Q2 2020 Mercer International Inc Earnings Call
On the call today, it's David Green, Dorothy President and Chief Executive Officer, Our Mercer International and David Your Senior Vice President Finance, Chief Financial Officer and Secretary.
I'll now hand, the conference over to David Your.
Thank you and good morning, everyone I'll begin by reviewing the second quarter's financial highlights following my remarks, I'll pass the call to David will comment on our ongoing response to the cold at 19 pandemic market conditions operational performance progress on our strategic initiatives.
Along with our outlook into the third quarter or 2020.
Please note that in this morning's conference call, we will make forward looking statements that according to the safe Harbor provisions of the private Securities Litigation Reform Act like United Fire I'd like to call your attention to the risks related to these statements which are more fully described in our press release and then the company's filings.
With the Securities and Exchange Commission.
Our second quarter results were down compared to Q1, primarily due to the impact of the sequential change and foreign exchange rates combined with an increase in our inventory impairment provisions.
We also have a slightly higher annual maintenance impact in Q2.
Tds of maintenance downtime compared to only two days last quarter.
In addition, the cold at 19 pandemic impacted our results for lower sales volumes and slightly higher freight costs, David will speak to our response to the pent up back in a moment.
We generated EBITDA for the second quarter of about $40.5 billion compared to EBITDA of about $57 million in Q1.
This quarter, we benefited from lower fiber costs and modestly higher pulp prices, however, when compared to the previous quarter. These positive impacts for more than offset by the absence of the foreign exchange gain that we recorded in Q1 on our dollar denominated cash and receivables in addition.
We increased our inventory impairment provision to $12.3 million from $5.1 million Q1.
Our pulp segment contributed EBITDA of $35.3 million, while our wood products segment contributed quarterly EBITDA of $7.1 billion. Our wood costs segment results reflect strong sales volumes near record production and the benefit of historically low.
Sawlog prices.
As usual you can find additional segment disclosures in our form 10-Q, which can be found on our web site at that the FCC.
Average softwood and hardwood pulp prices were virtually flat all of our markets. As a result, our average coal sales realizations increased slightly during the quarter impacting EBITDA by about $5 million compared to the prior quarter.
Pulp demand the steady in Q2, our pulp sales volume totaled 492000 tons, which was down about 12000 tons for Q1 and in line with production.
Sales in our wood products business were also strong as we sold the equivalent of about 109 million board feet of lumber in the quarter, which was down about 9 million board feet from our record sales levels. So Q1 with about 38% of this volume being sold to the U.S. market.
Electricity sales totaled 245 gigawatt hours in the quarter, which is down slightly relative to Q1, primarily due to modest lower coal production in Q2.
Our caribou pulp joint venture, which has accounted for using the equity method contributed another 20 gigawatt hours to this total.
Okay.
It is a net loss of $8.4 million for the quarter or 13 cents per share compared to a net loss of $3.4 million or five cents per share in Q1.
Cash generated in the quarter totaled $17 million compared to $65 million of cash usage in Q1.
Our cash generation in Q2 was primarily driven by working capital movements hours Super bowls for down primarily due to lower sales volumes at our raw material inventories were seasonally lower which were partially offset by slightly higher finished goods inventory.
We also invested about $22 million capital than our bills this quarter.
David will speak to our current spending expectations in 2020.
As expected after temporarily dropping in Q1 due to increases in working capital our liquidity improved considerably in Q2 and at the ended the quarter totaled $567 million comprised of $303 million is cash and $264 million of Undrawn.
Revolvers.
In addition to solid cash flow in the quarter. The additional liquidity reflects an amendment to the sole guar revolving credit facility, which we increased from 40 million to 60 million Canadian dollars.
All other terms at the facility remain principally on cheap.
Okay.
Local low pulp prices and higher fiber costs continue to force us to revalue certain components of our Canadian inventory.
In Q2, we increased the noncash impairment provision to $12.3 million from $5.7 million in Q1, net negative EBITDA impact in Q2 of about $6.6 million.
To the extent that pulp prices increase we will recognize a profit on this written down inventory in Q3.
In Q2, our planned maintenance shuts included a short had successful three day shut at Stendal and a 12 they shot at our caribou joint venture compared to Q1, when we successfully executed a short to getting shot soccer.
The impact of the additional maintenance days, including lower production and higher direct costs reduced Q2, EBITDA by about $3.5 billion compared to Q1.
And as a reminder, our competitors that report the results are under I FRS are committed to capitalize the direct cost of their annual maintenance costs, while we expense our costs in the period of shut completion.
And as a as you would have noticed from our press release, our board has approved a quarterly dividend of six to half centsper share for shareholders of record on September 29 per which payment will be made on October 620 20.
Got it ends my overview of financial results and I'll now turn the call over to Dave.
