Earnings Call Transcript - MERC Q2 2021

David Ure, CFO

Good morning, everyone. Before David begins, I would like to remind you that in this morning’s conference call, we will make certain 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. David?

David Gandossi, CEO

Thanks, Steve and good morning everyone. Well, Q2 was a remarkable quarter for us. We advanced key elements of our strategy, growing our annual pulp capacity by 80,000 tons at Stendal, rebuilding our recovery boiler at Peace River, improving our ESG ratings and demonstrating the potential of our Friesau sawmill. We delivered solid operating earnings and executed three large maintenance shuts all while navigating the complexities of a global pandemic, wildfires in Western Canada and flooding in Germany. Now, despite these challenges, including the current volatility of end product markets, we are very bullish on our future and I’d like to take a few minutes to step away from the quarterly earnings to discuss why. For many years, we have been pursuing a strategy to create long-term value for stakeholders. We have focused on market pulp, building products, green energy and chemical extractives, because we believe that in the fullness of time these products, produced in modern facilities with a focus on long-term sustainability, will outcompete the many weaker players in this space and deliver superior performance. We invest only in large and modern facilities that have the potential to be world leaders. We focus on timber supply, procurement and logistics in making our investment decisions. We promote a values-based approach to our human resource development that honors health and safety, innovation, boldness, accountability, sustainability and the pursuit of excellence. We maintain our mills to a very high standard. We look forward and execute on high-return projects that provide superior returns, not just financially but environmentally, including resource efficiency. We don’t buy junk. We don’t pay too much. We have a point of view on the future and are seeking growth in areas where we have a strong commitment and where we feel we have sufficient core competencies to be successful. We do this while remaining true to our commitment to maintaining a strong balance sheet, carrying at times what might appear to be excess liquidity, but which could ultimately be described as dry powder for those opportunistic ideas that can come at any point in the cycle. We focus hard on sustainability. We know the planet is struggling under the weight of climate change. We believe our assets and activities are part of the solution, and this will become ever more apparent as science and policy converge to fight climate change. We support and promote sustainable forest management practices. We have a track record of going above and beyond when it comes to ecosystem-based management practices, promoting biodiversity and forest health. We also understand how critical it is for us to focus on our people. If you’ve taken the time to explore our website, you will recognize us as a progressive company, working hard to develop our teams to maximize our team members’ experiences and engagement with us. Mercer is a truly unique company of exceptional people, and we strive to ensure that every one of our employees is proud to be part of the team. From our website and disclosures, you will also recognize a company committed to transparency regarding important and relevant ESG performance indicators. We understand that we need to continuously improve, and we have a good track record of doing this. I see many of our competitors underperforming in this area, and time is catching up on them. I will have more to say in a few moments, and I know listeners will be interested to discuss our product market fundamentals. But first, let’s give the floor to David Ure to review our financial performance.

