Apr 28, 2017
Executives
David Gandossi - President and Chief Executive Officer David Ure - SVP, Finance and Chief Financial Officer
Analysts
Hamir Patel - CIBC Capital Markets Dan Jacome - Sidoti & Company Sean Steuart - TD Securities Sam McGovern - Credit Suisse Adam Zirkin - Knighthead Capital Management Andrew Shapiro - Lawndale Capital Management
Operator
Good morning and welcome to Mercer International's First Quarter 2017 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
Good morning, everyone. I will begin by taking a few minutes to speak about the financial highlights of the quarter and then I will pass the call to David to discuss the markets, our operational performance and our outlook into Q2.
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 Q1 financial results reflect solid operational performance, strong sales and the early impact of the NBSK pricing improvements which took hold late in the quarter. Our financially statements also reflect refinancing activities completed during the quarter in anticipation of our German sawmill and power plant acquisitions.
In Q1, we achieved EBITDA of $60.2 million compared to $57.8 million in Q4 2016. When compared to Q4, our Q1 results reflect higher sales volume, lower scheduled annual maintenance, partially offset by the absence of the wastewater feed reversal and favorable foreign exchange movements that occurred in Q4.
Our pulp sales totaled about 375,000 tons, which is up 30,000 tons compared to Q4. And electricity sales were up almost 23 gigawatt hours relative to Q4 due to solid pulp production and the absence of scheduled maintenance downtime in Q1.
We reported net income of $9.7 million for the quarter or $0.15 per basic share compared to net income of $18.5 million or $0.29 per basic share in Q4. As you know, early in the quarter we issued $225 million of new senior notes that are due in 2024 and carry a coupon rate of 6.5%.
These funds were used to redeem our higher cost 7% senior notes that were due in 2019 and extend the termination date beyond our exiting 2022 notes. In connection with the redemption of our 2019 notes, we incurred an accounting loss $10.7 million or $0.16 per share comprised of the $7.9 million call premium along with certain unamortized issuance cost.
Subsequent to the initial issuance, we tacked on an additional $25.0 million to that same issue to help finance our recent sawmill and power plant acquisition in Germany. Our Q1 interest expense was $13.9 million which is a little higher than normal due to a bit of an overlap in the timing of the issuance of our new senior notes and the redemption of our old 2019 senior notes in the quarter.
Income tax expense in the quarter was $7.5 million of which approximately $3.3 million was current. Current taxes reflect our continues use of tax assets to shield cash taxes.
Turning to cash flow. Our cash balance increased by about $47 million in Q1 compared to a decrease in cash during Q4 of $8.5 million.
Our Q1 operating results were comparable to Q4. The positive working capital movements and lower capital spending in Q1 compared to Q4 contributed to our cash build.
In addition, there was a slight timing difference between when we completed a $25 million tack on to our new 2024 notes which occurred in March and the timing of the sawmill acquisition which did not close until April. Overall, our operating cash flow was about $53 million in Q1 compared to $30 million in Q4 and working capital movements were significantly less favorable.
In addition, our 12 month rolling operating cash flow as $130 million. Capital expenditures grew approximately $8.4 million during the quarter.
Some of the more notable projects include the completion of Rosenthal's whole log delivery system. And work done to upgrade Celgar's leech plant.
Our cash outflows in the quarter also included our quarterly $7.4 million of dividend payment. And in early April, just after the quarter-end, we also secured a new five-year revolving credit facility for our German sawmill and power plant operations.
The €70 million facility will be shared with Rosenthal and replaces the existing €25 million facility we had supporting that mill. The new facility has substantially similar terms to the terminated Rosenthal facility.
Our liquidity remains strong. Our consolidated cash balance was approximately $188 million at March 31, 2017 and we had about $134 million of undrawn revolvers between our three mills, putting our total liquidity at almost $322 million.
This liquidity was used to finance the German sawmill and power plant acquisition and working capital requirements during Q2. The cash balance at the end of the quarter includes approximately $4 million of restricted cash.
These are funds that have been set aside to act as collateral for our Stendal interest rate swap. The collateral amount is contractually based and as the interests rate swap balance declines, so does the collateral amount subject to certain minimum requirements.
At the end of Q1 there were two settlement payments remaining. One in April and the final one in October of this year.
