Mercer International Inc (MERC) 2018 Q2 法說會逐字稿

Good morning, and welcome to Mercer International's Second Quarter 2018 Earnings Conference Call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International; and David Ure, Senior Vice President, Finance, Chief Financial Officer and Secretary.

I will now hand the call over to David Ure.

Good morning, everyone. I will begin by taking a few minutes to speak about the financial highlights of the quarter and then I will pass the call to David to discuss the markets, our operational performance, strategic activities and our outlook into Q3.

Please note that in this morning's conference call, we will make forward-looking statements. And according to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.

As we discussed last quarter, our Q2 results were heavily influenced by the scheduled maintenance programs at our Celgar and Stendal mills. This was partially offset by solid pulp and lumber markets, which supported sequential price improvements.

Q2 consolidated EBITDA was $60.5 million compared to $99.4 million in Q1. When compared to Q1, our Q2 results were negatively affected by the loss of pulp and energy production, along with the direct costs associated with our scheduled shuts, the total impact of which we estimate to be about $59 million. These costs were partially offset by higher pulp and lumber prices along with favorable foreign exchange movements.

We also experienced some sequential escalation in fiber costs, resulting from the remnants of weather-induced shortages from Q1.

In terms of business segments, our pulp segment contributed $58.1 million of EBITDA and our wood products segment contributed EBITDA of $6.1 million. As usual, you can find additional segment disclosures in our 10-Q.

In Q2, the average European pulp list price was up over $100 a tonne relative to Q1 while the average price in China was unchanged quarter-over-quarter. Compared to Q1, higher pulp prices positively impacted EBITDA by over $12 million.

Our pulp sales volume totaled about 338,000 tonnes, which was down almost 30,000 tonnes from Q1 due to the scheduled downtime. Consolidated electricity sales totaled 110 gigawatt hours, which was down about 138 gigawatt hours relative to Q1. The majority of the lower energy production was due to one of Stendal's turbines being down for a scheduled 3-month maintenance.

On the wood product side of our business, we sold the equivalent of about 113 million board feet of lumber in the quarter, with about 22% of this volume being sold to the U.S. market. This sales total was down only slightly from Q1.

We reported net income of $16.8 million for the quarter or $0.26 per share compared to net income of $25.6 million or $0.39 per share in Q1.

Our Q2 interest expense was flat quarter-over-quarter at $12.1 million and down from $13.3 million in Q2, 2017, which reflects the benefit of the senior notes refinancing completed in Q1.

Income tax expense in the quarter was $8.5 million, of which approximately $7.3 million was current. Our current tax expense continues to reflect the use of our tax assets. And as our profitability grows, we will be using these assets more quickly.

Turning to cash flow. Our cash balance increased by about $56 million in Q2 compared to an increase in cash during Q1 of approximately $70 million. The increase in cash in the quarter was driven by a net reduction in working capital, resulting from our scheduled maintenance activities this quarter, which we expect to reverse in subsequent periods.

Lower accounts receivable were the result of lower pulp sales volume, and higher accounts payable were due to the timing of Celgar shut, which occurred late in the quarter.

We spent approximately $29 million during the quarter on capital projects, and David will speak more to this in a moment.

Our cash outflows in the quarter also included our quarterly $8.1 million dividend payment.

On a trailing 12-month basis, our net debt is about 1.4x EBITDA, which is decreased slightly relative to Q1, primarily due to our rising 12-month EBITDA.

Subsequent to the end of the quarter, we successfully extended the CAD 40 million Celgar revolving loan facility on substantially similar terms to July 2023.

And as you all see from our press release yesterday, our board has approved a quarterly dividend of $0.125 for shareholders of record on September 26, for which payment will be made on October 3, 2018.

That ends my overview of the financial results. And I'll now turn the call over to David Gandossi to discuss market conditions, our operational performance and strategic activities.

Thanks, Dave, and good morning, everyone. I will start my comments by noting that we're pleased with our Q2 performance. As Dave noted, our Q2 results were heavily impacted by our major maintenance program. Celgar and Stendal were down for a total of 37 days.

The mills completed a number of significant high-return projects as well as the regular maintenance activities. I'm proud to say that both shuts were completed safely and all primary objectives were achieved. Celgar's shut went 11 days longer than planned, primarily due to damage identified inside the recovery boiler that required specialty replacement parts.

