Domtar Corporation
Q3 2016 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Good day, ladies and gentlemen and welcome to Domtar Corporation Third Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this call is being recorded. The date is October 27, 2016. I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead Sir.

[Nicholas Estrela:]

Good morning, and welcome to our third quarter 2016 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer, and Daniel Buron, Senior Vice President and Chief Financial Officer. We 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 we will take questions. During the call, references will be made to supporting slides, and you can find this presentation in the investor 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 to the Securities Commissions for a listing of those. Finally, certain non-US 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. With that, I will turn the call over to John.

[John Williams:]

Thank you, Nick, and good morning, everyone. This morning, we reported third-quarter EBITDA before items of $194 million on sales of $1.3 billion, a solid performance. Our improved results compared to the second quarter were driven by better profitability in Pulp and Paper and continued growth in Personal Care. Our pulp business had a strong performance with lower maintenance downtime that resulted in higher productivity and lower unit costs. We also benefited from increased shipments and higher average selling prices. The ramp-up of the Ashdown pulp machine made meaningful progress, with milestones achieved throughout the quarter. We're meeting production targets of bale softwood pulp on the new machine and will be commencing fluff pulp qualification in the current quarter. In our paper business, we executed well, and we took measures to balance our production to our customers' demand. We're better productivity from lower planned maintenance outages, while our continuous improvement programs help drive margins. We shifted 102% of our production capacity in the quarter, reducing inventory levels while taking 39,000 tons of lack-of-order downtime. Copy paper prices improved despite a competitive market, partially offset by lower export prices. In Personal Care, strong sales momentum was sustained, and our top line continued to growth faster than the market with year-over-year sales growth of 8%. In early October, we completed the acquisition of Home Delivery Incontinent Supplies, a strategic bolt-on that supports our Personal Care growth strategy. In summary, we executed well, and our strong results reflect the commitment of all of our employees to finding new ways to work efficiently and to generate savings. With that, let me turn the call over to Daniel for the financial review before making additional comments on our results and outlook. Daniel?

[Daniel Buron:]

Thank you, John, and good morning, everyone. As usual, let's start by going over the financial highlights of the quarter on slide 4. We reported this morning net earnings of $0.94 per share for the third quarter, compared to net earnings of $0.29 per share for the second quarter of 2016. Adjusting for items, our earnings were $1.13 per share in the third quarter, compared to earnings of $0.61 per share for the prior quarter. EBITDA before items amounted to $194 million, compared to $152 million in the second quarter. Let's turn to the sequential variation in earnings on slide 5. Consolidated sales were $3 million higher than the second quarter, mostly due to good sales momentum in Personal Care and flat sales in our Pulp and Paper business. Cost of sales were $44 million lower than the second quarter, mostly due to lower maintenance and manufacturing costs. Depreciation and amortization was in line with the second quarter, while SG&A was $3 million higher. Third-quarter earnings included closure restructuring charges of $10 million in addition to an impairment charge of $5 million. Both charges were related to the conversion of a paper machine to a fluff pulp line at our Ashdown facility in the plan to optimize fluff pulp manufacturing at the Plymouth mill. In the third quarter, we reported an income tax expense of $16 million, or an effective tax rate of 21%. The effective tax rate for the third quarter was impacted by the recognition of additional R&D and energy tax credits related to the finalization of certain estimates in connection with the filing of 2015 tax returns. During the quarter, we've repaid the balance of the 9 1/2% notes in the principal amount of $39 million which matured on August 1, 2016. We also amended our existing revolving credit agreement, which increased by $100 million to $700 million with a five-year maturity. Borrowing under the new agreement will bear interest at the same rate as the former agreement. Now, turning to the cash flow statement on Slide 6. Cash flow provided from operating activities amounted $95 million, while capital expenditures amounted to $83 million. This resulted in a free cash flow of $4 million for the third quarter. Year to date cash flow provided from operating activities amounted to $310 million, and capital expenditures amounted to $302 million. During the quarter, we've paid a $26-million dividend. From January 2011, to September 2016, we've returned a total of $1.4 billion to our shareholders through dividends and share buybacks, representing 76% of our free cash flow. At the end of the quarter, we had 62.6 million common shares outstanding. Let's turn to the quarterly waterfall on slide 7. When compared to the second quarter, EBITDA before items increased by $42 million, due to lower maintenance costs for $39 million, lower raw material costs for $14 million, and a favorable exchange rate for $2 million. These were partially offset by higher other costs, mostly related to the non-returning property tax benefits reported in the second quarter, higher SG&A either $3 million, lower prices for $2 million, higher freight expense for $2 million, lower productivity of $1 million, and lastly, lower volume and mix for $1 million. Now, the review of our business segments starting on slide 8. In the Pulp and Paper segment, Sales were flat when compared to the second quarter, and down 3% when compared the same period last year. EBITDA before items was $175 million, compared to $131 million in the second quarter. Our paper business on slide 9. Sales decreased 1% just this last quarter and 5% just as the same quarter last year. Estimated EBITDA before items was $140 million, or 17% EBITDA margin. Manufactured paper shipments were 1% lower when compared to Q2, and 4% lower just as the same period last year. Transaction price for all of our paper grades were $1 per ton lower than the last quarter. In the quarter, we took 39,000 ton of downtime to balance our production to our customer demand. Now, our pulp business on slide 10. Sales increased 3% just this last quarter and the same period last year. Estimated EBITDA before items increased $18 million when compared to the second quarter. Our shipments were substantially higher by 3% just in the second quarter, and up 11% when compared with the same period last year. Average pulp prices increased $2 per metric ton just as the second quarter. Our paper inventories decreased 17,000 ton when compared to last quarter, while pulp inventories increased by 52,000 metric tons, mostly due to the ramp-up of the new machine in Ashdown. Our Personal Care business now on slide 12. Sales increased 8% when compared to last year as a result of new customers. Our EBITDA before items was $31 million, $1 million higher than the second quarter. As usual, you'll find on slide 13 our forecasted maintenance for the remainder of the year. And finally, we are forecasting CapEx for the entire year to be between $340 million and $360 million. This concludes my financial review, and with that, I turn the call back to John.

