Oct 27, 2017
Executives
David Ure - Senior Vice President Finance, Chief Financial Officer and Secretary David Gandossi - President and Chief Executive Officer
Analysts
Hamir Patel - CIBC Capital Markets Sean Steuart - TD Newcrest Daniel Jacome - Sidoti & Company Andrew Kuske - Credit Suisse Andrew Shapiro - Lawndale Capital Management Adam Zirkin - Knighthead Capital Management, LLC Joseph Pratt - Stifel, Nicolaus & Co., Inc.
Operator
Good morning and welcome to Mercer International's Third 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. Sir, please go ahead.
David Ure
Thank you. Good morning, everyone.
I will begin by taking a few minutes to speak about the financial highlights of the quarter and then I will pass the call to David to discuss the markets, our operational performance, strategic activities and our outlook into Q4. Please note that in this morning's conference call, we will be 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 Q3 financial results reflect record level operational performance, strong markets for our products and faster that expected ramp up of our Wood Products business.
In Q3, we achieved consolidated EBITDA of $64.0 million compared to $39.1 million in Q2. When compared to Q2, our Q3 results are reflect by lower major maintenance costs and higher pulp and lumber prices, which were partially offset by a weaker U.S.
dollar. Our sawmill operations also contributed solid earnings totaling $4.4 million of EBITDA.
In Q3, we have 10 days of scheduled major maintenance at our Rosenthal mill compared to 22 days combined between Celgar and Stendal in Q2. The impact of our Q3 shut was $5.2 million of direct costs compared to $21.0 million in Q2.
The majority of these costs could be capitalized by our IFRS reporting competitors. As I noted last quarter with the acquisition of the Friesau saw mill we are now reporting two business segments.
In Q3, our Pulp segment contributed $61.8 million of EBITDA, our new Wood Products segment contributed EBITDA of $4.4 million and our corporate offices incurred costs excluding depreciation of $2.2 million. Additional segment disclosures could be found in our 10-Q.
Compared to Q2 higher pulp and lumber prices positively impacted EBITDA by $7.5 million. David will have more to say about the markets in a moment.
Our results also reflected the impact of a U.S. dollar that continued to weaken during the quarter and negatively impacted EBITDA by $10.8 million compared to Q2.
Our pulp sales totaled about 384,000 tons which is essentially flat compared to Q2, and electricity sales were up almost 32 gigawatt hours relative to Q2 due to record pulp production. In addition, with the wrap up of our Friesau saw mill we sold the equivalent of about 74.2 million board feet of lumber in the quarter with about 10% of this volume being sold in the U.S.
market. During the quarter we also completed the build up of lumber inventory for the purpose of growing our U.S.
market sales in Q4. We reported net income of $21.1 million for the quarter or $0.33 per basic share compared to a net loss of $2.1 million or $0.03 for basic share in Q2.
Our Q3, interest expense was $13.5 million which reflects our senior note interest as well as interest on the Friesau saw mill revolving credit facility. Income tax expense in the quarter was $6.6 million of which approximately $2.4 million was current.
Current taxes reflect our continued use of tax assets to shield cash taxes. Turning to cash flow, our cash balance increased by about $15 million in Q3 compared to a reduction in cash during Q2 of $43 million.
The increase in cash in the quarter was a result of our strong operating results so this was partially offset by a net increase in working capital primarily due to an increase in lumber inventory needed for our U.S. sales program.
Capital expenditures through approximately $15 million during the quarter and this spending with spread between the mills and was focused on high return and reliability improving projects. Our cash outflows in the quarter also included our quarterly $7.5 million dividend payment.
Our strong Q3 results have improved our liquidity as at the end of Q3 to $323 million which is made up of our consolidated cash balance of approximately $159 million and about $164 million of undrawn mill revolvers. On a trailing 12-month basis, our net debt is about 2.3 times EBITDA which is decreased relative to Q2 primarily due to our stronger EBITDA.
And as a closing comment on cash flow, the final schedule settlement payment on our floating interest rate swap was completed just after the quarter end. And you all have seen from our press release yesterday that our Board has approved a 9% increase in our quarterly dividend, increasing it to $0.125 for shareholders of record on December 27 for which payment will be made on January 4, 2018.
That ends my overview of the financial results, and I'll now turn the call over to David Gandossi to discuss market conditions or operational performance and strategic activities.
David Gandossi
Thanks Dave. Good morning, everyone.
Our Q3 operating results reflect our strong operational performance in the quarter. All our mills ran well and had a number of production records in the process.
We also sold a record volume of energy in Q3. These results show we are already seeing the benefit of our recent investments in Celgar's reliability and how quickly our team has been able to ramp up the Friesau mill.
Part of the ramp up includes achieving the synergies we were expecting. We now expect the 2017 synergies to be near the upper end of the $47 million range we originally forecasted.
As of the end of September, we have captured $4.8 million worth of synergies. Our strong Q3 operating results included 10 days of annual maintenance downtime at our Rosenthal mill.