As I mentioned on our previous call, we also undertook a significant capital upgrade to our digester with installation of new screens and nozzles for improved pulp washing along with a new chip in-feed system. The nozzle and screen work was challenging, but the extra time down for the recovery boiler allowed us to get the work done efficiently and on budget.

Celgar's start up was slower than usual due to challenges of commissioning the upgraded digester, but early indications are that the digester upgrade was successful.

Our Friesau sawmill performed very well this quarter, producing 112 million board feet of lumber on a 2-shift basis, which was up 9 million board feet from Q1. The solid performance allowed us to achieve about $6.9 million of synergies so far in 2018, primarily between Friesau and our Rosenthal mill. For comparisons purposes, we achieved $7 million of synergies in all of 2017.

Turning to our markets. The pulp markets remained tight through Q2. In Europe, Q2 list prices averaged $1,200 per tonne compared to $1,097 in Q1. European market is particularly strong, with limited spot tonnes available and, as a result, we continue to see upward pricing pressure. July's list price is $1,230 per tonne, and we expect steady prices in August, which is traditionally a slow sales month.

In China, the Q2 average price was $910 per tonne, which was unchanged from Q1. July business in China transacted at between $880 and $910 per tonne on a net basis. We expect August prices to be slightly lower given the traditional summer slowdown. We continue to believe that the tightness in the pulp markets is reflecting steady demand from paper producers, combined with constrained global NBSK supply.

In addition to this macro situation, there are other factors we also see influencing the markets. I have discussed these before on calls, but for completeness, once again, producer and customer inventories remain very low. We're seeing increased levels of unscheduled downtime throughout the industry. And we are currently in the middle of the industry's major maintenance window.

China's recent environmental initiatives that include the closure of highly polluting agricultural-based pulp and paper mills along with limitations on the import of recycled fiber are all combining to create a noticeable supply tension in the market.

We're continuing to monitor the recent NBSK capacity additions. The incremental capacity that's come online in the last 2 years has so far not negatively impacted the market. The SCA expansion has been completed, and that mill is back in the market. While supply/demand conditions feel tight today, summer often brings a softening of pulp prices as paper producers take seasonal downtime.

Lumber markets continue to be very strong. Prices in the U.S. have come off in the late part of the quarter due to seasonal influences as supply began to catch up with demand. But prices are expected to remain relatively steady through Q3.

The Random Lengths U.S. benchmark for Western SPF #2 and better averaged $601 per thousand board feet in Q2, which is up almost $90 from Q1. In Q2, 22% of our lumber sales were in the U.S. market, with the majority of the remainder of our sales in the European market. Despite the recent price softening in the U.S., the European lumber market has continued to experience steady demand and strong pricing. Overall, our realized average sales price was $433 per thousand board feet in Q2 compared to $418 in Q1.

In Q2, we experienced slightly higher fiber prices relative to Q1. In Germany, low fiber inventories carried over from Q1. And although harvesting levels improved, increased demand from the board industry kept prices up. In Western Canada, similar low inventory conditions exist as the sawmills are focused on harvesting sawlogs rather than pulp logs. Looking forward, we expect wood prices to decrease slightly in Q3 as harvesting continues to improve and will allow us to access lower cost wood.

As we've mentioned on previous calls, we have an attractive CapEx schedule plan for the balance of 2018. We are currently in the process of investing almost $40 million in our Friesau sawmill to improve our lumber yield and grade outturn, with modifications mainly to the sawline so far. Construction of the new planer will start in October and will be completed in June of 2019. Phase 2 work on the sorting lines will commence in October, with completion in the first half of 2019.

In Q2, we also invested about $14 million in our Celgar mill. Included in these investments are the previously mentioned upgrades to the digester as well as pulp machine upgrades. These investments will improve the mill's production rate, reduce costs and eliminate production bottlenecks. Company wide, we expect to spend about $90 million on CapEx in 2018.

In addition, we continue to expand our customized railcar fleet in Germany. This railcar program is a continuation of our initiatives to replace shorter-term equipment leases and rental agreements with much more efficient equipment. We expect to see the first of the next 300 new railcars in early 2019 and all 300 are expected to be delivered by early 2020.

I would also like to remind everyone about the timing of our annual mill maintenance shuts for the balance of the year. As usual, we will complete Rosenthal's 14-day shut in Q3 followed by a 3-day short shut at Stendal in Q4.