On a trailing 12 month basis, our net debt is about 2.3 times EBITDA which has improved our Q4 as a result of strong operating cash flow in Q1. And you will have seen from our press release yesterday, our board has approved an 11.5 cent dividend per shareholders of record on June 27 for which payments will be made on July 6.
That ends my overview of the financial results. I will now turn the call over to David Gandossi to discuss market conditions, our operational performance and strategic activities.
David Gandossi
Thanks, Dave, and good morning everyone. As Dave noted, effective April 12, we acquired a significant sawmill and energy generation complex in Friesau, Germany.
The Friesau sawmill has an annual capacity of 550 million board feet of lumber, 13 MW of electricity, and 49.5 MW of thermal energy. It is a flexible production facility that produces over 200 products with multiple package sizes capable to meet customer requirements around the world.
This acquisition is in line with our longer term growth strategy as it leverages some of our core competencies, including wood procurement, production optimization and green energy production. We believe the Friesau sawmill provides potential operating synergies and other margin enhancement opportunities, including synergies in the range of $4 million-$7 million, primarily relating to the procurement ensuring of wood and biomass fuel resources, the optimization of logistics and staffing, and services with our Rosenthal mill.
We also believe we have the opportunity to materially increase lumber production in 2018 and to reduce cost and approve sales realizations through targeted capital upgrades. We are optimistic about the potential for this acquisition.
However, due to the nature of the German wood markets, we believe it will take between four and six months before this mill begins to contribute our earnings. Looking ahead to our entry into the lumber business, we are obviously watching with great interest the development of lumber markets and the potential impact of the softwood lumber agreement between the United States and Canada.
The Random Lengths Composite Index has surpassed the $430 per thousand mark in recent weeks and we are seeing steady improvement in the European markets as well. As we develop our marketing plans for a product, it will be branded Mercer Timber.
We will take full advantage of our mill and logistics flexibility to optimize our global customer base and to maximize margins. Turning to our Q1 performance.
Overall we had strong operating results this quarter as a result of strong pulp sales volumes, higher production volumes and continued cost discipline. In term of the pulp markets, demand has been strong through April.
Prices have risen steadily in China in Q1 to the point that our March list price was $670 per ton, up $70 from September or up $100 since November of 2016. Demand was also strong in Europe and although prices haven't risen as dramatically as they have in China, prices are up $30 per ton since December, and in April price announcements will take the May list price to $890 per ton.
The quarterly average resi list price in Europe increased to $822 per ton compared to $810 in Q4. Similarly the quarterly average resi list price in China increased to $645 per ton compared to $595 in Q4.
Overall, our pulp sales realizations were up only slightly compared to Q4, while the widening of industry list price discounts in Europe and the U.S. markets that took effect in January, down from the impact of the [list one] [ph] price improvements in Q1, we expect price improvements to be more apparent in Q2.
It's important to note that these increases have been implemented or announced even as incremental NBSK capacity came on line in Europe in 2016 and has been ramping up. Consistent with increasing NBSK pulp prices in Q1, NBSK producer inventories were down three days to 29 days from the end of 2016.
At the same time, hardwood inventories were essentially flat since December. We believe inventories at this level are well balanced.
Consistent with the upward pricing pressure on NBSK, demand through Q1 has been strong. Global NBSK shipments were up over 2% compared to the same period last year.
We continue to believe China's strong demand is consumer driven and being supported by increased tissue and paper capacity. We are also seeing the supply side impacting demand for wood pulp as highly polluting old China agricultural based pulp facilities have been closed.
Moving to operations. Overall, our Q1 production was up relative to Q4.
The increase of almost 24,000 tons was due in part to both the timing of our scheduled maintenance shuts and increased productivity. In Q4 we took 12 days of scheduled downtime at our Stendal mill compared to no scheduled downtime in Q1.
Our 2017 annual maintenance [structure] [ph] is as follows. In Q2, Celgar has an 18 day shut and it will include the completion of a number of capital projects that are designed to improve the mill reliability.
Stendal will also have a short three-day shut in Q2. In Q3, Rosenthal will have its 12 day shut and in Q4 Stendal will be down for another short 3-day period.
