Domtar Corporation
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Domtar Corporation Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded today, October 27, 2017. I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead.

[Nicholas Estrela:]

Good morning, and welcome to our third quarter 2017 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. They will be supported by Michael Garcia from our Pulp and Paper Division; and Michael Fagan from the Personal Care Division. John and Daniel will begin with prepared remarks, after which they will take questions. During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of the website. As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements, subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings with the securities commissions for a listing of those. Finally, certain non-U.S. GAAP financial measures will be presented and discussed, and you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release as well as on our website. So with that, I'll turn it over to John.

[John Williams:]

Thank you, Nick, and good morning, everyone. This morning, we reported EBITDA before items of $163 million on sales of $1.3 billion. Our strong third quarter results reflected solid performance in Pulp and Paper as we continue to improve productivity and margins and generate good cash flow. In Paper, demand improved after a soft start to the year. Our volumes were 3% higher sequentially, driven mostly by seasonal strength. In addition, we have successfully grown our export paper business, with currency and improved offshore prices making this market more attractive. Our mills ran well. Paper costs were low, and we further benefited from our continuous improvement work and reliability programs. Finally, we announced price increases covering a number of paper grades. Our Pulp business also had a solid performance. It was a light maintenance quarter, which, combined with good operations, resulted in improved productivity. Pulp markets benefited from robust global demand and tight supply while our shipments and average selling prices trended higher. Operational and cost performance of the Ashdown A1 machine are improving. The machine ran well in the quarter, and productivity was above plan. Fluff pulp sales volumes are steadily increasing, and we continue to make progress on the pulp qualification with targeted customers. In Personal Care, our third quarter results were below our expectations. When compared to last year, price pressure and raw material headwinds negatively impacted margins, partially offset by a 9% increase in our infant diaper volumes. In a market that continues to be competitive, our sales pipeline remains strong, and we're executing our strategies for long-term success while focusing on near-term growth opportunities. On a consolidated basis, we generated $72 million of free cash in the quarter and $213 million year-to-date. So we continue to trend well. With that, let me turn the call over to Daniel for the financial review before making further comments on our performance and our outlook. Daniel?

[Daniel Buron:]

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on Slide 4. We reported this morning net earnings of $1.11 per share for the third quarter compared to net earnings of $0.61 per share for the second quarter of 2017. EBITDA before items amounted to $163 million compared to $143 million in the second quarter. Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $68 million higher than the second quarter due to higher volumes and prices in all our businesses. Depreciation and amortization was $1 million higher than the second quarter while SG&A was $7 million higher than the second quarter as a result of higher mark to market of stock-based compensation, higher variable compensation and an unfavorable foreign exchange variation. In the third quarter, we recorded an income tax expense of $3 million or an effective tax rate of 4%. The tax rate in the quarter was favorably impacted by the recognition of previously unrecognized R&D tax benefits. Excluding this, our tax rate would have been 23%, in line with our forecasted tax rate. Now turning to the cash flow statement on Slide 6. Cash flows provided by operating activities amounted to $112 million while capital expenditures amounted to $40 million. This resulted in free cash flow of $72 million for the third quarter. Let's turn to the quarterly waterfall on Slide 7. When compared to the second quarter, EBITDA before items increased by $20 million due to higher volume and mix for $9 million, better productivity for $8 million, lower maintenance for $6 million, higher selling prices for $6 million and lower raw material and other costs for $4 million. These were partially offset by an unfavorable foreign exchange impact of $7 million, higher SG&A for $5 million and higher freight costs for $1 million. This quarter was marked by unusual severe weather conditions, particularly in the U.S. Southeast. Those hurricanes had limited impact on our operation and our people. We estimate the financial impact to be $1 million in the quarter but expect to see some fiber, freight and chemical cost inflation in the next few quarters due to the difficult hurricane season. Now the review of our business segments, starting on Slide 8. In the Pulp and Paper segment, sales were 6% higher when compared to the second quarter and flat when compared to the same period last year. EBITDA before items was $152 million compared to $128 million in the second quarter of 2017. Our Paper business on Slide 9. Sales increased 5% versus last quarter and were 5% lower versus the same quarter last year while EBITDA before items was $119 million. Manufactured paper shipments were 3% higher when compared to Q2 and 3% lower versus the same quarter last year. Average transaction prices for all our paper grades were $2 million -- $2 per ton higher than the last quarter. Our Pulp business on Slide 10. Sales increased 8% versus last quarter and were 17% higher versus the same period last year. Estimated EBITDA before items was $33 million. Pulp shipments were 11% higher versus the second quarter and up 15% when compared to the same period last year. Average pulp prices increased $10 per metric ton versus the second quarter. Our paper inventories increased 24,000 tons when compared to last quarter while pulp inventory increased by 32,000 metric tons. Our Personal Care business on Slide 12. Sales increased 10% compared to last year as a result of new customer wins and the addition of HDIS. Our EBITDA before items was $25 million, $4 million lower than the second quarter, largely due to some cost headwinds and unfavorable currency movement in the quarter. Finally, as shown on Page 13 of the slide deck, we expect Pulp and Paper maintenance spending to increase $12 million in the fourth quarter when compared to the third quarter. So this concludes my financial review. And with that, I'll turn the call back to John.