It has been about a year since we acquired the Friesau sawmill. And I'm pleased that we've been able to ramp up our lumber business ahead of plan and that we're realizing significant synergies between our solid wood and pulp businesses. And as a result, Friesau has generated substantial value for shareholders. I'm confident upcoming targeted investments in Friesau will generate additional value for Mercer's shareholders.

This quarter was highlighted by significant investments in our assets, which were focused on increasing our efficiency, productivity and lowering the risk of unplanned downtime. These investments are consistent with our long-term value-creation strategy of leveraging our core competencies to deliver results for shareholders from world-class assets and building a platform for sustainable and profitable growth.

My team continues to focus on growth opportunities, and our disciplined approach to growth is framed by Mercer's core competencies, which include NBSK and other grades of pulp, wood products, wood derivatives and extractives as well as green energy and biochemicals. It is these core competencies that will drive long-term value creation for shareholders.

That's the conclusion of our prepared remarks. I'll now turn the call back to the operator so we can open up for questions.

(Operator Instructions) Your first question comes from Sean Steuart with TD Securities.

Couple of questions to start. Wondering if you can speak to markets in China, specifically. And it sounds like there is pressure on resale prices there. And David, wondering if you can give some context to, I guess, paper downtime in China and how much near-term demand destruction there's been in that market potentially as a function of prices for pulp rising faster than prices for paper in that market?

Well, it's -- it feels like a normal summer in China to us. The traders kind of take a holiday. A lot of paper guys are taking downtime. So it's almost just not a good time to really try to push any transactions. We don't have really much pulp to sell this summer, to be honest. We had a 30,000 tonne unbleached kraft run going into the shut at Celgar. And then we completed the shut. We're making pulp now, but that will take a month to get to China.

So it's -- if we were going to be selling -- if we wanted to sell a full month's production in China today, we'd probably be down $40 or $50 from where we were a month ago. Where we will be by the end of the summer, I don't think it would likely be any lower than that. As you get into September, the market is tight enough and the inventories are low enough that as all the guys come back and need to fill their warehouses again to get back to business, pulp prices should remain at that level or improve.

So I kind of see it as a soft summer dip. I'm not really overly concerned about it. It's -- maybe another factor that's important to understand is that over the last 18 months, I think Chinese paper producers have been generally quite successful raising prices of their paper products, probably more so than European producers.

And especially, the challenge is typically felt mostly on the tissue side, where it's typically twice a year that the tissue producers negotiate prices with their customers. But in China, I think the moves have been so quick that they've just -- our feeling is these guys have been fairly successful keeping up with the pulp price movements.

And further to that, David, I guess over the midterm, do you have any thoughts on speculation about China imposing duties on U.S. or imports from the U.S. of pulp and paper and how that could affect pricing in that market over the mid to long term?

Yes. It's interesting times for sure. And I guess, we don't really -- it's impossible to know what will happen. But one of the things we should reflect on, I guess, is that -- is the trade -- tariffs are imposed on products coming from the country of origin, right? So Mercer doesn't have any pulp production in the U.S. per se. China doesn't have any NBSK production. It gets most of its product from Canada or from Europe.

So they're not going to put a tariff on Canadian pulp, I wouldn't think -- that's like shooting themselves in the foot. U.S. pulp, on the other hand, which is predominantly fluff, southern softwood, if there is a tariff placed on that in China, that would limit the ability of southern fluff producers to run their mills without really insisting on higher prices, I guess or taking huge margin hits. So challenging for them, but net-net for us probably a positive.

Yes, that's what I was trying to get at, just trying to understand the potential magnitude there. But last question for me, you mentioned interest in potential growth in biochemicals. And Mercer was associated with a potential sandalwood plantation and refining acquisition opportunity a few weeks ago in local press. Can you give some context, I guess, on the scale of your potential growth ambitions in that product line?

Yes, well that particular -- I mean there's a lot of things that we're looking at. As everybody knows, and it's -- have to be careful before they're disclosable, but there is that press in the market.

So it's true. We've been chasing a sandalwood plantation situation in northern Australia. There's a couple of them up there. We've been working on both of them. The one that we're currently active on I would categorize as not really material from an invested dollar perspective, but something that's super exciting for longer-term value creation.

Sandalwood is an exotic tree that as traditionally sandalwood products have come to market -- traditionally come from illegal harvesting activities. That growing stock is down to less than 10% of the -- what it was just a short 10 years ago per se. And plantation sandalwood will become the new supply as the legally harvested wood is pretty well eliminated.

