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Mercer International Inc (NASDAQ:MERC)
Q4 2019 Earnings Call
Feb 14, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Mercer International's Fourth 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 of Finance, Chief Financial Officer and Secretary.

I will now hand the call over to David Ure. You may begin Sir.

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

Good morning, everyone. I'll begin by reviewing the fourth quarter's financial results. Following my remarks, I'll pass the call to David, who will comment on our key markets, operational performance, progress on our strategic initiatives, along with our outlook into the first 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 Securities and Exchange Commission.

Our fourth quarter results were noticeably impacted by our most ambitious planned annual maintenance period in recent history, along with weakness in the pulp markets, which combined to dampen our financial results considerably. Our heavy maintenance spending this quarter leaves us well positioned to operate without major maintenance until the third quarter, allowing us to take full advantage of improving market conditions when they occur.

We incurred an EBITDA loss in the fourth quarter of about $34 million, compared to positive EBITDA of about $51 million in Q3. The majority of the sequential drop was anticipated, and reflects the completion of the annual maintenance shuts at our three largest pulp mills in Q4. In total, our scheduled maintenance negatively impacted EBITDA by about $74 million. In addition to the planned impact of the shuts and modest reductions in pulp realizations, the U.S. dollar weakened significantly, also negatively impacting EBITDA.

The EBITDA loss is entirely attributed to the pulp segment, which incurred a $37 million EBITDA loss, while our wood products segment contributed positive EBITDA of about $7 million. Our strong wood products segment results reflect improved sales realizations and strong production despite the ongoing construction activities under way on site, along with the benefit of lower sawlog prices.

As usual, you can find additional segment disclosures in our Form 10-K, which can be found on the SEC website.

While NBSK market pricing was relatively flat sequentially in China, we experienced some deterioration in European list prices. Hardwood pricing in all markets also fell during the quarter. Compared to Q3, our average pulp realizations negatively impacted EBITDA by about $12 million. Our pulp sales volume totaled 482,000 tonnes, which was down about 60,000 tonnes from Q3, reflecting the planned Q4 maintenance shuts at Stendal, Celgar and Peace River.

On the wood product side of our business, sales were solid and we sold the equivalent of about 101 million board feet of lumber in the quarter, with about 32% of this volume being sold to the U.S. market. Electricity sales totaled 178 gigawatt hours in the quarter, which is down roughly 25% relative to Q3, due to our heavy Q4 annual maintenance schedule. Our Cariboo pulp joint venture, which is accounted for using the equity method, added another 20 gigawatt hours to this total.

We reported a net loss of $72.7 million for the quarter or $1.11 per share compared to net income of $1.2 million or $0.02 per share in Q3. Cash flow in the quarter totaled $86 million compared to $8 million in Q3. Despite the low level of EBITDA, operating cash flow was strong at $56 million and reflected a considerable reduction in working capital of just over $90 million. Also contributing to the increase was the issue of $200 million in face value of our 2025 Senior Notes. This transaction was completed in October. The proceeds of which were used in part to redeem the remaining $100 million face value of the 2022 Senior Notes. We also invested about $50 million in capital in our mills this quarter, and David will speak more to our 2019 capex and spending expectations in 2020.

Our leverage has been elevated somewhat to about 3.5 times annual EBITDA. The increase was primarily due to the drop in EBITDA and reflects our current position in the market cycle. However, our liquidity improved during the quarter and remained solid totaling $638 million, including $351 million of cash and $287 million of undrawn revolvers.

During the quarter, we recorded the reversal of $13.7 million of previously accrued wastewater fees, the reversal is the result of a waiver provided by regulatory authorities based on our successful completion of qualifying capital expenditures that target emission reductions at our Stendal mill. You will recall that in Germany, wastewater fees accrue to water consuming industries. However, under certain conditions, those fees will be waived if water consuming entities complete capital projects that lead to permanent reductions in permitted emission levels. The reversal comes in addition to $7.2 million reversal at our Rosenthal mill recorded in our Q3 results. Low pulp prices continue to force us to revalue certain components of our inventory. In Q4, this resulted in a non-cash $9.2 million inventory write down. However, after considering the reversal of the Q3 inventory write down of $6.9 million, our net negative EBITDA impact in Q4 was about $2.3 million. To the extent pulp prices increase, we will recognize a profit on this written down inventory in Q1.

In addition, Stendal, Celgar and Peace River's planned maintenance shut this quarter totaled 54 days and resulted in loss production and direct costs impact in Q4 EBITDA by about $74 million. Our competitors that report their results under IFRS are allowed to capitalize the majority of these costs.

Earlier this year, 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 did not purchase any additional shares. And as we noted in our press release yesterday, our Board has approved our quarterly dividend of $0.1375 quarter per share for shareholders of record on March 25, for which payment will be made on April 1, 2020.

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

David M. Gandossi -- President and Chief Executive Officer

Thanks, Dave and good morning, everyone. As David highlighted, our financial performance in the quarter was dominated by our heavy annual planned maintenance program in combination with weak pulp markets. Despite the impact of these elements on our financial results, we were generally satisfied with our mills' operating performance. Our Friesau saw mill recorded strong production and Stendal ran at record capacity on a per operating day basis.