[John Williams:]

Thank you, Daniel. The improvement in our financial results compared to the second quarter was driven by a number of factors. We had less maintenance outages and minimal lack-of-order downtime in our Pulp and Paper businesses. Total production tonnage was high, and cost performance across our network was very good. In Paper, the business is delivering steady results and cash flow. Our shipments increased as market demand improved seasonally compared to quarter 2. Pricing improved, and we also announced price increases on certain communication and specialty and packaging grades at the end of the quarter. We expect to implement the price increases over the next 2 quarters, with the full run-rate impact by the second quarter of 2018. We completed the installation of a second turbine generator at our Windsor mill, below budget and ahead of schedule. It was online and selling power into the provincial grid in September. The new generator immediately improved the mill's energy efficiency and should deliver approximately $10 million of additional revenue per year. In Pulp, momentum continues in global softwood and fluff pulp markets, which represent over 90% of our market pulp mix. Pulp prices trended higher following the previously announced price increases, and we expect some additional price momentum as we implement the September and October increases. As a point of interest, current nominal prices are below or close to the 10-year average NBSK and fluff pulp prices in both North America and China. Our Pulp business is growing significantly and becoming an ever more important part of our portfolio. With nearly 2 million tons of high-quality market pulp capacity, it provides us with a scaled business that will add momentum to our growth strategy. Our softwood shipments, which include fluff, NBSK and SBSK, are up 14% year-to-date. We're continuing to increase our position with fluff and tissue-grade customers, and our volumes are growing. We're well positioned to capture additional growth, both through contract wins and incremental volume from existing customers. We continue to make good progress with Ashdown fluff pulp qualifications at several internal and external customer locations in North America and across the globe, and we're receiving great feedback. We're poised for another strong quarter in shipments and on track to ramp up to approximately 50% fluff sales in quarter 4 at Ashdown. The timing of Plymouth's optimization is being closely aligned with fluff pulp sales at Ashdown. We have decided to run the smaller pulp line at Plymouth beyond the end of the year to support our transition. Following the closure of NC2, Plymouth will be rightsized to an annualized production target of approximately 390,000 metric tons of fluff pulp. In Personal Care, we continue to capitalize on near-term growth opportunities in a highly competitive market. We expanded our adult incontinence assortment at a key North America retailer, and we're growing well above market consumption rates with them. Meanwhile, our partner brand infant category continues to grow, well outpacing the market. Our sales pipeline remains strong, and we're well positioned to continue to grow above market. I'm also encouraged with our cost-savings performance in this division so far this year, which helps mitigate some raw material inflation. Before turning to the outlook, I wanted to touch briefly on asset repurposing and follow up on some of my comments from the second quarter earnings call. We are committed to preserving the value of our fiber lines. Continuing to generate earnings from our assets when permanent removal of our white paper is needed ensures we're operating our mills in a long-term sustainable fashion. We have a number of world-class assets, access to nearly 17 million green tons of wood fiber and expertise in fiber-based products. We're actively engaged in looking at all the alternatives available to us to maximize value for our shareholders. As part of that process, we have retained the Jacobs Engineering Group to initiate a containerboard feasibility study. Early work has confirmed that we have good candidates within our network that can be converted. And we believe the containerboard provides us with an interesting option when considering asset repurposing. All of our repurposing will be in measured steps, driven by our supply-and-demand balance in our white paper business. Now to our outlook. For the fourth quarter, we expect higher maintenance costs in Pulp and Paper. Additionally, Paper is expected to be negatively impacted by a seasonally unfavorable mix. Pulp should continue to realize higher prices, following recently announced price increases. And Personal Care is expected to benefit from higher volumes or favorable raw material costs and seasonally lower marketing expense. Thank you for your time and support. And I'll turn the call back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. So both John and Daniel will be available for questions. [Operator Instructions]. So Anthony, you can open up the lines for questions, please.

[Operator:]

[Operator Instructions]. Our first question comes from George Staphos with Bank of America Merrill Lynch.

[George Staphos:]

I guess, first question, kind of a shorter-term one. Can you give us an update -- perhaps you already mentioned and I missed it, but an update on where your realizations are on average in Pulp and Paper exiting or currently versus your third quarter average?

[John Williams:]

You mean where the price is sort of end of quarter as opposed to average? Is that the question?

[George Staphos:]

Correct, yes. Or even if you want to comment on where they are as we sit here today, but either/or.

[Daniel Buron:]

Okay. So let's talk about pulp first. I mean we've announced price increase in September and October so far. So none of that is actually -- or very little of that is actually in our Q3 results. So when I'm looking at the exiting price versus the average price, they are not that far on the paper side of the business and on -- sorry, on the pulp side. On the paper side...