David Ure, CFO

Thanks, David. Our second quarter EBITDA was comparable to Q1, despite the significant planned downtime we took this quarter to facilitate capital projects and annual maintenance. Combined, we took about 16 weeks of planned downtime in the second quarter, which negatively impacted EBITDA by approximately $80 million. In addition, our Q2 operating results were negatively impacted by the effects of a weaker U.S. dollar on our foreign currency-denominated operating expenses. More than offsetting these negative impacts were higher prices for our pulp and lumber products, with those higher lumber prices driving record earnings for our lumber business. We generated EBITDA in the second quarter of almost $84 million, compared to EBITDA of about $82 million in Q1. Our pulp segment contributed EBITDA of $41 million, and our Wood Products segment contributed record quarterly EBITDA of $46 million. Our Wood Products segment benefited from strong demand and record U.S. sales prices in Q2. Recently, the U.S. market has weakened significantly, and David will speak more about that shortly. And as usual, you can find additional segment disclosures in our Form 10-Q, which can be found on our website or that of the SEC. Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets this quarter. In China, the Q2 average NBSK net price was $962 per ton, up almost $80 from Q1. European list prices averaged $1,288 per ton in the current quarter, compared to $1,037 per ton in Q1. And the hardwood price in the U.S. market averaged $1,297 per ton in Q2, which was up $277 compared to the prior quarter. In total, higher average pulp sales realizations positively impacted EBITDA by about $62 million when compared to the prior quarter. Pulp demand remained steady in the quarter. However, our sales volume was down compared to the previous quarter due to our planned downtime. Our Q2 sales totaled almost 361,000 tons, which was down about 127,000 tons from Q1. In Q2, our mills were down a combined 117 days for capital and annual maintenance work. This is roughly the equivalent of 173,000 tons of production. Our Peace River mill was down 79 days in Q2. The majority of this time related to the rebuild of the mill’s recovery boiler and will be covered by insurance. The claims settlement process is ongoing, and while we have recognized about $4 million of business interruption insurance recovery in the current quarter, we currently expect the final business interruption claim to be in excess of $15 million. Our Stendal mill was down a total of 26 days, which is longer than the mill’s regular maintenance downtime. The extra time was needed to finalize the installation of two new batch digesters that will add 80,000 tons of incremental capacity. Our lumber realizations also increased considerably during the quarter, particularly in the U.S. The Random Lengths U.S. benchmark for Western S-P-F #2 and Better averaged over $1,342 per thousand board feet in Q2, which is up $370 from last quarter. U.S. lumber prices rose steadily through the quarter, and it was the largest contributor to our Q2 average lumber sales realization, increasing to $789 per thousand board feet from $622 per thousand in Q1. The benchmark lumber price is currently $490 per thousand board feet. Our Wood Products business continues to perform extremely well. We sold about 109 million board feet of lumber in the quarter, similar to the strong level of Q1. Our electricity sales totaled roughly 152 gigawatt hours in the quarter, which was down relative to Q1 due to lower production related to our planned downtime. Our Cariboo mill joint venture, which is accounted for using the equity method, contributed another 17 gigawatt hours to this total. We reported net income of $21 million for the quarter, or $0.32 per share, compared to a net income of $6 million, or $0.09 per share, in Q1. The increase in income reflects the absence of the Q1 $30 million, or $0.46 per share, loss in the early extinguishment of debt as a result of the senior note refinancing. Cash used in the quarter totaled approximately $11 million, compared to cash generated of $34 million in Q1. Our cash usage in Q2 was primarily the result of our ambitious CapEx spending and the repayment of our revolving credit facilities, which were partially offset by working capital movements in the form of higher accounts payable balances. We invested $62 million of capital in our mills this quarter, and we remain on course to invest between $150 million and $185 million in our mills this year. David will provide an update on our CapEx progress shortly. Our strong results and solid cash flow have led to a modestly improved liquidity position at the end of the quarter, totaling about $695 million, comprised of $385 million of cash and $310 million of undrawn revolvers after paying down $42 million of short-term debt in the quarter. Our strong liquidity position will support the planned seasonal growth in working capital, along with the remainder of our ambitious 2021 capital spending program. As I noted, we completed 117 days of planned capital and maintenance downtimes in our mills in Q2, and this compares to a total of 27 days of planned maintenance in Q1 at our Celgar mill. The impact of the Q2 planned downtime, including lower production and higher direct costs, reduced Q2 EBITDA by almost $50 million when compared to Q1. As a reminder, our competitors who report their results under IFRS are permitted to capitalize the direct costs of their annual maintenance shuts, while we expense our costs in the period of shut completion. And as you will have noted in our press release, our Board has approved a quarterly dividend of $0.065 per share for shareholders of record on September 29, 2021, for which payment will be made on October 6, 2021. With that, it ends my overview of the financial results, and I’ll turn the call back to David.

