Good morning and welcome to Mercer International second quarter 2020 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 conference over to David Ure.
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, who will comment on our ongoing response to the COVID-19 pandemic, market conditions, operational performance, progress on our strategic initiatives, along with our outlook into the third quarter of 2020.
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 U.S. Securities and Exchange Commission. Our second quarter results were down compared to Q1, primarily due to the impact of the sequential change in foreign exchange rates, combined with an increase in our inventory impairment provision.
We also had a slightly higher annual maintenance impact in Q2, with 15 days of maintenance downtime compared to only two days last quarter. In addition, the COVID-19 pandemic impacted our results in the form of lower sales volumes and slightly higher freight costs. David will speak to our response to the pandemic in a moment. We generated EBITDA in the second quarter of about $40.5 million 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 were 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 in Q1.
Our pulp segment contributed EBITDA of $35.3 million, while our wood products segment contributed quarterly EBITDA of $7.1 million. Our wood products segment results reflect strong sales volumes, near-record production, and the benefit of historically low saw log prices. As usual, you can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. Average softwood and hardwood pulp prices were up marginally or flat in all of our markets. As a result, our average pulp sales realizations increased slightly during the quarter, impacting EBITDA by about $5 million compared to the prior quarter. Pulp demand was steady in Q2. Our pulp sales volume totaled 492,000 tons, which was down about 12,000 tons from 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 of Q1, with about 38% of this volume being sold to the U.S. market. Electricity sales totaled 245 GWh in the quarter, which is down slightly relative to Q1, primarily due to modest lower pulp production in Q2. Our Cariboo Pulp Joint Venture, which is accounted for using the equity method, contributed another 20 GWh to this total. We reported a net loss of $8.4 million for the quarter, or $0.13 per share, compared to a net loss of $3.4 million or $0.05 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. Our receivables were down primarily due to lower sales volumes, and our raw material inventories were seasonally lower, which were partially offset by slightly higher finished goods inventory. We also invested about $22 million in capital in our mills 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 end of the quarter, totaled $567 million, comprised of $303 million of cash and $264 million of undrawn revolvers. In addition to solid cash flow in the quarter, the additional liquidity reflects an amendment to the Celgar Revolving Credit Facility, which we increased from CAD 40 million to CAD 60 million. All other terms of the facility remain principally unchanged.
Low pulp prices and high fiber costs continue to force us to revalue certain components of our Canadian inventory. In Q2, we increased the non-cash impairment provision to $12.3 million from $5.7 million in Q1, a 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 and successful three-day shut at Stendal, and a 12-day shut at our Cariboo Joint Venture, compared to Q1 when we successfully executed a short two-day shut at Celgar. The impact of the additional maintenance days, including lower production and higher direct costs, reduced Q2 EBITDA by about $3.5 million compared to Q1.
As a reminder, our competitors that report their results under IFRS are permitted to capitalize the direct costs of their annual maintenance costs while we expense our costs in the period of shut completion. As you would have noticed from our press release, our board has approved a quarterly dividend of $6.50 per share for shareholders of record on September 29th, for which payment will be made on October 6th, 2020. That ends my overview of the financial results, and I'll now turn the call over to David.
Thanks, David. Good morning, everyone. I'll begin by saying that we remain very focused on the ongoing COVID-19 pandemic. The virus continues to be active globally, and we're continuing our efforts to ensure the safety of our employees and the safe operation of our plants. I'll also take a moment to thank all of our employees for staying focused on their own safety as well as that of their colleagues. I'm pleased with our Q2 operating results during this challenging time. Our mills ran very well. We remain focused on strong cost control, and while pricing is poor, we are experiencing steady demand for our pulp products. Our Friesau sawmill continues to set production records as our expansion project gets nearer to completion. Pulp prices in Q2 generally experienced very modest upward pricing pressure due to steady demand.
