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Mercer International Inc  (NASDAQ:MERC)
Q2 2019 Earnings Call
Aug. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Mercer International's Second Quarter 2019 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.

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Good morning everyone. I'll begin by reviewing the second quarter's financial highlights. Following my remarks, I'll pass the call to David, he will comment on our key markets, operational performance, the integration of our new assets, progress on our strategies and our outlook in the second half of 2019.

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 risk 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.

We're pleased with our Q2 operating performance. We achieved record pulp and energy production during the quarter, which supported our overall financial results, despite declining pulp prices in the quarter. Q2 consolidated EBITDA was $70 million compared to $123.8 million in Q1, a reduction principally attributable to the sharp decrease in pulp prices that occurred through the quarter. Our Q2 results also included our 50% portion of 15 days of schedule downtime at our Cariboo pulp joint venture, which reduced EBITDA by approximately $11 million compared to Q1 in which there were no scheduled maintenance. In addition, our EBITDA was reduced by $6.9 million non-cash impairment charge to portions of our inventory to reflect low pulp prices along with an unrealized $4.3 million non-cash loss due to the sharp weakening of the US dollar in the final days of the quarter. To the extent, pulp prices increase, we will recognize a profit on this inventory in Q3.

Our pulp segment contributed $72.1 million of EBITDA and our wood product segment contributed EBITDA of $1.9 million. As usual, you will find additional segment disclosures in our 10-Q.

In Q2, the average NBSK, European pulp list price was down about $110 a tonne, relative to Q1. While the average list price in China was down $60 a tonne quarter over quarter. NBSK pricing in the US market was down about $90. Hardwood prices in China were down about $50 a tonne relative to Q1. And compared to Q1, our average pulp realizations negatively impacted EBITDA by about $28 million.

Our pulps sales volume totaled 520,000 tonnes, which was down about 35,000 tonnes from Q1, due to broadly lower sales across all markets. When compared to Q2 of 2018 however, our sales were up nearly 182,000 tonnes, reflecting the contribution of our Peace River and Cariboo operations. After removing the contribution of the new mills, sales were up roughly 35,000 tonnes relative to Q2 2018.

Electricity sales totaled 256 gigawatt hours in the quarter, which is up almost 10% relative to Q1. Our Q2 electricity sales benefited from strong pulp production at all of our mills included record energy production at our Stendal mill. I should also remind you that the energy sales and related statistics from our Cariboo pulp joint venture are not included in these results because our joint venture is accounted for using the equity method of accounting. Inclusion of the Cariboo statistics would add another 7 gigawatt hours of sales, which was down from Q1 due to their Q2 scheduled maintenance.

On the wood products side of our business, we sold the equivalent of about 101 million board feet of lumber in the quarter with about 30% of this volume being sold into the US market. Our lumber sales were down 8 million board feet from Q1 due to slightly lower production levels as a result of lower yields from the increased supply of lower quality, storm and beetle damaged logs. We reported net income of $10.3 million in the quarter or $0.16 per diluted share compared to net income of $51.6 million or $0.78 per diluted share in Q1.

Our Q2 results include non-cash charges for inventory impairments and foreign exchange losses totaling $9.3 million or about $0.14 per share. Our operating performance led to the generation of $89 million of cash in the quarter compared to $42 million in Q1. The higher level of cash generation reflects solid EBITDA combined with strong collections of accounts receivable during the quarter. Overall, we generated free cash flow of almost $64 million in Q2.

We also invested $25 million of capital in our mills this quarter. As noted in previous calls, we have an ambitious capital expenditure plan in 2019. And David will have more to talk about this in a moment. Our leverage remains at an efficient level and on a 12-month basis, our net debt is down to 1.8 times EBITDA, primarily due to lower net debt.

As I noted earlier, we recorded a non-cash inventory impairment charge totaling $6.9 million this quarter. US GAAP requires that inventory be recorded at lower of cost or net realizable value. Our analysis this quarter highlighted that due to low spot pulp prices and higher wood costs that existed at quarter-end, a small portion of our inventory was recorded above net realizable value. And accordingly, we adjusted those inventory values down. This adjustment was recorded in cost of sales in our statement of operations.

Last quarter, we completed filings necessary for us to acquire Mercer shares on the market. The filings prescribe a maximum program of $50 million that, if not extended, will expire in May 2020. During the quarter, we purchased about 53,000 shares at an average market price, including fees of $14.25 per share. And you will have seen from our press release yesterday, our Board has approved our quarterly dividend of $0.1375 per share for shareholders of record on September 25, for which payment will be made October 2, 2019.

That ends my overview of the financial results, and I'll now turn the call over to David.

David Gandossi -- President and Chief Executive Officer

Thanks, Dave. Good morning, everyone. As Dave highlighted, our Q2 results were strongly influenced by weakening pulp markets with our strong operating performance partially offsetting the impact of lower prices. Our operating performance is a result of our long-term value-creation strategy.

Now I'm going to start today with the markets. European NBSK pulp demand weakened steadily through Q2. While demand in China was at its weakest midway through the quarter, demand strengthened slightly in June on news of NBSK curtailments. European list prices in Q2 averaged $997 per tonne compared to $1,105 in Q1. July's European list price was about $950 per tonne.