Pulp prices in Q4 generally experienced negative pricing pressure due to higher producer inventory levels. European and North American NBSK pulp prices weakened early in Q4 and then remained flat. In China, average NBSK prices were essentially flat through the quarter. Pulp shipments were strong and we saw considerable reductions in Chinese port stocks through the quarter. This is reflected in the latest industry inventory statistics. At the end of November 2019, NBSK and NBHK producer inventories were at 34 days and 48 days, respectively. These metrics may increase slightly at the end of December due to seasonal logistical slowdowns at the end of December, but we expect inventories to continue to move toward being in balance in 2020.

In China, the Q4 average NBSK price was $588 per tonne, virtually unchanged from the $585 per tonne in Q3. European list prices averaged $822 per tonne in the quarter compared to $860 per tonne in Q3. The average Q4 hardwood list price in China was $475 per tonne, down $32 from Q3 and the hardwood list price in U.S. market averaged $893 per tonne in Q4 compared to $970 per tonne in Q3.

As we closed out 2019, high industry maintenance downtime levels, a mill closure in Eastern Canada, the threat of a lengthy strike in Finland, and lower producer inventory levels, combined with tightening fiber supply in some regions led us to believe that the NBSK market price would start to increase. The hardwood inventory levels on the other hand have been an overhang, but we have also seen big inventory shifts from producers to customers, particularly in China, which is a positive development.

With both transaction volumes high, [Technical Issues] and generally profitable, particularly in China, we felt the turn could be near. Unfortunately, the outbreak of the coronavirus has added a new variable to the global economic outlook, which is difficult to evaluate at this time. Despite this uncertainty, the improving market conditions have led many of our competitors to announce price increases for February and March across all major markets. We consider the softwood market to be in good shape, but the low prices for hardwood will dampen upward momentum, because we believe there are limits to how wide the spread can go between the grades. We believe hardwood prices are at the bottom, but it will take some time to work through the current inventory situation in China. Now to add a few comments specifically on the coronavirus threat and its impact on our markets, the risk to us mainly relates to quarantine actions and logistics. Some highways have been closed to restrict movement in certain regions, some factories have deferred start-up after the Lunar New Year and employees who left their jobs to return home for holidays have been slow to return. All of this is requiring us to work with our customers to manage a return to normal of operations still remains unclear when that might happen. We continue to believe that steady demand combined with the absence of new capacity, along with announced curtailments and possible supply constraints, will exert upward pressure on pulp prices in the coming months.

With regards to our wood products business, the European lumber markets continue to experience steady demand. However, pricing was down slightly compared to Q3, which continues to be impacted by lower sawlog prices. Lumber markets in the U.S. showed considerable improvement in Q4. We believe that lumber production curtailments in British Columbia, due in part to the limited supply of sawlogs and positive statistical data on the U.S. housing market are creating this upward pricing pressure. The Random Lengths U.S. benchmark for Western S-P-F #2 and Better averaged $380 per thousand board feet in Q4 compared to $356 in Q3. Today, the benchmark is close to $418 per thousand.

In Q4, about 32% of our lumber sales volume were in the U.S. market, with the majority of the remainder of our sales in the European market. When comparing to Q3, our average realized lumber prices -- sales prices increased slightly to $347 per thousand in Q4 compared to $337 in Q3. Outside of the annual maintenance shut, we had some instability in our pulp productivity as we optimized new equipment installed in the Q4 shuts. Including our Cariboo joint venture, we produced 442,000 tonnes of pulp. We estimate that the 54 days of scheduled annual maintenance downtime at our pulp mills reduced production by about 87,000 tonnes. Excluding our Cariboo joint venture, our pulp mills produced 433 gigawatt hours of power. This total was negatively impacted by our heavy Q4 planned maintenance.

Our wood product segment performed well this quarter, despite relatively weak, but improving market conditions and ongoing disruptions of production as we work through the Friesau construction project. We produced almost 107 million board feet of lumber. As Dave mentioned, our wood product segment generated about $7 million of EBITDA in Q4. The Friesau saw mill also allowed us to achieve over $4.5 million of synergies this quarter, the majority of which resulted from reduced woodchip costs for the Rosenthal pulp mill. Year-to-date, Friesau has created almost $14.7 million of synergies.

In Germany, beetle damaged wood remains plentiful and is resulting in lower log costs generally. We expect this log supply dynamic to last at least through the first half of 2020. In Western Canada, pulpwood supply remains tight, sawmill curtailments have limited the sawmill chip supply, resulting in higher cost options being used to replace those volumes. Looking forward, we expect our wood costs to be stable in Q1.

Our annual maintenance program for 2020 is firming up. Our preliminary expectation is that one, Stendal will take two short three-day shuts likely in Q2 and Q4, Cariboo will have a five-day shut in Q2, Rosenthal will take a typical 15-day shut in Q4, Peace River will take a 60-day recovery boiler rebuild shut in the fall straddling Q3 and Q4, and I remind listeners other than the normal shut period that will be covered by insurance, and Celgar will take the three-day -- will take three mini shuts in Q1, Q2 to Q4 and its larger 10-day shut in Q3.

2019 was a year of heavy capital spending. In total, we have invested approximately $132 million in our mills. The majority of which were high return investments like our Friesau sawmill upgrade that when finished in 2021, will make that one of the largest and most efficient in the world. In addition, while not included in our capex numbers, we have continued to invest in German wood logistics by increasing our fleet of highly efficient log and lumber hauling railcars.