Average pulp prices in all markets were either up nominally or were flat through Q2. In China, the Q2 average NBSK net price was $572 per ton, or 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 ton, 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 limited spread have created significant economic uncertainty, and we recognize that changes can happen very quickly. Currently, we are expecting a 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 drop in recycled office paper, which we believe will create increased demand for virgin pulp. We believe that current low pulp pricing will drive additional market curtailments as we move through the seasonally slow summer period and enter the fall, when we expect mills to take maintenance downtime that was deferred as a result of the COVID pandemic. Our Celgar mill has been down for 30 days until the end of July to allow the mill to build more economic base of fiber, and this will take roughly 52,000 tons of NBSK out of the market. We also have planned a short maintenance shut for the first week of August.
Overall, we expect a slow pulp recovery beginning late in Q3 through Q4 that will begin with supply-side reductions and will be bolstered by increasing demand as the global economy begins to recover from the pandemic-related slowdown. We are already seeing economic activity gaining momentum in China. June market statistics reflect steady demand, but we are currently seeing demand being outstripped by supply, with NBSK inventories growing to 42 days and hardwood at 49. The NBSK inventory increases are being exacerbated by deferred mill maintenance, while the hardwood inventories are also being negatively impacted by integrated pulp moving into 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 an important part of the healthcare supply chain, and in some jurisdictions, we are considered an essential service.
We expect to continue to run, and we will continue to follow all government health-related recommendations to ensure we keep our people safe 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 a 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- $3.45 per thousand board feet, primarily due to the steep price declines we saw in the U.S. 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 pull as a result of the quick recovery of the U.S.
Housing market created this upward pricing pressure. The Random Lengths U.S. benchmark for Western SPF number two and better averaged $357 per thousand board feet in Q2 compared to $399 in Q1, reflecting a significant drop in pricing early in Q2. Today, strong housing statistics and limited supply have pushed the 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 the European lumber market to remain steady and the U.S. market to stay strong. Through the first half of 2020, U.S. lumber prices have been volatile, but we are 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 the pandemic-related challenges, including our Cariboo Joint Venture. We produced almost 513,000 tons of pulp, down 21,000 tons from Q1. The decrease is primarily due to losing 15,000 tons of production in Q2 during our Cariboo Mill's 30-day fiber-related curtailment. Excluding the Cariboo Mill, our pulp mills produced 563 GWh of power, down 16 GWh from Q1, primarily due to the lower pulp production. Our wood product segment performed at a near-record level this quarter despite ongoing production interruptions as we worked through the Friesau construction project. Our Friesau mill produced 113 million board feet of lumber and generated EBITDA of over $7 million in Q2. In Germany, beetle-damaged wood remains plentiful and is resulting in lower log costs 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 sawmill chip supply, resulting in higher cost options being used to replace those volumes. High wood costs combined with low pulp realizations has tightened margins. However, we are seeing increased sawmill production in response to the strong U.S. 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 COVID-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. Cariboo deferred its five-day shut to Q4. Rosenthal will take its typical 15-day shut in Q4, and Peace River will take a five-day shut in Q4.
Its recovery boiler rebuild shut has been deferred until Q2 of 2021 due to the inability of contractors being available to guarantee the availability of skilled tradespeople during the pandemic. Celgar will take a six-day shut in Q3 and a three-day shut in Q4. In Q2, we invested almost $22 million in high-return projects at our mills. We've also reduced our expected planned 2020 CapEx program to about $90 million to manage cash in anticipation of the reduced availability of skilled labor as a result of the pandemic. Our more modest 2020 capital program will focus on the completion of the Friesau phase II expansion project, along with some smaller high-return productivity and cost reduction initiatives.
We also expect to commence early work on the production expansion project at Stendal, which will be complete in 2021, and which will increase the total capacity of that mill from 660,000 tons to 740,000 tons per year. During the first half of 2020, we have 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 us success. Our focus on world-class assets, strong balance sheet discipline, and sustainable operations will continue to serve us well as we focus 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 COVID-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 families, 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, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Sean Steuart with TD Securities.