[George Staphos:]

On pulp?

[Daniel Buron:]

Yes, on the pulp side. So on the paper side, actually our price moved $4 -- $2 per ton, sorry, this quarter versus last -- or Q3 versus Q2. It's actually $4 of increase mostly due to export. I mean, our export business, given the currency and some price increases in our foreign market, we had good pricing momentum. But if you look at our -- I mean given the fact that our price were flat, I mean, our closing price were also very close to the average of the quarter there, too.

[John Williams:]

Does that help, George?

[George Staphos:]

Yes. I thought I heard a $4 per ton. Was that a reflection on 3Q versus 2Q? I didn't find that exactly. Was that exit price?

[Daniel Buron:]

Yes.

[George Staphos:]

Got it.

[John Williams:]

No, that's Q3 to Q2.

[George Staphos:]

Yes, okay. And secondly, recognizing this is maybe discussion for conference call in itself, Personal Care, can you tell us how you feel the strategy is going relative to your expectations and your need ultimately to generate return from the investments? Are there any tweaks that we might see going forward? And then I had a follow-up question on containerboard.

[John Williams:]

Sure. So I mean, let's talk about the Personal Care piece. So this was a disappointing quarter. I mean, our expectation is we bounce back in quarter 4 closer to our average that you've seen from us in sort of 2017 and slightly prior to that. The market has become very competitive on pricing, George, particularly in the baby diaper space. So our customers are having to be aggressive in their marketplaces to hold their share. In the adult incontinence business, where the prescription business is operating in Europe, that's become price competitive. Obviously, governments are struggling to make their budgets balance so they're offering people with a prescription, so either less euros per month or lower-quality product. We have a big business in Spain in that space. I think we now have an answer to what we're going to do. We've launched some new products and actually are beginning to regain some share in those products. As those products get more traction, I think, and gain more share, we'll see our margins come back a little bit in Southern Europe. I certainly -- I think, from a strategic standpoint, our partner brand model is still very compelling. And when we look at the pipeline and we look at where we have momentum, there's no doubt we're going to keep making that page because that resonates with some of our customers. I mean, some of the growth we've seen has certainly helped us. I mean, one of our issues has quite simply been raw materials. And in this business and the way we do this business, you may have a contract for 1 year or 2 and you really can't do anything about your margins until the end of that contract. Sometimes that's good news, sometimes that's not-so-good news. And in quarter 3, that was not good news. I think that's basically how it works. Does that help?

[George Staphos:]

Yes, that's helpful, John, I guess. The last question, as you look at the containerboard conversion potential, I think you touched on it last quarter. Certainly, there are some challenges in terms of channels to market. And recognize you're only early days, at least in terms of what you're saying on this, in terms of your review. How do you expect to contend with that? Or do you have any thoughts there given the integration model that exists in North America broadly? And given -- and maybe it's an unfair question, but I'll ask it because Personal Care, the investments here have not yet achieved what you wanted, I don't -- I think, in terms of return. How does that guide your potential investment and framework for investing in a new potential growth market in containerboard?

[John Williams:]

Yes, that's a great question. So of course, the difference here is we have fantastic assets already in place, where the capital intensity of what we have to apply to make this work is very different to what we would have had to do in Personal Care, where we're buying businesses. Here, essentially, we're repurposing already pretty competitive assets. So I think, on that side, it's a compelling story. We've done it 3 times before, twice with fluff pulp, once with lighter-weight paper grades and, I think, have been very pleased actually with what we have achieved. So I think in terms of our ability to repurpose, I've got a lot of confidence. In terms of route to market, you're right, it's too early to tell. But I think, to be honest, we are open to many choices. So there may be folks out there who are thinking around joint venture. There may be people out there who are thinking around supplying particular assets of theirs. So my mind -- in the last 4 months, I think, I've learned to be fairly open-minded as certain discussions have been held where people have all kinds of optionality, and I think we'll remain open to that optionality as we move forward. I would just a reiterate though, all this is about repurposing white paper assets when we do not have white paper to sell. So the timing around this is really based on how we see our supply-demand balance moving. And of course, in recent months, we've begun to feel more comfortable with that as some of our -- some capacity has actually gone out.

[Operator:]

Our next question comes from Mark Connelly with Stephens.

[Mark Connelly:]

Two things. Do you expect white paper...

[John Williams:]

Mark, you're very faint. Can you -- sorry, we're having trouble hearing you.

[Mark Connelly:]

Let me try harder.

[John Williams:]

That's much better. Perfect. Thank you.

[Mark Connelly:]

Do you expect industry white paper operating rates to be materially higher in 2018?

[John Williams:]

Well, I think that's going to depend -- the answer is depending on the timing of capacity closures that have been announced, balanced by supply/demand. I think we have to think about what that means. I -- and to be honest, I really look at our operating capacity. I think you can get blinded by the industry operating capacity. And we feel actually we're going to be pretty balanced next year in terms of supply/demand, where we see selling to our customers and how we're going to run our mills.