And before I turn the call over for questions, I'll take a moment to comment on our operating approach for 2020. In terms of capital spending, we have planned a much more modest program for 2020. It will focus on the completion of the Friesau Phase 2 expansion project, along with some smaller high return productivity and cost reduction initiatives. We will also expect to commence early work on the production expansion project at Stendal, which when complete in 2021, will increase the total capacity of that mill from 660,000 tonnes to 740,000 tonnes per year. Our early estimate is that our total capex spend for 2020 will be below $100 million.

2020 is starting out with pulp prices on the floor. So we will be operating with a view to doing everything we can to optimize our fiber handling and logistics and to control and reduce costs. Our balance sheet is in good shape with ample liquidity, but discipline at this stage in the cycle will contribute to shareholder value over the long term.

That completes our prepared remarks. I'll now turn the call back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Sean Steuart with TD Securities.

Sean Steuart -- TD Securities -- Analyst

Thanks. Good morning, guys. Few questions to start. With respect to NBSK prices, you noted the uncertainty in the near term in China. Can you give us some context on how the February hikes are progressing in the other markets?

David M. Gandossi -- President and Chief Executive Officer

Yeah, it's a lot of pushback, obviously, Sean. So, it's hard to say how much if any of those increases will get. Really too early to be definitive, but there is an overhang in China, so everybody kind of looks at that. So, as well, maybe we should hold the line here. So...

Sean Steuart -- TD Securities -- Analyst

That makes sense. The buyback activity in light of the more recent weakness in your share price, any context you can give us on your intent to get busy on the buyback through the next few months?

David M. Gandossi -- President and Chief Executive Officer

No, I don't want to signal anything too specific, Sean. It's a tool we have that we can use, if we feel the timing is right.

Sean Steuart -- TD Securities -- Analyst

Okay. And then last question for now, you touched on incremental volumes for Friesau going into the U.S. market. Can you give us a sense of your sales plan geographically for that asset? In 2020, how much more incremental supply would you expect to move into the U.S. market?

David M. Gandossi -- President and Chief Executive Officer

Yeah, it's -- we're sort of around the 30% range right now and I could see that creeping up a little bit. What's really nice about the Friesau mill, now that we've got transverse grading and trimming capabilities and we're enhancing all our sorting, obviously. We can take that lower value log and -- that we get -- the calamity wood in Germany and we can process select number out of it.

So, many of the European mills can't do that. And so -- and there is limitations on greenwood in Europe when there -- everybody is chasing the lower cost calamity wood. So, sometimes European market has got a little tied up with too much capacity chasing the same profile and with our flexibility, we can step out of that and with good logistics to the U.S. market, we'll be taking advantage of that.

I think we'll also be expanding our J-grade offering. And we have -- also dimension lumber in the U.K. can be fairly good return for us as well. So, we'll be honoring our roots in the European market, but we'll be taking advantage of our ability to service the higher margin markets, the dimension lumber markets in the coming year, I'm sure.

Sean Steuart -- TD Securities -- Analyst

Okay. Thanks, David. That's all I have for now.

Operator

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

Hamir Patel -- CIBC Capital Markets -- Analyst

Hi, good morning. David, I'll ask about the calamity wood. How much supply do you see? Is that a multi-year event for you? Heard different things from different companies as to how long that could persist. And are you seeing signs of some of the European competitors looking to invest in their sawmilling capacity to take advantage of that?

David M. Gandossi -- President and Chief Executive Officer

Yeah. So it's -- we're sort of on the third year of a drought in Europe and some of the older spruce, obviously, is impacted by the beetle and so there's been lots of it available. German forestry rules don't allow you to leave it standing. Unlike the pine beetle situation in British Columbia, there is a very aggressive approach to bringing that wood out. So, there is lots on offer and it's pretty cheap compared to what it would have been if it was a prime sawlog before the calamity.

What the future holds partially depends on weather. That beetle doesn't like really wet conditions. So, if we get some good weather here before the summer that could have a big positive impact. If it's dry again and continues to be dry, then there'll be calamity wood again for the foreseeable future.

This could be -- we don't know, but if you look at like the pine beetle situation, I mean, that was a 15-year situation where there was excess wood available. In Canada, lots of the super mills were built up to take advantage of that. It's quite interesting. We're not seeing any of that in Europe. Like we have -- we just are not seeing anybody else moving into the commitment to get into planting, drying and transverse optical grading and those kinds of things. It's -- everybody just seems to be hunkered down. A lot of it -- a lot of the sawmilling is smaller family owned entities and I just not -- don't see them taking the bet to build bigger mills to process this kind of wood.

So, I think we'll benefit from it for quite some considerable period of time. We've got the flexibility. If the calamity resolves, we can process fresh wood like the best of them. If calamity wood is available, then we can hit it out of the park because of the low cost.

Hamir Patel -- CIBC Capital Markets -- Analyst

Great. Thanks. And Dave, would you look to, I think, pre-sell potentially? Could you add another shift there?