In total, we produced approximately 374,000 tons of pulp this quarter compared to approximately 350,000 tons in the fourth quarter of last year and approximately 378,000 tons in the first quarter of 2016. Strong market demand allowed us to sell all of our Q1 production consequently our pulp sales volumes were also up in Q1 and totaled approximately 375,000 tons compared to 345,000 tons in Q4 of '16, and 393,000 tons in Q1 of 2016.
Similarly, our strong pulp production led to high energy sales. The mills sold approximately 203 gigawatt hours of electricity in the quarter, compared to 180 in Q4 and 207 gigawatt hours in Q1 of 2017.
Our fiber cost continue to trend down this quarter, if only slightly, as lower winter harvesting rates have marginally tightened our fiber markets. Our German fiber prices were down slightly in Q1.
Looking forward, we expect German wood prices to increase slightly through Q2 as we expect strong demand to put some upward pressure on prices. In British Columbia, our Q1 fiber prices were also down slightly this quarter, relative to Q4.
We are currently forecasting that Celgar's Canadian dollar fiber prices will stay essentially flat in Q2. However, the softwood lumber agreement dispute that is looming between Canada and U.S.
could push fiber prices up, but we currently believe that our Celgar mill will not be significantly impacted. As planned, our fiber inventory levels have come down in Q1 and we remain satisfied with our mills wood markets and with our fiber inventory levels.
Regarding our CapEx plans, we expect to invest approximately $50 million in our mills in 2017. The focus of our CapEx program continues to be a balance of maintaining our mills while improving reliability and reducing cost.
This spending will be spread evenly over all three mills. With respect to our NAFTA claim, we do not have any updates at this time, but we continue to expect a decision this year.
And so that’s the conclusion of my prepared remarks and we will turn the call now back to the operator so that we can open up for questions. Thank you.
Operator
[Operator Instructions] And your first question comes from the line of Hamir Patel with CIBC Capital Markets. Your line is open.
Hamir Patel
David, your press release mentioned a short-term target of placing 25% of Friesau's volumes into the U.S. If prices are strong enough in the U.S., what do you think is sort of maximum that you would feel comfortable moving into the U.S.?
David Gandossi
Yes. We are targeting 25%, Hamir.
And I think we will push that as hard as we can. The mill has got a lot of flexibility.
Got a big planer with two lines in it. 800,000 cubic meters a year of drying capacity in the kiln.
So we are just ramping the mill up and working hard to put wood in front of it and obviously we will push the U.S. market as hard as we can at this stage.
Hamir Patel
Great. And we don’t have much visibility on prices in Europe.
So could you maybe help us understand how the economics for a typical European sawmill compare right now for selling in Europe versus selling to the U.S.?
David Gandossi
Yes. Prices have been improving in Europe and the margins have been pretty steady, where they have been the last several years even.
So 12% to 15% EBITDA margin are quite normal for a modern sawmill running well over here.
Hamir Patel
And would you, are there any sort of infrastructure that you have to develop in the U.S. for distributing the products?
David Gandossi
Well, there is a number of different ways to approach that market, obviously, and we haven't finalized on who we are going to do that. There will be physical assets that we need to, from an infrastructure point of view, we need to invest in.
It's really just a matter of producing some product and getting it over on to the U.S. warehouses, probably Atlanta, and then starting to market it.
We have lots of optionallity at this stage in terms of how we are going to approach that market.
Hamir Patel
Great. Thanks, David.
And just a final question I had for David Ure. Can we get the mill production and shipments in Q1?
David Ure
Yes. Okay.
I will start with production. So this is in thousands of [copies] [ph] in thousands of air dried tons.
So in Q1 our Rosenthal mill produced 88.8. Our Stendal Mill produced 171.2 and Celgar produced 15.8.
And sales volumes, again in thousands of tons, Rosenthal sold 91.4, Stendal 184.1 and Celgar 99.7.
Operator
And your next question comes from the line of Dan Jacome with Sidoti & Company. Your line is open.
Dan Jacome
Just following up on the sawmill acquisition. It looks like U.S.
prices have obviously been very robust but do you guys see that as sustainable going forward. I am just trying to have a better understanding of kind of like, your visibility into it once you start kind of get into further capacity.
David Gandossi
Yes. Good question.