[Mark Connelly:]

Yes. No, that's fair. The reason I was asking is we've seen over the last couple of years the industry struggle with operating rates, and you get some price and then give it right back. So that's why I'm curious. But a second question, would you be willing to put your Personal Care growth strategy on hold to pursue containerboard growth?

[John Williams:]

Well, if that's a capital allocation question, which I guess it probably is, I think we can -- we could afford to do both. But there's no doubt -- if you look at where containerboard might take us and where that would leave sort of our balance sheet in the short term, again depending on timing, because the timing is fairly fluid, there's no doubt, from a kind of return on capital compelling story, we think repurposing, if it were to be containerboard, is the compelling story. So that remains a priority. I think on Personal Care, we don't really need to erupt into a large M&A. What we really need to do is kind of do the street fighting man stuff of winning new business at solid pricing and moving that through the business. We've got $300 million of runway across the asset base we have today in terms of sales. If we can get that and get that dropped through, I'm going to get the returns I'm looking for.

[Operator:]

Our next question comes from Mark Wilde with BMO Capital Markets.

[Mark Wilde:]

John, I'm wonder if we could start off by just talking about this Appvion bankruptcy filing a few weeks ago and what impact that has on your business.

[John Williams:]

Certainly. So as you know, we have a long-term supply agreement that remains in place. Our finance folks have done a brilliant job of making sure we haven't lost any money. So we have not lost any money. We have a pretty good relationship with them. As you may know, they've just announced a price increase. So I think that piece of supply and that piece of business still remains attractive, Mark. So kind of where -- it falls where it falls, but there's no doubt we are an absolutely critical supplier to that business. We supply them 180,000, 200,000 tons of paper every year out of Marlboro very competitively. It's not an easy grade because it's very lightweight. So we are watching carefully, but at the minute, we are shipping volumes. As we ship volumes, I'm getting paid for it.

[Mark Wilde:]

Okay. John, just out of curiosity, I mean, this carbonless market seems to be shrinking at kind of a high single-digit rate. So just how does that affect how you use Marlboro? Because presumably they're needing less and less each year.

[John Williams:]

But I mean, their real growth profile, Mark, is thermal, so on the thermal paper. So this is kind of receipt paper, lottery paper. They're actually getting some growth there, pretty regionalized at the minute, and they see opportunities to build that globally. So actually, we're not seeing that volume decline. Carbonless is a small part of the portfolio.

[Mark Wilde:]

Okay. All right. And then just turning to the uncoated freesheet market. Can you talk about any kind of early indications on these pricing initiatives. And historically, it seems like the industry has needed a higher operating rate than what we're at right now to make price increases stick.

[John Williams:]

Well, yes. I mean, again, I can't really talk industry. I can only talk about us. But we've been shipping what we can make. The customers have responded, I think, pretty well with the price increase. I mean, I see a lot of other people following. Some customers are already adjusting their selling prices, i.e. "Okay, this is going to happen to me, so I need to adjust how I'm selling into the market." So, so far, I think it's early days, but I think confidence is pretty good on it. And as we said in my prepared remarks, we think full run rate probably second quarter 2018, but that's a pretty normal lag.

[Mark Wilde:]

Yes, okay. And just I'm curious about how 2 other factors affect this. One is the sort of global rise in pulp prices. And then I think there has been some tightening around the trade rules because some of the importers were, I think, coming in just under the brightness standard so they weren't affected by the antidumping duties.

[John Williams:]

Yes. So one in particular, so now we've solved that problem so -- legally, so they're not going to be coming in. I also think -- you've seen those closures being announced that will flow through over the next 12 months. Also, I think West Linn is interesting because, patently, it may be coated producers are going to think about making coated paper rather than worrying themselves about whether they should be in the uncoated market because 14% of industry capacity has come out, I think it is, in the coated space. So I think, all in all, people are feeling okay. It may not be that tight right now. But if I look at our own supply-demand balance, we thought that was an opportunity.

[Mark Wilde:]

Yes. And do you have any idea, John, for some of these coated mills that have closed, how much uncoated you think they were actually putting into the market?

[John Williams:]

To be honest with you, Mark, no, no. I think there's more noise than volume, put it that way.

[Mark Wilde:]

Okay. All right. The last thing I wanted to us ask about is just, if you can help us, sort of cadence, the increase in pulp prices into the fourth quarter and then as we look into 2018 because I'm hearing about maybe some deals have been struck for kind of 2018 already for the full year at kind of fixed prices. So fourth quarter and 2018, if you could.

[John Williams:]

I mean, obviously, the answer to can I is largely no. I guess I'll try and give you the little bit color I can. So the great debate, of course, is how long does this momentum last. Our view is -- really here, we are talking about the fourth quarter. We see that momentum going into the fourth quarter. Where does it go after that? It's too hard to tell really. Because -- certainly though, if the Chinese keep their waste paper ban -- on their mixed waste ban going and I just look at overall demand, I still see runway. And I would just remind us, when you really look here at this pricing, this is really mid-cycle pricing. This is not way up the top of the cycle pricing. And if you take inflation out, it's anything but mid-cycle pricing. So to my mind, the market dynamics are positive. We don't necessarily need any shocking events, and we maybe have a little bit more runway than people are anticipating.