Thank you. Good morning, guys. A couple of questions. David, I'm wondering if you can give us some more context on pulp market conditions. It feels like China's bottomed out, and we have a good picture on all the downtime that's been taken in BC. Hoping you can provide a little more context in Europe. We're 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 in softwood markets there?
Yeah, Sean, it's hard to say. I've been signaling my expectation that markets are going to be weak over the summer. I mean, it's a seasonally slow period anyway, and with some of the steep declines in certain printing and writing grades, it's particularly difficult. Having said that, we have to fight for our volumes, but I don't see any curtailment coming in Europe, certainly not for us. I think we've got a pretty good order book. We're going to keep the inventory flowing, and we do have access to China for a little bit of the Stendal stuff. If we have a bit of a build, we've got equipment. We can get pulp into China, which is only possible because we were really quick out of the gate booking containers. There's a much lower volume.
That's one of the challenges Europe has is they can't get stuff to Asia because there's been a lot of blank sailings in the first half of the year. But we're in generally pretty good shape, and I don't see a catalyst for a price increase, certainly over the summer. But as I say, I'm confident we'll keep the volume moving.
Okay. Thanks for that detail. And for Friesau, you shipped 38% of the volume in Q2 to the U.S. What's your flexibility to toggle that up into the current crazy market we're seeing in the U.S. for lumber right now?
We do have quite a bit of flexibility, but from a strategic point of view, that's getting top-ish in my mind. We have important customers in Europe as well. It's a much less volatile market. So we're taking a balanced approach. I can see our U.S. volumes ranging between 25% and 40%, say, would go much lower, and I don't want to go much higher because of the volatility.
Okay. And the last question for me, the Stendal capacity expansion. How fast do you anticipate, once that project's complete, your ability to ramp up to that full run rate new capacity number?
Yeah, I'll be fairly quick, Sean. It's not a complicated upgrade. Stendal's a SuperBatch process, and we're adding two additional digesters. We've done that before, a little bit of debottlenecking on the dryer and a few other service areas. So not a technically difficult capital project, either from an execution or a startup perspective, I would say.
Okay. That's all I have. Thanks very much.
Thank you.
Your next question comes from the line of Paul Quinn with RBC Capital Markets.
Morning, guys. This is Marcus on for Paul.
Hey, Marcus.
Just firstly, the release mentions that chemical production was lower due to the German mills processing some beetle-damaged wood. Are you able to quantify the financial impact of the reduced chemical volumes as compared to the lower fiber cost?
Yeah. Well, it's the crude tall oil we're talking about. And there are times where I think on an annual basis, we've sold up to maybe $15 million of crude tall oil. And in the summer months, when you're running beetle wood, sometimes you don't get any. So it's a negative, but it's not huge. It's only for a few months. And Stendal, being such a heavy-depine, still has some tall oil production in the summer. So, Marcus, I can't tell you the exact number, quarter over quarter, but yeah, it's a couple of million, probably a couple of million dollars.
Yep. That makes sense. Maybe on the pulp demand side, there's obviously been some pretty big swings with tissue being strong and printing and writing demand falling right now. Are you seeing any shifts in that in the near term? And maybe longer term, do you see any permanent shifts in that mix?
Yeah, COVID's going to change some things, for sure. Hard to say just yet, but you're right. On the tissue and hygiene side, April was up over 7%. It was the demand I'm speaking about globally. May was up again over 6%. I think North America in May, tissue demand was up 10%. I think the pipeline's pretty full right now. But continued COVID responses, any further perceptions of supply chain challenges will cause a bit of a frenzy again, I think, and people will draw down that pipeline. Other trends we're seeing are certain packaging grades are just on fire, obviously, with a lot of the people ordering from home. The mix of tissue from away from home to more in-home brands, which are higher quality sheets, obviously, with more NBSK in them typically. That's a trend that's continuing.