David M. Gandossi -- President and Chief Executive Officer

We could, yeah. But we've got to finish off the ramp up of the planer and then we've got the final sorting lines to do this year. So I don't think we'll be doing that this year, but certainly adding a third shift in the coming years is totally doable. It will be a very efficient sawmill. So the manning issues are not that challenging anymore. So, yeah.

Hamir Patel -- CIBC Capital Markets -- Analyst

Okay, great. Thanks. That's helpful. And then just a final one from me. Your Performance BioFilaments partner, Resolute, they're building a plant to produce cellulose filaments commercially. Can you just update us as to how you're looking to commercialize other bioproducts from your own pulp mills?

David M. Gandossi -- President and Chief Executive Officer

Well, other bioproducts that we produce are things like green energy, obviously, crude tall oil, turpentine, we're moving into biomethanol at our Stendal plant. We look at sterols and other products. They're all just sort of additives. Down the road, we certainly see lignin in our future for a variety of different applications. Number of --- there has been a lot of people, lot of money spent looking at opportunities with lignin. I think some of that's getting close to being very viable. So, we're all over that.

Very pleased with Resolute's decision to build the CF plant. We're partners with Resolute on -- we have a -- we're partners in all non-pulp and paper novel products that are made with BioFilaments. So, their commitment to building the plant is a sign of their confidence in the future of this material and it's a longer-term project as I've always said, but we're moving well in a good positive direction there.

Hamir Patel -- CIBC Capital Markets -- Analyst

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

Operator

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

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

Hi, thanks for taking my questions this morning. Just a little bit more color on Chinese activity. You mentioned the coronavirus, but can you kind of give us play-by-play in terms of what happened in January from volume perspective? And then what's been going on last couple of weeks in February? And color from a customer basis would be helpful and then also from a trader perspective as well.

David M. Gandossi -- President and Chief Executive Officer

Sure. Well, there's a number of things, DeForest. To start with leading up to the coronavirus outbreak, Chinese paper makers in general were running really hard and consumption was good, margins were a great, particularly on tissue, it was fantastic and it looked like things are really about to turn. And then what this outbreak has done is everybody goes home for Lunar New Year and all of a sudden the virus hit and then it -- so people get stuck where they are and you can't get back home. During the Lunar New Year, our understanding is that most of the big paper mills kept running, which is not always the case, but this year because they were so profitable and consumption was strong, the big guys all ran. And so -- and they're still running. The little guys that went down, small, medium mills are just starting to come back now.

It's been -- the authorities delayed the Lunar New Year holidays to try to encourage people to stay where they are. But as these people are all coming back to work now, these mills are ramping up and trying to get going. Their challenges are -- there is twofold; first, they got to get the people back; then they have to get raw materials into the mills; and they have to get their finished products to their markets. And the authorities doing everything they can to restrict the movement of the virus. You could imagine a trucker, he's got a life his away that says, you get to drive down this highway from A to B and you can't go anywhere other than A to B, and somebody in the background is trying to bribe them to turn off at C, and the authorities are blocking entrances and it's a bit of a gong show is our understanding. So it's really restrictive where they can go and what they can do, and that's the overhang. It's getting their finished goods to the market, getting our pulp into their mills, and just -- we just -- if things would get back to normal and once the system starts to open up, we'll work through it and things will really start to move.

Some of the reports you read about the -- on the hardwood side are interesting. I guess, leading up again to the end of the year, there was some feeling that there have been a big shift of inventory from producers to the customers, a lot of that was in the hands of traders then and so there would be a lot of it gets pulled off the market and there is going to be a push in the New Year for higher prices. And so, you saw announcements and producers were pushing for higher prices and what you're seeing now is with the slowdown, the paper makers are saying, I don't want to honor that order, I'm just going to keep taking it at the old price and Suzano has offered flat pricing in Q1, which is kind of ties into that story.

So, it -- I don't think it's a signal that things are that bad that they're pushing back from orders. I think it's just a signal that, hey, they know the price is flat, so they don't need to pay anything more than what the [Indecipherable] price is.

And so, we're just waiting -- some -- one final comment on the dynamic of it all, a lot of it depends on the discipline of the South Americans, obviously. Last year, I think they ran at something like 82%. So, they probably left a couple of million tonnes off the table as a result of this inventory hiccup and what they do this year is completely within their control. If they -- everybody knows if they run super hard and just keep flooding pulp into the market while it's trying to recover, it's going to take longer. If they show some discipline, then things could crack fairly nicely. So, that's bit of a wildcard from my perspective.

Softwood, on the other hand, as I said earlier in my remarks, is balanced. Supply and demand is in good shape. We just need to eliminate the congestion and get everything running again and that grade will be tight, held back somewhat by the overhang of hardwood.

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

And just so we're clear, I know I'm kind of asking the same question twice, but on the trader side, I think in the past, you said they could be up to 30% of the volume going into China. Are they back buying? And you did mention in your press release, fourth quarter Chinese demand was very strong. So, was that encompassing B2B and then sales to the traders or what's going on there?