At this stage the countervail [indiscernible] is out here. It's averaging 20%.
Then in a few months there will be a duty determination and then months following that there will be like a settlement determination. Like a relook and final settlement of the countervail.
And you go through that three-quarters by the time you get through all that, possibly. And then you have to have a negotiation between Canada and the U.S.
and I don’t know where that’s going to land but a lot of the things we read imply that it's going to be a strong push for quotas against Canada, which was strongly resisted the last time they went through this thing. But if the American push for trade issues is for quota then this could carry on for a very long time.
We don’t have to rely on that. We have got a really great mill in the middle of the European market but right now with these kind of conditions there is obviously premiums to be had in the U.S.
market.
Dan Jacome
So. On China, if I understand you correctly, if the tariffs go into place, it could help the lumber pricing for you in the U.S.?
David Gandossi
You know the Canadian shipping into the U.S. market have cost in countervail and dumping duties to get it there.
So the price in the U.S. market has to go up to compensate for that.
If there is a quota then there will a restriction on the amount of Canadian lumber that can feed the U.S. demand.
So Europeans and others possibly will look to service that market.
Dan Jacome
Okay. That makes sense.
So probably a positive but looks like it's too early to tell. And then I just had a question about the sawmill in Germany.
Were you guys buying sawmill residuals from it already before the acquisition? Just kind of [curious] [ph] there.
David Gandossi
Yes. That’s a very important point.
I mean this mill was kind of the foundation of the Klausner Group back when he was starting to build his mills over here in Germany. And this is a big mill.
In the day when this mill was servicing almost completely the U.S. market, pre-2008, it provided about 40% of Rosenthal's fiber.
And it's 13 miles west of the pulp mill. So it's, from a synergy point of view in all respects, it's an important mill for us to control.
Dan Jacome
Did you say 30%?
David Gandossi
It was 40% at its peak.
Dan Jacome
Got u. And then my favorite topic.
Wood procurement, fiber and logistics. You guys have been doing a pretty stellar job especially in '16 with the railcar optimization.
Just out of curiously, where do you guys think we are on that, like? And I hate to use a clichéd baseball analogy but the [fifth inning] [ph] or the bottom of the ninth, how would you look at it?
David Gandossi
Well, I like to think we are just getting going. There is a lot of moving parts obviously, in logistics and procurement.
Having sawmill capacity just gives us even more levers. You know we have got the railcars which gives us the ability to really optimize.
We can bring more wood in from further away. We can backhaul out lumber.
We have our wood2M joint venture with Mondi. So in all the import markets we optimize there as well and can improve the volumes and lower the cost.
So there is lot of that kind of creative thinking and work going on and we are definitely having an impact. There is other bigger factors we can't control.
So prices may go up or down but on top of whatever happens, we optimize and do our best to make sure that we don’t ever get behind the eight ball.
Operator
And your next question comes from the line of Sean Steuart with TD Securities. Your line is open.
Sean Steuart
A couple of follow ups on Friesau. Just coming out at it another way, with respect to the 25% shipment targets in North America.
How much of that is motivated just by the price spike we have seen since late January. And what would the inflection point be for pricing that makes it a viable market for the sawmill to ship into.
David Gandossi
Well, it's -- I don’t have a number in my head. I mean right now it's very attractive, obviously.
It can fall back quite a bit and still be quite attractive. But the core European market is good too.
It's just not as good as what the U.S. is offering today.
Sean Steuart
Okay. And you indicated, it's maybe four to six months of time to ramp the mill up to the 90% operating rate.
Will you guys loose a little bit of EBITDA through that ramp up period or is that stuff get capitalized as you bring the operating rates up.
David Gandossi
Yes. And we can capitalize anything, Sean.
You really can -- there is nothing to capitalize in terms of operating startup things or optimization severances or any of that kind of stuff. They won't be big numbers.
Really what's moderate operating loss as we -- what we need to do and put the mill as to get the volume of wood in front of the mill up. So the previous owner wasn’t really running the mill very much at all at the end and it was really sort of a restructuring thing.
So it will take a little time to purchase the wood that we need to run the mill hard and once you are running the mill hard then you will make money.
Sean Steuart
Okay. And lastly on this asset.