And so having a fairly significant growing stock that will produce value down the road is kind of option value at this stage for shareholders. It's not -- as I say it's not a big capital outlay, but it's getting our foot into -- our toes into a business that we think we can grow as it's a platform for growth.

And really when you think about our core competencies and how this relates to that, it's taking a growing stock, adding value to it through downstream processing and marketing. And a sandalwood plantation today that is coming on stream is, it's difficult to value the growing stock, but there is a lot of it, and it's a lot of value. It just comes a few years down the road.

So that's what we're trying to do on that particular one. It's not a done deal yet, but it's something that has been leaked to the press as something we're working on.

Can you give us some perspective on potential scale of that opportunity, I guess, in terms of dollars committed for you guys, potentially?

Yes, well, as I said, Sean, it's not material from an investment -- like an invested dollar perspective. But it is very material from a value creation. And I don't want to -- it's too early to be throwing those kind of numbers out. But it's something that's quite exciting to us.

Your next question comes from Hamir Patel with CIBC Capital Markets.

David, on the maintenance front, Q2 is obviously very heavy. Given the timing of shuts, is 2019 still looking like it should have significantly less maintenance than 2018?

Yes, that's right, Hamir. So Stendal is on an 18-month rotation, as you know. So that will eliminate a number of days for 2019. There will still be 2 small shuts, but not a large one.

Okay. And for the 2 other mills?

The normal 12-day shuts as far as we know at this stage.

Okay. Fair enough. And David, just given the investment at Friesau, does that change how you think about potentially building a greenfield lumber mill at Stendal?

No. I see us building a platform in Northern Europe, 2 to 3 mills, possibly 4. And Stendal is an option. We're getting fairly far along on our feasibility studies and preliminary engineering. And there's tremendous synergies to build the Stendal sawmill. But there is also we think opportunities to get existing capacity that you don't have to wait 2 years while you build it. So we're focused on both. And I'm hopeful that we do both in the fullness of time.

And David, any thoughts on how maybe multiples in Europe have trended since you did Friesau?

Well, it depends on the situation. There's not a lot of transactions to point to. I think multiples in Europe would be, I mean, similar to multiples of other transactions you've seen. I don't think Mercer certainly wouldn't be buying on the high end of some of the multiples we've seen in the U.S. South recently. But we're looking for situations where we can create value. And so I've got to be careful I don't get too far out in front of this as well.

Okay. Fair enough. And maybe just a final question for David Ure. Could you run through the production and shipments by mill in the quarter?

Yes, sure. So in thousands of tonnes, production by mill for Q2, Rosenthal was 91,000 tonnes, Stendal 140,000 tonnes and Celgar 79,000 tonnes. And in terms of sales volumes, Rosenthal 91,000 tonnes, so matching production, Stendal 140,000 tonnes and Celgar 107,000 tonnes.

Your next question comes from Sam McGovern with Crédit Suisse.

Just to sort of think about the impact of the downtime during the quarter. To the extent that you guys have $61 million after that impact, I think you outlined $59 million for the impact of the downtime. Is it as simple as just adding the 2 together to get to $120 million sort of a pro forma figure to sort of back out the impact of the downtime?

Yes, that's right. That's the right way to think about it.

Okay. Got it. And then as you sort of think about normal maintenance downtime in each of your segments, how would that EBITDA sort of break down? What would the impact of the downtime be split out across the 2 segments?

You mean by mills or...

Yes, that's right.

Yes, the EBITDA impact on Stendal was actually a little larger than Celgar. So it'd be about $32 million for Stendal and $26 million for Celgar.

Got it. That's helpful. And then just thinking about sort of capital allocation, you talked about potentially spending on new lumber mills in Europe. How do you think about how you plan to allocate the cash flow that you guys will be generating? Obviously, you guys have already delevered pretty substantially. I know you guys announced the dividend. What other things are you guys thinking and prioritizing?

Well, so there is -- I started the -- I started to develop this theme on the last call. There is a number of things that we're focused on. One is a sawmilling platform in Europe. And I spoke a little bit a few minutes ago about that.

But maybe just to clarify that, it's -- with the pulp capacity that we've got in that market and if we buy or build sawmills, the synergies are tremendous. I mean the -- it's the location of where the chips are produced, it's the waste heat that's being used in the kilns. It's just the whole infrastructure.

