITDA for the years indicated:
Year Ended December 31,
(in thousands)
Loss on early extinguishment of debt — 30,368
(3)
Redemption of the 2024 Senior Notes and 2025 Senior Notes.
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Selected Production, Sales and Other Data
Year Ended December 31,
Pulp Segment
Pulp production ('000 ADMTs)
Annual maintenance downtime (days) 80 188
Pulp sales ('000 ADMTs)
Average NBSK pulp prices ($/ADMT)(2)
Average NBHK pulp prices ($/ADMT)(2)
Average pulp sales realizations ($/ADMT)(3)
Average energy sales realizations ($/MWh)(4) 214 (5) 123
Solid Wood Segment
Lumber
Average sales realizations ($/Mfbm) 703 699
Energy
Average sales realizations ($/MWh) 224 (5) 155
Manufactured products(6)
Average sales realizations ($/m3) 715 580
Pallets
Average sales realizations ($/unit) 14 -
Biofuels(7)
Production ('000 tonnes) 45.7 -
Average realizations ($/tonne) 355 -
Average Spot Currency Exchange Rates
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
Source: RISI pricing report. Europe and North America are list prices. China are net prices which include discounts, allowances and rebates. Effective January 2020, the RISI pricing report does not provide list prices for China.
(3)
Sales realizations after customer discounts, rebates and other selling concessions. Incorporates the effect of pulp price variations occurring between the order and shipment dates.
(4)
Does not include our 50% joint venture interest in the Cariboo mill, which is accounted for using the equity method.
(5)
Energy sales realizations are net of the German energy windfall tax of $6.7 million for the pulp segment and $1.1 million for the solid wood segment.
(6)
Manufactured products primarily includes finger joint lumber and CLT.
(7)
Biofuels includes pellets and briquettes.
(8)
Average Federal Reserve Bank of New York Noon Buying Rates over the reporting period.
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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Consolidated – Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Total revenues in 2022 increased by approximately 26% to a record $2,280.9 million from $1,803.3 million in 2021 primarily due to higher sales realizations, higher pulp sales volumes and the inclusion of revenues from our Torgau facility from its acquisition on September 30, 2022. These increases were partially offset by the negative impact of a stronger dollar on our euro denominated energy and European lumber revenues.
Energy and chemical revenues increased by approximately 89% to a record $211.8 million in 2022 from $111.9 million in 2021 primarily as a result of strong demand and higher energy prices in Germany, which were double those in 2021. Energy demand and prices in Germany increased primarily from actions restricting the flow of natural gas and oil from Russia resulting from its invasion of Ukraine.
Effective December 1, 2022, the German government implemented an energy windfall tax in response to high energy prices which taxes energy revenues at 90% above a "base threshold". In 2022, the energy windfall tax expense was $7.8 million and was recognized in cost of sales, excluding depreciation and amortization.
In 2022, after reducing energy revenues by the windfall tax our average energy sales realizations in Germany were approximately €219 per MWh compared to about €113 per MWh in 2021.
Costs and expenses in 2022 increased by approximately 30% to $1,888.6 million from $1,456.7 million in 2021 primarily due to higher per unit fiber, freight, chemical and energy costs, the inclusion of Torgau’s results and a higher pulp sales volume partially offset by the positive impact of a stronger dollar on our euro and Canadian dollar denominated costs and expenses.
In 2022, the dollar was 11% stronger against the euro and 4% stronger against the Canadian dollar compared to 2021, which decreased our euro and Canadian dollar denominated costs and expenses.
In 2022, cost of sales depreciation and amortization increased by approximately 9% to $144.1 million from $132.1 million in 2021 due to the inclusion of Torgau partially offset by the positive impact of a stronger dollar.
Selling, general and administrative expenses increased by approximately 34% to $105.8 million in 2022 from $78.9 million in 2021 primarily due to the acquisition of Torgau and higher employee costs, including stock compensation expense, and consulting costs.
In 2022, our operating income increased by approximately 13% to a record $392.4 million from $346.6 million in 2021 primarily due to higher sales realizations, the positive impact of a stronger dollar and higher pulp sales volumes partially offset by higher production costs, including per unit fiber costs, chemical and freight costs.
In January 2021, we refinanced, referred to as the “Refinancing”, a significant portion of our debt by issuing $875.0 million of 5.125% senior notes due 2029 (the “2029 Senior Notes”) and used the proceeds to redeem and/or repurchase all of our 6.5% 2024 Senior Notes and our 7.375% 2025 Senior Notes at a cost including premium of $824.6 million, referred to as the “Redemption”. We recorded a loss on such Redemption of $30.4 million (being $0.46 per share).