When you announced it and based on what you are saying today, I mean it sounds like a very opportunistic tuck-in for you guys. Is there an opportunity for other growth in the saw mill business in Europe?
What the opportunities look like for further bolt-ons?
David Gandossi
Yes. Well, we think there is.
You know, it fits our --it's just a logical good step for us. We are big wood procurement guys in this central European market and we are dominant in a lot of ways.
And we don’t have a lot of competition from guys that don’t understand this market or wouldn’t really be capable of competing with us in this market. So we see a potential for more growth but we will be opportunistic about that.
We are not going to go crazy. We will look for the right synergies and the right situation.
But we are intending to continue this path.
Operator
And your next question comes from the line of Sam McGovern with Credit Suisse. Your line is open.
Sam McGovern
I apologize, you may have touched on this and I may have missed it. But just in terms of fiber cost at the Celgar mill with regards to softwood lumber agreement.
I mean can you talk a little bit about the impact there. Should we expect the fiber costs to go up if there is less sawmills operating in the area or what would be the impact there?
David Gandossi
Yes. Sam, two of the big mills that are in our region, really modern mills, Interfor has put a lot of money in the Grand Forks and the Castlegar mill over the recent years.
And they do have options to the U.S. market.
My feeling is that they will run where others -- and other regions may have more difficulty to do that. So I think the eastern Canadian mills are going to be harder hit than the guys in the west.
And our guys in our region in the specialty lumber production and the well-invested, low cost nature of the mills, not really that worried about it at this stage.
David Ure
And I would just add that our number two supplier is a U.S. supplier as well.
Operator
And your next question comes from the line of Adam Zirkin with Knighthead. Your line is open.
Adam Zirkin
Just a couple of questions for you. First of all, just on the production rate at Celgar.
David on the last call, you talked about some of the initiatives there and you talked about even potentially getting to more than 1.5 million ton number for the total year. I am curious how you feel about that now going into the 18-day shut in the second quarter.
David Gandossi
Yes. So Celgar has been putting on some good runs and a lot of the work that guys have been doing is really starting to payoff.
But having said that, you are very right, this is a big shut and I have got all my fingers crossed, hoping that they -- they executed really well last year but they had, as you would all remember, three completely unrelated upsets that were not really related to the performance of the work and the shut, it had more to do with just unusual conditions of -- just a bunch of unusual, unrelated situation. So I am really -- we are doing everything we can to perform all the quality checks that need to be performed.
It's just enormous and our work obviously in these kind of shuts but I think we have got good systems and processes and barring any unforeseen disasters, I am optimistic for that mill this year. But most important thing is to come out of that shut and get it up and running and no upsets in that process.
Adam Zirkin
And David assuming that all goes as planned, what would you anticipate the production for that mill would be this year?
David Gandossi
Yes. I think we would come between 475 to 480,000 tons for this year, if everything goes well.
Adam Zirkin
Got it. Okay.
That’s very helpful. Moving over to pricing.
Perhaps you could put, you mentioned expanding discounts having an impact on the realizations. Perhaps you can put a little more color around that.
By how much did discounts widen and also I know that or I believe that some of your pricing is done on a sort of a one month lag basis. So perhaps you could talk about the impact of that.
Because it would help to get a better sense as to what the sequential improvement in price would be for the first quarter into the second.
David Gandossi
Okay. Well, I will do my best, Adam.
I am not going to give you the discount number because that’s something that we just can't do. It's part of the competitive tension in the market and producers don’t disclose those numbers.
So generally the European and the U.S. markets where discounts have been widening historically for the last ten years and they creep up a little bit every year and they typically get established as part of the annual contracts at the end of the year.
So that was the case again this year. And then the price increases in Europe, starting in December, remember it was around 8.10.
And then in January we announced $20 up for new orders taken in January. So that orders in January to get shipped in February.
And then in February we implemented up to 6.50 for orders taken in February, but most of those not delivered until March. And then in March we were up 20 to 6.70 and then again up to the 6.90.
So I am sorry, Adam, I took you between two things. So let me finish Europe.
So 8.10, then the 8.30. January we announced 8.30 and then in February we announced 20 up to 8.40.
And then in March 20 to 8.60. And all of those when you announce, it's for the orders taken effectively almost immediately after that point and then there is another month before it gets shipped.