So there's fiber synergies, there is operational synergies and so on. But there is also a really strong fiber market strategy in there. So as -- you all know about our railcars and our strategy of bringing and importing wood and flooding it into the domestic market to help to temper the price of industrial wood in the domestic market where we buy it for pulp mills.

If we do the same thing with sawlogs, we just have so much -- such a strong relationship with all of the harvesters in our region and we have the capacity to bring in imports that, to some extent, we're able to normalize prices in our market.

Then if you imagine somebody we're competing with in the sawmilling business in that region, or somebody who might think they want to move in or compete with us, rather than paying -- as you -- when you buy wood for facilities the size of pulp mills, you've always got a marginal cost curve for wood. You've got low-cost wood and you've got some high-cost wood, which -- and there is an average cost of wood.

So if our high-cost wood today is coming from Poland -- Eastern Poland or Eastern Czech, and we want to compete with somebody in our market, we just -- instead of buying high-cost wood and importing it, we can put the pressure on the wood basket in the area of the sawmill that we're competing with.

So it sounds a little harsh, but that's what happens when you have a platform that's got enough capacity that you start to control the market. So that's what we're building in Northern Europe. And Friesau is big first start, Stendal is option #2. And that option of Stendal also creates options with others. So that's kind of the strategy there.

Another wing is to -- in our pulp mills, we've been focusing on our long-term planning for the mills for the last several years. And those plans are gelling into production creep capacity opportunities for us.

And as I mentioned on the call last time, we believe we've got about 150,000 tonnes of incremental capacity coming from the combination of the 3 pulp mills that we're running. And those are all high-return capital project opportunities, so that would be 150,000 tonnes with better than a 3-year payback is what it looks like today.

And then the next wing is M&A, as I mentioned, and so we're very active looking at all sorts of situations, including sawmills, potential pulp acquisitions, biochemical situations and so on, extractives. And it's just a question of being really disciplined, so that we don't pay a price that's like taking a bet on the current strong conditions that we're operating in.

Like we take a longer view and we can think about cyclicality and prepare ourselves that when we make an acquisition, we're comfortable with it and that's it going to create value over the cycle.

Your next question comes from Dan Jacome with Sidoti & Company.

I just had a quick question on the lumber operations. Maybe I'm being too nitpicky. Just wondering, it looks like 22% you said was shipped into the U.S. in your total capacity of production out there. I think 1Q was 27%, so maybe -- just let me -- some color on what drove that kind of quarter-to-quarter change.

Because if I look at kind of Random Lengths, the U.S. lumber prices were up a lot higher in 2Q versus 1Q. I think like $540 2Q, up from $484 average pricing in the quarter immediately preceding it. Was it just something with transportation or where you thought you can get the highest returns? And how should we think about that metric going forward? Is it kind of like the mid-20s kind of a baseline to use?

Yes, so good question. Our approach is to allocate roughly 25% of Friesau to the U.S. market. We're right in the middle of Central Europe where we are. And Europe is a -- I guess if you look at it over the longer term, it's been a much less volatile market than the U.S. It's a strong market, good pricing. And our customers are very close to us. So the U.S. market is marginally better, but the European market is also very good for us.

The -- part of the consideration is, there were grading issues in the U.S. generally for European lumber starting in the fourth quarter of last year. All European lumber producers faced that situation.

And really, what it is is the traditional European split stock, which is really 2x8s being cut into 2x4s in the planers, which is very common procedure, produces -- creates a risk of a thing called spike knots. These are the knots that you can't see from the very center of the tree growing out. And U.S. grading guys have -- they really kind of focused on that, feels like for the first time in the fourth quarter. So as I say all European producers got caught up in that.

So Mercer, because we're really focused on building a strong brand in the U.S., we just pulled out all split stock and said, we're not going to take the risk. And so we don't have any grading issues. There, at that point, we did have some preliminary issues when we were first getting started with the splits, when the issue was being identified. But we were very proactive, pulled back, really improved our quality control, eliminated the splits going into the U.S. and focused the rest of the production on our strong European markets.

Some of the capital work we're doing, which includes improved optical scanning and the ability to cut different saw patterns, which don't require producing a split 2x4 from the center of the log will eliminate that issue and provide much more volume for the U.S., should we want to let the club out and sell more in that market.

Okay, that helps a lot. So your average realized pricing on lumber was like $433 assuming the U.S. was $540. And then I'm just trying to get back into the European-only lumber. Am I in the ballpark with the kind of low 400s per thousand board foot price?