In China, the Q2 average NBSK price was $653 per tonne, which was down from $710 per tonne in Q1. Recent NBSK curtailment announcements, combined with tightening fiber supply in some regions, led us to believe that the Chinese NBSK market price is at or near the floor at $585 per tonne in July. The average Q2 hardwood list price in China was $635 per tonne, down $52 from Q1 and the hardwood list price in the US market averaged $1,100 per tonne in Q2 compared to $1,180 in Q1.

Now the pulp markets continue to be influenced by a number of factors including macroeconomic conditions, the continuing US-China trade dispute and related tariffs, the high pulp producer inventory levels, all of which are creating uncertainty and negatively affecting pulp prices in all markets. These factors are influencing pulp markets by reducing demand for certain printing and writing paper grades. In addition, high pulp producer inventories are allowing bulk buyers to limit their purchasing levels to date. Tissue and specialty paper demand remains steady.

We've seen some signs of pulp demand improving, but as we look ahead to Q3, we expect markets to remain essentially flat as the traditionally slow summer months and inventory overhang unwinds. We expect Chinese government stimulus to push economic growth, which would improve demand. This may be offset by the increased tariffs that will remain to be seen. At the same time, we expect reduced pulp supply as the impact of announced curtailments take effect and as pulp producer maintenance and planned pulp conversion projects take significant volumes of production off-line in the back half of this year. We expect to see upward pricing pressure late in Q3 and through Q4.

Over the last 6 months, we have seen a large shift in pulp inventory levels. Pulp producers currently have historically large inventory balances while paper producers have historically low inventories. This dynamic allows pulp buyers to buy for short-term needs in the hopes of lower prices tomorrow with little downside risk of not being able to source enough pulp. However, we see the previously noted curtailments, conversions and maintenance downtime being a catalyst to move inventories back into balance. Our feeling is softwood will tighten faster than hardwood given the larger hardwood inventory overhang. Looking further ahead, we continue to believe that steady demand combined with the absence of new capacity will exert upward pressure on prices.

Lumber markets in the US have been bumpy through Q2 with production curtailments giving some life to demand and then subsequently being offset by weaker-than-expected housing demand. We expect further British Columbian production curtailment announcements due to poor demand and high sawlog prices, driven by limited sawlog supply. The random length US benchmark for Western SPF Number 2 and better averaged $333 per 1,000 board feet in Q2 compared to $373 in Q1. Today, the benchmark is close to the Q1 average price. Today's lumber prices are not at sustainable levels. We believe certain producers are currently selling below cost, in part due to sawlog shortages, resulting in high log prices in Western Canada. We continue to believe that curtailing announcements along with expected demand from the US building season, that is yet to materialize due to poor weather, will eventually create upward pricing momentum in Q3.

In Q2, about 30% of our lumber sales volume was in the US market with the majority of the remainder of our sales in the European market. Despite the recent price softening in the US, the European lumber market has continued to experience steady demand with average pricing down only slightly from Q1. When comparing to Q1, our average realized sales price dropped slightly to $348 per 1,000 board feet in Q2 compared to $359 in Q1.

Our strategic focus on our assets has allowed us to achieve record production this quarter and is driving our enhanced capital spending this year. As I've noted in the past, we will continue to invest in our mills with more than half of the 2019 investment being in high-return projects, with the remainder focused on asset maintenance supporting mill reliability. In support of the world-class asset maintenance pillar of our strategy, our ambitious 2018 capital program will be financed from cash from operations, leaving our strong balance sheet intact and a firm foundation to support further growth. Our mills ran very well in Q2, including our Cariboo joint venture, we produced a record 542,000 tonnes of pulp and a record 629 gigawatt hours of power. Despite less than ideal market conditions, we are also pleased with our wood products segment's performance this quarter. We produced almost 101 million board feet of lumber and generated about $2 million of EBITDA in the quarter.

The Friesau sawmill also allowed us to achieve roughly $3.5 million of synergies this quarter, the majority of which resulted from reduced wood chip costs for the Rosenthal pulp mill. In Germany, storm and beetle damaged wood remains plentiful and is resulting in lower log costs generally. In Western Canada, pulp wood supply continues to be tight as sawmills have been curtailing production, which is limiting the volume of sawmill chips that are available, resulting in higher cost options used to replace those volumes. Looking forward, we expect our overall wood cost to continue to trend down as a result of the lower European fiber costs.

Turning now to our major maintenance schedule in Q3 and Q4, we expect to have a total of 60 planned shut days. At Rosenthal, we will take a 10-day shut in Q3. At Stendal, we will take a 13-day shut in Q4. At Celgar, we will take a 22-day shut in Q4, not only for annual maintenance, but as I mentioned last quarter, we will also do some important productivity improvements throughout the mill including a packaging line upgrade. At Peace River, we will take a 15-day shut in Q4. We had originally planned to take an extended shut in Q3 to repair the recovery boiler, but due to a key supplier delaying the delivery of parts, we have rescheduled this work to 2020.

The integration of the Peace River and Cariboo pulp mills continues to progress well. We continue to grow our safety program at these mills, and we are progressing on identified synergies. As I've mentioned on previous calls, we have further growth aspirations, but we will continue to take a disciplined approach to ensure we maximize long-term shareholder value. Any opportunity we consider will be framed by Mercer's core competencies in pulp and lumber production, wood derivatives and bio extractives as well as green energy. Our core competencies will continue to drive long-term value creation.

I'll remind listeners that our Board has approved our second quarter dividend, which we remain deeply committed to. It is well supported by the strength of our balance sheet and our steady cash flow generation.