I am happy to report that the shut was completed safely ahead of schedule and started up without a hitch. In terms of the pulp markets, demand is being strong and steady throughout October.
In Q3 prices averaged about $670 per ton in China and were flat relative to Q2. Late in Q3 we have seen significant upward pricing pressure in China.
Our October list price in China was increased $800 per ton and we've announced a further increase in November. New business in China is transacting today between $830 and $850 per ton.
In our view, the strength in China stems from a combination of factors and circumstances some of which we highlighted during our Q2 conference call. First, during the first half of the year, traders were reselling, taking profits on pulp they purchased at lower prices in 2016.
The local RMB market price was lower than contract U.S. dollar prices for most of that period.
Second, demand for pulp in China and in fact most markets has remained strong. Third, China has in the preceding years close a significant volume of highly polluting agricultural-based pulp and paper capacity, and finally, the introduction of a waste paper import ban combined with many pulp consumers sitting on low inventories and traders being empty has fed the demand induced price increases.
Moving to Europe, NBSK demand has also remained steady with Q3 list prices averaging $903 per ton compared to $880 in Q2. We've also seen upward pricing pressure in Europe in October.
The third quarter is traditionally a slower sales period, so the upward pricing pressure we experienced in Q3 is a reflection of the underlying strength of the NBSK market in Europe further supported by higher margin opportunities in China. All of these factors seem to have mitigated the predicted negative impacts of new capacity entering the markets.
In addition, current price discussions have been at higher levels and considering the gap with China, it seems there maybe success in this regard. NBSK producer inventories were relatively flat, ending September at 29 days.
We believe inventories at this level are well balanced. Further supporting the demand picture, global pulp shipments were up over 3.6% through the first nine months of 2017, and softwood pulp shipments to China were up 3.3%.
This demand is coming from paper producers and supported by strong consumer demand, and while new capacity may bring some downward pricing pressure in 2018, we don't expected to be as significant as many market analysts might be predicting. Lumber markets are also very strong and including prices in the U.S.
that are at near record levels. The Random Lengths U.S.
benchmark for Western SPF No. 2 and better average $405 per thousand board feet in Q3, which is above its historical average and up $19 from Q2.
We’re also seeing steady demand for lumber in European markets. In Q3, we successfully enter the U.S.
market with our lumber products. We sold about 10% of our lumber sales volumes in the U.S.
this quarter and we expect to grow that in Q4. Turning to operations, in Q4, we successfully completed a short three-day maintenance shut at Stendal this week and we do not have any further major maintenance plan this year.
Looking ahead to 2018, we expect to have both our Celgar and Stendal major maintenance shuts in the second quarter of 2018 and Rosenthal will be in Q3. Stendal shut will also include an 80-day maintenance outage on one of its turbines.
This is the normal maintenance required for turbines which happens about every seven years. In total, we produced a record 388,000 tons of pulp this quarter, compared to approximately 363,000 tons in Q2 and approximate 362,000 tons in the third quarter of 2016.
We also produced 109.6 million board feet of lumber in the quarter, while running the mill on a two shift basis. Pulp sales volumes in Q3 totaled approximately 384,000 tons compared to 389,000 tons in Q2 and 360,000 tons in Q3 2016.
We also sold $74.2 million board feet of lumber in Q3. Our strong pulp and lumber production led to record energy sales.
We sold approximately 249 gigawatt hours of electricity in the quarter, compared to 217 in Q2 and 208 in Q3 2016. Relative to Q2, our fiber costs were down slightly this quarter.
Overall our wood markets are currently balanced. Looking forward, we expect to remain pulpwood costs, prices rather to increase marginally in Q2 as we continue to build our winter stocks.
We are seeing some increased in competition from the board industry for this industrial fiber. We also expect Celgar's Canadian dollar fiber cost will increase marginally in Q4, as we begin to build interim inventories there, after what has been a slow summer harvesting season due to extremely dry conditions in BC.
We are continuing to watch the development of the Canadian U.S. softwood lumber agreement negotiations, but currently we do not expect them to material impact our fiber prices.
We expect to sawmill’s fiber costs to be flat to Q4 as we continue to rationalize the mills fiber logistics, we’re also very comfortable with our sawmill fiber inventories and supply. Regarding our CapEx plans, our teams are executing well on our roughly $65 million program in 2017.
The focus of our CapEx program continues to be a balance of maintaining our mills, while improving reliability and reducing costs. With respect to our NAFTA claim, the time it has taken to arbitrate this is now at the outside of how long these claims historically take.
So we continue to expect a decision in the near future. In addition the ongoing NAFTA negotiations between Canada, the U.S., and Mexico will not in our view impact our claim.
As Dave mentioned, we're pleased to be announcing a 9% increase to our quarterly dividend, while we continue to evaluate acquisition opportunities to leverage our core competencies, our cash generation and balance sheet strength also support a measured dividend increase. As I noted earlier, we are pleased with how quickly our new sawmill has ramped up.