Thanks, Dave and good morning, everyone.
I'll begin by saying that we remain very focused on the ongoing cobot 19 pandemic. The virus continues to be active globally and we're continuing our efforts to ensure the safety of our employees going to cease operation of our plants.
I will also take a moment to thank all of our employees through staying focused on their own safety as well as out of the colleagues.
Im pleased with their Q2 operating results. During this challenging time, our mills ran very well we remain focused on strong cost control and while pricing. This poor we are experiencing steady demand for our pulp products.
Freescale, Sean will continues to set production records as our expansion project gets year to completion.
Well prices in Q2, generally experienced very modest upward pricing pressure due to steady demand average coal prices in all markets for either up nominally or were flat through Q2.
In China. The Q2 average MBS K net price was $572 per tonne were essentially flat from Q1, when it was $573.
European list prices averaged $850 per ton in the quarter compared to $833 per ton in Q1.
The average Q2 hardwood net price in China was $465 per tonne up $5 from Q1, and the hardwood list price in the U.S. market averaged $897 per ton in Q2 compared to 890 in the prior quarter.
The pandemic and government responses to limit at spreads have created significant economic uncertainty and we recognize that changes can happen very quickly.
Currently we are expecting the seasonal decrease in pulp demand through the summer, but expect a modest increase from certain end uses including printing and writing as countries begin slowly to reopen their economies.
We're also seeing a large go up and recycled office paper, which we believe will create increased demand for Virgin pulp.
We believe that current low pricing will drive additional market curtailments as we move to the seasonally slow summer period and enter the fall when we expect mills to take maintenance downtime that which deferred as result of of the corporate 10 Dennis.
Our Celgar mill has been down for 30 days until the end of July to allow the mill to build more economic base of cyber and this will take roughly 52000 tons of MBS scale of the market.
We also had planned short short maintenance shut for the first week of August.
Overall, we expect to slow pulp recovery beginning late in Q3 through Q4.
I will begin the supply side reductions and will be bolstered by increasing demand as the global economy begins to recover.
On the pandemic related slowdown.
Already seen economic activity dating momentum in China.
To market statistics reflects steady demand that we're currently seeing demand being outstripped by supply with MBS K inventories growing to 42 days and hard but at 49.
The MBS K inventory increases are being exacerbated by deferred mill maintenance, while the hard when inventories are also being negatively impacted by integrated pulp moving in the pulp in the market pulp we're optimistic that the inventory build will reverse slowly as the global economy opens back up.
I will also add that our pulp products are important part of the health care supply chain and in some jurisdictions. We are considered in the central service.
So we expect to continue to run and we will continue to follow all government health related recommendations to ensure we keep our people sage and to reduce the risk of the virus spreading through one of our facilities.
With regards to our wood products business the European lumber market remains steady while we saw dramatic increase in demand from the U.S. market late in Q2 and that demand remains today.
Compared to Q1, our lumber realizations were down $3 to $345 per thousand board feet, primarily due to the steep price declines we saw in the us market early in the quarter.
Lumber markets in the U.S. were down significantly early in Q2 on pandemic related economic uncertainty. However, they bounced back late in Q2.
We believe that lumber production curtailments in British Columbia, and significant demand pool as a result of the quick recovery of the U.S. housing market created the separate pricing pressure.
The random links U.S. benchmark for Western SPF number two in better averaged $357 per thousand board feet in Q2 compared to $399 in Q1, reflecting the significant drop in pricing early in Q2.
Today strong housing statistics and limited supply have pushed the benchmark benchmark up close to $586 per thousand board feet.
In Q2, 38% of our lumber sales volumes were in the U.S. market with the majority of the remainder of our sales in the European market.
As we move through Q3, we expect European lumber market to remain steady and the less market to stay strong.
Through the first half of 2020, U.S. lumber prices have been volatile, but we're optimistic that high levels of economic stimulus will continue to bolster housing starts and do it yourself project demand.
Our mills ran well this quarter in spite of all depend demick related challenges, including our caribou joint venture. We produced almost 513000 tons of pulp down 21000 tons from Q1.
The decrease is permanent primarily due to losing 50000 tons or production in Q2 during our caribou Mills 30 day fiber related curtailments.
Excluding the Kirby mill, our pulp mills produced 563 gigawatt hours of power down 16 gigawatt hours from Q1, primarily due to the lower pulp production.
I would products segment performed at or near record level. This quarter. Despite ongoing production interruptions as we work through the free show construction project.
Our fuchsia mill produced 113 million board feet of lumber, we generated EBITDA of over $7 million in Q2.
Germany Beatle damaged would remains plentiful and is resulting in lower log cost generally.
We expect this log supply dynamic to last well into 2021 in Western Canada pulpwood supply remains very tight sawmill curtailments have limited the saw mill chip supply, resulting in higher cost options being used to replace those volumes I would cost combined with low pulp realizations as tight margins.