David Gandossi, CEO

Thanks, Dave. I am encouraged by the global rollout of COVID-19 vaccines and the positive effect this is having on global economic activity. Unfortunately though, there remains uncertainty about the impact of the COVID-19 variants and increases in infection rates. And as a result, we remain focused on our protocols to ensure the safety of our employees, contractors and the ongoing operation of our mills. I am pleased with all that we accomplished this quarter. And as I said earlier, we have added 80,000 tons of NBSK pulp production at our Stendal mill. We rebuilt Peace River’s recovery boiler, effectively giving the mill a new boiler. Combined, we completed 117 days of capital and major maintenance work, and we successfully completed all this work without allowing COVID-19 into our mills. Overall, our mills ran well, but a significant level of planned downtime resulted in lower than normal production levels, which was the drag on our results, obviously. However, strong demand for our products and related price increases when compared to Q1 more than offset the impact of our planned downtime, with our lumber business leading the way with record quarterly earnings. Both softwood and hardwood pulp prices rose steadily and significantly through the quarter. Favorable supply demand fundamentals, including low paper producer inventories, unusually high pulp producer downtime, much of which was unplanned, logistical challenges due to the global shortage of containers that has limited the volume of pulp into China and a relatively strong Chinese currency, all factored into favorable supply demand dynamics during Q2. Late in the quarter, pulp prices began to retreat in China, primarily due to speculative forces, but the supply demand factors that created have created a soft landing; while in Europe, we successfully implemented a $40 price increase, taking the list price to $1,340 per ton. Overall, we feel pulp prices globally will trade in a narrow band through the traditional slow summer months. Supporting our views are the May pulp statistics, which continued to reflect good demand for both NBSK and hardwood. The hardwood market statistics highlight a tight market, and the NBSK inventory statistics reflect a balanced market after factoring in shipping delays caused by limited container availability. In addition, we are seeing more indicators reflecting growing global economic activity and supporting analyst predictions for significant GDP growth in 2021, which will support the demand for all commodities, including pulp and lumber. We also believe government economic support will help fuel this growth. And as a result, we are optimistic that steady economic growth and strong market fundamentals, along with a weaker U.S. dollar, will continue to support pulp prices. Our Wood Products business once again achieved record operating results, due to the strong U.S. market pricing. The European lumber market also experienced upward pricing pressure in the quarter. Recently, U.S. lumber prices underwent a significant correction, bringing the framing lumber composite benchmark down by roughly 70%. This decline was likely due to the record-high prices beginning to have a negative impact on the do-it-yourself lumber demand and fears that this negative outlook could spread to the housing market. Higher COVID-19 infection rates in certain parts of the U.S. also created negative sentiment. U.S. lumber pricing appears to have hit a floor due to recent B.C. sawmill curtailment announcements, with more expected due to the heavy wildfire activity and high stumpage fees. We see some pricing upside as well, due to the reduced B.C. supply, low inventory levels and a strong U.S. housing market. The European lumber market has shown steady price increases through the year and remains strong today, and we expect this to continue even if some European producers reduce their exports to the U.S. We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can. In Q2, 39% of our lumber sales volumes were in the U.S. market, with the majority of the remainder of our sales in the European market. Looking forward, we have taken down our turbine generator at Rosenthal for maintenance, following a service interruption, which has damaged some parts of the equipment. The timeline for returning the generator to service could be as long as 100 days and we therefore decided to conduct what would have been a required maintenance halt in 2022 this year. This will save 37 days from next year. During this time, Rosenthal will need to purchase all of their electricity needs. There will be an insurance component of this, but that’s not determined at this time. The Wood Products segment achieved another strong production result, producing almost 117 million board feet of lumber, which was comparable to the Q1. In Germany, our wood costs, particularly for pulpwood, remain at historically low levels due to the abundance of beetle-damaged wood, and we expect this pulpwood supply dynamic to continue well into the fall. We are seeing sawlog cost inflation early in Q3, but we expect prices to begin to moderate again due to early indications of heavy spruce beetle activity this summer. In Western Canada, pulpwood supply remained