A lot of the mechanical paper grades, magazine grades of things, I mean, that space has just been decimated. I mean, who wants to read a magazine? You're not sitting on airplanes or in airports. You can't reuse these things. Somebody else has read it. You don't want to look at it. So I see some of those things. People are really learning to live without certain paper products. On the toweling side, I think there could be some dramatic shifts over time. Away from in the away-from-home sector, from Dyson air-blowing hand dryers and cloth roll hand dryers in restaurants and institutions and so on. I mean, that's all probably going to go away. And paper towels or fiber-related products will probably be the replacement.
That's a global trend, probably, including Asia, which has very low tissue penetration in Asia today, but that could change quite significantly. Generally, on printing and writing, I mean, there's been some pretty big declines. That's because there's just been nothing going on in a lot of those sectors so far. As we get into the fall, if countries are successful reopening and kids get back to school and those kind of things start happening again, then a lot of that will be a pretty big uplift or a big improvement in a lot of those grades, I would expect. There'll be some rationalization coming out of this pandemic where some machines will close or companies will rationalize their production strategies to keep the machines that are left running busier.
But there'll be definitely some improvement in the printing and writing side going into the back half of this year, is my view. So I'll stop there and see if I'm.
That's helpful. And maybe lastly, could you just walk us through some of the puts and takes this quarter regarding the CEWS payment, the FX gain, and the inventory adjustments?
Yeah. Let me ask David to cover that for you.
Yeah. I guess in terms of the CEWS, so this is for those folks that aren't aware of it. This is the Canadian federal government's wage subsidy. So we were eligible for several months of subsidy and received about $4.5 million of support during the quarter. We're not sure that there's probably going to be another month of that, we think. But this is a program that is not it's not indefinite, and we're not sure how long it'll be maintained by the Canadian federal government. But I think there's probably reason to expect a little bit more in Q3 as well. In terms of the impairment, as you know, under U.S. GAAP, you're required to value your inventories at no higher than their net realizable value.
And as we've done for a couple of quarters here now, we have to go through this review every quarter and just make sure that both our wood inventories and our finished goods inventories don't rise above that net realizable value. And you can imagine we've got a situation with depressed pulp prices, particularly hardwood. We continued to do that calculation, and we had to increase our provision in Q3 or sorry, in Q2 up to over $12 million. So the net impact, while the impairment for the quarter is $12 million, the net impact for those of you that are watching on a sequential basis from Q1 to Q2, because we had a provision in Q1, the net impact is just over $6 million in the quarter.
Thanks, sir. That's helpful. Have a good day.
Your next question comes from a line of Andrew Shapiro with Lawndale Capital.
Hi. Good morning. If you could, could you expand a little bit more on Celgar's shut? You refer to it, what you call, as market-related, and then you describe it as a fiber issue, which I would think then affects everyone else in the neighborhood. Can you expand a little bit more about that? It'll lead me into my next question.
Sure. Well, the situation in the first quarter around our Celgar mill was such that there were massive sawmill curtailments due to COVID, and it was just across the board. Just everything stopped for a month or, roughly speaking, some longer, a few shorter, so the way a pulp mill needs to think about its fiber supply is it has to look out more than 12 months, usually almost 18 months. We have periods of time where we can't get into the bush because of spring breakup. We have fire season in the summers. We have different conditions at different times that limit us, and so we have to look through the peaks and valleys and make sure 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 for lack of fiber.
So we had a choice. Without the sawmill residual, and I should also say that the two primary sources of fiber for a pulp mill are the sawmill chips that come in as a residual from the lumber-making process, or you can buy residual roundwood, which is we call them pulp logs. It's the harvest product that doesn't qualify as a saw log. It's the tops of the trees. It's the crooked, broken pieces, and so on. And we can take that, debark it, chip it, and put it into the pulp mill. Now, the processing costs to use roundwood are higher. And so we have a fairly steep marginal cost curve with residual cost being the lowest and the roundwood being the highest. So as we looked at 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 mill for the next 12- 18 months, recognizing inflows and outflows, or we could take a curtailment and just stop all purchases of high-cost roundwood and build up an inventory of sawmill residuals, and that was the choice that we made, so we made the decision early. We burned down the pile, producing pulp through June without bringing in, there weren't many sawmill residuals being generated, and we turned off all roundwood deliveries, lowered our raw material inventories down, and then took the month of July off, and as luck would have it, all the sawmills are running hard. Lumber prices have improved dramatically in the U.S. market, particularly, and so we've been receiving the lower-cost sawmill residuals to refill the pile.