However, we are seeing increase saw mill production in response and strong us housing market, which we expect will begin to moderate residual fiber costs in western Canada during Q3.
Our annual maintenance program for 2020 has changed in order to reduce exposure to covert 19 that may occur when the traditionally large numbers of contractors enter a site to assist with maintenance during a shut.
Our current plan is to have stendal down for three days in Q4.
Boot deferred its five day shut to Q4.
Rosenthal will take its typical 15 day shut in Q4 and Peace River, we'll take a five day shut in Q4. This recovery boiler rebuild shut has been deferred until Q2 of 2021 due to the inability of contractors being available.
To guarantee the ability availability of skilled trades people during the pandemic.
Celgar will take it 60 shut in Q3 and a three day shut in Q4.
In Q2, we invested almost $22 million and high return projects at our Mills. We've also reduced our expected time 2020, Capex program to about $90 million to manage cash and an anticipation of the reduced availability of skilled labor as a result of different dynamic.
One more modest 2020 capital program will focus on the completion of the for you show Phase two expansion project, along with some smaller high return productivity and cost reduction initiatives.
We also expect to commensurately work on the production expansion project at Stendal, which will be complete 2021, and which will increase the total capacity of that mills from 660000 tons to 740000 tons per year.
During the first half of 2020, we had experienced a wide range of pandemic related operating challenges and market shifts and as we move into the second half of 2020, I'm confident that effective execution of our strategy will continue to bring a success.
Our focus on World class assets strong balance sheet discipline and sustainable operations will continue to serve us well as we focused on optimizing our fiber handling and logistics and controlling our costs. Our balance sheet is in good shape with considerable liquidity and continued financial discipline will contribute to shareholder value over the long term.
This completes my prepared remarks, but if I can take just a moment to remind listeners that the covert 19 virus is still there remains a significant risk to us all and that risk grows as governments reopen their economies. So please continue to be vigilant keep your family's friends and neighbors safe.
Thanks for listening and I'll now turn the call back to the operator for questions. Thank you.
As a reminder to ask a question.
The press Star one on your telephone.
A question Chris Thompson, please standby weaken products in a roster.
Your first question comes from a line of Sean Stewart with TD Securities.
Thank you good morning, guys.
Couple of questions. David I'm wondering if you can give us some more context on on pulp market conditions. It feels like China has bottomed out and we have a good picture on all the downtime it's been taken in DC.
Hoping you can provide a little more context in Europe.
Hearing reports that integrated paper mills are putting some extra pulp into the market.
Can you help us gauge any downtime that might be on deck in Europe and.
Any sense of additional near term downside and softwood markets there.
Yes, Sean it's hard to say.
I've been signaling my expectation that markets are going to be weekend in over the summer.
I mean, it's a seasonally slow period anyway, and you know with some of the steep declines and certain printing and writing grades you know its.
Particularly difficult.
Having said that.
We have to fight for volumes, but but I don't I don't see any curtailment coming in Europe, certainly not for US I think we've got a pretty good order book.
Well, we're going to keep.
Keep to keep the inventory flowing them and.
And we do have access to China grew a little bit of the stendal stuff that we have a bit of a build we got equipment. We can we can.
Good pulp into China, which.
There is only possible it because we were really quick kind of the gate cooking containers.
So much lower volume that's one of the challenge is Europe houses and can't get stuff to Asia.
Because there's just been a lot of blank ceilings.
For the year, but we're generally pretty good shape and I don't see a catalyst for price increase certainly over the summer, but but as I see I.
Confident we'll we'll keep the volume moving.
Okay, Thanks for that detail and for free so.
You shipped 38% of the volume in Q2 to the U.S.
What's your flexibility to.
Toggle that up into the current premarket, we're seeing in in the U.S. for lumber right now.
Well, we do have quite a bit of flexibility, but but from a strategic point of view that's getting topic.
Hi mine, which we have important customers in Europe as well it so it's a much much less volatile market.
I, you know, where we're taking a balanced approach.
I can see our U.S. volumes, ranging between 25 and 40% say.
Would go much lower and.
We'd want to go much higher because of the volatility.
Okay and last question for me at the Stendhal capacity expansion.
How fast do you anticipate once that that projects complete your your ability to ramp up to that that full run rate new capacity number.
No we have been very fairly quick shot it's it's not a complicated upgraded.
And also super batch process, and we're adding two additional digesters, we've done that before.
A little bit of de bottlenecking on on the dryer.
You know SUNS service areas. So.
Not a lot of technically difficult.
Capital project.
Either from an execution or a startup perspective I would say.
Okay.
That's all I have thanks very much.
Your next question comes from lineup.
RBC capital markets.
Morning, guys. This is mark us on for Paul.
In August.