We have developed a strong management leadership in sales team for solid wood business and I'm excited about the potential for further growth in this area. Looking further ahead to 2018, you can expect us to continue to execute our strategic plan to maintain and improve our world class assets and to seize growth opportunities in areas where we can leverage our core competencies, such as in Wood Products, in Wood Procurement and Logistics, and Green Electricity and Wood Base Chemicals and Derivatives and of course in Wood Pulp and Specialty Paper Products.
So that's a conclusion of our prepared remarks. And I'll turn the call back to the operator, so we can open the call for questions.
Operator
[Operator Instructions] And your first question comes from the line of [indiscernible] with RBC Capital Markets.
Unidentified Analyst
Hi, good morning, guys.
David Gandossi
Good morning.
Unidentified Analyst
Good results, but just one thing kind of on the fiber cost in Germany, they're up 9% in the quarter or I think year-over-year and just maybe some added color on that and you guys not seeing any savings or benefits of your added reach with new railcars?
David Gandossi
Well, of course for the new railcars provide benefits in a bunch of ways reduced costs per unit gives us for the reach. And so really I think the increase we're seeing in Europe is really more to do with.
We had a storm in your early part of October. It was actually a Hurricane called it Xavier, which shutdown which a bond for about a week maybe 10 base there is a pretty – there is an FX component in that as well.
So I mean like a local fiber costs are not increasing as much as it might otherwise imply. A little behind on a winter build up of inventory because of the storm and also because of some of the weather conditions earlier in the summer.
So we'll have - it's not that unusual at this time year to have some modest price increases. But maybe not us significant it appears primarily because of FX.
Unidentified Analyst
Okay. Got it.
Got it. All right.
That’s it for me guys. Thank you.
Operator
Your next question comes from the line of Hamir Patel with CIBC Capital Markets.
Hamir Patel
Hi, good morning. David looks like Friesau is running you know better than that I think you may have originally expected.
What level of lumber production you targeting there in 2018?
David Gandossi
Well, if you normalize the recent quarter you get - you can totally see the $465 million that we've talked about its capacity so that's a good number to use for modeling purposes.
Hamir Patel
Okay. Fair enough and do you expect to sort of mix shift in the products you're producing there is 18 unfolds?
David Gandossi
Yes, I mean it's a very flexible mill, so with the way conditions are right now we're obviously going to focus on really healthy offering to the U.S. markets.
European markets for a variety grades are strong. We've sent our first six containers to Japan to start to introduce our J-grade prime products into that market.
So I think it will be balanced in our approach optimizing high margins where we can but we're new in the business so we're building out a full suite of offerings. So that if there's changes in markets that will be well diversified.
Hamir Patel
Thanks. That’s helpful.
And David can you speak to how robust the pipeline of potential acquisitions for sawmills in Europe might be right now and valuation multiples shifted much since you acquired Friesau and other than I think - at least one transaction in recent months?
David Gandossi
Yes, that's a good question. We've been busy for - we've had a number of targets before we bought Friesau and we've still got other things we're working on but as you point out valuations are challenging.
So we're disciplined we're not we're not going to overpay for anything. We also have - we have high return capital opportunities on the Friesau saw mill and we might even have some build scenarios that might make more sense and buying given we're valuations are today.
So we're analyzing all of those different options.
Hamir Patel
And if you were to go down a Greenfield – with that I mean that will be in proximity to maybe want to be other sawmills – sorry one of the pulp mills?
David Gandossi
Yes, I'd be in the northern regions closer to Stendal.
Hamir Patel
Fair enough. And then just the question on the pulp side, [indiscernible] earlier this week, they were speculating that perhaps you know the annual discounts on their hardwood contracts might actually go down next year.
Curious what we're seeing on the softwood side as you sort of finalize those contract negotiations for 2018?
David Gandossi
Well, it's I mean it's certainly the topic I think that's going to be discussed at length and in London a week from now that's the traditional London pulp week where there's you know a lot of discussions on contract renewals. With the tension in the market prices going up I don't know why there would be a need for any discount.
Why being effect there may be producers like ourselves pushing to reduce discounts. But this is all happening very quickly here and also those discussions haven't really started.
Hamir Patel
Thanks for the color David. That’s all I had.
Operator
Your next question comes from line of Sean Steuart with TD Newcrest.
Sean Steuart
Thanks. Good morning, guys.
Couple questions. David, you want through the various factors that you've indicated have added this sort of incremental attention to the pulp market towards the end of the year, and I wanted to focus on the Chinese restriction of recycled fiber imports.
How much of it do you think is that’s that variable specifically is added to this sort of last leg of a positive momentum or most recent leg of positive momentum? And your guys on the ground have any view on when those import licenses might be relaxed, I guess and we might be looking at more recycled fiber coming back over to China again?
David Gandossi
Yes. Well maybe just to review for me, I mean this is a regulatory shift if you like in China.