Thanks for listening, and I'm looking forward to your questions. I'll turn the call back over to the operator. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question will be from the line of Paul Quinn with RBC Capital Markets.

Marcus Campeau -- RBC Capital Markets -- Analyst

Hey guys, this is Marcus on for Paul. Thanks for taking my questions.

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Hey, hi Marcus.

Marcus Campeau -- RBC Capital Markets -- Analyst

Just starting with pulp markets. Could you talk a bit about what you're seeing in terms of global inventories today? Maybe touch a bit on what you're seeing regionally there?

David Gandossi -- President and Chief Executive Officer

Yeah, well, I guess I think the big overhang starts in China, maybe it is the way to think about that. Chinese buyers are quite careful when they think pulp prices are going down, so they would hold their orders. And buy just what they need, and if they don't need it, they can -- it's more or less a spot market, I guess, it is the way to think about it. So we've seen this big shift in levels in China from what would otherwise be customers now to producers. Our take on it is we're probably 1.3 million tonne overhang. I think Qingdao normally would have 500,000 tonnes, it's about 1.3 million today. Zhangshu, 350,000, sort of at the 840,000 today. So a total of 1.3 million over. Our estimate is about 80% of that is hardwood. So there's -- that's really where the problem is. There's been an announcement lately that there's a clearing price in the market. We're expecting to see a big movement -- moves in the third quarter on the hardwood side from producers to consumers or to customers rather. And I think that's the beginning of the turn. It's like we've always said, as long as, until you have that clearing price and you see things starting to move, big volumes moving, it just kind of drag along.

So hopefully with that announcement and with summer coming to an end and getting into maintenance season, and there are curtailment announcements also in Latin America, so you were expecting that to turn through the third quarter with back in fourth quarter should be a different scenario.

Softwood in China is not as serious. We've had good volume moves. As you may know, Arauco and Mercer both announced sub-20 for August, and we'll see how well we do on that side of things. In Europe, it's been a better mill net. So anything that can't get sold in China to the extent that logistics are available, some of that pulp would move down into the Central European market. So it's been in decline. As you know, every month, it's been moving down. So I think that will continue until we really see the turn in China.

US markets held up reasonably well. Spot offers have been quite profitable compared to contract business there. But again, it's a slow erosion as the global overhang persists. So I think we can expect things to carry through the third quarter much as we're seeing today, hopefully, with significantly larger volumes transferring from producers and lift in the fourth quarter. It's our read on it.

Marcus Campeau -- RBC Capital Markets -- Analyst

All right, thanks. That's helpful. And then just on the delay of maintenance downtime at Peace River. Have you guys considered taking any market-related downtime? And then also, just a follow-on there. When in 2020, would that downtime be occurring? Thanks.

David Gandossi -- President and Chief Executive Officer

Yes. So the question on have we considered market downtime. Yes, we obviously, it's something to think about. But in our system, there's no reason for us to do that. We have access to wood. We have fixed costs that need to be covered. And we're working hard on improving the reliability and productivity of our pulp mill. So I have zero interest in taking market downtime as long as we're covering our fixed costs and moving the mills ahead, and I see this as a relatively short-term condition through the rest of the summer. We've taken the hit on the market writedown, as you know, in the quarter. So we won't be, Mercer won't be taking market downtime.

In terms of when the shut is going to be, I don't know that yet. The -- it's an issue with the tubes for the recovery boiler user, stainless steel overlay carbon tubes that get manufactured by a specialist manufacturing entity, and the tubes did not meet the specifications required and the supplier is working on trying to figure out what they did wrong and what has to be done to rectify that. And we're fine with that. This is not a problem for us to change the timing. It will lighten up the amount of capital we spend in the back half of the year. I think, actually, we had quite a bit planned for Peace River on the productivity side. So I think we'll lighten up our capital spend in the back half of this year by about $30 million as a result of that and other actions, but in terms of the health of the boiler and its run ability and everything else, we don't, at this stage, we don't see that as a major concern.

Marcus Campeau -- RBC Capital Markets -- Analyst

Alright, thanks, guys. That's all I have. Best of luck for the quarter.

David Gandossi -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Hamir Patel with CIBC Capital Markets.

Hamir Patel -- CIBC Capital Markets -- Analyst

Hi, good morning. David, you touched on the clearing price. So I guess, Suzano has announced on the hardwood side. What do you think the potential is for Chinese customers to switch more to hardwood, if we've got a -- if that clearing price is going to drive hardwood down over the near term?

David Gandossi -- President and Chief Executive Officer

Well, it's hard to say. There always is some substitution on the margin. But I guess, it's important to reflect on the relative size of the two markets these days. When you take a premium NBSK market, it is 15 million, 16 million tonnes compared to the size of the hardwood market and the recycled availability and the amount of recycled fiber in the furnish, which is like a hardwood in a way in terms of the strength characteristics. So the guys that use NBSK, use it because they need the strength attributes and the structure that it provides. So they may be able to adjust a little bit, and they do. And when softwood prices come down and approach hardwood, there's a -- they pile into softwood big time as well. So you sort of get that swing on the margin.

But fundamentally, the very, majority of our NBSK pulp goes into tissue and specialty grades that are branded products that need a particular recipe or furnish. So I don't see that as really being a major issue. I just think a lot of it has to do with the psychology in the market and the sentiment. The paper guys today are running on 25, maybe maximum days of inventory. Normally, they'd be up at 60. And if every day is what is it 80,000 tonnes or something like that, 15 days is 1.3 million tonnes that shifted from the producer, from the customer to the producer. So we're not far from balance if people are optimistic that we're out of the bottom, right.