steady and price changes have been modest in our fiber baskets. However, this year is shaping up to be another significant forest fire year, which could potentially have negative impacts on both supply and prices of fiber. We will be monitoring this situation closely. Today, there are no direct forest fire threats facing our operations, but the fires are negatively impacting rail logistics in the region. This will slow down our ability to get pulp to market as we use less efficient and ultimately more expensive alternatives. In addition, the logistical challenges could impair our ability to move raw materials to our mills. And for those of you following weather news in Germany, you will know that the problem there is not fire, but water. While the floods that have been severely impacting many regions in Western Germany have restricted some logistics channels, our operations for the moment have not been impacted. The majority of our heavy 2021 maintenance program is now behind us. I’d like to remind listeners that we have had major maintenance at Celgar, Stendal and Peace River in the first half of the year. This is a bit unusual to have this much maintenance lumped together but was the result of a number of reasons, including our migration to 18-month annual revisions, versus 12 months previously, and also due to the necessary timing for the Peace River boiler rebuild. Our remaining 2021 major maintenance schedule is as follows. In Q3, Rosenthal has a 15-day shut planned. Cariboo will take a 16-day shut, and our Friesau sawmill will take its traditional summer rolling department maintenance outages. In Q4, Stendal has a 2-day mini shut planned, and Celgar will also take a 4-day mini shut. While the majority of our annual maintenance work is complete, significant capital expenditures to grow the company are ongoing. We are using our well-managed liquidity and strong balance sheet to continue to pursue the growth aspect of our strategic plan and, more specifically, the objective of adding shareholder value by growing the company in areas where we have core competencies. We have commenced the construction of two new wood rooms, one at our Peace River pulp mill and one at Celgar. These projects will allow us to transform our supply chains, increase our capacity and significantly reduce the cost to produce our own wood chips. The projects will also allow us to accept alternative forms of lower-quality wood that were previously left in the forest. The total cost of these projects will be between $65 million and $70 million. These projects are also eligible for a number of carbon reduction grants that could exceed $20 million. And even without the carbon reduction grants, these projects will create significant shareholder value. We expect the projects to be largely complete by mid-2022. We continue to advance the engineering and permitting process for our Stendal sawmill. The initial plan for the mill contemplates a 400 million board foot capacity, with the product lineup and flexibility of our Friesau mill, but we expect to build the mill in such a way that will allow for incremental capacity increases in the future. Inflation and delivery of key equipment timelines are now becoming considerable. We are seeing delays in the delivery of sawmill equipment along with the potential for higher costs, particularly for steel, concrete and electrical installations. We remain committed to the project. However, we will continue to consider the timing as this development work progresses. In addition, you will have likely seen the court filing about our stalking-horse bid for Katerra’s Spokane, Washington, cross-laminated timber plant. We have agreed to a stalking horse bid price of $50 million and a draft asset purchase agreement. Strategically, we feel this asset would be a material addition to our growing company and has the scale to be the first step of a significant pillar in our building products competency, particularly considering the expected growth in demand for mass timber construction. The facility will no doubt garner interest from other parties and we are in no way assured of success. We will have more to report on this as the process progresses. Excluding our bid for the CLT plant and depending on the speed of certain construction prerequisites and deposits, we expect total capital expenditures to be between $150 million and $185 million in 2021. Our strong financial position that we vigorously protected during the pandemic gives us significant financial flexibility as we put our sights back into growth. I remain confident that the effective execution of our strategy will continue to bring us success. We remain focused on our world-class assets, and our modern sustainable operations will continue to serve us well as we continue to focus on optimizing our fiber handling and logistics and controlling our costs. So this completes our prepared remarks. But if I could take a moment to remind listeners, COVID-19 mutations continue to be a significant risk. I encourage everyone to get the vaccine and continue to keep your friends, family, colleagues and neighbors safe. This pandemic is not over yet. Thanks for listening. I will now turn the call back to the Operator for questions. Thank you.