[Operator:]

Our next question comes from Adam Josephson with KeyBanc.

[Adam Josephson:]

John, since your call 3 months ago, obviously, a couple of containerboard producers have announced conversions of their white paper machines to containerboard. Has that changed -- has that affected your thinking at all about a potential conversion? And why or why not?

[John Williams:]

Well, that's a great question. So let me give that some time. So just to remind ourselves, whenever we look at repurposing, whatever that may be, it's always around have we got white paper assets that no longer fit, i.e. there isn't demand for that product, that manufacturing. Patently, as we see closures, we believe we have more runway than we had before. Typically, what will happen is we'll take a certain level of market downtime. As we're thinking about the asset that we're going to repurpose, we steer the market downtime into that specific asset. And then when there's a few -- tens of thousands of tons left, we'll move those tons into the rest of the network, and then we'll repurpose the facility. That's how we've done it 3 times, certainly, since I've been here, and I know that's the way the business has done it historically. And so that really, I think, is more of a timing question than it is a "Is this still a good idea?" question. And I would just remind us all that this is still really building optionality around repurposing versus some of the options we've had before. Does that help?

[Adam Josephson:]

Sure. Just related question, the sharp move in containerboard export prices this year. One of the producers said yesterday they think export prices, [indiscernible] on export could reach parity with domestic prices just based on current conditions. Does that affect your thinking at all about potentially converting a machine that would be largely export-oriented just given all the challenges of finding converters to sell those tons to, et cetera?

[John Williams:]

Yes. It makes it more likely, I would say, because, obviously, if you're feeling you're not doing a business that nobody else wants to do, you've got more choices. And of course, you know those excellent numbers in terms of tons, so they would appear to be quite an opportunity there potentially.

[Adam Josephson:]

And just a couple others. The sequential pulp pricing benefit, I know you talked about exit prices. Can you just help me a little more with, in rough numbers, what kind of benefit you could expect just based on the prices that you've -- the increases you've implemented?

[Daniel Buron:]

I think you have to divide the answer into 2. I mean, we're shipping in both China and North America. Those are the main 2 regions that we're shipping into. So North America, there's normally a lag between announcement and actually realization. It could be between, depending on contracts, 1 to 3 months. So September, October, we should see a little bit of that in the U.S. market. China is more a month, half in terms of increase. So whatever's been announced so far in China, we should see a little bit more of that in Q4 than North America, which leads me to conclude that in Q1, we'll have the tail end of the fall increase in North America and China will be whatever the market is at that time. So we believe we have a good runway in Q4 and a little bit -- with the current price increases announced, a little bit of runway in Q1.

[Adam Josephson:]

And one last one on the cost and inflation you talked about from the hurricanes in future quarters. Can you give us any rough magnitude there in terms of what your expectations are?

[Daniel Buron:]

It's very hard to share -- to calculate. I mean, freight is more availability. I mean, there's a need for reconstruction. So there's a lot of trucks actually driving by our mills and being full versus the past, so there's a little bit more tightness. That's more or less the same thing in terms of wood costs. And there was -- I think there was a chemical plant that was actually in the middle of the storm that's creating, in an already tight market, a little bit more tight situation. So it's more an expectation than an actual price increase or supply price increase. That's one thing. But we believe the market will be tighter in all 3 components of our cost structure. And we're going to fight -- actually, our procuring people are working hard to try to find alternative sources, but we should see a little bit of inflation there.

[Operator:]

Our next question comes from Brian Maguire with Goldman Sachs.

[Brian Maguire:]

Just wondering if you could -- following on the pulp comments earlier. Just wondering if you could comment on recent trends, maybe particularly to China and some of the export markets, how they've been holding up in October. And recognizing the markets have been strong, but are you seeing any change in that strength? Or does it continue to be strong as we get into 4Q now?

[John Williams:]

Well, it continues to be strong. So I mean, just to remind ourselves, in the last sort of 8 weeks, we have announced on NBSK about $170 a ton price increase in China; on SBSK, $70 in October; and on fluff, $40 in China and I think $40 in North America. So again, those have yet to take, if you like, but if that momentum goes through, patently, we'll see some -- now China pricing can move around, obviously. It doesn't mean, just because we got that at last -- but I think Daniel's point was well made in terms of its momentum. Certainly, from a demand standpoint, I mean, if you look at RISI as it comes out, we are very much in the softwood grades. So tissue manufacturers are growing, like Chapsy [ph] in China. We are right there with them. Most of the majors buy from us. Personal Care, where we sell fluff pulp, most of the majors buy from us. And actually, if you look at market penetration of Personal Care in China, so baby diapers and adult diapers, it's still very low. So to my mind, as that grows, we still have growth. So I think if you really look at end-use markets, I mean the reason we're in these grades is not pure accident. I mean, we like the look of those end-use markets and want to support grades into those end-use markets. So I think, at the top line, there's no reason to say why there should be a slowdown. And of course, right now, I think what's partly juicing some of this, of course, is that waste paper, that mixed waste paper ban in China, where people are actually using some of the softwood pulp they are buying to kind of try and furnish some of their machines. And of course, you've got the Chinese shutting quite a lot of sort of smaller, old-fashioned pulp mills. So you put all that together. So you've got sort of an accelerant, if you like, I think, on demand that's coming from that activity, but underlying demand's also pretty strong just based on market growth. Does that help?