And just firstly the relief mentions that chemical print production was lower due the German mills processing some people damaged wed.
Are you able to quantify the financial impact of the reduced chemical volumes as compared to the lower fiber cost.
HM.
Yes, well, it's if they could tall oil we're talking about and.
You know there's times where.
I think on an annual basis, we've we've sold up to maybe 15 million newest owners of crude tall oil and in the summer months.
Well hear when you're running beetle would sometimes you don't get any so there is.
Oh.
It's it's.
A negative but it's it's not huge it's only for a few months.
And Stendals stendal being such a heavy to pine still has some tall oil.
Production in the summer so.
Our because I can't tell you the exact number that.
Quarter over quarter, but.
Yes couple of million, probably a couple of million dollars.
Yeah that makes sense.
Maybe on the pulp demand side, there's obviously been some pretty big swings with tissue being strong in printing and writing demand falling right. Now are you seeing any shifts in that in the near term.
Maybe longer term do you see any permanent shifts in that mix.
Well you know cool that's going to change some things for sure.
Our hard to say, just yet, but you're right there.
On on it on the tissue and hygiene side, you know April was up over 7% demand I'm speaking about globally main was up again over 6%.
North American me.
Tissue demand was up 10%.
I think the pipelines pretty full right now.
And.
But you know continued.
Continued cobot responses.
You know any further perceptions.
Hi chain challenges will.
Caused a bit of a frenzy again, I think people drawdown that pipeline.
Other or trends, we're seeing is.
Packaging certain packaging grades are just on fire, obviously with a lot of the.
Ordering from home.
The mix of.
Tissue from away from home to more in home brands.
Which are the higher quality.
Shoots obviously with more MBS scan them typically.
That said, that's a trend that's continuing.
Got to the mechanical paper grades magazine grades of things I mean that space has just been decimated he wants to read a magazine.
Sitting on airplanes are in airports.
You can't reuse he seems if somebody else's read it you don't want to look at it.
So I see some of those things.
People are really learning deliberate certain paper products.
On that on that.
Holding side I think you could be some dramatic shifts overtime.
You know wave from.
In the away from home sector, you know from Dyson year, blowing hand, dryers and Clos role.
Dryers, you know in restaurants.
Institutions, and so on them and that's all.
Probably going to go away.
And a per tells us.
Yeah.
Fiber related products would probably be the replacement.
And that's a global trend, probably and including Asia, which has a very low.
Al has a very low penetration in Asia today, but that could change could significantly so.
Generally a comment generally on printing and writing I mean, there's been some pretty big declines.
But that's because it's just been nothing going on in a lot of those sectors, so far but as we get into the whole that yes. It's countries are successful reopening.
No kids get back to school and those kind of things are happening again, a lot of that.
Pretty big uplift or big improvement in a lot of those grades I would expect.
There'll be some rationalization coming out of this endemic where you know some machines will close or.
Companies will rationalize or production.
Strategies to keep the machines that are left running busier.
But they'll they'll be sudden definitely some improvement in the printing and writing site going into that capital. This year as my my view.
So I'll stop there and see if im.
That's helpful.
And maybe lastly could you just walk us through some of the puts and takes this quarter regarding the cws payment FX gain and the inventory adjustments.
Yes, Steve your to cover that for you.
Yeah, I guess in terms of the.
CEW asked so this is for those folks that are where but this is the Canadian federal governments.
Waves subsidies. So we were eligible for for several months of subsidiary received.
About four and a half billion dollars support during the quarter.
The we're not sure there's probably going to be another another month of that we think but.
This is a program that it's not it's not a definite and.
We're not we're not sure how long it'll be maintained by the Canadian Federal government I.
I think there's probably.
Reason to expect a little bit more in Q3 as well.
In terms of the the impairment.
As you know we have under under us GAAP, you're required to value or Youre your inventories.
No higher than their net realizable value and as we've done for a couple of quarters here now to have to go through this this review every quarter a distinct your that.
Our would inventories and are finished goods inventories don't rise above that that net realizable value you can imagine.
In a situation where to kraft pulp prices per.
Particularly hardwood.
We continue to do that calculation and we had increase our provision in Q in Q3 years very acute care about.
The over 12 million.
So the net impact.
Well the impairment for the quarter, its 12 million that that impacted for those via that are watching.
Sequential basis from Q1 to Q O Q2, because we had a provision in Q1 the net impact is.
I was just over $6 million are there in the quarter.
Look I think there that's helpful.
Hi, good.
Your next question comes from.
Hi, Carolyn Lawndale capital.
Hi, Good morning, a few things if we could could you expand a little bit more unfilled GARS shut you refer to it what you call is market related and then you in.
You describe it as a fiber issue, which I would think then it affects everyone else in the neighborhood can you expand a little bit more about that leads me into my next question.