Hamir Patel, Analyst

Hi, good morning. David, you referenced kind of rising inflation for the sawmill projects under consideration. So for Stendal, do you have a sense as to maybe what that updated build cost would be if you go forward? I know we had a recent greenfield announcement in the U.S., and it looks like, at least in the U.S., that that project was around $750 a thousand. I don’t know if that’s a similar benchmark that you’re seeing in Europe.

David Gandossi, CEO

I think $650 to $750 could be the ZIP code. There are options to stage things, build the mill in phases. There is – I don’t want to build something that doesn’t have all of the appropriate bells and whistles. We know how important that is to get the grade profile out. So we’re working our way through all the final quotes and adjusting scope as we can. And maybe there is a slight delay in pulling the trigger on this. We’re not going to do something crazy, obviously. But it’s really remarkable how rapidly the cost of steel and just equipment, in general, has gone up. I don’t think it will stay where it is, but for the moment it’s really been a remarkable increase. So we’re just going to monitor it. We’re doing the work, and we will be in a position to make decisions. But again, I think it would be prudent to take a really cautious approach to it.

Hamir Patel, Analyst

Sure enough. And given the escalation on the Greenfield side, has that maybe increased your appetite for considering buying an existing sawmill and have you seen maybe the pipeline of opportunities improve as lumber prices have come off?

David Gandossi, CEO

Yes, it certainly factors into our thinking, Hamir. Absolutely. Having said that, we just don’t want to buy junk and everything that we looked at has been pretty expensive and hasn’t really been at a scale, at least in North America, hasn’t been at a scale that would make sense for us from our strategic point of view. There are still a few targets in Europe that we continue to monitor. And you’re right with changing conditions those could come back into focus and make more sense for us. So they are also on the table for consideration.

Hamir Patel, Analyst

Fair enough. And just a last question for me, David, with the capacity increase now at Stendal and then just given the sort of cycle of the various shuts, what level of production would you be targeting for 2022?

David Gandossi, CEO

Well, net of all shuts and things like that, I could just flip through my report here. Just give me a second, unless David has it open. Sorry, Hamir. I don’t have that just easily handy.

Sean Steuart, Analyst

Thanks. Good morning guys. David, I wanted to revisit NBSK markets in Europe. It looks like you got about half the proposed June price hike. And I’m trying to gauge your thoughts on the ability to hold prices through the summer as things have corrected in China and, to a lesser extent, North America. Do you think the industry will have an ability to tread water through the summer in Europe as other regions weaken?

David Gandossi, CEO

Yes. It’s a great question. And the way I’m thinking about it and some of my colleagues here in Mercer, we’ve been putting some time into thinking about what’s the same and what’s different about the last two cycles the 2017-18 cycle, where we had peak prices, and the current cycle. So one of the differences here is at the end of 2017-18 cycle, the pulp stocks were very high; whereas, today stocks are well balanced. At the end of 2018, the global economy was cooling considerably, particularly in China. There was the trade conflict with the U.S. going on and so on. And today, in 2021, all major regions are expected to grow and grow strongly, and there is a very different sentiment in the market today. Paper inventories in 2018 were very high, particularly in China. Today those are at normal levels. Considerable overcapacity in the European printing and writing sector in 2018 has been really offset in 2021 through massive cultures of paper capacity, primarily in 2020. Back in 2018, you remember Suzano, the market leader, just completed a merger with Fibria. They were pretty busy with themselves. And most would say they misjudged the market, created some of the problem we had to work through in terms of inventory overhang. And I think another important factor, particularly as your question relates to Europe, is ocean freight challenges favor the European paper producers in 2021. And by that, I mean, like, paper imports into Europe are very limited. So the paper producers are busy, and they are profitable. They have been successful raising prices more or less across the board. And so it’s a much stronger market without much influence coming in from paper producers in China, for example, that they would have previously been competing with. And then, finally, I think another big difference is the dissolving in the fluff markets this year are pretty strong, unlike in 2018. So there is really no swing tonnage coming into the paper-grade side. So there is a lot of differences. And generally, just the tone of our customers in Europe tells us that we’re going to trade at a pretty narrow band here through the summer, and I’m optimistic about the back half of the year.

Sean Steuart, Analyst

Thanks for that detail. That’s really helpful. I also wanted to follow-up on your comments with respect to the CLT asset you’re bidding on. Help me understand, I guess, that opportunity. Have you been looking at other engineered wood opportunities or is it a result of the Katerra bankruptcy that this one fell into your lap potentially? And how do you weigh the appetite for this type of expansion versus sawmills in North America, because you have kicked the tires on opportunities on that front as well?