In China, I just went back and forth -- so China started up 5.90, up 20 to 6.10 and then up 40 6.50, and then up 20 to 6.70. China, when we announced prices, we were always net.
So there is no incremental discounting here but it's a slightly longer supply chain so it's even more delayed from when you announce to when the customer sale is recorded. So in China the price increases were more dramatic but China business a third of our business and Germany is a much bigger piece.
And so the two more or less offset each other in the quarter. But these price increases when you get into the second quarter, you really start getting somewhere around the road because they were starting to ship at these higher prices right now.
Adam Zirkin
Right. I mean they look fairly meaningful, right.
Because if, and correct me if I am wrong, but if the pricing you have as of today, were to hold for the remainder of the second quarter, the average pricing in Europe would be up some $30-$40 above the first quarter average and a little more that above the China average. So in theory you sort of weight that heavy towards Europe and that would give you a sequential change, right.
Am I thinking about that correctly?
David Gandossi
Yes. You are thinking about it, right.
Just remember to take a discount off the increase in the list price.
Adam Zirkin
Of course. And then lastly, David, I feel you get this question on every call, it's a fair weather question.
But once again you did an excellent job of generating cash in the quarter. And certainly you will generate some next quarter and into the remainder of the year.
How are you thinking about spending that cash? Particularly given that you have done the first sawmill acquisition, you have the integration of that into the business in front of you.
How would you hope to use the cash balance that just continues to fortunately build?
David Gandossi
Well, I guess my pitch would not be any different from what it was on the last call. Debt reduction is always a priority.
We intend to maintain our dividend and intend to maintain a strong balance sheet. And we do like to keep optionality for future growth.
So I think it's stay the course. No real changes in our capital allocation approach.
Operator
And your next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Your line is open.
Andrew Shapiro
A few touch ups from prior people's question and have one or two of my own here. I just want to get like the big picture.
In summary, on the sawmill acquisition, is the bulk of the integration activity simply the timing of rolling over to the new raw material contracts later in the year.
David Gandossi
Yes. Primarily, Andrew, the timing was one of these things.
So that the previous -- the mill was not running normally for the last year or so. It really had mostly to do with liquidity issues of its owner.
So it didn’t have -- so the annual process of establishing fiver contracts didn’t happen normally. So when we take over the business early in the near year, we obviously were out there with all our suppliers that we know so well in our pulp business, saying, okay, now we need some saw logs too.
And they are all doing whatever they can to deliver saw logs to us but they are not sold out but their allocations have been pre-determined. So they are all sort of making adjustments and doing whatever they can to help us ramp the mill up.
And I am confident we will. It's happening very quickly but we have been just trying to signal.
We just need that first couple of quarters to really get the mill up to the level where it's really humming.
Andrew Shapiro
Right. And the big picture is, when the annual contracts then roll, your obviously much stronger balance sheet than the sellers enables you to then come in and lock in favorable spreads and rates.
David Gandossi
Yes, exactly. We have got very strong logistics.
The sawmills like a typical sawmill has got a truck logistics in its region. We are pan-European with optimized railcars, our own railway stations, our own facilities at the port of [indiscernible].
We have got a much bigger reach and wood cost further east you go obviously the cheaper they are and it's all about the transport cost to get into our market. So we have got all sorts of trading options.
We have got leverage back and forth between pulp and saw logs. We have got fuel optimization so we can put the bark where it needs to -- to whichever boiler it makes the most sense to go to.
We can push all of those boilers to their maximum capacities. We can sell the other byproducts like [pins and fines] [ph] to guys that will pay a little bit more than the energy value and trade products and that kind of thing.
Andrew Shapiro
Some of your past CapEx projects, I wanted to follow up on and just find out what, if there are still decent amounts of improvements ahead of us. You have goal of increasing the power and the byproduct profitability at Celgar and you have previously said there was still a lot of room for improvement on power generation at Celgar.
Is that still the case and what are the milestones and the timing for those improvements.
David Gandossi
So Celgar, the way to think about it is, is the amount of fuel we have for power production as related to the amount of pulp that we have produced and if you look at the -- see the average of the last three years. I know it's produced in the 440, 000 to 450,000 ton range.