We'll start up in the second week of August, and we'll have ample inventory to continue on through the rest of the year. We will have a roundwood component in our diet, for sure, but it won't be as significant as it would have been if we hadn't done this. So it.
Okay. Yeah. Go on.
Go ahead, Andrew. Yeah.
So understanding this, this is an impact that has to affect all the other competitive pulp makers. And there are other factors impacting them in that Mercer's always been as a newer facility. And of course, because you guys run things so well, you've always been a lower-cost producer versus some of these higher players. In light of the stressed market that's going on, are you seeing and is there some visibility of competitors, other facilities that are in need of shuttering and that shuttering being more permanent because it doesn't make sense to restart it or the boilers are at end of life, etc.?
Yeah. Be very careful I don't name names here, but I mean, there are other Canadian mills that have challenges for a variety of reasons. As you say, several of them are really struggling with economically priced fiber right now. There are solutions there. They need government action, obviously. I mean, there's a tremendous amount of wood in British Columbia. It's just not managed properly, in my view, and particularly, it's been a saw log-centric regime, and so it hasn't figured out how to price pulp wood, frankly, but if they could do that, that could solve a lot of problems for most of the mills. Under the current conditions, there's others who are running with much higher wood costs than we are because they haven't curtailed. They're chasing every stick they can get, and I don't think that's a sustainable business model, so they'll start fighting with each other.
And I mean, it's kind of an ugly situation. I think at Celgar, we're in good shape. We've got a geographic advantage in terms of just where we are and where our sawmill partners are and also in how we treat them and the synergies that they have with us. In many ways, we provide harvesting activities to some of them that provide fiber that they need, and we get chips in return, that kind of thing. As far as boilers go, the older mills, there are a few mills that have equipment challenges coming. And with a period of low pulp prices, it makes it a much more difficult decision for them whether they actually go down that road or not. So I guess companies will make their own decisions. So there are certainly supply risk challenges coming, but I can't say specifically which one it'll be.
If the government reforms or support programs that are being contemplated occur, does Mercer qualify for those, or it's just going to keep the weaker players alive longer right now in an oversupplied commodity market?
No, I think we would benefit greatly if we could get this right. I mean, Celgar, in an average year, would be 30% roundwood in its diet. And our mill, the Cariboo Mill, we co-manage with West Fraser. There's been some permanent curtailments of sawmilling capacity up in the Quesnel region. So they're shifting their diet to more roundwood today than they've ever needed. And they haven't really needed to do that before. And they're stumbling into these stumpage pricing issues that are making it very difficult for them.
Okay. And in the CapEx projects you've discussed and others that you contemplate, you've had a typically short payback period and 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 now, are these expenditures being done based on, we'll call it, the current levels of the market in the event they last longer than anticipated?
Yeah. We look at our capital strategies in a longer time frame, Andy. We balance the maintenance of business requirements. We always want to run reliably. That's really important for pulp mills. The fixed cost coverage gives you tremendous cost reduction potential. We look for debottlenecking initiatives and things like the Stendal situation just make a lot of sense from that perspective. We also, frankly, take ESG metrics into account as much as we do financial. We know that society's expectations will change over time. Sustainability is a really big theme within our company. We think about emissions and odors and particulate emissions, water usage, those kind of things. That's also very important elements to measure when we weigh which projects to do and which ones not to do. We certainly can't do everything we want to do.