David Gandossi, CEO

Well, I’m really bullish on mass timber. It’s been sort of a current steady area of business for Europeans. It’s growing very rapidly in North America. When you’re at the FPAC table or COFI or listening to the premier or the prime minister talking here in Canada, mass timber is something that’s really supported. It’s a green building product. It’s got a much lower carbon footprint to steel and cement. And I think we all think there is a tremendous growth opportunity here. So we’ve been really focused on the value-add space through time. And as I’ve spoken about in the past, we’ve got an empty hall coming at Friesau, and the opportunity there would be to take the lower-profile material and put it into either CLT or glulam or something like that, do some finger-joining and so on. And so we’ve been really looking for opportunities in that area. So we understand the business, I think, pretty well. We’ve done a lot of work in it. And the Katerra thing is an opportunistic situation, clearly. It’s a big plant. It’s really big. So I always – we say we don’t want to be a small fish in a big pond; we’d rather be a big fish in a smaller pond. But if there is really good growth market dynamics and we can establish ourselves as leaders and use that as a platform for further growth in that area, that’s kind of what we dream about. It’s going to be competitive. I mean, I’d be shocked if others don’t show up. So that means there will be an auction. And as we were with the K1, we will need to be disciplined and not overreach. It’s still a growing market in CLT. So if we don’t get this one, we will possibly find other value-added products we can go into. So we will see. It’s a cool opportunity. It’s a very well invested plant, with equipment that we know. It looks a lot like a sawmill except it just doesn’t have timber in it. But all the sorting and planning and continuous kiln drying and all that kind of stuff, it’s all the same equipment we run in Europe, basically.

Marcus Campeau, Analyst

Good morning guys and thanks for taking my questions. Maybe starting with pulp here, there is quite a bit of hardwood capacity coming online over the next few quarters. How do you think that will impact the market? And can you remind us how you think about the relationship between hardwood and softwood pulp prices?

David Gandossi, CEO

Yes, great question. Yes, it’s – yes, so between Arauco and UPM and a bit of [indiscernible] there is hardwood coming. Hardwood is going to struggle a bit, or at least has the potential to. It really depends on the discipline of the producers, in my mind. And one of the – there is a couple of angles in the whole thing. They are adding capacity because they believe, and I think they are right, that the demand for virgin fiber is growing significantly. Hardwood right now is growing at more than 1 million tons a year, every year, and has been doing that consistently. You may remember three years ago we thought [indiscernible] capacity is going to destroy the market. Well, it didn’t, until we had a behavior issue that really kind of got in the way. So it’s going to be lumpy, and it’s going to wind its way through. I mean, I think we do have some hardwood pulp in Mercer, and our opportunity with our wood room and possibly some other Aspen extraction material product opportunities that we have up in Peace River, I think we can get our cost structure down to where we can really compete on the hardwood side. And we’ve got softwood swing capacity up there as well. So that mill, still a great mill and will be a contributor over the next couple of years. But for a couple of years, hardwood will be the drag, generally, on virgin fiber. I think the demand for virgin fiber is going to be strong enough, and particularly for softwoods, that the gap between the two grades will widen and kind of end up at a delta that’s probably something we’ve never really experienced for prolonged periods of time before. I’ve seen the difference at $200 in previous cycles. And recently, we’ve seen it as high as $220. Today we’re down below the $200 level, but I could see that being the case for some extended period of time. I don’t think it’s going to be a ball-and-chain on softwood. Softwood is too small a market and it’s too important to so many different paper grades that it will trade based on its own supply-demand dynamic. It will become a niche pulp trade that way, and hardwood will be the big benchmark grade. And the way to be successful in the hardwood space is you’ve got to be a low-cost producer, a high-quality producer, and the consolidation of the hardwood producers should exert some discipline into the market that allows everybody to make reasonable margins.