Interest expense in 2022 increased to $71.5 million from $70.0 million in 2021 primarily as a result of increased borrowings on our revolving credit facilities partially offset by a lower interest rate for our 2029 Senior Notes.
Other income in 2022 was $24.4 million compared to $14.4 million in 2021. Other income in both periods is primarily due to foreign exchange gains, caused by a stronger dollar, on dollar denominated cash held at our operations.
In 2022, income tax expense was $98.3 million or an effective tax rate of approximately 28%. In 2021, income tax expense was $89.6 million or an effective tax rate of 34%. The decrease in effective tax rate is primarily due to higher 2022 profits being partially sheltered by carryforward tax assets which were previously not recognized. We continue to maintain a full valuation allowance in certain jurisdictions where it is not more likely than not that the deferred tax assets are recoverable.
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In 2022, our net income was a record $247.0 million, or $3.74 per basic share and $3.71 per diluted share, compared to $171.0 million, or $2.59 per basic share and $2.58 per diluted share in 2021.
In 2022, Operating EBITDA increased by approximately 12% to a record $536.5 million from $478.8 million in 2021 as higher sales realizations, the positive impact of a stronger dollar and higher pulp sales volumes were only partially offset by higher per unit fiber costs and other production and freight costs.
Pulp Segment – Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Selected Financial Information
Year Ended December 31,
(in thousands)
Pulp revenues in 2022 increased by approximately 21% to a record $1,686.4 million from $1,389.4 million in 2021 due to higher sales realizations and sales volumes.
Energy and chemical revenues increased by approximately 92% to a record $179.7 million in 2022 from $93.7 million in 2021 primarily due to higher sales realizations and sales volumes. During 2022, we benefited from strong energy demand and higher energy prices in Germany.
Total pulp production was flat at 1,878,612 ADMTs in 2022 compared to 1,863,893 ADMTs in 2021 as the positive impact of lower annual maintenance downtime at our pulp mills was offset by the negative impact of the fire at the Stendal mill in July 2022, lower production at our Canadian mills as they slowed production as a result of logistics issues and unplanned maintenance downtime.
The fire at our Stendal mill resulted in it being down for most of July and, after its restart, operating at a modestly lower production rate. Total lost production due to the fire in 2022 was approximately 68,100 ADMTs. We currently expect to complete the installation of replacement equipment at our Stendal mill in the second quarter of 2023. We maintain property and business interruption insurance for the Stendal pulp mill and the insurer has provided written confirmation of coverage, subject to customary deductibles and limits. In 2022, the insurer provided initial non-refundable payments of $15.1 million for the business interruption claim and an initial $2.2 million payment for the property and casualty claim.
In 2022, our pulp mills had 80 days of annual maintenance downtime (approximately 111,000 ADMTs) and an additional six days (approximately 8,400 ADMTs) at our Celgar mill due to a slower than planned start up. We estimate that annual maintenance downtime in 2022 adversely impacted our operating income by approximately $99.0 million, comprised of approximately $70.2 million in direct out-of-pocket expenses and the balance in reduced production. Many of our competitors that report their financial results using International Financial Reporting Standards, referred to as “IFRS”, capitalize their direct costs of maintenance downtime. In 2021, our pulp mills had 188 days of annual maintenance downtime (approximately 253,700 ADMTs).
In 2023, we currently have scheduled maintenance downtime for our pulp mills of an aggregate of 77 days, or approximately 91,000 ADMTs which will be comprised of 3 days in the first quarter, 31 days in the second quarter, 14 days in the third quarter and 29 days in the final quarter.
Total pulp sales volumes increased by approximately 6% to 1,917,744 ADMTs in 2022 compared to 1,812,689 ADMTs in 2021 primarily due to the timing of shipments and strong demand.
In 2022, third party industry quoted average list prices for NBSK pulp increased from 2021, largely as a result of low customer inventory levels primarily caused by the pandemic and other logistics and shipping issues. Third party industry quoted average list prices for NBSK pulp in Europe and North America were approximately $1,427 per ADMT and $1,704 per ADMT, respectively, in 2022 compared to approximately $1,243 per ADMT and $1,478 per
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ADMT, respectively, in 2021. Average net prices for NBSK pulp in China were approximately $949 per ADMT in 2022 compared to approximately $850 per ADMT in 2021.
Third party industry quoted average list prices for NBHK pulp in North America were approximately $1,514 per ADMT in 2022 compared to approximately $1,225 per ADMT in 2021. Average net prices for NBHK pulp in China were approximately $794 per ADMT in 2022 compared to approximately $661 per ADMT in 2021.
Average NBSK pulp sales realizations increased by approximately 12% to $876 per ADMT in 2022 from $779 per ADMT in 2021 and NBHK pulp sales realizations increased by approximately 41% to $869 per ADMT in 2022 from $615 per ADMT in 2021. The higher sales realizations are due to higher list prices.