In the current environment, we've really dialed back significantly on what we have, what 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's structural improvements we can do in logistics or roundwood processing. Those types of initiatives, we focus on those near-term things that will benefit the company. But we also, and this went back to comments I made a year ago, that when we're going through a down cycle, we don't want to destroy value by just shutting off all of our initiatives. So we're continuing to finish the Friesau expansion phase II. And we did pull the trigger on the Stendal expansion because it's such a great project.
But we've pulled back a lot on these smaller high-return projects just as part of managing our cash and our liquidity, given that we don't know how long the COVID pandemic is going to last.
Right. And then in terms of managing cash and liquidity and your capital structure, you're plugging along and trying to maintain cash flows and build up that cash. Where do you feel the focus of your next, I guess, built-up bucket of cash would be in terms of your capital structure? Have you stretched out and lowered the interest rates as much as you can on the debt? Or what's kind of the next step for you and David?
Yeah. It's a balancing act, frankly. We're a growth-focused company. So 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. There may be some smaller things we can do, but we have to be careful that we don't bite off more than we should in a time like this. Debt reduction is also something. And there'll be some restructuring of our debt as we get closer to the call periods. We've got the 24, 5s, and 6s out there. And as we get closer to those, there'll be hopefully better market conditions, and there'll be an opportunity to, I would hope, lower the interest costs and stretch things out and just carry on. And then we've got to get the dividend back up to better levels.
And that certainly would be in our intentions as well. So it's a combination of all three, growth, debt reduction, and dividend.
The last question I have is, given the pandemic and the inability to travel, etc., 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 for Jefferies conference. I didn't know what else there was.
Yeah. I think there's two or three coming up. Dave's got the schedule. We've done quite a few virtual conferences so far this year, and they go quite well, actually, very efficient. So 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 obviously staying in close contact with all our existing shareholders to the extent that they want to hear from us.
How about your marketing and sales efforts? How does that go with respect to your pulp customers and lumber customers?
Yeah, well, fortunately, we've got pretty deep trap lines. We know our customers really well. We've had years of being very close to them, so right now, it's working fine. These are virtual meetings or telephone calls and technology like Google Meet and Zoom, and you can at least see each other and talk with them, and so I think relationships are solid. We're a key supplier to most of our customers, and so we're viewed as a modern preferred supplier for a lot of reasons, and so things are fine. It's amazing how well it's working, actually.
All right. Thank you for answering those questions.
Yeah. Thank you, Andy.
Your next question comes from a line of Andrew Kuske with Credit Suisse.
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 impacts you had, either in costs or timeline from COVID-related protocols or shutdowns that happened?
Yeah. Sure. Good morning, Andrew. I'd say the most significant impact really was on the planer at Friesau, so we have a supplier that couldn't travel right at the time when we wanted to be optimizing this thing and really getting it humming. Using Google Meet and Zoom and that kind of thing, we were able to get the planer running, some optimization occurring, but we couldn't get it to the final place we wanted it, so we're more or less a month behind from the true optimization of that piece of equipment. Having said that, the travel is booked, and it's going to happen, I believe, in the next couple of weeks. We'll finish that final step on it.
You don't see it in our results because our results are better than they have ever been in terms of productivity from that mill, but it's not as good as it would have been if we hadn't had these delays. The sorter package that's come into Friesau, that's the next wave of work. It's not as technical. I don't anticipate there being a problem with that. And the equipment for the Stendal expansion is basically this stuff gets built in a factory somewhere and then delivered. And so it's 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. And as I was saying earlier, it's not that technical. I don't think we'll need a lot of support for it. So don't anticipate there being a big problem there.
I guess I should comment on the Peace River situation. So we've got an insurance claim to rebuild the bottom half of the recovery boiler. This was an equipment failure that happened under the previous ownership of that mill. We've pushed that out into next year because it will require quite a bit of support from specialists to help us with all that welding. And it just doesn't make sense to push it right now. So we're just doing a small utility shut at the mill this year, and we'll 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.