Hamir Patel -- CIBC Capital Markets -- Analyst

Fair enough. That's helpful. And I just wanted to ask on the M&A side. Are you seeing any opportunities start to come up given the weaker pricing environment for both the lumber and pulp? And any update you can give us on the sawmill project that you were studying near Stendal?

David Gandossi -- President and Chief Executive Officer

Okay. Well, on the M&A front, I mean, I think the safest thing for me to say is that we are always, I mean, we're working really hard on our growth and thinking about different options and opportunities. And you're right, when you're at this stage in the cycle, valuations make a lot more sense than they do when you're at the top of the cycle. So we're active for sure.

On Friesau, I would touch wood when I say this, but I would say things are going very well. We've got a lot of work going on in the mill and the mill has run very well despite the congestion on the construction site. We're really looking forward to completing that. We'll start to see the performance in the middle of the fourth quarter this year, where we're getting that product -- the product lift that comes from the better trim capabilities, all the optical scanning and sorting, and it's going to be a significant improvement in the product profitability of lumber and as well as big volume increase. So no real issues to speak of at this stage. And the equipment, this is an equipment that's installed in sawmills around the world. So it's nothing new to anybody. Not expecting any major challenges.

Hamir Patel -- CIBC Capital Markets -- Analyst

And David, are you still considering greenfield elsewhere in Europe?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Yes, we are. We've been trading off the options of a greenfield at Stendal versus buying and renovating, if you like one of the competitor mills in Northern Germany. So that analysis continues. Timing, probably be able to announce something next year on that.

Hamir Patel -- CIBC Capital Markets -- Analyst

Great. That's all I had. I will turn it over. Thanks.

Operator

Our next question comes from the line of Andrew Kuske with Credit Suisse.

Andrew Kuske -- Credit Suisse -- Analyst

Thank you, good morning. David, I think you walked through some of the numbers on what you said on what you said is a 1.3 million tonne overhang in the market. Could you just frame the current pulp cycle as you see it versus some of the past cycles that you've seen? And then, especially around the context of the pricing downturns and then the snap back?

David Gandossi -- President and Chief Executive Officer

Andrew, well things feel different this go around. And it's-- the hardwood overhang is coming from the big consolidated producers. This strategy throughout the year that kind of baffled me. I don't think it's worked for them, and we haven't really ever seen this before. So that's where my -- that's why I say, it feels different to me. If you go back far enough, I mean the cycles used to simply be, the industry was chronically oversupplied, and there were times when it tightened up, so you'd get good pricing. And then when it looked like it was a turn, then customers hold back their orders, and the price would rocket down and the high cost producers would take a whole bunch of market downtime. And you would rebalance and you would go through the cycle again.

Today, fundamentally, the market is not oversupplied, whether it be softwood, hardwood or recycled, like they're just, once everybody's going, and everybody's feeling like things are good, it's not -- it shouldn't be a roller coaster like this. Like, nothing's really, like I don't really believe that much demand destruction has happened that we're in a fundamentally different market from we were -- from where we were a year ago. It's just a sentiment is so much more negative because of all these trade wars and things. So I wouldn't be brave enough to say it's going to be a snap back like we've seen in the past. That's the real question, is it a V or a U. But I think I did my best to describe earlier that I think there's a number of factors coming in the fall that should really start to concern pulp buyers that supply is going to become, even though there's a lot of inventory today, as that moves across and the paper guys refill their warehouses, would get up to their normal levels of inventory. And then you start looking around and seeing these market -- these maintenance shuts and Valdivia [Phonetic] going off paper grade, Enocell going off paper grade, and Stuttgart going off paper grade, it's going start data and if anybody has a running problem, like we've seen in the last two years, which hasn't really happened yet, then we'll be moving, right, so.

Andrew Kuske -- Credit Suisse -- Analyst

Okay. That's helpful. I guess, maybe on the hardwood side. I mean, what you're alluding to is maybe there's some self-help that's needed by the hardwood players in the market. But when we look at the NBSK, we went through a lot of the additions of capacity. There hasn't been anything. There's really nothing scheduled ahead for the next several years. So the market should be tighter. And I guess that echoes in your comments on no market downtime for you in the current market conditions. And how do you think about just the cost curve? Because you've got young mills that are sizable versus some others. So how do you think about the cost curves right now?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Well, the cost curve is shifting a lot. So Western Canada, I mean we've got curtailments happening in the North, right. So I think that has to be simply, they can't get wood. Like the fixed cost of the pulp mill are such that you've got to be under water very, very significantly before you're going to take a curtailment for cash flow reasons or earnings reasons. So it's better to run and lose a little money than to not run and lose a lot. That's what I'm trying to say. So guys that are curtailing or curtailing because of access to fiber and fiber -- more access rather than cost. And I think there's more to come. There's other mills in this province that are really struggling today, and will continue to struggle. And I don't see it getting any better with Western being out and announcements in the North about further sawmill permanent closures and that kind of stuff. So it's -- the curtailments are not over. The fourth quarter, as I've always said, the guys in the fourth quartile are very high cost compared to the rest in the second and third, and they're getting worse.