Earlier on this call I expressed an aspiration to 475 to 480 this year. And I said on previous calls that we are working hard to get that mill up to go 500.
So that generates incremental electricity. And the other leg of the stool is the work we are doing to, with BC Hydro and the province of British Columbia to ensure that we have fair power rates in front of the mill.
And that also ties into the NAFTA situation as well. So, yes, I think there is room for steady improvement and progress on the generation side.
How we will do in the long term power rate side, I am not ready to have a good clear line of site of that but I am optimistic the province will do the right thing for us when renewal comes and also optimistic about NAFTA. But we don’t have any visibility on -- we just don’t get any input from the tribunal until they are finished making decisions.
So I just don’t know at this stage.
Andrew Shapiro
Is your feel on the decision by the judge or the arbitrator, is your feel or feedback from your lawyers etcetera, is that decision is completely independent of the new uncertainties that have been tossed into the interactions between the three governments with the new presidential administration.
David Gandossi
Yes. I really hope it is, I mean I have every reason to believe it is like an impartial tribunal under NAFTA.
Remember, we are on the American side of this argument. We are U.S.
public company and we are fighting for fair treatment in Canada. So I don’t think there will be -- like the rhetoric, I don’t think will influence decisions.
Andrew Shapiro
Right. Will it slow the decision down or do you think it's on its own course?
David Gandossi
I don’t think it has any impact at all Andrew. I don’t see why it would.
Andrew Shapiro
Okay. On capacity questions.
You talked about some producers with higher cost. We are at the tipping point for closure due to the losses and a declining price environment.
With a decent amount now of increased prices, does that terminate thought of these closures or are their other factors that make these closures inevitable regardless.
David Gandossi
That’s a good question. Some of the mills that are running are -- they must be exceptionally difficult to run because of the age of the equipment, the end of life issues.
And when you get into the big vessels and recovery boilers and power boilers rebuilds, these are really expensive things to do and they are really old mills. And you don’t have that much margin enhancement.
It's kind of like putting drain towels around your house. So eventually these things will go away regardless of what pulp prices are doing.
It's my view. But when you are at a pricing environment like we are right now, the owners of them are going to be trying to hang on because they can eke out a living until the big disaster happens where they are faced with a very expensive maintenance and business capital project.
So in the current environment I am not anticipating, we have not visibility on anything that might be happening in the near-term.
Andrew Shapiro
Okay. And then in Canada, there was thought prior to the anti-dumping countervailing duties kicking in here now.
That if that were to kick in on saw mills that the cost for eastern Canadian pulp producers would greatly rise. Is that still the visibility on the circumstance?
David Gandossi
You mean with the countervail duty in? Is that what you...
Andrew Shapiro
Yes. With the -- I think they have come down now and they proposes that they are going to have all these extra duties.
I don’t know when and if they will get implemented but it's now a little more definitive that that’s what's being assessed. Will that and how long does it take to get into the system to make the cost for the eastern Canadian pulp producers to jump.
David Gandossi
Yes. It's a question that really relates to what's going to happen to the eastern sawmills.
And I can't answer that. Lumber prices have been increasing to offset the increased cost of the duties.
And as long as the sawmills then the pulp mills get the fiber. If you have sawmill capacity reductions, then that impacts on the pulp mills fiber availability.
I don’t know what's going to happen for those guys.
Andrew Shapiro
Okay. Last question, since it wasn’t in the script but last question.
What are the plans for your investment presentations and non-deal road shows in the coming months?
David Ure
Yes. So for the rest of the quarter we will be attending the Barclays High Yield in the second week of June.
And then we will probably be doing a small non-deal road show in Europe. Probably in the third week of June.
And then looking further ahead, we will be attending the Jefferies Industrials Conference in August as well.
Operator
[Operator Instructions] Your next question comes from the line of [indiscernible]. Your line is open.
Unidentified Analyst
Thanks for taking my question. This one is quick.
In the press release, there is the 5% decline in pulp production due to a delayed shipment. So can we think about that as all of that moving into the second quarter and does that imply sort of flat production in the second quarter?
How do we think about that?
David Gandossi
So the background of that story is that our Canadian pulp goes to China in break bulk delivery systems that we control, as opposed to the guys that ship over in containers. So break bulk is all the stuff goes to the port, gets put in a ship and it all goes over in big shot.