Sure.
No.
The situation in the first quarter.
Around our Celgar mill was such that there was a massive sawmill curtailments due to cold it.
And just say it was just across the board just everything stopped for a month or.
Roughly speaking some some longer something shorter.
So.
You know the with the way of pulp mill needs to think about its fiber supply as it has to look out.
More than 12 months, usually almost 18 months, we have periods of time or we can't get into the bush because of spring breakup, we have fire season in the summer is we have.
You know different different conditions at different times that limit us and so we have to look through the peaks and valleys and make sure and we've got enough fiber in front of the mill to run.
And in particular, you never want to take a mill down in the middle of winter lack of fiber.
So we had to choice, we could with without the saw no receivable and I should also say that that the two primary sources of fiber for pulp mill are those are the saw no chipset come in as a residual from the lumber making process.
Or you can you can buy residual groundwood, which is we called and pull plugs. It's.
It's the harvest product that doesn't qualify as a sawlogs. It's it's a low it's the tops of the trees, it's the crooked broken pieces and so on.
And we can take that T. Barkat chip it put it into the pulp mill now, it's the processing costs to use groundwood or higher.
And so we have you know fairly steep marginal cost curve with residential.
Cost being the lowest and roundwood being the highest.
So as we looked at all of US all the sawmill curtailments we.
Ran our models and.
Had a choice to make we could either chase the high cost roundwood. So that we can continue to have enough fiber in front of the milk for the next 12 to 18 months.
You know.
Recognizing inflows and outflows or we could take take a curtailment.
And just stop all purchases of hi, crush Roundwood and.
Buildup in inventory of sawmill residuals and that was a choice that we made.
So we made the decision early we burned down the pile producing pulp through June.
Bringing in there weren't many sawmill residuals being generated and Weve turned off all all round would deliveries.
Lowered our raw material inventories down and then took the month in July off and that's not good habit, although saw mills are running hard.
The prices improve dramatically in the U.S. marcon, particularly and so we've been receiving the the lower cost.
So on the residuals to refill the Powell.
I'll start up and.
The second week of August and we'll have ample inventory to continue on through the rest of the year without we will have a roundwood component in our diet for sure, but it won't be as significant as it would have been if he had done this.
So it okay. Yeah. Yeah go ahead, Andrew yes.
So so understanding.
This isn't impact that has to affect all the other competitive.
Of pulp makers and and there are other.
Factors impacting them in that Mercer has always been as a newer.
Facility and of course, because you guys run things so well.
You are always been a lower cost producer versus some of these higher players.
In light of distressed market, that's going on are you seeing and is there some visibility of.
Competitors other facilities that are in need of shuttering and and that shuttering being more.
Eminent because it doesn't make sense to restarted or the boilers are at end of life et cetera.
Yes.
The very carefully don't name names here, but there are I mean, there are.
Other Canadian mills that have challenges for a variety of reasons as you say.
Several of them really really struggling with economically price fiber right now.
Their solutions there.
They need government.
Our government action, obviously, there's a tremendous amount of wouldn't British Columbia, It's just not managed properly in my view and particularly it's been a sawlogs centric.
Regime, and and so it hasn't figured out how to price pulpwood, frankly, and but if they could do that that could solve a lot of problems for the most of the mills.
Under the current conditions, there's others, who are running with much higher wood costs and year, because they haven't curtailed.
They're chasing elastic they can get.
And I don't think Thats, a sustainable business model, so they'll start fighting with each other and I mean, it's it's kind of an ugly situation I I think at Celgar. We're in good shape, we've got to.
Geographic advantage in terms of just where we are and where sawmill partners are and also in how we treat them and and the synergies that they have with us.
In many ways.
We provide you provide.
Harvesting activities to some of them that provides fiber that they need and we get chips and return that kind of thing.
As far as Blue gecko the older Mills.
There are few two mills that have equipment challenge is coming and that no one.
Period of local prices that makes it much more difficult decision for them, whether they they actually go down that road or not so I guess people companies will make their own decisions.
So there are in supply risk challenges coming.
I can't say, specifically, which one it will be.
And if the government.
Reform source support.
Programs that are being contemplated occurred just mercer qualify for those or it's just going do.
Keep the weaker players alive longer.
And then you know right now and oversupplied commodity.
Market.
No I think we would benefit greatly if we could get this rate I mean celgar.
In an average here would be 30% roundly.
Thats diet.
And and our her or mill.
The curve will know we co managed with with West Fraser.
There's been some permanent curtailments or someone capacity up and Ocwen L. region. So there is present, they're shifting their diet to more roundwood today than than they've ever needed and they haven't really.
It had to do that before and there is there something into these.
Stumpage pricing issues that that are making it very difficult for.
And in the Capex projects, you've discussed and others that you contemplate.
You've had a typically short payback period and in a high.