[Brian Maguire:]

Yes, yes. The reason I asked was sort of just the recent -- what we're hearing is just recent trends. It seems like some of those recycled fiber exports to China are starting to ramp back up again. So I was just wondering if that juicing of the market you kind of referred to has been changed. Have you seen any change there?

[John Williams:]

Yes. I mean, I think -- I forget the exact numbers, but certainly, there are several million tons of mixed waste that, under new legislation, won't go. I mean, you absolutely have to have ways that's acceptable as far as contamination is concerned. I think -- and if you look at everything the Chinese are saying and you look around the party Congress, the environment is going to be top of the list. So let's see.

[Brian Maguire:]

Okay. And then just switching to Personal Care. It has obviously had some challenges the last couple of quarters. Any sense of when -- where the margins will bottom out and when we'll kind of get there and how long are we going to take to hit the target?

[John Williams:]

Sure. No, that's a great question. So of course, it is frustrating because we were hoping to do better than this. So we -- as I said earlier, we see a bounce back in quarter 4 to the sort of numbers we've been doing prior to this. I think the margin pressure continues a little bit into next year. We have some wins that are going to kind of kick in third quarter of next year. But I think it's going to be a tougher slog than we anticipated. But I have still not left sight of the fact that, over time, I still believe very strongly we should see mid-teen margins in this business because, quite frankly, that's what you should expect in a decent, well-sized, well-run consumer products business. So I think we have a scale challenge right now, where we obviously need to fill that top line, which we're doing, I think, quite successfully, to sort of make sure that we get the margin drop-through.

[Brian Maguire:]

Okay. And just one last one from me. Just following up on the containerboard question. Any -- as you've gotten the feedback from Jacobs, any update on the potential cost estimate? I think last time you referred to maybe $200 million plus or minus $50 million. And then location-wise, it seems -- I think if I -- if my data is right, maybe Marlboro and Ashdown are the only ones where you've currently gotten a lot of BSK pulping capacity. Would that be one of the main determining drivers of which sites would be targeted for a conversion?

[John Williams:]

Yes. So that's a great question. So the answer is no refinement on cost at this point. And you're exactly right, this is about softwood wood basket. So where that's attractive, patently, that's where we'd look.

[Operator:]

Our next question comes from Gail Glazerman with Roe Equity Research.

[Gail Glazerman:]

One of your competitors mentioned the possibility that private label diaper producers might see or might have seen a bounce because of the hurricanes, that if people are kind of donating, they're not exactly necessarily donating top tier priced products. So I'm just wondering, is that something that might help that bounce back in the fourth quarter? Did you see anything of that in the third quarter?

[John Williams:]

Well, that's interesting. I mean, to be honest, not really. But actually, our private label baby diaper business is right now the star of the show in terms of sales growth, I think, largely because we have kind of aligned ourselves with sort of key customers who are winning that battle, I guess I would say, in terms of private label positioning. Because obviously, the overall diaper market, as you know, is in decline, and it is in the midst of a price battle as the global brand leader tries to fight back for their space. I think what you are seeing in private label generally is you're seeing better products. So the consumer, I think, is no longer feeling private label is sort of, how would I put it, compromised purchase. I'd rather buy the brand, but look at the price differential, I'll buy private label. More and more -- I mean, look at these retailers, look at Aldi's, look at Trader Joe's, look at Lidl, it's actually pretty much all private label so I think the offering is doing better. So actually, if you look at the diaper business, those people with a strong offering who are being price competitive on private label are doing quite well. Those people with a weaker offering who are not price competitive are not doing so well.

[Gail Glazerman:]

Okay, very helpful. And could you just talk maybe a little bit more color on what you're seeing in terms -- on kind of RICI trade ? You talked about exports going up maybe in terms of magnitude. And also, kind of what you've seen and what you might expect moving forward in terms of imports into U.S.

[John Williams:]

Yes. So I think there's been a shift. It's currency driven, and it's also domestic market driven. So you've seen what's going on in Europe in terms of, I think, 3 price increases this year and now another one just announced by one of the major players. That has allowed us to find that business more attractive. We've got a great export business, where we can do A4, that bizarre size the British choose to use. And we've got good solid customers. So we've gone to those customers and said to them, look, we see an opportunity here to have -- do a little bit more business. And if you look at our plan for next year, it's not dramatic but there's a nice piece of growth going on in our export business mainly into Europe. If you don't mind, I won't give you the exact numbers because we don't. But we see opportunity there, a margin opportunity there that certainly wasn't there a couple of years ago.