I mean their real focus is on reducing poverty and improving the environmental conditions. The 13th five-year plan that was done through 2016 to 2020 was pretty clear saying, it's all about enhancing green development, promoting supply side structural reform, and reducing outdated overcapacity, improving energy efficiency, reducing pollution all that kind of stuff.
So our feeling is they are very serious about this. And this isn't just about waste paper.
This is all sorts of products going into China. The initial draft regulatory standard that came out, I think it’s the Environmental Protection Control Standard from solid waste.
They put a really tough maximum contamination rate on paper. I mean I think it’s something like 0.3%.
So the discussion is whether it's going to continue to be 0.3% or something else. Is it mixed office waste we were talking about, coming out of North America or coming out of Japan, I mean there's no way that stuff is going to meet this standard not even close.
But it seems to me that's what China is trying to prevent. They don't want to import big percentages of garbage along with the fiber that's coming in.
So the mixed office waste going to China is something like 5.5 million tons, the fiber yield on that maybe 60%, so you're talking a little over 2.5 million to 3 million tons of fiber that's missing in the system. Plus I think in the other grades like SOP and OCC and stuff, I mean those guys don’t have to get license import permits as well and we don't really have a feel for how much tougher that is right now compared to what it used to be.
My feeling on China is it real room guys will kind of cheat the system, so I think there's some slowdown in the pipeline of getting permits because they are auditing people and companies and making sure that the guys aren't going, but putting the wrong – calling something it isn't. So things may evolve, Sean, I really don't know.
I don't think this is going away. I think this is here and I think it's kind of like the agricultural-based pulp and paper stuff I think as they get their arms around it they're going to continue to tighten up.
And their real focus is to now sort of try to get the domestic recycling stuff going. So that will be an evolving story over time.
This 0.3% I think is a number that has to be addressed and announced in November sometime and we'll see what happens.
Sean Steuart
Thanks for that context. Second question I had on the dividend policy, can you remind us again, as you think about the sustainability of your dividend.
What is your target with respect to payout ratio whether it's relative to EPS or for cash flow per share? How do you guys think about that payout is a long-term objective?
David Gandossi
Yes. We're not driving it off a metric per se as a percentage of free cash flow or EPS or anything like that.
It's really just part of a balanced capital allocation strategy. We want to return cash to shareholders.
We want to invest in high return projects. We want to grow the company and we want to maintain an appropriate level of leverage and safety, so that equity investors are always comfortable throughout the cycle and increasing our dividend modestly as we have is just a reflection of our comfort and our approach to enhancing shareholder value.
Sean Steuart
But just to clarify that David, we shouldn't think about it as a variable dividend policy, when you increase it like this, it's with a view that this is a sustainable level based on your forecast horizon over to the…?
David Gandossi
Yes.
Sean Steuart
So that's why we think about it.
David Gandossi
That’s right. I mean I said many times we're not ever hoping.
We never have to reduce the dividend. We would hope to continually increase it.
Although maybe modestly at times, but just steadily increase that over time as the performance of the company improves and our scale and scope improves, but no. It's not – this isn't a one time thing.
This is a signal of a direction.
Sean Steuart
Got it. Okay, that’s all I had.
Thanks very much guys.
Operator
Your next question comes from the line from Dan Jacome with Sidoti & Company.
Daniel Jacome
Good morning. How are you?
Can you hear me?
David Gandossi
Yes, we hear you fine Dan.
Daniel Jacome
Terrific, nice job. Just two quick questions here, first on the lumber side, I know you only have two quarters or so on the books.
But I was impressed by – you improve the utilization levels, I think from like 51 to about 68 this quarter. You gave us a target for the production, you expect to get from that, but what's a reasonable kind of utilization rate to think about just near-term I mean with this progress, is it safe to assume you'd be kind of north of 70 possibly on the current quarter, the fourth quarter?
And then second question, kind of the NAFTA. I know you've been waiting a long time for it, but that seems to be even beyond your initial expectations on when we would have a resolution.
What do you think is taking so long? Is it just the course you have so much on their desk or is there something else on that same?
That’s it from me.
David Gandossi
Yes. Okay, well two questions, so the first one on lumber.
I think the best guidance is to look at the third quarter run volumes and normalize it and that's a good bogey for next year. This is Mercer, we're always fixing things and optimizing and expecting to rollout some high return capital in that mill for next year.
We haven't finalized all those plans yet, but we've got some great high return ideas for that mill and so we'll talk about those on future calls. For an after, I've said on previous calls that we did learn that the tribunals had – it's three guys, basically three Judges and one of the – I think the lead Judge had another really big file that backlog them and our understanding is that prolong the time here.
But it's really late. So our view in the company is that it must be getting pretty close – see what it is…
Daniel Jacome
Okay. Maybe I have a follow-up here.