In 2022, we had a positive impact of approximately $106.0 million on operating income due to foreign exchange compared to 2021, primarily as a result of the effect of the stronger dollar on our euro and Canadian dollar denominated costs and expenses.
Costs and expenses in 2022 increased by approximately 24% to $1,525.5 million from $1,231.7 million in 2021 primarily due to higher per unit fiber, chemical, freight and energy costs and higher pulp sales volumes. Such higher costs were partially offset by the positive impact of a stronger dollar and our receipt of German regulatory approval to reverse a wastewater fee accrual of $13.3 million as a result of completing certain capital projects. Included in costs and expenses in 2022 is $6.7 million for the German energy windfall tax.
On average, in 2022, overall per unit fiber costs increased by approximately 33% from 2021 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. 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 due to regional sawmill curtailments. In 2023, we currently expect modestly lower per unit fiber costs with a modest decrease in Germany due to lower demand for wood for energy purposes and generally flat per unit fiber costs in Canada.
Transportation costs increased by approximately 29% to $176.2 million in 2022 from $136.3 million in 2021 primarily as a result of the increased use of higher cost trucking and higher freight rates and sales volumes.
In 2022, depreciation and amortization modestly decreased to $112.1 million from $115.3 million in 2021 due to the positive impact of foreign exchange partially offset by higher depreciation due to the completion of capital projects.
In 2022, pulp segment operating income increased by approximately 35% to a record$340.7 million from $251.7 million in 2021 primarily due to higher sales realizations, the positive impact of a stronger dollar and higher sales volumes being only partially offset by higher production costs, including per unit fiber costs, chemical and freight costs.
Solid Wood Segment – Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Selected Financial Information
Year Ended December 31,
(in thousands)
Pallet revenues $ 36,063 $ —
Biofuel revenues(3) $ 17,691 $ —
(1)
Includes results of the Torgau facility since September 30, 2022.
(2)
Manufactured products primarily includes finger joint lumber and CLT.
(3)
Biofuels includes pellets and briquettes.
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Lumber revenues modestly decreased to $288.0million in 2022 from $293.2 million in 2021, primarily due to lower sales volumes, partially offset by higher sales realizations. Lumber markets in both the U.S. and Europe were strong in the first half of 2022 but weakened materially later in the year primarily due to higher interest rates and lower housing construction activity. In 2022, the U.S. market accounted for approximately 55% of our lumber revenues and approximately 42% of our lumber sales volumes, while the majority of remaining sales were to Europe.
Energy and wood residual revenues increased to a record $43.9 million in 2022 from $17.9 million in 2021 primarily due to higher sales realizations resulting from strong energy demand and prices in Germany.
Manufactured products revenues of $22.8 million in 2022 and $2.4 million in 2021 primarily consists of finger joint lumber revenues from our Mercer Mass Timber facility.
Pallet revenues of $36.1 million and biofuel revenues of $17.7 million are from the inclusion of Torgau’s results since its acquisition on September 30, 2022.
Lumber production modestly decreased to 442.2 MMfbm in 2022 from 447.9 MMfbm in 2021 due to planned maintenance downtime.
Lumber sales volumes modestly decreased to 409.9 MMfbm in 2022 from 419.7 MMfbm in 2021 due to the timing of sales and weaker demand in the later half of 2022.
Average lumber sales realizations modestly increased to $703 per Mfbm in 2022 from $699 per Mfbm in 2021 as overall higher average pricing in both the European and U.S. markets was only partially offset by the negative impact of foreign exchange on our euro denominated sales. European lumber pricing increased due to steady demand with limited supply. U.S. lumber pricing increased due to strong demand at the start of the year from the housing and renovation markets before declining sharply in the later part of 2022.
Fiber costs were approximately 75% of our lumber cash production costs in 2022. In 2022 per unit fiber costs increased by approximately 19% from 2021 as a result of using more green wood and strong demand for sawlogs partially offset by the positive impact of a stronger dollar on our euro denominated fiber costs.
Transportation costs increased by approximately 33% to $45.6 million in 2022 from $34.4 million in 2021 primarily due to higher freight rates and the inclusion of Torgau.
In 2022, depreciation and amortization for our solid wood segment increased to $31.2 million from $15.8 million in 2021 primarily due to the inclusion of Torgau. Torgau’s amortization included $8.3 million for the order backlog intangible asset acquired.
In 2022, our solid wood segment operating income decreased by approximately 33% to $70.6 million compared to $106.1 million in 2021 primarily due to higher per unit fiber costs and higher other production and freight costs partially offset by higher sales realizations.
Sensitivities