[Gail Glazerman:]

Okay. And just in terms of imports, I'm just wondering if you think that...

[John Williams:]

I'm sorry, Gail, you were just breaking up. Say it again.

[Gail Glazerman:]

I'm just speaking just kind of between what might go on with exports and what you're seeing with imports. I mean, is that a source of...

[John Williams:]

Yes. So imports, as you know, are down. I see no particular reason why they wouldn't remain down. So there's obviously -- there's the dumping case around them. There's also the currency issue. And actually, if you start to look at those economics now, people are going to find themselves more profitable selling in their domestic markets. So they won't be here.

[Gail Glazerman:]

Okay. That's exactly helpful. And then just in terms of fluff, just can you just remind us what your current expectations are for the growth rate in that market?

[John Williams:]

Yes. I would say, I mean, a couple of percent. In terms of fluff pulp, very different in different markets. So in the developed markets, in baby diaper, the move is to a thinner diaper, which results in slightly less fluff pulp in some of the product. In developing markets, normally a slightly heavier-weight product because of softness and thickness is seen as quality as opposed to thinness and a huge runway in somewhere like China where actually the adoption of those products has still got a long way to go. So I think that's where the growth -- -- sorry, it's going to look different based on the geography, but overall -- we're all over that geography, of course, because we're a big global supplier. So to my mind, I think there's still plenty of runway.

[Gail Glazerman:]

Okay. And just one last one. In terms of repurposing, is Jacobs looking at anything beyond containerboard, in the other product lines? Or is that the current mandate and focus at this point?

[John Williams:]

Their particular brief is containerboard at this point. But of course, we'll also look at what we always look at, the pulp options as well.

[Operator:]

Our next question comes from Steve Chercover with D.A. Davidson.

[Steven Chercover:]

Just a couple of questions on pulp, if you will. First of all, realizations are up for you guys $30 year-over-year, but the list prices are probably up $100 or better. So is the discount growing faster than the list?

[John Williams:]

So that's a great question. So over the years, the discounts open up dramatically versus the list price, if I'm being honest with you, Steve, to a point where list price is almost pointless.

[Steven Chercover:]

Yes, I think so.

[John Williams:]

And I mean, nobody would agree with you more than me. Because I think -- why is that happening? I have some particular theories that I would talk about privately. But I mean, if I look at it, it's now reached a point where it's almost ludicrous.

[Steven Chercover:]

Yes, it is becoming kind of laughable. Well -- so is that part of the reason why EBITDA is down year-over-year? Because, I think, even the maintenance was lower this year, so maybe you can help...

[Daniel Buron:]

Actually, Steve, the maintenance, Q3 this year versus Q3 last year, there is $10 million more maintenance this year than last year in the Pulp business. So that's a -- and a couple of million of noise also quarter-over-quarter or quarter this year versus quarter last year. So -- but the main reason is actually more maintenance this year than last.

[Steven Chercover:]

Okay. And finally, also on pulp, what is the transfer price of your fluff to the Personal Care segment?

[John Williams:]

Yes. So we transfer market. So we take a bundle of market prices and we transfer market. But if there's a freight benefit, we give them the freight benefit, depending on the mill.

[Operator:]

It appears we have a follow-up question from George Staphos with Bank of America Merrill Lynch.

[George Staphos:]

One quick follow-on, if I could. So within the paper market, we've seen at least one closure of coated one side capacity and release liner. And John, you were touching on this more broadly before. But is that something that you think is an attractive opportunity? Perhaps -- I think it was roughly around a couple hundred thousand tons. Or is that really not that attractive to you at this juncture? And then could you give us a marker for, if Ashdown is going to be roughly 50% fluff by quarter 4, where it could look by the end of next year, if all goes according to your plan? One last question actually before I sign off.

[John Williams:]

Okay, keep going.

[George Staphos:]

If you could keep up. The last thing is, are you seeing any interest in hardwood supply out of your markets, out of your mills to Asia? Because that's something that we've picked up on in some of our recent travels as well, so that as a broader trend.

[John Williams:]

All right. So I think I can answer the first one -- the last one first because I can still remember it. So on hardwood, the answer will be really not. We see hardwood as kind of a necessity where we have to, but it's not our preferred grade, George. So I think we're going to carry on with the mix we're in because we think that mix has got plenty of runway. There was a couple of other ones. There was pulp.

[George Staphos:]

Where will you see Ashdown in terms of fluff versus total...

[John Williams:]

So I mean, obviously, we are highly motivated to sell as much fluff as we can. So certainly, I'd want to be in the kind of high 70s by year-end 2018 in terms of output, if not beyond.

[Daniel Buron:]

As we're going to close the small dryer in the [indiscernible]

[John Williams:]

In Plymouth, over time, that's almost inevitable. There was a third one, remind me.