Just on the import ban in China, you provided a lot of details and I think in the press release, you said this could be sounds like a medium term benefit for you guys. I'm just curious I don't know how much visibility you have and you did provide a lot of details, but what would you need to see for you guys to feel confident that the restrictions are putting in place there are in fact longer-term?
Is there anything that we can be looking out for you that maybe you are internally or it's just going to wait and see?
David Gandossi
Yes. Well, I think that I'd be watching is this draft regulation that's going to be finalized in November and [indiscernible] tell us a lot about the determination of the Chinese regulatory officials on how they're going to approach this and there'll be lots of sort of new stuff coming out about the impact on the price of waste papers in different jurisdictions.
So I think we've got a pretty clear read on it very quickly.
Daniel Jacome
Okay, that's it for me. Thanks a lot.
Operator
Your next question comes from the line of Andrew Kuske with Credit Suisse.
Andrew Kuske
Thank you. Good morning.
I appreciate the detail and the release on Friesau on all aspects of this. A question really relates to that and it's a bit of the interplay just on the fiber in particular, obviously you've got ships going from Friesau out of Rosenthal and then you've got ways going back.
Could you quantify a little bit of the impact the economic impact this helps overall Mercer on those operations? And then maybe the follow-up question about is, are you also getting better pricing from local suppliers for the other aspects of your wood fiber?
David Gandossi
Yes, on the synergies it's white wood – white chips going from Friesau to the pulp mill. And then we're able to take bark from the pulp mill up to the Friesau saw mill and that’s it's a cheaper fuel than Friesau used to burn in the past.
We were able to pull out of Friesau ways stream that fines and so on and sell that as a by-product as well instead of burning it. So the run rate EBITDA to the end of September synergy is about $4.8 million and we've guided that for the year will be on the high-end of our originally announced expectations which are 4 to 7.
In terms of impact on the fiber basket around us, Friesau hasn’t really moved the pulp wood market per say which is - I think at signal of the strength of our procurement activities. We did push saw log prices up initially in the region because we pushed our elbows out and muscled our way into the market and you know we've really ramped that mill up very quickly and but today we've got a full level of inventory in front of the mill both in terms of debarked wood as well as storage and prices have been modestly coming down normalizing again as we've got through the hump of the build up.
And we're just another sawmill in the region now. I think we've got as I mentioned in my remarks are very comfortable with our fiber supply and our inventory levels for that mill.
Andrew Kuske
Okay. That's very helpful and then just one other question a little bit different tangent.
Just on the FX and you’re explicit in the results on the $13.7 million impact, compared to year-ago in the same quarter just because of FX moves. So obviously there's a lot of FX volatility, but how do you think about “normal FX” in your modeling assumptions for when you're looking into 2018?
David Gandossi
I led our CFO answer that question.
David Ure
I could ask you that maybe. Well, I guess we don't take and we used FX to test obviously distressed the model and just make sure that we're comfortable with our capital planning and our long-term planning, but and we haven't in the past talked a lot about our views of FX and that is so volatile on I'm not sure we'd really gain by our thoughts there.
Just it's very, very volatile and then the other thing to remember there is an element it's not immediate but there is a relationship over time because the majority of NBSK is produced in Eurozone or the Canadian dollar zone that over time you tend to see in periods of weakening U.S. dollar like we've experienced in the last quarter or two.
You tend to see a little bit of upward support on the commodity prices well. So over time they say it's not immediate - there's not instantaneous but over time you tend to see kind of an offsetting effect from FX on the price.
Andrew Kuske
Okay. That's very helpful.
Thank you.
Operator
Your next question comes from the line of Andrew Shapiro with Lawndale Capital Management.
Andrew Shapiro
Yes, hi, just a few follow-up questions if I could. You have certain things you were expecting to do on the integration and getting certain synergies out of Friesau saw obviously other then the main thing of ramping up its business again, which seems to be on pace.
But with respect to how the integration is going and what you expected to do what is left that needs to be done or is it all done.
David Gandossi
Well, when you speak of integration Andy I guess a lot of the work or synergies. Okay well.
There's since we bought the mill we've improved the rate we get for power by at pine for an additional regulatory was something as a regulatory available. So just it's a bonus if you do things in a certain way you can achieve this at the higher rates of where we've done that.
There's another one on top of that called [indiscernible] bonus, the guys are working on that we haven't applied for that yet because we just want to make sure that that's the right thing to do. We will continue to optimize with Rosenthal on the backhauls of tuning chips one direction and mark the other.
There's also synergies in logistics and transportation in the sense that we bring saw logs in from the north rail and we've stick lumber on the same rail cars and turn them around and ship them up to Berlin where they get loaded onto a vessel to go to the U.S. and then the train cuts across, picks up more logs and comes back down.
So as time goes on, we just continue to optimize our logistics and produce more value as we do. On the integration side, what I think it is it's like getting the support services, integrating SAP, we're in SAP shop and they were, but it was earlier version, so we've been upgrading and optimizing the systems that they used to give us better capabilities to optimize our product offerings and type of thing.