Andrew Kuske -- Credit Suisse -- Analyst

That's helpful. And one final one for me, and I might have missed it in the results, but just on DMI. Where are you in the synergies? Where you're tracking? Have you disclosed that number?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Yes. No, we haven't put it out there. I mean there still is -- we disclosed expectations of 15% to 20%. It's not -- we're not on a run rate of 15% yet. And a lot of that has to do with the market that we aren't able to benefit from a tighter market in that contract relationship versus what the previous owners were doing. But I still see that synergy in our future. And it's -- the pulp is a good pulp that's well respected in the market and adding it to the Mercer package for our customers is significant to them and significant to the relationship. So it will come. It's just a little slower than we'd hoped.

Andrew Kuske -- Credit Suisse -- Analyst

Okay. That's great. Thank you.

Operator

Our next question is from the line of Adam Zirkin with Knighthead.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Gentlemen, appreciate you're taking the time. Few things for you. First, David Ure, you went through this very quickly. But can you explain once again what gave rise to the inventory adjustment? Because certainly, Celgar is making money, so the notion of prices falling below cost didn't intuitively make sense to me. So perhaps you could explain that.

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Yeah, yeah. It's not, it may not be intuitive. So generally, so the policy is, in US GAAP is if you value your inventories at the lower of cost or net realizable value. And the cost for most producers, the cost would be defined as not just the cash cost, but your depreciation as well. So you've got something on cash costs in there, some administration costs. So it's possible that the EBITDA, the cash costs are lower than your inventory value. And so when the net realizable value of pulp dips down below that cost level then you need to adjust down to the net realizable cost. And we called it out because typically, we run at cost. When the market is normal, we're running our inventory at cost and the inventory, there's fluctuations in the inventory value, but they tend to be pretty small. But in this case, we have the pulp price drop considerably toward the end of the quarter. And so we had to push the inventory value down.

Adam Zirkin -- Knighthead Capital Management -- Analyst

And David, remind me, you are a LIFO accounter. Is that right?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

We are an average, weighted average -- we use a weighted average method.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Got it. So the net effect rate will be that it essentially moves earnings or losses from one period to another. Because when you pull these tonnes from inventory, say this quarter, they'll be carried at a lower value.

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Yes, that's exactly right. So you can imagine next quarter, if prices pop up again, this is a hit to the P&L that we've taken in Q2 that we wouldn't be taking in Q3.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Right. Understood. All things equal, that would create a better result in Q3 than have you not taken it in Q2.

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

That's right. Yes. If we -- had we just left our inventory value at cost, we would have smooth, some of this would have been, we would have floated right through Q2 and Q3, and you wouldn't even have noticed it. In this case, we're pushing it down in Q2. And then the cost of the inventory goes back up to cost. Next quarter, it will be a, recovery is not the right word, but it will be a benefit to earnings next quarter.

Adam Zirkin -- Knighthead Capital Management -- Analyst

That's helpful. Thank you, David. David Gandossi, just a question with respect to the markets, picking up on Andrew's question. You talked about the shift in cost curves. Can you just explain for a moment, and perhaps I should be familiar, but why the wood supply issues affecting the northern mills are not affecting you at Celgar in Canada?

David Gandossi -- President and Chief Executive Officer

Well, the northern mills have been -- they're more or less integrated with the saw milling activity, I guess, is maybe the fundamental reason in my mind anyway. So the pulp mills tend to consume the sawmill residuals from the mills around them. As you know, in our world, we have needed a roundwood program. We always, we have good healthy sawmills around us, but we have a bigger demand than they can provide. But when you harvest sawlogs, there's a lot of residual fiber that goes along with that, the tops of the trees, the parts of the trees that look like they're good sawlogs. And historically, in British Columbia, that has been a somewhat underutilized resource. And Mercer has been quite innovative, developing programs to get that wood, bring it in and process it economically. So we have lots of levers, and we have lots of access to wood. I'm not concerned about it. If the cost is higher, obviously, then when it's pure -- when the sawmills are all really running hard. But the guys in the North haven't really gone there much. So they don't have access to other volumes of wood that they need to run in the context of significant curtailments on the lumber side. And so.

Adam Zirkin -- Knighthead Capital Management -- Analyst

That's helpful. David, can you just give me a sense of scale? I mean, how far are those mills from you? I mean, how far will they have to move wood to tap it into your suppliers? Is that even a silly question?

David Gandossi -- President and Chief Executive Officer

It's a completely different geography, 800 kilometers or 900 kilometers, I guess, the North, print storage region, right. So we're in the southeastern corner of the province and they're way up North, yes.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Got it. And then lastly, just on fiber costs, generally. I think last quarter, we were talking about how fiber prices were falling in Europe, but they hadn't yet had a chance to run through your inventory of raw materials in the European mills. I was expecting a little more of a downward move in the fiber costs this quarter. Didn't see that. So perhaps you could explain sort of where we are in that cycle of seeing those declining fiber prices in the Mercer P&L?