Hurdle rate when you're looking at these payback periods and hurdle rates and figuring out where you're going to do some capex projects.
Is that based on a prospective normalized.
Market environment or no are these expenditures being done based on.
While at the current levels.
Of the market in the event days last longer than anticipated.
Yeah.
We look at our capital strategies in a longer timeframe Andy and.
You know, we you know we balance the the maintenance and business requirements like we always want to.
Run reliably that's really important for pulp mills.
The fixed cost coverage gives you a tremendous cost reduction potential.
You know if and so we look for Debottlenecking initiatives and.
Things like the Stendal situation, just make a lot of sense from that perspective.
We also.
Frankly, we take DSG metrics into account as much as we do financial we.
We know that societies expectations will change over time, and so sustainability is a really big theme within our company and so we think about emissions orders.
Particulate emissions.
Missions, those get a water usage those kind of things and so that's that's also a very important.
Elements to measure and when we when we weigh which projects to do and which ones not to do.
We certainly can do everything we want to do.
And the current environment Weve really dial back significantly.
On the on what we have.
I would call shovel ready projects, we're doing the most important things we're doing things that help us reduce costs like if there is structural improvements we can do in logistics.
Now with process and those types of initiatives, we focus on on those near term things that will benefit the company, but we also.
And this went back to you know comments I made a year ago that you know when when when we're going through a down cycle, we don't want to destroy value by just shutting off all of our initiatives. So so we were continuing to finish the fresh out.
Expansion phase two and we did pull the trigger on the stendal expansion, because it's such a big project.
But we pulled back a lot on new smaller high return projects, just just as part of managing our cash in their liquidity.
Given we don't know how long the cobot pandemics going to last.
Right and then in terms of managing cash and liquidity in your capital structure.
Your plugging along the building up.
Trying to maintain cash flows and build up that cash where do you where do you feel the focus of your next I guess built up.
A bucket of cash would be in terms of your capital structure have you.
Have you stretched out and lowered the interest rates.
[music].
As much as you can on on the debt or what's what's kind of like the next.
The next step for you and David.
Yes.
That's a balancing act frankly the.
We're a growth focused company so we have.
We have initiatives.
On the books that we.
Could do that will.
Require.
Capital obviously.
Having said that where we are in the cycle. These are very difficult to contemplate.
No there may be some smaller things we can do.
But we have to be careful you know that we don't bite off more than we did we should end the time like this.
Debt reduction is also something and there'll be some restructuring of our debt as we get closer to the coal periods. You know we've got the.
24, fives, and Sixs out there and as we get closer to those will yield to be.
Hopefully better market conditions, and they've been opportunity to I would hope lowered the interest costs and.
Such things out and and.
Just carry on.
And then we've got to get back because the dividend backup to better levels and certainly on would be earned tensions as well.
So the combination of all all three gross debt reduction and dividend.
The last question I have is given the pandemic in the ability to travel et cetera, what are the company's plans to continue to reach out to new and existing investors in the.
Coming months, I think you're up up but you're up for Jefferies Conference I didn't know what else there was.
Yes, I think is two or three coming updates got the schedule, we've done quite a few.
Virtual conferences, so far this year and they go quite well actually very efficient.
So were you know for our outreach program, we really are relying on the banks to a large extent.
Teach ins with their sales staff and.
Encouraging them to book meetings for Us and.
And.
See staying in close contact with our existing shareholders to the extent they want to get from us.
And how about your marketing and sales efforts, how does that how does that go with respect to.
Your pulp customers and lumber customers.
Yeah, well it's some.
Fortunately.
We've got pretty deep top lines.
We know our customers really well.
Had years of being very close to them.
So you know.
Now it's working fine.
It's these are virtual meetings or telephone calls and.
Yes.
Technology like Google beat and Zoom and you know you can we see each other and talk with them and and.
So I think relationships are solid were key supplier to most of our customers.
And we you know so we were where we're viewed as a modern.
You know preferred supplier for a lot of reasons and so we just.
Things are fine buckets, it's amazing how well it's working actually.
Alright. Thank thank you for the answering those questions.
Thank you Andy.
Your next question comes online Andrew Nowinski credits.
Thanks, Good morning, just on your capital projects that you're in the midst of completing.
Could you maybe go into some detail on.
Any impact you had other costs or timeline from corporate related protocols are shutdowns that happened.
Yes sure.
Good morning, and who the.
I'd say, though the most significant impact really was was on the planar at three show.
So we have.
Supplier that couldn't travel rate at the time, when we want it to be optimizing this thing and really getting at humming.
Using Google meet some zones and that kind of thing we were able to get the cleaner running.
Some optimization occurring but we can't get it couldn't get it to the final.
Place, we wanted it so were more or less a month behind from the.
True optimization about piece of equipment.