David M. Gandossi -- President and Chief Executive Officer

So what happened -- so there is two types of traders, I guess. Really, in simple terms, you've got the traders who facilitate trade finance for customers. So, there are traders that bring the Russian pulp into China as a regular basis. That is the -- that's part of the normal order fulfillment process. But there is also speculators and speculators can be the state-owned entities that buy commodities but there is also big paper companies who will speculate as well. And our understanding is that to be that big shift -- that big push to sell hardwood out of the warehouses in China in the fourth quarter, a good chunk of that would have been picked up by traders that are speculating. And so that's not going to come back on the market until there is -- until there is profit in it, obviously, or it might show up in the market if pulp prices fell further and they could buy a low sell -- sell this, right? So, I think that pulp is just kind of perked right now in these current conditions, until you start to see some upward movement.

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

Okay. And then maybe just different question but similar lines. If we think about our, I guess, contracted volumes and then our spot volumes, as it stands today, are those customers still taking contracted volumes and then stuff on a spot basis? Is the phone still ringing or has the market kind of just paused?

David M. Gandossi -- President and Chief Executive Officer

Yeah. No, so we have-- to be clear, we have no problem selling our pulp. Our contract customers are all taking product and that's fine. In China, you don't really have firm contracts, so we do in Europe and North America, but you have a relationship contract for a volume and they're taking orders. I mean, there hasn't been a big price increase. So they're happy to -- happy to buy their monthly allotments. So we're not having any problem making pulp go away.

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

Okay. And then, can you give us any color on fiber cost outlook across the different markets, maybe percent change year-over-year as it relates to start of the year?

David M. Gandossi -- President and Chief Executive Officer

Well, from our fourth quarter results, I think in Europe you can expect sort of a modest continual downward slope. And that's really just us optimizing and managing logistics and really getting in sync with this calamity wood that's available to us and working off the higher cost -- average cost of wood that -- we've always got a pretty big -- pretty big bundle of wood in front of the mills. So as cost comes down, the average cost comes down, so we're -- a little bit more improvement coming in Germany. I wouldn't call it will really be material for us, but it's generally in that direction.

As I said in my early remarks, for the Celgar mill, I think wood costs are going to be kind of stuck at the current level for a while until we see some improved saw-milling activity. I'm actually quite optimistic about that, there is -- the U.S. markets are really starting to recover for lumber and the curtailments, the closures that we saw last year, those mills have now run down their log decks there, they've shipped their lumber off to the markets and it's really starting to bite and I don't really think there is much inventory in the pipeline and I also know that lumber rates are scheduled to come down here in British Columbia in the near future. So, generally quite positive, so what that translates into pulp mill like Celgar is that it's going to have more availability of sawmill residuals, which will allow it to take the foot off the pedal on some of the higher cost around wood programs that they run.

Peace River is -- it will be stable. It's just -- the only thing that really impacts it is the seasonality, weather conditions, those kind of things, but it's very stable, diversifying so not much change.

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

Great. Thank you. And then my last question, can you just remind everybody about your covenants on your Senior Fixed-Rate Notes?

David M. Gandossi -- President and Chief Executive Officer

I'll let Dave talk to financial thing.

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

Yeah. So there -- the senior unsecured notes, they don't have material covenants. They have some baskets on the taking on of new debt. But -- but we're not near any -- we've got several hundred million available in those baskets to take on new debt. And then the revolvers are -- the German revolver has one covenant, but very, very flexible, It's a leverage covenant. But it's based on -- the leverage is based on the borrowing on that facility, and as you know from our disclosure, we've not borrowed on that facility yet. So lots of room there. And then the Canadian revolvers are springing covenant. So there's no covenants until you reach -- till you get close to borrowing the maximum borrowing base. So the maximum, imagine the working capital that supports those covenants and we've got a lot of room -- lot of room there. So the debt is quite flexible.

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

And just so everyone understands, is there any restrictions on share repurchases currently?

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

No, there are not. I mean there are baskets in the notes for restricted payments and that would be one of them, but there is a lot of room in those baskets still.

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

Okay. Thank you for taking my questions.

Operator

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

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Yeah, hi. Thank you. Just a few, one is a follow-up on the nanocellulose, the BioFilament. Can you summarize for us the -- I guess, the details of the economics of the joint venture and the particular business model in terms of maybe the timing for the revenue ramp? And it won't be consolidated up or how will that show on the balance sheet as that business generates revenues?

David M. Gandossi -- President and Chief Executive Officer

Well, it's a 50-50 joint venture.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Okay.

David M. Gandossi -- President and Chief Executive Officer

It -- we have a commitment to each other that as we develop these novel product applications, that we will do it together and we will share the economics 50-50. They're building a plant, they've-- it ties into other work they're doing in Quebec with one of their paper mills. As a joint venture we have access to that product with them and so that further ties us together. In terms of -- I think the product itself is -- it's a refined -- it's really highly refined pulp that creates like a strengthening agent and it provides properties to a number of different applications, like it can go in concrete and creates a stronger slab through its impact on the drying and it can change the viscosity of liquids, it can -- have -- some of the applications might be in drilling mud, and some of these other things as a lubricant so...

Andrew Shapiro -- Lawndale Capital Management -- Analyst

All right. And then the timing?

David M. Gandossi -- President and Chief Executive Officer

Well, the timing is always longer than we'd like it to be. So we've been looking at this for four years, and I just can't -- I don't want to signal that it's going to become a material contributor to our bottom-line here in the next year or two. But over time, these things have the potential to be very significant. So it's -- I think you should park it in the category of R&D right now, long term potential value creation. It's not consuming any material resources per se. We've made a $3 million commitment four years ago and we still have room in that to go. It's not an overly expensive development process. It's just -- it's the qualification, the time that it takes for customers to really get their heads around how to use it and make the commitment.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

And the plant that they're constructing, when would it be completed and starting to produce, and I guess sell small amounts of product?