So there would be steady improvement as time goes on. And then as I mentioned earlier, we're working very hard on high return capital projects for the mill.
I mean if we can get three or even two year paybacks on capital, it's something really good stuff to do; it's falling off a long type of investments. We know the risks and we know we can execute well.
So we'll talk more about that I'm sure on the February call.
Andrew Shapiro
Okay. On prior calls, you spoke of the progress to increase the power and by product profitability at Celgar, but you still said there was a lot of room for improvement after the latest maintenance and CapEx you've done in there.
Where do you kind of stand on that? Is your description still that there's a lot of room for improvement, I mean there's always room for improvement, but is there still a lot of upside in cost cutting and revenue enhancement you can do?
David Gandossi
Yes. There's a big difference between making 430,000 tons and 460,000 tons in a mill like Celgar because of the fixed cost coverage and because every ton of pulp you produce gives you an incremental amount of electricity generation.
So in this year, we've moved Celgar from I think was 433,000 tons last year to – the target for this year is about 465,000 tons with the capital program for 2018 my expectation are that that mill will run at that 460,000, 470,000 range for the first six months of next year and then following the high ends of it's maintenance shut, it should move into the 490,000 ton range. And so that's the level I've been talking about in the last few years.
That's a really good optimal run rate for that mill; really optimize its cost per ton, its energy generation for ton et cetera. There is opportunity to go to the next level up to 520,000.
That will be high return capital opportunities for us down the road 2019 perhaps. But for next year, we’ve got a clear line of sight on the level of tons that I just described.
Andrew Shapiro
Got it. And with respect to the NAFTA claim, when you made the claim and you assess damages and there's a high end, there's a low end et cetera.
Some of that calculation based on an expectation of the timing of the decision and in light of the decision which would involve, I guess potentially mandating modification of behavior. That the damage claims would change or that was all built in just because it's taken so long for the decision?
David Gandossi
Yes. I understand what you're thinking, but it doesn't work that way.
The damage claim will be the impact of the actions that the provincial government over the regime took to our mill, and it will be an award of damages that that caused. There is no influence on Canada or the province of British Columbia to change anything, it's just Canada simply has to pay for the damages they caused to us.
And the damages remember where we did not get the opportunity to sell the appropriate amount of power relative to all of the other pulp mills in British Columbia that are owned by Canadian companies.
Andrew Shapiro
As that policy changed or are you still not getting that opportunity?
David Gandossi
No, it's a long-term contract. We got what we got and if we'd been treated the same we would have got a lot more.
Andrew Shapiro
Okay, so that is why the damage is kind of a fixed number.
David Gandossi
That's right.
Andrew Shapiro
All right and lastly what are your plans for the next – I don’t know six months or so of investment presentations, non-dealer road shows et cetera?
David Ure
Yes, so even a non-dealer road show coming up by November, early December Dave?
David Gandossi
Last week in November.
David Ure
Last week of November, so the East Coast on that one and then will be January I guess is the CIBC Investor conference, which we always look forward to as well attended.
David Gandossi
And nothing specific on agenda other than that, but we will be doing more non-dealer road show activity in 2018 along with all the usual bank conferences and so on.
Andrew Shapiro
Great, thank you.
Operator
[Operator Instructions] Your next question comes from the line of Adam Zirkin with Knighthead.
Adam Zirkin
Hey, gentleman, how are you?
David Gandossi
Good. Thanks, Adam.
Adam Zirkin
Congratulations on a really solid quarter. Looks like the assets run very well.
Would you happen to have the production and sales by mill, usually someone asked by now, but I don't think we did on this call?
David Gandossi
Yes, I can read those off.
Adam Zirkin
Thanks, David.
David Gandossi
So we talk about pulp production first, so the Rosenthal mill and these are thousands of tons all run through. So Rosenthal 83.5, Stendal 177.3, Celgar 127.3 and sales again in thousands, Rosenthal 87.6, Stendal 177.5, and Celgar 118.7.
Adam Zirkin
Great, thank you. Thank you very much.
Dave also it looks like just – looking at the cash flow statement in the press release. The capital spending seemed a bit elevated in the quarter relative to run rate.
What's driving that?
David Ure
Nothing in particular, just the timing of things, I mean it's just where we are in the various projects and not a signal of anything good or bad, Adam…
Adam Zirkin
Got it, okay. And then lastly, can you remind us, and just given everything that's happening in pricing.
Can you remind us what the split of tonnages, I guess between the major markets right, any given quarter or year? What goes to China versus to Europe, I know the North American component small.
David Gandossi
Yes, that’s right. For Celgar, I thinkfor 100-ish into the Asian market.
For Stendal, we’re committing about 10% to China. We think it’s a right thing to do rather than to push more times into Europe.
We push it into China. The margins there over the cycle seems to be as good or sometimes better.