Yes, I think so.

Your next question comes from Andrew Shapiro with Lawndale Capital Management.

A few questions here on the CapEx and some of these more strategic investments. I think you updated us on the status of the sawmill project to be considered near Stendal. What's the status of the overhaul of one of the electrical turbines? I think it was Stendal or Celgar. And the reduced revenues that were encountered during that process and how many and when would there be more of these once-in-every 10-year turbine overhauls?

Yes. So that's -- TG 1 at Stendal is down for its revision. And in the maintenance dollars, we were talking about earlier the lost energy revenue from that upgrade in the quarter was somewhere around $10 million. And there is about $4 million left to go for Q3 on that turbine.

Celgar has had a turbine revision going on as well. And that is coming back up, we think, in early August. So not that big of a hit for this third quarter. It's a -- it would be sort of $1.5 million a month, I guess, that turbine would take us down.

So how turbines are at Stendal since I think it was opened, I guess I've been here for that many years before Stendal was even opened? The other turbine would be ready?

Yes. We put the second turbine into Stendal in 2009, '10 time frame. So that will come up probably, I guess it's probably 3 or 4 years from now. And Rosenthal has got a turbine that will be going through its long-term revision in 2021 or 2022.

Okay. And since, I guess, I've been around for as long -- the rumored investment in Australia sandalwood was discussed, which, of course, is a long-term opportunity. I wanted to know if you can update us on the nanocellulose joint venture investment made a long time ago with Resolute, and what has come of that?

Yes, that's Performance BioFilaments. And that's again a long-term value-creation initiative. So for shareholders who aren't familiar, that was a $3 million commitment that, I think, Mercer made along with a $3 million commitment by Resolute. So it's a 50-50 joint venture. It has its own team, and its business purpose is to develop commercial applications for cellulose filaments.

And the -- it's a -- I'd say, from our perspective, it's going very well. There are quite a number of very interesting attractive initiatives where the value to the customers appears very clear. There is -- we have access to production facilities, and we're expecting in the fullness of time that will -- that could be a very significant value-creation initiative for us. It takes time. So these things all need to be patent protected as you develop the applications.

So you can imagine there is always a long work step with the potential customers. This is a -- this will be a -- like a chemical product that's provided to a customer that allows him to achieve superior performance at lower cost on whatever the products are he's making. And we need to make sure that we're the only guy that can do that with him, supply him with that material.

So we will have sales in 2019, small amounts of sales as these customers ramp up their use of the equipment -- of the fiber. And we see that as kind of like a slow-and-steady ramp-up business. Some of the applications seem very interesting, things like additives to fracking muds, and additives to concrete, for example, could be potentially huge volumes down the road. But as I say, we have to take it a step at a time.

Okay. And then 2 last ones here. Are you -- you did 20,000 to 30,000 tonnes of batch of unbleached pulp for China. Can you describe what the -- if it's quantifiable the favorable impact and any future plans or opportunities to produce unbleached again?

Yes, sure. So there was a number of factors going on there. So with the recycle permit challenges in China, we saw some pretty heavy demand for unbleached kraft. In fact, we had Chinese customers asking us if we could do a run. We have a -- at the same time going into the shut at Celgar, we're doing some retiling work in one of the bleach towers, the DO tower.

And so if you have to do retiling in a short shut window, it's more expensive than if you can spread the time out a little bit. So we thought if we took the bleach plant down for an extra couple of weeks, that would give us ability to do that capital work at a lower cost. And then when you're -- because you're not running the bleach plant, you save about $80 or $85 of chemicals. And also because you're not bleaching and putting the pulp through O2 delignification, you get a better slightly yield.

So all in all, we sold that unbleached at net $880 a tonne. And our bleached pulp was going for somewhere between $880 and $910. So when you put it all together, it was a really successful run for us. Not sure when we'll do it again. It depends on market conditions, and we do really want to maintain a strong partnership with our existing customers in China.

So we don't want to be doing this too often. We want to be a reliable supplier for them. But on occasion, it may make sense for us depending on market conditions and other things that might be going on at the time.

And lastly, what's your plans for upcoming investment presentations, non-deal, roadshows, et cetera in the coming months?

Yes, we've got quite a bit going on. I'm going to be at the Jefferies' conference in August. There is also a TD one dayer coming up. We've got -- we'll be at Sidoti. David, am I missing --?