If you don't make any money running the mill anyway, it would have been a great time to have it down for 60 days to do the boiler, but it's just too risky for us. The chance we'd get it opened up and wouldn't get it finished. So we've deferred it. Everything else is more or less being done by our own people.
That's really helpful. Maybe just on the planer, because you mentioned it's not running exactly where you'd like it to be. How much of an enhancement financially, if it was, do you anticipate it would have been in the quarter if it was running the way you wanted it to?
Yeah. It's hard to say. But getting the planer really humming and getting all the sorting finished gives us that ability to optimize the profile of what's coming out of the spaghetti factory, if you like. And the trimming edges to get grade uplift and all that kind of stuff is significant. So I mean, the whole project is, it's going to be that mill is just going to be a thing of beauty when it's finished. So every month that goes by, we see the improvements in the grade profile and in the volumes. But when that planer is really humming and we get A4 up on the sorting side, I think it's really going to be noticeable. I don't want to put a number on it because there's so many variables and assumptions in that.
But the margins will continue to improve at that mill significantly because of the completion of this work.
Okay. That's great. And then I think earlier in the call, in your prepared remarks, you mentioned something about freight costs creeping upwards. Could you maybe give some color on freight costs and where you're seeing impacts?
Yeah. Well, they went up and they came down. And by that, I mean there was a time, particularly in Europe, where you couldn't cross a border. The trucks would just sit there for eight hours waiting to get cleared. And that's all behind us. That all got sorted out. So freight logistics are much more open and available now. And as I was saying also in my earlier comments, the booking equipment to get product to Asia, we were first out of the gate. So with limited availability, we were able to control a reasonable quantity for ourselves. So that was a positive. So container rates are a little higher. Well, they are higher than they were before COVID. They're not as high as they were at the peak.
I think as economies open up, I mean, China almost looks like a V-shaped recovery if you look at many of the metrics. The ocean-going traffic should start to improve, and those costs will come back down again and be more available.
Okay. That's great. Thank you very much.
Again, if you'd like to ask a question, you may do so by pressing star one on your telephone keypad. Your next question comes from a line of DeForest Hinman with Wellington and Company.
Hi. Thank you. Just clarity. We've been asked by a number of people about the Friesau too. How much is left to spend, and what's the expectation once the planer's optimized and the sorting equipment is in place? What's the production capacity of that facility?
Yeah. There's probably 25-ish left to go to DeForest. And the capacity of the mill, when it's completed, would be if we ran it on three shifts, it'd be close to between 70 million and 75 million board feet, which is a very, very big mill. But more importantly, it will have all of the bells and whistles in terms of optical scanning, trimming, and sorting. So in a German lumber mill like this, everything goes in at five-meter lengths. The log is a five-meter log typically. And that can produce a 16-foot 2x4 or 2x6 or 2x8, or you can make 2x8 footers, or you can run something through there that looks like a reject and chop two feet off, and it becomes a number two, that kind of thing.
It's like you can slice and dice with optical scanning and computer technology to optimize every board that comes out of the planer, and that's really where the value is.
The 25 million that you referenced, is that for phase II, or is that inclusive of phase II?
That's phase II. That's the completion of phase II.
Phase II. When is phase II targeted to be completed?
The planer is running and running probably at two-thirds of its normal rated capacity today. It will be optimized by the end of the summer. Most of the optical scanning, there's a lot of AI in that. There's a lot of learning that the computer has to do to make sure it identifies all of the different defects, thousands and thousands of images of timber breaks and spike knots and all that kind of thing. Then the final piece is just the sorting. That's the sorters on site. Installation is beginning. We have the pre-existing sorters running. The bigger bin going in will give us much more capacity to sort the multiple profiles that I've been describing. That'll be completed spring, summer next year.
You talked about three shifts. I think there was some commentary in the past about manual sorting, moving to computerized scans and sorting that some of those people could maybe move to other areas of the facility. Are we anticipating moving to three shifts? Is that really the end game here?