And so sometimes we have a timing issue. So I think it's really about 10,000 tons, after normalizing things, that will step into the second quarter.
We don’t -- every quarter as a sale, to a ship sales. And then another piece.
Things are really strong right now and the mill has been running pretty well. So it's inventories, Canadian mills inventories are pretty close to 50,000 tons at the end of the quarter.
So we are going to really push it in the second quarter. I think April shipments might be around 44,000 tons, 44,000 to 45,000 tons for April and probably for May.
So there is a good chance we will get Celgar's inventory down well below the 40,000 sort of level by the end of the second quarter. So it's good volume and good prices in the second quarter for that.
Operator
And your next question comes from the line of [indiscernible] Your line is open.
Unidentified Analyst
Just help me understand the fiber basket around Friesau. You talked about, we have to rebuild those wood supply relationships at that sawmill.
And it sounds like it's a multiyear process but we also have -- it sounds like lumber prices are relatively high, so maybe there is an increased desire for people who own that land to harvest. Is the allocation that we are going to get from that fiber, is it displacing other people or is it more a function of getting them to just harvest more.
David Gandossi
Yes. Well, first there is, I mean this is sawmill country.
There is sawmills in the southern part of Germany that predominantly rely on spruce, and there is some sawmills in the north that rely on the pine. And then there is Mercer, the only to have pulp mills in the country.
And we buy chips from all those guys and we buy round wood that is the part of the harvest that isn't a saw log. It's all the thinnings and the tops and the pieces that aren't appropriate for sawmills.
So we are just expanding our activities will all of these suppliers that we have a long-term relationship with and we are just -- now we want saw logs as well. Their ability to meet the volumes that we are looking for are -- they can't mobilize fast enough for us.
Like we will get the mill up to these numbers, like 75,000 cubic meters of wood a month for the first couple of months and then in the next months expecting to get up closer to a 100,000 cubic meters. And then in the month after that, if we can get to 110 or 115, then we are going to be 300 to 330,000 cubic meters lumber output.
So we are not that far behind but a sawmill needs to run hard to make good margins and it's going to take us several months to get there. But we are not talking years, we are talking several months.
And then as we approach the -- and we have import capabilities. We are bringing wood from Czech, it's a big market for us, from Poland.
We can bring wood in from all around Germany. Bring it in, import from the Baltics, that kind of thing.
By the end of the year, I am really optimistic combining our wood procurement with the pulp side that the contracts for the next year will get the volumes we want. We are hard on getting the good prices and optimize our logistics and we will be way to there.
But it's just going to take a little while to get it going.
David Ure
Just to make one thing clear. It's not like we are building new relationships with new suppliers.
These are people, these are landowners and state forests that we have existing relationships through our pulp business. So we are harvest saw logs for the saw mill from the same sites as pulp log.
So it's just a matter of reintroducing ourselves on the saw log business. But these are folks that we have got ongoing relationships with already.
Unidentified Analyst
And then on the sales side as we ramp that, I mean the adequacy, help us understand of our ability to get that product move so we don’t have a situation where we have too much inventory build on the balance sheet because it's a pretty meaningful ramp. Is that something that we Friesau already had or is it something we add headcount to, build more relationships to make sure we can sell our product.
David Gandossi
I mean that mill makes lumber to order. We are not going to be making inventory.
We can expand the orders and make product for it depending on how much wood we think we have and the timing. And logistics are not a problem for us between truck and rail out of the mill.
So I am not anticipating any bottlenecks and I am not anticipating inventory building. We are going to invest in working capital on the raw material side and there will be working capital in the finished goods that on its way to the customer and then you have got receivables.
So that’s why we started the new revolver for the mill. Yes, we will take orders for everything we think we can produce.
Operator
And there seem to be no further questions over the phone at this time. I will turn the call back over to David Gandossi for closing remarks.
David Gandossi
Okay. Well, thanks everyone.
Lots of interesting questions today, so thanks for joining the call. Dave and I are always available if you have more questions.
So feel free to call us anytime and we look forward to speaking to you all again on the next quarter. Bye for now.
Operator
And this concludes today's conference call. You may now disconnect.