Yes. And then we're also planning a couple of non-deal roadshows in September and October in the East Coast of U.S. and Canada as well.

That's right. So we'll be going out with R.J. in Canada and CIBC in New York and Boston.

Your next question comes from DeForest Hinman with Walthausen & Co.

Just maybe asking kind of a, I think, question similar to someone else. Big picture basis, the company has always been kind of hard to analyze because of all the moving parts. But you had an interesting situation in the second quarter.

You guys put the pencil to the paper and break out the expense related to Celgar and Stendal, you add back all those numbers just on that segment, I think you're going to get a number -- on the EBITDA side, it's like $110 million.

So you divide that by 90 days in the quarter, it's like $1 million a day. So if we have kind of pencil to the paper steady-state environment that if the 3 mills are running, they make over 100 -- or they make $1 million a day. Is that a good way to think about the business right now?

Exactly. Yes. And I should -- DeForest, I should just mention just to be really clear that the reason we break it out so carefully is that we're one of the few pulp guys that report under U.S. GAAP like you -- the Canadians use IFRS. And so what they do with their maintenance shut dollars is they capitalize them and then they amortize them to the next shut through depreciation and amortization line. So you never see it in their EBITDA.

Okay. So we'll talk about that $1 million more. Maybe pricing, at least right now in July, up a little bit versus where it was in the second quarter. And it sounds like we have an expectation for falling fiber prices. So $100 a day on paper, in theory could be a little bit higher in third quarter?

We don't typically give guidance. But the way the market looks to me today, I think the back half is going to be a boomer.

Okay. I think that's very helpful. And I think it's a good way to have people think about your business right now because I think you want to own the stock for what's going to happen in the future, not what happened in the past. Can you go into a little bit more detail on what happened with the boiler? What was the issue inside there when we got inside and looked around?

Yes, there is always -- these sort of things are pretty common stuff. So the technical thing is, inside a recovery boiler are devices called soot blowers, these have -- these are nozzles that rotate and they've got steam that comes through them. And they blow, they blow the salt cake off all of the piping in the various areas of the boiler. And if they get misaligned or have any kind of malfunction during the period, salt cake can build up in the boiler.

So we had a big salt cake buildup in one corner of the boiler up high. And as that salt cake fell down, it dented the floor. And so when you go through the maintenance shut, you cool your boilers down, you clean them out and inspect all damage, do all your wall thickness tests and repair what --- who you had to repair.

In this case, we looked at the impact of that event and decided to replace the floor pipes in question. And that requires ordering additional pipes, reverse engineering the exact shape of the [mull] in a shop in Edmonton and then airlifting them to the mill for installation, which is really what took the extra 11 days.

It's not a hugely expensive thing from the grand scheme of things, but it just -- it's very finicky work that has to be done precisely. And I thought the guys did a great job of expediting that whole procedure. And it's important to do that as recovery boilers are sort of the heart of the mill. And we expect to have our boilers in great condition at all times.

So is that more -- just in the context, was that more had to do versus nice to do having to shut?

Well, from a Mercer perspective, it was a must do. I'm not sure every operator of pulp mills would have done it the way we did it. We tend to follow best practices always. But it's one of those things -- it doesn't change the performance per se, but it protects the asset over the longer term.

Okay, understood. And then on Celgar, you mentioned briefly some of the investments made there on the digester and the screen. It sounded like we ramped it up slowly. But can you help us understand how it's running in July, either weekly production level? Or how is it performing versus prior to that investment?

Yes, so the objective of the investment in the digester is to, one, is the in-feed. So we were running that digester. We were putting chips in as fast as the equipment would allow us to put them in. So it was physically a bottleneck at the top of the digester. It couldn't squeeze anymore in faster.

So we changed the in-feed system, including a new chip bin at the top, which -- and a screw with -- a screw feed system, which allows us to -- we can put all the fiber into the digester we want. So that bottleneck is eliminated.

Then the next bottleneck is that the digester had a limitation on how well it washes the pulp. And so we've done something -- we had this exact same procedure done at Rosenthal a number of years ago where you put -- we put about 14 nozzles into the base of the digester and a third layer of screens, which creates a whole -- just really improves the washing at the bottom of the digester.