I'm not sure at this stage, but I don't think we need to. You can push it if you're in a really, really fantastic market. I think two shifts with the maintenance downtime in the evenings is the way to go. You can really optimize everything we do and maintain the reliability, that kind of thing. I mean, I've seen these lumber mills run on four shifts. Basically, a sawmill chews itself apart over time. It's not the best operating strategy from my perspective. Two shifts, 550 million-650 million board feet of lumber consistently would probably be a good target.
Okay. That's very helpful. And then on the Stendal expansion, how much is left to spend on that project in 2020? How much is expected in 2021? And when will that be completed?
Yeah. I'll just speak generally. It's about a EUR 42 million capital project. One of the benefits of it is a wastewater offset opportunity. So Stendal pays EUR 4 million a quarter for wastewater fees or to accrue them. And if you have a qualifying project that allows you to lower your emission intensity, you can offset. Basically, you're forgiven the fee as an offset. So the Stendal expansion project qualifies for six years of offset. So that's EUR 24 million of the EUR 42 million is a bit like a grant, if you like. It's wastewater emission fees we don't have to pay if we do the project. So financially, just fantastic. Good ESG metrics all the way around. There's some improved washing and things like that that come along with it. And in terms of what we've spent so far, so we've ordered the digesters. They're under construction.
We probably spent $10 million-ish of the total. And the heavier piece of spending will be next year. Primarily next year will be the main chunk. There may be some progress payments during this year, but not overly significant.
Okay. Thank you. And then maybe you don't want to do this online, but it's probably worth at least asking. Has there been any government response, dialogue as it relates to some of the pricing of the wood coming out of the government forest? You alluded to it a little bit earlier in the call.
Yeah. Yeah. It's a complicated issue, obviously. And the fixes are different depending on regions, really. I've been in to see the forest minister a couple of times. He's very open to really understanding the challenges that we're facing in our area. The government set up what they call their working tables around the different timber supply areas to really drill into the specifics of 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 I'm reasonably optimistic that the process will produce some benefits for us here, hopefully.
All right. That's helpful. Thank you for taking the questions.
Yeah. My pleasure.
Again, if you'd like to ask a question, you may do so by pressing star one on your telephone keypad. Your next question comes from a line of Hamir Patel with CIBC Capital Markets.
Hi. Good morning. David, it seems like there's some policy changes the minority government in B.C. is trying to implement in the power sector. What impact would you expect that to have on the power contract renewal at Celgar? Sorry.
Yeah. So we're up for renewal September this year. We've seen the first draft of what BC Hydro is offering us for our EPA renewal. It's not what we were hoping for. They're still prepared to buy our power, but it's not all of it and not at the same rate that we were expecting. That's still very much an open negotiation from my perspective. But it's challenging just at the moment, I think, for them because power consumption has dropped off dramatically due to COVID. They're building Site C. They haven't really been successful with their LNG program. And the price they're getting for power in Alberta for their surplus is pretty low. So I mean, I think they're trying to come to the table for us. They're working with us. And there may be maybe we can do better than what they've offered so far.
But it's a bit early. But it's not great. It's not going to be as good as it was, unfortunately.
Fair enough, and I just want to ask about, there's that ex-Domtar mill in northern Quebec that's supposed to come up in a few months. Do you expect that to have a major impact on the NBSK market?
This is the Lebel-sur-Quévillon. Yeah. No, I don't think so. I mean, it's not a big mill. It's like 300,000 tons, I think. So you divide that by 12. So the monthly noise and the supply-demand picture won't be very material, I wouldn't expect. A little surprising to me that those guys are going for it. That one's been down a long, long time, and it's coming back as a small mill. So I don't know how that works, but we'll see.
Great. Well, that's all I had. Thanks, David.
There are 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 to take any questions you might have as they occur during the quarter. So thanks again, everybody. And stay safe out there.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.