So that’s another 60,000 to 70,000 tons at Stendal into China. The rest is primarily around the chimneys, central Europe, a little bit of Middle East and those kinds of markets when we get a good return.
Adam Zirkin
So as we look for example and this is – to understand the math at the fourth quarter, 80% of Celgar’s production and 10% of Stendal’s would be somewhere around 460,000, 470,000 tons a year, right or little over 115,000 tons of quarter right, give or take. Pricings up well over a $100 a ton right, sequentially in the Asia market right?
So I mean the math is pretty much just straight multiplication is [indiscernible] that ought to be sort of a $10 million to $15 million tailwind on the Chinese price alone, going to the fourth quarter. Are you thinking about that right?
David Gandossi
Yes, China business in October is 30 to 850 ranges as I mentioned, and then starting November 1, it’s going to go up. West Fraser [indiscernible] at 880 ranges, Canfor at the 900 range will be in the middle of those two probably somewhere?
Adam Zirkin
Right, and that compares to high 600,000 right in the quarter, we just concluded right?
David Gandossi
Yes, that’s right.
Adam Zirkin
Got it, okay. Perfect.
That is – that’s very helpful. And I guess sorry lastly one another on the fiber costs.
David you mentioned some of the issues maybe the hurricane in German that let to some pressure there. Do you expect on a sequential basis?
Do you expect that to perhaps decline a bit going into the fourth quarter? Does it feel stable as an increasing was it feel.
David Gandossi
Well, we got a little bit of fiber cost inflation in euro terms in local currency in Europe going into the winter I mean that kind of normal seasonal activity and that’s just little bit tighter right now because of the – we missed the good solid 10 base of transport because of the Hurricane, so I’m not – I mean it’s hard to quantify. It’s going to be a little bit up for the fourth quarter and by this spring it will start to come down here.
Adam Zirkin
Got it make sense. Great.
Well, thank you. Thank you very much.
Congratulations again.
David Gandossi
Thanks Adam.
Operator
Your next question comes from the line of [indiscernible].
Unidentified Analyst
Did you talk about the maintenance shut schedule for 2018 at this time or is not been disclosed yet?
David Gandossi
I put it in my opening comments, but I was going through a pretty quick before. So it’s Celgar and Stendal are both going to be in the second quarter in 2018.
It's unfortunate that happens that way because it to really impact the quarter but it's what drives it is Stendal’s on 18 month maintenance for us. Schedule which is because of some a modern mill we can get away with that and it's I mean it's great to do that, but every other year it's going to bump up against one of the other two mills.
Celgar is on a 12-month maintenance and it can't - we can't hold it back it wouldn't be right to hold it back into the third quarter start to impact the mills were liability and possible to create some risk and then you do have Rosenthal in the third quarter. So we had to make a choice.
So it'll be it'll be ahead in the second quarter obviously. Rosenthal's third quarter of the - much later obviously than the second with the two big mills in it.
Unidentified Analyst
Okay great. And I think I mean the comments on Celgar really interesting I mean the performance you just disclose in the third quarter was very, very strong 127,000 tons EMC net long time.
Most of October is done and I think to get to that number you talked about the 465 we need another 127 million sort of tons quarter is that kind of where we're running in October that sort of quarterly rate?
David Gandossi
I put my neck out a little bit here, but I don't see any reason why the mill won't produce 465,000 for 2017. It's running well, that’s equipments all in good shape.
We've got we're very pleased with our labor situation we've got a great team there and everybody's going in the same direction. So borrowing any unforeseen disasters a very, very comfortable with the direction that mill is going.
Unidentified Analyst
Okay and commentary on the bump up the 490 in the second half of 2018 is also very interesting? Can you give us a little bit more color in terms of what is being done to get that incremental improvement?
David Gandossi
Yes, sure. So the first phase of work that we've been talking about for the last couple years has been getting the reliability of the mill up to high standards and so that's dealing with equipment that may be getting close to the end of life that could all of the sudden break and cause some downtime and if - it's mill at a certain age to get it you know you've got a number of the sort of things that if you don't if you don't deal with proactively it's kind of like debt by a 1000 mix.
So the program that we've just finished is we virtually through all of the sort of high risk areas of maintenance of business that impact reliability. So now we have the mill running reliably and steadily and we have all of our risks analyzed and contained.
And now the next set of projects is to increase the rate. So reliability is up at a high standard and then it's now you have to prove the rate.
And the first rate de-bottlenecking work that we see is in our digester and it's really a digester is not the [ball and like] it’s the feeding mechanism that goes into the digester we call it a low pressure feeder and a chip meter and a chip then. And so it's a capital opportunity for us that we can de-bottleneck that aspect of the mill and enhance the production.
So it'll be running at a run rate of – if we take that bottleneck out it'll run at a run rate of 490,000 tons. We're going to do the work and the tie-ins during that shut in April next year.
So that's why I mentioned the 465 for the first half of your and 490 for the second half.
Unidentified Analyst
And did we put a price on the project?