[George Staphos:]

Yes. Just release liner, how is that as an opportunity for some of your capacity over time? Or is that really not that attractive?

[John Williams:]

I mean, I don't think, it's that great an opportunity. I mean, there's no doubt we really like the Appvion relationship, where they're coating the base paper that we make very competitively. I mean, if there were other opportunities in the right market with that kind of relationship, we'd look to build it. But there aren't many, quite frankly, George.

[Operator:]

[Operator Instructions]. It appears we have a follow-up question from Adam Josephson with KeyBanc.

[Adam Josephson:]

Just one last one on the repurposing situation. Have you talked to any converters about potential JV structure? And/or would you consider going direct to a customer and building box plants with them?

[John Williams:]

Well, if you don't mind, I don't want to have that discussion in that much detail. But we've -- some of them have called us up. I can't go any further than that.

[Operator:]

Our next question comes from Chip Dillon with Vertical.

[Clyde Dillon:]

First, a comment. I actually think A4-sized paper is okay because you can get more on the page.

[John Williams:]

You're traditional is due. Okay, thank you for that.

[Clyde Dillon:]

Exactly, exactly. Listen, I was -- I had a couple of questions on the pulp situation, and I think you kind of touched on it. But first of all, my understanding is that other folks, especially in fluff, had a lot of contracts that tend to be renegotiated at year-end and that, often, the discount mechanism will be -- will fluctuate based on the strength of the market. Is there a shot that you might see a boost in first quarter realizations across your softwood grades, paper or fluff, in January without an overt price increase because maybe some of those discounts narrow?

[John Williams:]

I mean, that's pure speculation, Chip. I honestly don't know. I mean, you've obviously read what I've been reading. And if someone's going to have a try, nobody really knows. But I think it'll all be about individual negotiations with individual customers. I would say -- for the purchasing fraternity, they have to prove to their bosses against some benchmark that they're doing well. And obviously, list to discount is a classic spot where they might try and do that. So whether or not it's really doable in the reality of the sort of buyer/seller relationship, I think, remains to be seen.

[Clyde Dillon:]

Okay. And then one other question is, with the strength in the pulp market, especially along the edges with strong spot pricing, are there any of your paper mills, and they're all pretty much integrated, not -- or most of them, where you could be getting close to a point where you might say, "Let's make rolled pulp instead of paper" in order to achieve a lot of goals, keep the mill running, tighten up the white paper market and maybe even make an equivalent amount of money all in?

[John Williams:]

So the short answer is, just to remind ourselves, we're really only at mid-cycle pricing, so those economics don't add up now. But I mean, we have a number of mills who make pulp. And patently, the way we manage productivity in this business is pulp output patently because I want to make as much pulp as I possibly can. And where I've got dryers, if I divert some of that into the market right now, that's only a good economic decision, and that's what we continue to do. But to your question, the answer is not right now.

[Clyde Dillon:]

Not right now. And then the last one is, when you think -- on repurposing, which I think makes 1,000% sense of how you guys are looking at it, is it fair to say that -- I mean, it's pretty obvious Marlboro is your best virgin conversion opportunity. But if we think about some of your other white paper mills that might be a couple hundred miles away from Southern pine forests like, for example, Kingsport or Hawesville, and I'm not saying them in particular but I just look at the map, would something like that make more sense as a recycled conversion? Or are you seeing that you might want to do a virgin conversion and truck or rail up the chips from the pine [indiscernible]?

[John Williams:]

So you're asking all the questions we're asking. So quite frankly, we really look at this as saying, "Okay. Well, we need to build some kind of plan. That plan will be defined by white paper demand." So there'll be a plan whose timing will be defined by white paper demand. And that's what we're building. And it's very early days, Chip, so it's too early to answer the questions. But they are the questions we are wrestling with.

[Clyde Dillon:]

Got you. And then lastly for Daniel or maybe for both of you. You mentioned the CapEx. I think it's going lower than what we thought it would be so far this year. So -- and you might have mentioned this, but what should we realistically expect for both this year and without anything for next year for repurposing, what would next year look like?

[Daniel Buron:]

Let's start by giving you an indication of what we believe this year may look like. So our latest forecast is actually between $185 million and $190 million, which means a big quarter versus the last 3, so there's still a bit of risk of us spending a little bit less than that. Next year, it's very early. So I'll just remind you that, normally, in our paper business, without repurposing, with maintenance and some cost optimization project, it's around $150 million. In Personal Care, there's still some more that needs to be done plus normal maintenance, I mean probably around $50 million. So a total of $200 million, but we'll come back to the market at the end of Q4 with a more precise number as we're finalizing our plan for next year.

[Operator:]

And it appears we have no other questions in the queue at this time.

[Nicholas Estrela:]

Thank you, Anthony. So as a reminder, we'll release our fourth quarter and full year 2017 results on Thursday, February 8, 2017. Thank you for listening, and have a great day.

[Operator:]

That does conclude today's conference. Thank you for your participation.