Having said that were.
The travel is booked in its that's going to happen I believe in the next couple of weeks, we'll we'll finish that final step on it.
So.
You don't see it in our results because of results are better than they have ever been.
In terms productivity from that no but.
It's not as good as it would have been.
We hadn't had these delays.
The.
The.
Sort of package that's come into free showed us. The next wave of work I, just let us technical I don't I don't anticipate there being a problem with that.
And the equipment.
For the Stendal expansion as you know this is basically this stuff gets built in a factory somewhere and then delivered and so its many many months away from needing to come to the mill most of that work will happen next year from our perspective on our site.
So I would say no there it's not that technical I don't think we'll need a lot of support for it so.
Don't anticipate that being the big problem there.
The I guess I should comment on the peace River situation. So we.
We've got an insurance claim to rebuild the bottom half of the recovery boiler. This was.
The equipment failure that happen under the previous ownership of that mill.
We've pushed out into next year.
Because it will require you know quite a quite a bit of support from specialists to help us with all that welding.
And.
Just doesn't make sense to push it right now so we're we're just doing a small utility shut in at the mill This year and we're just carry on.
And do it next year I would have liked to have done it this year because hardwood prices at the moment are so low.
Any money running the mill anyway.
It had been a great time to how to down for 60 days into the boiler, but just.
Two risky for us.
The chance we get it opened up in wouldn't get it finished so so we'd appreciate it.
Everything else has led us being done player and that's really help maybe just on the planar because you mentioned do you know it's not knowing exactly where are you likely to be how much of an enhancement financially. If it was juju anticipate or one of them in the quarter. If it was running the where you wanted it to it's hard to say, but.
You know the.
Getting the planar.
Really humming and getting all the sorting finished.
Gives us that ability to optimize the profile of whats coming out of the.
The Spaghetti factor you feel like you know like that trimming edges to greet uplift and all that kind of stuff is.
A significant so it's I mean, a whole project is.
Thats going to be a mill is just going to be a thing a beauty. When it's finished so were.
Every every month that goes by we see we see the improvements in the grade profile and in the volumes.
But when that when that cleaners really humming and we get we get a floor up on the sorting side I think it's I think it's really going to be noticeable I want to put a number on it because of that so many variables assumptions in that but.
But the margins will continue to improve it that mill significantly because of the completion of this work.
Okay. That's great and then I think earlier in the call and in your prepared remarks, you mentioned something about freight costs I'm creeping upwards could you maybe give some color on freight costs and where you're seeing impacts.
Yes, well they move up and they came down.
And by that I mean.
You know there was there was a time, particularly in Europe, where he couldn't cross the border.
So just sit there for eight hours waiting to get cleared.
That's all find us like that on got sorted out.
So so so.
Great logistics are much more open and available now.
And and as I was saying also my earlier comments, the booking booking equipment to get product to Asia.
We were <unk> percent of the gates so.
With limited availability, we were able to control units reasonable reasonable.
Joining me for ourselves and that was a positive so.
You know container rates are a little higher there they are higher than they and they were before coal that they're not as high as they were at the peak I think as condom use open up I mean, China almost looks like a V shaped recovery do you look at many of the metrics.
You know there should be you know the ocean going traffic should start to improve and those costs will come back down again.
Yes.
Okay. That's great. Thank you very much.
And again.
Question, you may do so by pressing star one on your telephone keypad.
Your next question comes on line of the Forest Simon.
Company.
Okay. Thank you just clarity would cut.
Been asked by a number of people about the presell.
Two.
How much is left to spend.
And what's the expectation.
Once the the planers optimized and the.
Sorting equipment is in place what what's the.
Production.
Capacity of that facility.
Now, there's probably 20 fiveish left to go to for Us.
And the capacity of the mill when it's completed would be we rounded on on on three shifts would be close to between seven and 750 million board feet Chisholm.
Very very big mill.
But more importantly it.
It will have all of the bells and whistles in terms of optical scanning.
Trimming and sorting so.
In a German link mill like this everything goes in at five meter lengths that said the log as a five meter log typically.
And that can produce a 16 foot to buy for or to buy six or to buy or you can make.
Two eight footers or you can run something through there that looks like or reject and chop to feed off it becomes a number two you know that kind of thing it's like you can.
Slice and dice by you know what optical scanning and computer technology.
To optimize every every board that comes out of the planar and that's that's really where the value is.
In the in the 25 million that you referenced is that for phase two or is that inclusive of phase three.
That seems to that's a completion of phase two Toby and what has failed to targeted to be completed.
The planar will be the is running and running probably two thirds of its normal rated capacity today and it will be it will be optimized by the end of the summer.
Most of the optical scanning lot of there's a lot of AI and that takes a lot of learning that the computer has to do to make sure that identifies all the different defects.