David Gandossi -- President and Chief Executive Officer

Well, we got some of it and there's more to come. It's -- for others that might aren't -- maybe not quite as familiar with the situation, so we build inventory for the winter so that if there is large storms or heavy snowfalls or whatever, we've got access to wood without being harvesting. So you build up your inventory. We did that. And as wood costs continue to decline, you have to work that average cost of inventory valuation down. So some of it unwound in this quarter, and there'll be more to unwind in the next quarter. And we see this trend continuing. There's a lot of wood available. In Europe, if you've got some damaged forest areas for whatever reason, then the losses you take it out, you prioritize that and you bring it out and you put it on the market. So there's really more wood available than there are buyers to buy it. It is the dynamic. So we're seeing some pretty cheap wood over there. And we think that's going to continue.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Can you just quantify the downward move perhaps in those wood prices, David, in terms of like dollars per pulp tonne or dollars per wood tonne? Or how should we -- how best to think about it?

David Gandossi -- President and Chief Executive Officer

Yes, I've got to be -- we haven't disclosed all that stuff on the pulp. So I don't want to get into some specific numbers, Adam.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Fair enough. Perfect. I think that's all I have. Thank you very much.

David Gandossi -- President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of Joe Pratt with Stifel.

Joe Pratt -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Hi good morning Dave and Dave. Looking at Canada, my simple question is what percentage of NBSK producers up there do you think have a direct operating cost that's higher than the current price?

David Gandossi -- President and Chief Executive Officer

Well, Joe, just generally, I would say most Canadian pulp producers are either -- well, we took a writedown at both mills. And we're the low-cost guys over here. So I would say everybody is under water from a cash cost perspective. Some of them are going to be struggling simply from access to fiber, as I mentioned earlier. So it's tough going for the high-cost guys right now for sure. And that's part of why I think that we're going to see some events that improve the situation in the back half of this year.

Joe Pratt -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay. And do any of those with financial pressures have balance sheet pressures at the same time?

David Gandossi -- President and Chief Executive Officer

Hard to say. But I think it's a physical factor. I think it's access to wood, fundamentally.

Joe Pratt -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Yeah. Okay, thank you.

Operator

Our next question is from the line of DeForest Hinman with Walthausen & Company.

DeForest Hinman -- Walthausen & Company -- Analyst

Thanks for taking my questions. Can you help us think about capital allocation? I know we give everyone an update in the first quarter dividend increase, share purchase authorization. The market is always dynamic as it relates to pricing, and we're seeing that, to do some repurchase in the first quarter, although it was at a level higher than the current share price. And a lot of things have changed over the last few months. So can you help us think about, how you're thinking about capital allocation in a very high level? Then I'll have a, probably have a couple of follow-ups.

David Gandossi -- President and Chief Executive Officer

Yes. Sure, DeForest. Well, there's some big picture, big picture, concepts in the way we think about capital allocation. Obviously, I would say, one of them is a deep commitment to the dividend. I've always said that and believe it, and we will do that. Our Board is all aligned that we want to return a dividend to shareholders throughout the cycle. So that's one. Another pillar for us is to maintain a strong balance sheet throughout the cycle, so that investors are never concerned that if we go through a dip like we've done that there will be any permanent destruction of capital. So we maintain a strong balance sheet. We invest in our mills to be highly productive and reliable to make maximum use of our waste streams and our byproducts and all that kind of stuff. So we're -- we have a concept of sustainability where we want to be here for the long term. We want to continue to build just exceptional mills and human resources to run them. So it's stay the course. As far as the share buyback is concerned, we have that tool available to us and depending on how we're trading and how we're thinking about things, we will utilize that to the best of our judgment going forward.

DeForest Hinman -- Walthausen & Company -- Analyst

Thank you. That's helpful. Maybe just a little bit more detail on the share repurchase authorization. We have bought stock in the past a little bit more, I think -- opportunistic, but just taking your comments that you've made, it sounds like expectations are for pricing to improve, driven by volumes moving and potentially some pending curtailments. A share price at this level, is it an opportunity to use that repurchase authorization opportunistically? Or should we think about the share repurchase authorization more as a way to consistently return capital to shareholders over time either with ebbs and flows of your share price and NBSK prices in general?

David Gandossi -- President and Chief Executive Officer

Yes, I'm not sure how to answer that. We just think of it as another tool in the toolkit. And depending on the direction the equity markets go, we'll use it more or less. It's just really all about what unfolds. It's nice to have that opportunity if the stock trades off to pick up some stock. But we also are very focused on continuing to invest in our mills and to have the capacity to grow when the opportunities present themselves. So we really just need to be balanced in our entire approach.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. One of the questioners asked about mills running cash-negative level in Canada. Is there any situation that you're seeing out there where that's occurring in other geographies as well either on the softwood side or hardwood side?

David Gandossi -- President and Chief Executive Officer

Certainly, yes. I think one of the things I think is quite a material issue for some is the integrated pulp in China. So this is -- these are the pulp and paper mills. Paper mills that have pulp mills in front of them that are fully integrated, none of that ever hits the pulp market, but it's their furnish for their paper. These guys are buying wood chips in Vietnam and Australia and places like that. And it is really high cost for them. The future flows of chips from Southeast Asia and other markets is expected to decline. It is not a sustainable thing. And that pulp production would be significantly more expensive to manufacture than it would be for them just to purchase. And they don't have the same fixed cost constraints that North -- Western countries would have, perhaps. So it's hard to have visibility into that, but my expectation is there is shifting from integrated pulp production to market purchases of either recycled or hardwood.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. Thank you for taking my questions.

Operator

Our next question comes from the line of Sean Steuart with TD Securities.

Sean Steuart -- TD Securities -- Analyst

Thanks, good morning guys. I appreciate all the detail on your take on the markets and the cost curve. A couple of questions on downtime. Just with respect to this quarter at Cariboo. The expense of just under $11 million relative to the downtime taken seems quite high. Any context you can give us on any project-specific items that might have skewed that this quarter?