David M. Gandossi -- President and Chief Executive Officer

Yeah, I think it's going to be less than 12 months to be completed.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Okay, I'm just trying to figure out where we can watch milestones and then with Stendal, similar long term investment, but with prospective high opportunities. When do you start seeing, I guess, harvestation and revenue creation from that investment?

David M. Gandossi -- President and Chief Executive Officer

Yeah, the -- right now the activities are fine-tuning the -- all of the care and management of the trees and getting the team to be really demonstrating as a sophisticated team, working on our marketing resources to be able to bring the product to market. We've been able to -- there are trees that are kind of like 13-years old and younger and the optimum harvest time is around 15 years. But -- so we've had -- we've been quite successful obtaining product to produce to sell in the market and we sell like $10 million of oil a year or something like that. Our trees start becoming harvestable in there based on their birth dates starting toward the end of 2021. And I think the scale of that will be something like 200 hectares per year of harvest from there on and replanting and tumbling forward in that way and that's when it will really be -- that's when you'll be able to see the business in its true form.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Okay, excellent. Back to the core business here. Suzano recently announced their earnings, etc., but one of the things that came out when they announced was, I guess, a pretty substantial drawdown on the large inventories that had been booked up. Is this -- was this a typical activity where they've been like, I wouldn't call the word dumping, but they've been blowing it out? Or is this now a stabilization of the market creating of a floor since they are such a big player?

David M. Gandossi -- President and Chief Executive Officer

Yeah, well, maybe -- that's a great question, Andy, and I'll just try to recharacterize the backdrop. So this, Suzano is a combination of Suzano and Fibria, two very large companies. And so they became the consolidator, big, big hardwood producer. And as you know, we've had a really good run on hardwood and softwood pricing. And then as the trade war started to slow down activity in China and other parts of the world, as the price of pulp started to fall like all commodities, it's just that sentiment move, this big company just kind of drew the line and said we're not hitting the bid. We're going to -- this is our price and if you want our pulp, this is our price and the market price, spot price fell quite a bit below what they were prepared to sell out and they felt they were big enough they could just hold the line. They held the line, they held the line, they held the line, and finally, they realized they've failed. So they offered a fire sale in the fourth quarter last year. They basically announced to the world for the fourth quarter, you can buy as much pulp in China as you like. You can come and pick it up or you can leave it in the warehouse but after the end of the fourth quarter, prices are going up.

So, as I was discussing on my last call, we were expecting a pretty good shift of ownership and in fact that happened like that pulp in China, they've been a massive sale off. A lot of it hasn't left the warehouses yet. Coronavirus is holding some of that back. But that more or less has all been sold and a big chunk of that would have been purchased by traders, as I was saying earlier. So that kind of takes it off the market until the price goes up.

Now, Suzano has come out and said, OK, price is flat again for the first quarter. I guess, we just didn't see the momentum to be able to raise prices. So, it's flat for the first quarter. So that's kind of holding everything in this limbo pattern and if they can keep the volume moving, once the coronavirus clears up and things get back to normal, that I'm sure they're intending to -- they are not very happy with these pulp prices either. So it's just getting through these [Indecipherable] really is what everybody is trying to do.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Right. And is your intelligence coming back from China -- we're all somewhat here in the dark, but you have business relationships there, so you might have better input than even the typical media coverage and all, is it that consumption itself is slowed up or just it's now the movement of the goods? And unlike, let's say, people who are not going to visit a hotel and the hotel sits vacant and that's lost inventory nights, right? This is, whether it's consumption of toilet paper, consumption of coated freesheet, consumption of whatever-- cardboard, is the consumption levels -- have they materially taken a hit that you can tell or not?

David M. Gandossi -- President and Chief Executive Officer

Yeah, it's a great question. And my view is that consumption doesn't change. These are consumable products. In fact, what I -- what we think is going on is that it's probably getting difficult to buy stuff on the shelves, like the inventory in the shops is getting lower and lower, the supply chain is draining, but the consumption of some of our products is probably going up quite significantly like, as an example, in every single elevator anywhere in China, there will be a box of tissue that is used to push the buttons, because this virus lives on surfaces and they all know that. So they will not touch an elevator button, they will not touch a door handle, they're walking around with a little packages of tissue and doing everything they can to protect themselves. So it's -- the challenge is getting inventory from the manufacturing facility into the stores, making sure the stores are able to be open and people can move around to go and buy stuff, like that's the congestion.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Okay. And then lastly, what are your plans for investment presentations, non-deal roadshows in the coming months?

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

Yeah. So we've -- we'll be attending the RBC Forest Products Forum at the end of March in Toronto and then we're also -- just the details are a little bit fluid at the moment, but we're hoping to put together a little bit of a road show on the U.S. East Coast in the next two months as well. So, if there is anybody who'd like to -- like a meeting, please give one of us a call and we'll make sure we get you on the list.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Great. Thank you for answering the multiple questions.

Operator

Your next question comes from Paul Quinn with RBC Capital Markets.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah, thanks very much. Good morning, Dave. Good Morning, Dave.