And so by improving the washing, you're taking out a lot of the organics that aren't going to be pulped down at the end of the road. And you're removing that with your filtrate, which gives you what we call a better dilution factor coming out of the digester, which enhances the performance of the bleaching and the O2 delig. It cleans the pulp better, reduces the bleaching cost, and it also enables you to cook your pulp, more pulp.

So it's -- the challenge to commissioning it is really -- it's just that it's all new. Like when you're -- a digester is, it's like a heart, it's got all sorts of things going on and the operators have to learn a new way to run it. Basically, all the DCS systems have been rewritten for new procedures for running with -- it's just a different beast now with all this washing in it.

So they just have to -- they had to learn how to run it. And you typically start slow and then you keep amping it up and you learn by trial and error, to some extent. We've had -- we've run that digester for a period of about half a day at 1,650 -- the rate of 1,650 tonnes a day, which is a great rate. So we know the digester is debottlenecked. We've also seen dilution factors of +3 coming out of that thing. It was in the negatives before.

So from an equipment standpoint, home run, all objectives achieved, and it's just a matter of learning to run it a little better. And that will come, and it is happening already.

The second piece of work that was done during the shut was -- there was a lot of careful thinking and planning went into it, but we put quite a bit of effort into the drying machines. And so we've seen since the shut, we've been trialing the speeds of those things. We've got 2 machines there, PM1, which used to run somewhere around 90 meters a minute. We've run that at 130 now for a period of time as a trial with no issues. And we've got PM1 that runs up in the 185, 190 range.

So to put it in perspective, if you're running at 180 and 100 on the 2 machines, we're sucking our high-density storage tank down very quickly, which is -- means that the machines are actually able to run faster than the digester at the moment. So that's what we call sprint capacity. So we got 2 really big improvements that were successfully completed during the shut that will really speak...

That seems like -- that's a very technical explanation. In layman's terms, where do you think nameplate -- what your number on Celgar goes to?

That puts us on target for the 490,000 tonnes a year that I was describing as the objective. And also sets us up for the next phase of capital for Celgar that we feel will take that mill to 540,000 and that's in the works.

Okay. And then last question, you spent a lot of time talking about capital allocation, but you didn't mention the previous metrics in terms of returns, 3-year payback. Are we still going to hold ourselves to that return hurdle as we look at these different opportunities between organic and inorganic investments?

Yes. So on the internal high-return projects, yes. So for pulp mill projects and sawmill projects, that's our hurdle rate for discretionary capital, and we've got lots of room there, as I mentioned.

For M&A, it's -- you've got to let the club out a little bit, like 3-year payback is not a realistic target for M&A. But when we think about assets from an M&A perspective, we think about what do we have to pay to get the asset, what would we do with the asset, what could it become and how much would it cost to get it there. And so we look at that long-term holistic view in making our decisions.

Okay. Maybe, we, as shareholders, are getting spoiled. I mean, Friesau it looks like it's going to be pretty accretive pretty fast.

It was a great first step for us, for sure.

(Operator Instructions) The next question comes from Joe Pratt with Stifel.

Just could you walk me through the uses of cash, I'm thinking is interest around $50 million?

Yes, that's right, Joe.

Okay, and then cash taxes?

In the -- Dave, why don't you go?

Yes, so I think you're looking for annual numbers there, Joe. So yes, interest is typically around $50 million, cash taxes would $12 million, $15 million.

About $15 million?

Yes.

Okay. And then what's the cap -- can you break the CapEx number down by Friesau and then the pulp mills?

So on an annual basis -- so you'll recall that -- so Friesau, we're in the midst of a pretty extensive high return CapEx program that will probably total over the next 2 years $40 million. And the MOB CapEx for Friesau is quite small, but close to immaterial.

Okay. So does that mean $20 million in 2018 for Friesau?

Closer to $30 million.

Yes, probably a little higher than that, Joe.

Okay. So let's call it $30 million. And then how about the pulp mills? What's the CapEx number there?

$20 million, $20 million, $20 million. Round numbers.

$60 million. Okay. And is there any other use of cash going out the door? So $50 million for interest, $15 million for cash taxes, $60 million for the pulp mills and $30 million for Friesau?

We have our dividend that totals about $32 million.

There are no further questions. I turn the call back to presenters for any closing remarks.

Okay, well, thanks, everyone, for taking the time to join us today. As usual, if anybody has further questions, don't hesitate to call either Dave or myself. We're always happy to take your calls. Have a great day.

This concludes today's conference call. You may now disconnect.