Andrew Shapiro, Analyst

Hi. Thank you. A few follow-ups here and then a question. Regarding the stalking horse bid at Katerra, with the auction set for Monday, how does this bankruptcy court and this particular bankruptcy case, how do you see it proceeding in terms of the timing of the determination of, we will call it, the winner of the auction? Would there then be an additional breakup fee protection all the way through the reorg vote, etcetera? And when do you think that all takes place. I don’t know how complex a case this is and if this is just one small asset sale that is going to have the gavel bang down long before the overall restructuring is done, or what?

David Gandossi, CEO

Hi Andrew, yes, it’s going to be a very rapid close, is what we have been told. So, the auction will be Monday, and I think they are hoping to close within a week of that, more or less. So, we will either own an asset or we will have a break fee right away.

Andrew Shapiro, Analyst

Okay. So, it’s kind of a – it’s a separate 363 sale outside of the rest of the restructuring process.

David Gandossi, CEO

Correct.

Andrew Shapiro, Analyst

Excellent. Kind of along these lines which is, again, the use of pulp in a variety of other uses than the standard Mercer business line. You have a joint venture with Resolute in Performance BioFilaments. And can you remind me what percentage Mercer has of the joint venture? And more importantly, I think the last that we might have heard about this was that the Québec plant, the initial plant in Québec, is under construction. And maybe it has now been completed. And they anticipated making, I think, products, production and sales commercially here in 2021. What’s the status of all of that?

David Gandossi, CEO

Well, so Performance BioFilaments is a joint venture that we have with Resolute Forest Products. And both companies were very interested in the technology. We have access to all the patents and everything through our membership in FT Innovations. And we decided that let’s work on, let’s co-develop applications versus competing with each other in the market. And so, we put our resources together in Performance BioFilaments, hired the team. And I think somebody used the word, it’s an incubation hub, if you like, of products for the future. And filaments provide papermakers value either through strength or different properties that you can manipulate the surface features of filaments. It goes into non-wovens. It can go into cement. It can go into drilling mud. There are just all kinds of applications. And so Performance BioFilaments is all about working with end users, industries and companies that can benefit from biofilaments and helping them develop applications for it. And then the vision is that we would have the exclusive capacity to provide materials, like a chemical material, if you want to call it that, that creates value for them for whatever their application is. Our partners in Resolute felt strongly enough that they are building a plant, and that plant will provide material to Performance BioFilaments and will also provide material to operations in the paper space that they operate. And I think they are pretty excited about it. I can’t talk too much about it. It’s really their project in a way. And so I will leave it at that. But we continue to – I wouldn’t say plug away is the wrong word. I mean, we still feel there is lots of potential in high-performance strengthening agents for papermakers and other special applications, but these things take time.

Operator, Operator

Thank you. [Operator Instructions] Your next question comes from the line of DeForest Hinman. Your line is open.

DeForest Hinman, Analyst

Alright. Thanks for taking my questions. Can you give us an update in terms of your thoughts on the production capacity of Friesau? I know you have the summer holidays with the maintenance, but I know we have been adding a lot of equipment there. Has it changed your thoughts in terms of what can that facility do from a production perspective?

David Gandossi, CEO

Yes, great question. Well, I mean, it’s everything we thought it would be. And it really depends on how you run it and how you staff it, what it’s going to produce. So, maybe to give you the guidance that I think you need for your models, DeForest, for the third quarter we have got our summer maintenance. Sawmills are a little different than pulp mills. We can do – we kind of rotate through departments. So like, we will work on the log line for a while, work on one of the saw lines, get it back, work on the other saw line, work on sorters, work on dryers, work on planer, that kind of thing. And we can also double-shift some of these lines. So, when one is down, we can work hard on the other to produce the product. So, our production target for the third quarter, despite having all this maintenance, is about 123 million to 124 million board feet of lumber, is what we will produce in the three months. Thank you, Patricia, and thank you all for joining our call. And as always, Dave and I are very happy to talk to you any time. So, don’t hesitate to reach out. I look forward to speaking with you. And otherwise, we will look forward to our third quarter earnings call. Thanks again. Bye for now.

Operator, Operator

And this concludes today’s conference call. Thank you all for participating. You may now disconnect.