David M. Gandossi -- President and Chief Executive Officer

Hey, Paul.

Paul Quinn -- RBC Capital Markets -- Analyst

Thanks for the plug for the -- our forestry conference, by the way. I guess, stepping back a bit, it's been over a year since that DMI acquisition, just wondering what the major takeaways for you guys are from that deal and whether you're ready for another one.

David M. Gandossi -- President and Chief Executive Officer

Well, yeah, so having operated the mill for a year, I would say Mercer is delighted with that acquisition and we really like being in Alberta. Very supportive government, they're very helpful on clearing away red tape and regulatory burdens, those kinds of things. So, I really like that progressive conservative government there. We've got a tremendous FMA, with a lot of wood on it and as we're doing the inventories for our renewal, we're finding that the annual allowable cut on that FMA is growing quite significantly. So our biggest challenge is going to be -- we got so much wood, we got to figure out what to do with it, both softwood and hardwood.

We've got a great team, great mill, looking forward to getting this recovery boiler work done. We were in the boiler last year during the shut. I think those who follow us know that the tubes were not available for the timing of the shuts, so we deferred it to this year. But the boiler itself is fine, it's safe and operating well and will do for many years, but this boiler work is something that we need to do for the long term of the boiler and when we're finished, It will be like a brand new boiler. And so looking forward to getting that done.

We see continuing opportunities to refine and improve our logistics and our wood processing logistics. Currently, that's done primarily in remote -- lot of remote satellite chipping and we think there's opportunities to centralize that, bring the cost down and improve the yields. Those kind of initiatives don't see any major capital. Nothing really big going to be done in the mill here other than optimizing its cost structure and continuing to run with it.

As to whether we would buy another pulp mill, well, at this stage in the market, certainly not. I think the -- our focus is steady hand on the tiller, operate as best we can, really focus on the sustainability story that -- we'll be putting a sustainability report out this year with the demand for ESG metrics becoming so strong. We will be putting out our numbers and I think they'll surprise most people in terms of how efficient and well we perform both in the European market and also in the Canadian, North American context.

So -- and also, I just don't -- Paul, I just don't see Mercer buying any of these older pulp mill. So, it's just now -- it's not in our business strategy. We -- our strategy is to operate world-class modern pulp mills and there is a threshold upon which we participate, where we might -- can see getting a mill up to our level, but there just aren't really mainly targets like that out there that would ever become available.

So, I think our strategy is really growth in the solid wood side in conjunction with our sawmill -- with our pulp mill operations. So like what we've done with Friesau and Rosenthal, we see that duplicating that. In Stendal and I actually can see -- we're seeing the beginnings of a project to have a similar nature with the Peace River mill on the softwood side. So that's really where our focus is, as well as on [Indecipherable].

Paul Quinn -- RBC Capital Markets -- Analyst

Well, that's all I had. Best of luck guys. Thanks.

David M. Gandossi -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from Adam Zirkin with Knighthead.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Hey, gentlemen, appreciate you taking the time. Just a few questions for you. David, most of the -- when we talk about fiber optimization over the last couple of years, it seems most of those conversations have been around Europe. And you guys have done a great job there. Is there anything that could be done, particularly given the environment? And what's the economic position of some of the other mills in Western Canada to optimize the fiber planning in Canada?

David M. Gandossi -- President and Chief Executive Officer

Absolutely, Adam. So, one of the topics is working with the regulators to get the bigger truck configurations, like get to 10-axle, both for log culling and for the tandems for chips and we're making really good progress in Alberta. Things have been a bit slow in BC. So that's one. There is other strategies that -- that you can always do better and one of the things we're working on is a concept of drop trailers. So instead of having somebody who is doing a long haul for round wood which is what you have to do when you don't have enough sawmill residuals coming from the sawmills near the pulp mill, the guys can only drive for so long, so guy drives and he stops and he just parks his trailer in a holding spot and he goes to wherever he goes and another guy is doing back and forth, back and forth from there to the mill, you know what I'm saying. So it's like there's two legs, one guy goes back and forth on one leg and one guy goes back and forth in the other leg and they just detach and attach and you've got loaded and unloaded going in different directions. And that can significantly improve your cost structure for holding those kind of volumes. So that's an example of the strategy.

Also, as always, centralized shipping is better, when you're chipping in the bush, which is -- it's a lower capital so low cost solution, but you could have an 8% degradation of the wood in terms of, these are brutal tipping machines so you get a lot of sawdust, and fines, and smashed wood versus if you have a proper wood room at a pulp mill, you get a nice clean chip and you don't have as much sawdust, pins or fines. It takes a little capital to get there but the returns are -- tend to be quite nice. And we've just kind of -- we do have a wood at Celgar, there's optimization possibilities for it but it's just a recent development where we've had the fall down in sawmill activity and my guess is that's going to be coming back here in the near future, so I don't want to put in too much capital until we're really sure what the long term requirements need to be.,

And at Peace River, again, it's the bigger truck configurations and there's ways to optimize how we deal with the satellite yards. That's a really interesting one, so in Alberta, you can go anywhere in the winter, nice roads. In summer you can't go anywhere. So we have to work out, where should the satellite yards be, how do we do the drop trailer and the transfers, where does the chipping actually occur that could be the most efficient, that kind of things. So, we're doing out thing. We're continuing to optimize and edge our way forward into more and more efficient configurations and so there's lots of room for improvement, obviously but pretty good, not a bad starting point either so, it's a good team there.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Got it. And as you roll those things out, David, is this stuff that nurse to the benefit of Mercer specifically or sort of pulls fiber down for the entire industry, right? One of the -- one of the appeals of the railcar program obviously in Europe was that it was sort of yours and yours alone.