David Gandossi -- President and Chief Executive Officer

No, I don't think any details I might refer to it would be hard to put into context. I mean, it was a big shut. We've got all the work done. And I think things went reasonably well. They struggled to get up. At the end, there were a couple of, as always, these big mills sometimes takes a little while to get them all settle down. So we suffered a little bit of that. But no, I -- nothing really to -- that's remarkable.

Sean Steuart -- TD Securities -- Analyst

Okay. And with the Peace River shut being the major one being pushed to 2020. Can you give us an idea of what else you have on deck next year? And if the total downtime -- the total maintenance program is going to be bigger than what you'll see this year?

David Gandossi -- President and Chief Executive Officer

Yes, I don't know, but I wouldn't expect it to be bigger. We're moving toward 18-month shuts that you'll see, Peace River will be 17 months from its shut. Stendal, we've done 18 months for a time and that will probably continue. There is in fact, Stendal won't have a shut next year at all. Peace's recovery boiler may happen next year, it may happen the next year. Regardless of when it happens, it will be covered by business interruption insurance. The work that's in play right now are -- the big components are the Friesau sawmill finishing that off this year, a little bit next year on some additional sorting the bale line in Celgar, which debottlenecks one of our pulp machines there. And so as we continue to debottleneck and improve reliability, the place you need to be able to run is at the back end of the mill, and that bale line bottlenecks that drier at about 180 meters a minute. And if we can, the new bale line will debottleneck that issue. And so we'll have capacity well above 200, and we'll push the machine and find out where the next bottlenecks are. So it will be a high-return project. Celgar is also -- we're putting a new stock-prep containment system under the machine, so that we get a better, more even furnish on the machine, which will allow both of them to speed up. Peace River's maintenance is as usual, and Stendal is continuing to work on debottlenecking there. And Rosenthal will be pretty light. Just business as usual.

Sean Steuart -- TD Securities -- Analyst

Okay, that's useful detail. Thanks very much guys.

Operator

[Operator Instructions] And our next question is from the line of Andrew Shapiro with Lawndale Capital Management.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Hi, thank you. A lot of my questions were asked and answered. So I have a few fringes here on the edge on those. When you talked about market-driven shuts and the lack of wood and all that for some of the competitors that are, almost everyone there's higher costs in Canada. There are also passage of time, a bunch of facilities where, I guess, their boilers or other major equipment are getting near end of life, and these plants are facing a substantial amount of capital expenditure needs. Do you -- are there any in particular or do you see some that are really facing the decision of a permanent shut because of these end-of-life issues for a major capital component?

David Gandossi -- President and Chief Executive Officer

Well, certainly, there are some old timers out there that must be really, really difficult to run and very expensive to maintain. And then when you combine that with all of the changes that are happening on the fiber supply side, I'm expecting to see some fairly significant reductions in pulp capacity globally. So I don't want to name names, Andrew, it's just not fair to the other operators. But I think, generally, within the industry, we know who some of those mills are and it's hard to predict what owners will do, but they must be very close to the edge is my feeling.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

But these decisions are, without naming names, these decisions are going to be permanent shuttering of capacity rather than an extended market shutdown.

David Gandossi -- President and Chief Executive Officer

I don't know that.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

Is that right?

David Gandossi -- President and Chief Executive Officer

I don't know that. We'll see.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

Okay.

David Gandossi -- President and Chief Executive Officer

It always depends on situations. I'll leave it at that.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

Okay. Like I said, many of the other questions I had were asked and answered, but I don't recall in your scripts any updates. So I want to ask about the update on Santanol as well as -- I got a longer history here and others may not even know you have the investment. But your nanocellulose joint venture, which I thought was about to have maybe some commercial product six months ago when I asked. So can you update on both of those? We'll call them a longer-term interesting investments.

David Gandossi -- President and Chief Executive Officer

Yes, sure. So the sandalwood plantations in Western Australia are -- we're really getting our hands around that situation now. And very pleased with what we've purchased. The -- there is growth potential in that side as well, and it's created a platform for us to move further forward with our extractors and other related activities. We see that as a -- what we call our asset-light growth strategy. And so we -- I think we've got a good entry point there, and it's developing nicely.

On the cellulose filaments, for listeners who don't know what that is, this is heavily fibrillated fiber that creates strength properties in various products. I just recently met with our joint venture partner, Resolute with Yves Laflamme and his team to have a complete review. And we continue to be optimistic that there's value in those products. And so this is an R&D activity where we're looking for novel product applications that would be material. So still committed to it and still moving forward.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

David, over a period of time because it's a joint venture, has our percentage gone up, gone down from other cash and dilution? What's our percentage in that JV?

David Gandossi -- President and Chief Executive Officer

No, no. We're 50-50, and we're perfectly aligned as organizations on our objectives.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

Okay. And lastly, what are the plans for your investment presentations, non-deal road shows in the coming months? I know, one, I think was recently announced taking place soon after earnings here. But what else is on the longer multiple month runway?

David Gandossi -- President and Chief Executive Officer

Yes, well, I'm at Jefferies next week. I've got a nice full day there. I've also got a couple of days of marketing in the region with David Rafferty [Phonetic] our IR front, lined up meetings with some of the listeners on the call and some new ones. And Dave, what else have we got in the fall?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

We've got -- we'll be attending the TD Forest Products Forum in mid-September, and...