David Gandossi
Haven't disclosed that yet, but it's a high return it's like it's a real home run. So we'll talk about more of that in February when we finished our engineering.
Unidentified Analyst
And did we put the data on that shut for Celgar.
David Gandossi
It’s in April.
Unidentified Analyst
Number of days.
David Gandossi
We are not finished yet to for it to be I mean it is for typically 12 you could go up one or two or if you go down one or two just depending on the scope of work, but we haven't finished all our engineering and so on so. I'll getting update on the beginning of the year.
Unidentified Analyst
Okay. It sounds good.
Thank you.
David Gandossi
Yes, you are welcome.
Operator
And the final question comes from the line of Joe Pratt with Stifel.
Joseph Pratt
Hi, good morning. I’m not a paper guy.
These questions might too basic, but what's your total tonnage of, is it around 1.4 million?
David Ure
It's more than that 1.5 million, 1.6 million this year if we finish it on plan.
Joseph Pratt
So what's the total, 1.6?
David Ure
1.516 million is our target.
Joseph Pratt
Okay, 1.500 million. Okay.
And let's say an analyst wrote a report in the first quarter, what prices on average was he assuming in China would you say in the first quarter?
David Ure
We'll I don't know what he would have been predicting carrying forward, but we were – Chine was at like low 600, 625 in January.
Joseph Pratt
Okay, 625. I'm wondering about this math here.
Let's just say the 625 goes up by $200 which is sort of where it is now and that applies to the European deliveries going up $200 also. I mean would 300 million in incremental EBITDA drop from what is estimate it was in the first quarter?
I mean let's say it’s 180 in the first quarter, and instead of 625 in China and whatever it's going to be in Europe comparably it goes to 825 in China. How much of that $200 times if 1.5 million tons drop incremental EBITDA?
David Ure
Okay. Couple of things in there, Joe, couple of concepts.
One is don't forget foreign exchange, so we've had a pretty big shift in that. In January we're close to parity maybe like 105 or something like that 106 to the year and was 119 today and the Canada was probably in the 130s, I think we saw 136, at some point in the year we’re 123 today or even 121 something in that range.
So that has an impact on it. And then the second part to the whole thing is you're right, we had a big lift in prices, but what we can't backward engineer ourselves into giving guidance because we don't do that.
So better to look at the…
Joseph Pratt
Okay. My next question is as you're going to be generating at these prices assuming they can turn, you're going to be generally a lot more free cash flow than you were digging and expected to say six, nine months ago.
At what point in time does that strengthen the balance sheet to the point where you can refinance or what's the current average rate of the debt and what if you were upgraded – if your investment grade rating went – if your Moody's rates went up, what could you – what rate could you refinance?
David Gandossi
So the average rate – our average rate is probably in the range of 7% and the markets are moving a little bit, but you can look at where the bonds are trading and both tranches are trading at 105, 106 so that implies sort of a low 6’s for a rate which is kind of consistent with the refi we did earlier this year and got the 6 to 6.5.
Joseph Pratt
So 100 basis points save on $500 million in debt would only save you $5 million a year.
David Gandossi
Yes.
David Ure
But don't forget these are – the notes have a call premium to, Joe a long-term note, so that's – the 2022 might be close to breakeven on an NPV basis, but…
Joseph Pratt
Okay. Last question is on sawmill, when you acquired sawmill, did you give an expectation once you got it really cranked up after a year or two what the EBITDA could be?
David Ure
No we didn't. I think what I told – what I think what I said was that really high quality sawmill could you know should punch out at something like 15% EBITDA margin or better.
I mean if you're really on top of your gain and in my mind that's kind of the direction we're going.
Joseph Pratt
Okay. And a year from – these prices, what would the revenue run rate be on the sawmill revenues?
Do you break that out?
David Ure
We don't, but if you look at our quarter that we've just been through and we sold 10% in the U.S. market as we were growing inventory, we sold roughly 74 million square feet compared to production of over 100, so the 4.4 EBITDA you could give us bigger number, so run rate we're well over 20, right, 20 million not including the synergies.
David Gandossi
But the revenue is in our Q. Joe, you can see there.
Joseph Pratt
Okay. And just what it this document we're all waiting for to watch in November out of China which will sort of codified the ban on the dirty wastepaper?
David Gandossi
Yes. It's [China’s] Ministry of Environmental Protection was a draft regulation that was called something like environmental protection control standards for imported solid waste.
And in there it set a maximum contamination rate and our understanding is that goes live and final sometime in November probably.
Joseph Pratt
Okay. Thank you very much.
David Gandossi
You are welcome Joe. End of Q&A
Operator
I would like to turn over to presenters for any closing remarks.
David Gandossi
Thank you, everyone for attending our call, and as always, if there's any follow-up questions anybody has just reach out to either Dave or I. We are happy to be speak anytime.
And we look forward to talking to you all again in February next year. So bye for now.
Operator
And this does conclude today’s conference call. You may now disconnect.