David M. Gandossi -- President and Chief Executive Officer

Yeah, they're all different dynamics. So in Alberta, it's all our fiber. So and it's cheap fiber, the main cost is processing and logistics. So whatever we can do to be more efficient is all for us and also the more softwood we can squeak out of that forest, the more softwood pulp we can produce, obviously, so because you know it's a swing mill. So we're moving in that direction. For -- in British Columbia for the Celgar situation and I guess, it's a lot the same for Cariboo, it's -- these are regional fiber plays and the more efficient we can be mobilizing fiber in and around the pulp mill to lower the cost for the pulp mill is to its benefit. In Germany, it's more of a global situation where, as you point out, you've got Central Europe and then you've got the French supplies coming, Russia, Poland, Czech, that kind of -- those kind of areas where you can get cheaper wood, but the logistics kind of prevent that wood from flowing for most. Most sawmills in Europe never buy anything farther than 150 kilometers away, they're also completely restricted by truck logistics, whereas there's Mercer block trains just one end of Poland to the other moving wood around. So we bring well over 1.5 million cubic meters of wood into Germany and that has the impact of lowering the entire wood basket in Germany just by taking demand off the table. I guess we have certainly different options for supply.

Adam Zirkin -- Knighthead Capital Management -- Analyst

That's very, very helpful. David, can I just ask you also just sort of a larger capital investment question? I know you guys have been very consistent in your view that there's really nothing to buy in pulp land in terms of the quality of assets, but you are sitting here at a tough point in the cycle, very well capitalized with a ton of liquidity, right? I know you've thought about -- you've thought about the sawmill projects, I know you've kicked around whether to build one or either buy one. I mean, how are you seeing larger scale investment and how are you thinking about perhaps that timing and what clues you're looking for maybe from pulp [Speech Overlap] dictated?

David M. Gandossi -- President and Chief Executive Officer

The way we think about things is, we're at the bottom of the cycle. So it's time to be really disciplined about costs and about capital and we want to preserve everybody's investments in us and not create any risk and all that kind of good stuff, but we don't want to lose the momentum either. So we're very focused on what it is we want to do. We're moving those projects along at the appropriate pace in the context of where we are in the cycle and when things improve and pulp prices start to improve and the free cash flow is coming, then we'll deploy capital in a very thoughtful way. And it's a longer-term value creation strategy, it's -- we're not trying to hit a home run next year, but over time this is going to become like a really efficient basket of assets that produce well throughout the cycle and elsewhere. That's where we're driving to. So we haven't -- we're not -- we're not abandoning those activities where we really know we're going to go, but we're not going to be launching anything of size in the short term until we've got a much better line of sight on the recovery.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Got it. And one last, just a very quick housekeeping question. How do you see the working capital flows over the next quarter or two? I had thought you typically consume some working capital in the winter, didn't see so much of that in the fourth quarter. So just curious, what should we expect as we model the cash?

David M. Gandossi -- President and Chief Executive Officer

There'll be a bit of a shift from the normal fourth quarter to the first quarter. So a little more -- a little heavier build in the first quarter and that's partially explained by the dynamic of having the DMI assets, as I was mentioning before. You really got to -- we got to make hay while the ground is frozen. In Europe and around Celgar -- well I guess, that they are both different. So Celgar is sitting on quite a bit of wood because we've been very worried about the health of the sawmilling industry and the -- there's a lot of regulatory challenges for sawmillers to get logs these days. And so I know there's going to be further supply restrictions to the sawmills. So we've got enough round wood in our inventory that we run -- we'll run through unimpacted regardless of what even the worst-case scenario. So we will be working through that into the spring. So I think we'll see a big working capital release from that.

And in Europe, I think our goal is to -- now that we can see the volumes of calamity wood that are available, we're going to continually ratchet down what we need to carry and continue to keep our foot on the -- both on the price of the wood and keep the volumes down, because I don't see much risk that they're going to run away from us on the high side.

Adam Zirkin -- Knighthead Capital Management -- Analyst

Got it. Well, I appreciate it, thanks for taking so much time.

David M. Gandossi -- President and Chief Executive Officer

Yeah, you bet, Adam.

Operator

There are no further questions at this time. Mr. Ure, I'll turn the call back over to you.

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

On behalf of Dave and I, thank you all for joining the call. Lots of good questions this morning, obviously, it's an interesting time in the markets, so if anybody has any follow-ups, don't hesitate to call either of us. We're always available and happy to take your calls.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

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

David M. Gandossi -- President and Chief Executive Officer

Sean Steuart -- TD Securities -- Analyst

Hamir Patel -- CIBC Capital Markets -- Analyst

DeForest Hinman -- Walthausen & Co. LLC -- Analyst

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Adam Zirkin -- Knighthead Capital Management -- Analyst

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