David Gandossi -- President and Chief Executive Officer

That's me, right?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Yes.

And then, we will be -- we're working on a road show that will be an East Coast roadshow in the fall. The details are still to be determined. But if there's any listeners that would like to -- us to reach out to them when we go to the East Coast, please let David or I know, and we'll make sure you're included.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

And you have any plans for the San Francisco Bay Area at present?

David Gandossi -- President and Chief Executive Officer

No, we don't at the moment.

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

Okay, I'm sure you'll let me know when it comes. Thanks a lot guys.

David Gandossi -- President and Chief Executive Officer

Thank you, Andrew.

Operator

Our next question is from the line of Dan Jacome with Sidoti & Company.

Dan Jacome -- Sidoti & Company -- Analyst

Hi, good morning all. Thank you for taking the question. I was actually just looking for an update on your biomass energy business. I mean, just skewing off the second quarter, looks like you're clearly approaching a $100 million plus run rate, even of course, factoring in the recent acquisition. But I wanted to hear your thoughts on that going forward. I know taht the, you've enormous stake in the Celgar, BC Hydro agreement expires next year. I just wanted to get some flavor from you guys on how you think you're going to weather through that. And then, of course, weather through, if I'm not mistaken, the some of these green rates should be regressing somewhere in like a 7% to 9% range in the next couple of years just kind of normal attrition. Just wondering about that? That would be great. Thank you.

David Gandossi -- President and Chief Executive Officer

Yes. Well, I guess maybe I'll start with Europe. So I think the situation, the way to think about that is that Celgar's current tariff ends in 2020 and Stendal's would be 2024, and the legislation says that those rates that were in the previous tariff extend for two more years and then they regress 8% a year down to the point where you cross the line of today's market rates.

If you look at the forward curve and the changes in the electricity market in Germany, with walking away from nuclear and coal and so on, we're expecting to have pretty attractive generating assets in a regime that needs power and needs firm power. So that's stable I think. In Alberta, there's no changes expected for the foreseeable future. In British Columbia, we are starting to engage with the provincial government in BC Hydro on what the next energy purchase deal is going to be. My view is that green energy from a pulp mill where you produce all this employment and then allow them to monetize all the trees that the crown owns is just a no-brainer. And so we're expecting them to figure that out in time. And so it should be fine.

Dan Jacome -- Sidoti & Company -- Analyst

Okay. It sounds like you have a favorable outlook for some of these things that are up for, for a lack of a better word, contract or what have you.

David Gandossi -- President and Chief Executive Officer

If common sense prevails, yes, that would be the case.

Dan Jacome -- Sidoti & Company -- Analyst

Okay. All right. Thank you, guys. Good luck with the rest of the current quarter.

David Gandossi -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Frank Duplak with Prudential.

Frank Duplak -- Prudential -- Analyst

David Ure, can you just give us a little update on maybe where the full year capital spending may come out now? It sounds like maybe some of the Peace River spending is going to be delayed. I guess, I'm thinking maybe $130 million a year this year and next year. Is that the right ballpark?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

Yeah. I think, we're probably a little bit higher than that in 2019, probably closer to $140 million. And in terms of 2020, I think it's probably a little premature to describe that, yet we're still in the process of working on that plan.

Frank Duplak -- Prudential -- Analyst

Can you give us any directional guidance at this point for 2020?

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

No, I think it'd be premature, Frank.

Frank Duplak -- Prudential -- Analyst

Okay. Thanks I appreciate it.

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

But we'll have more to talk about it. Yes, we'll definitely have more to say on this in the next quarter, which is typically matching our planning cycle.

David Gandossi -- President and Chief Executive Officer

I think one thing we might be able to add though is that the projects that will be in 2020 and 2021 are much more heavily weighted to high return than maintenance and reliability. So that's -- we're moving back into that discretionary mode where we will pick off the projects that give us the highest return. And we don't want to just continue to spend, we want to make sure that we bring the mills up to their full capability as opposed to keep spending money on them. So we'll judiciously pick those high-return projects that we think contribute to further debottlenecking within the mills.

Frank Duplak -- Prudential -- Analyst

Thanks, that's helpful guys. Appreciate it.

Operator

At this time, we have no further questions. I'll turn the call back over to David Gandossi for any closing remarks.

David Gandossi -- President and Chief Executive Officer

Okay. Well, thank you, everyone, for joining the call. And as always, Dave and I are happy to talk anytime. So don't hesitate to call one of us, and I look forward to seeing some of you perhaps next week. Thanks, again.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

David Ure -- Senior Vice President, Chief Financial Officer and Secretary

David Gandossi -- President and Chief Executive Officer

Marcus Campeau -- RBC Capital Markets -- Analyst

Hamir Patel -- CIBC Capital Markets -- Analyst

Andrew Kuske -- Credit Suisse -- Analyst

Adam Zirkin -- Knighthead Capital Management -- Analyst

Joe Pratt -- Stifel, Nicolaus & Company, Incorporated -- Analyst

DeForest Hinman -- Walthausen & Company -- Analyst

Sean Steuart -- TD Securities -- Analyst

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Andrew Evan Shapiro -- Lawndale Capital Management -- Analyst

Dan Jacome -- Sidoti & Company -- Analyst

Frank Duplak -- Prudential -- Analyst

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