Thousands and thousands of images timber breaks stake knots, and all that kind of thing and the final piece has just assorting and that's the sorters on sites.
Installation is beginning we have the pre existing sorters running and.
On these bigger bigger been going in world will give us much more capacity to sort the multiple profiles of the describing and that'll be completed spring summer next next year.
And you talked about three shifts.
I think there were some commentary in the past about.
Manual sorting moving too.
Computerized scans sorting that some of those people could maybe moved to other areas of facility.
Are we anticipating moving to three shifts is that really shown here I'm not I'm not sure at this stage.
We need to and its you know.
You can push it if you if you're going to really really fantastic market, but.
But I think I think two shifts with the maintenance downtime and evening says to me to go and.
Really.
Optimize everything we do and maintain the liability that kind of thing so.
I mean, I've seen you might see music mills run unfortunates.
But you know you basically a song they'll choose itself apart overtime outlets.
Nothing strategy from my perspective, so that.
Two shifts you know.
By 50 to 650 million board feet of lumber consistently.
We'll be a good target.
Okay. That's very helpful. And then understand all expansion how much is left to spend on that project.
In 2020, how much as expected in 2021, and when will that be completed.
Yeah, I'll just speak generally it's it's about a 42 million Euro capital project.
One of the benefits of it is a wastewater offset opportunities so.
Stendal pays 4 million euros.
A quarter for wastewater fees were at a cruise them.
And if you have a qualifying project that allows you to lower your emission intensity.
You can offset.
You can basically you are for given the fee you know isn't as an offset so.
Stendal extension project qualifies for six years offsets lunch.
24 million euros.
The 42 is.
Like a grant if you like it's it's wastewater admission fees, we don't we don't have to pay.
If we do the projects so.
So financially this fantastic.
Good he SG metrics, all the way round.
You know the some improved washing and things like that that come along with it and.
In terms of what we spent so far so we've ordered the digesters theyre under construction.
Probably spent 10 million mesh of the total.
And the heavier piece of spending will be next year.
Due primarily next year would be the main chunk and maybe some progress payments during this year, but.
Not overly significant.
Okay. Thank you and then maybe you know on a.
Do this online, but it's probably worth.
You know to at least asking has there been any.
Permit response dialogue as it relates to.
Some of the pricing of the wood coming on to the government for us.
Alluded to it a little bit earlier in the chemical yeah.
Yes, it's a it's a complicated.
It's a complicated issue obviously and.
The fixes are different depending on regions really.
You know I've been into C.. The course Minister couple of times. He is very open to.
The understanding the challenges we're facing in our area.
The government set up what they call there, they're working tables around the different timber supply areas to really drilled into the specifics of what what the challenges are and what the solutions could be.
And so there's a lot of energy and.
Information sharing between industry and government. So you know.
The reasonably optimistic that.
The process will produce some benefits for us.
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All right. That's that's helpful. Thank you for taking the questions.
My pleasure.
And again, if you might ask a question.
Pressing star one.
Yeah.
Your next question comes on line of Hamir Patel with C Ibcs capital market.
Hi, good morning.
David It seems like there's some policy changes the minority government mbcs trying to implement right in the power sector, what impact that you expect that have on the our contract renewal at Celgar.
Fair enough.
Yes.
Yes, so were up for renewal.
September this year.
We've we've seen the first draft of what BC Hydro is offering us for our EPA renewal.
Yes, it's.
Not what we were hoping for.
There is still prepared to buy our power, but it's not not all of it and not at the same rate that we were expecting.
That is still very much a an open negotiation from my perspective, but it's challenging just at the moment I think for them because.
Yes, Hello power consumption has dropped off dramatically due to co bid.
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They are building site C.
They haven't.
Really been successful with their LNG program. So the.
And the price or getting for power in Alberta for their surplus is pretty low so.
I mean, I think there they're trying to come to the table for us or working with us and there may be you know there may be.
Maybe we can do better than what they've offered so far and.
But it's still it's a bit early.
But it's it's not great, it's not going to be as good as it was unfortunately.
Fair enough.
I just want to ask about you know there's that ex dumps are mill in northern Tibet, that's supposed to come up in a few months do you expect that to have a major impact on the MBS market.
This is the belk and the all in.
I don't think so here I mean, it's not it's not a big mill as say 300000 tons. I think so you divide that by 12 Sobi the monthly noise in the supply demand picture it won't be very material I Wouldnt expect.
Little surprising to me that those guys are going for it so basically down a long long time, and it's coming back as a small mills said on the how that works but.
We'll see.
Great well, that's a that's all I had a thing.
Sure.
And there no further questions at this time.
Okay, well. Thank you all for joining us today for the call and all the great questions and as always David and I are very happy too.
Take any questions you might have as they occur during the quarter. So thanks, again, everybody and stay safe up there.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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