[John Williams:]

Thank you, Daniel. As we continue to take measures to improve manufacturing processes, our assets our operating more efficiently, resulting in better productivity. We are benefiting from our continuous improvement and reliability program, particularly in pulp productivity, with better fiber yields and reduced chemical usage. In fact, our average cost per ton on slush-and-dry pulp production during the quarter was at its lowest level in recent years. Our efforts are also driving improvements during planned outages with fewer discoveries, resulting in below planned maintenance spending. With paper, our year-to-date shipments are tracking in line with market. We did take 39,000 tons of lack-of-order downtime in the quarter, but we managed to execute it well by rotating short outages around planned maintenance days. Prices for copy paper were higher following our announced price increases; however, export volume impacted overall realizations. In pulp, results were much better than in the second quarter, with an $18-million EBITDA improvement. Our shipments remained strong through the quarter, led by increased demand in China. Demand for market pulp, including NBSK, SBSK, and fluff, remains strong, and we're continuing to grow with winning customers. During the quarter, we began the startup of the new fluff pulp machine in our Ashdown mill, and the ramp-up continues throughout the quarter. We averaged approximately 1,000 tons of bale softwood per day in September, in line with our expectations. So far, our performance in October continues to improve, with better uptime and output. Qualification of fluff pulp is set to begin in the current quarter, with our Personal Care business operating as the launch customer. The completion of this project is another milestone on our strategic journey. In September, we announced the optimization of our Plymouth facility, with mid 2017 as the completion timeframe. This involves the permanent closure of the mill's spool pulp dryer and a workforce reduction of approximately 100 positions. Our actions will right-size the mill to an annualized production target of approximately 380,000 metric tons of fluff pulp. The mill will now focus on its larger, more efficient manufacturing line, thereby improving its overall competitiveness. The timing of the optimization is being closely aligned with fluff pulp production in Ashdown. The Plymouth right sizing and the start of the production in Ashdown will optimize our fluff pulp manufacturing network and strengthen our position in this growing market. In both our pulp and paper businesses, our continued success results from strong execution and operating efficiently to extract maximum value from our assets. That is what we focus on every day. Turning to Personal Care, we had robust sales, with our top line increasing 8% year over year. In North America, we had a strong sales quarter. We shipped our highest volume of adult incontinence products in 2016, following the successful launch at a major retailer. Our baby diaper volumes were up 22% versus last year, significantly better than the industry, which was down 5% in the quarter. The combined result was a 12% sales volume uplift year over year for North American business. In Europe, sales were lower when compared in the second quarter due to summer seasonality, but significantly higher versus prior year as a result of securing new customers. We also had higher sales with existing customers and accelerated growth in pull-up and bladder control categories. Operationally, the business continued to improve. We benefited from cost savings from our new manufacturing platform, in addition to favorable raw material pricing. Early in the fourth quarter, we completed the acquisition of Home Delivery Incontinent Supplies, a leading national direct-to-consumer provider of incontinence and related products. By adding HDIS's successful high-touch service model, we'll capture end-to-end value chain capabilities and further support our Personal Care growth strategy. We're strengthening our institutional healthcare business with more innovation and a new clinical value proposition with our Attends adult incontinence brand. We're expanding on our recent success in retail channels with our partner brand model, and we will continue to build out our direct-to-consumer channel. As we execute our strategy, we're further upgrading and standardizing product platforms to lower costs and to facilitate faster innovation. We're employing automation and digitization to improve productivity, raw material, and demand planning. We've made progress since our first Personal Care acquisition, but we are also mindful of the time it takes for our investments to fully play out in our results. As we continue to win new business and become a partner of choice to our customers, we're confident that our growing Personal Care division will contribute significantly to achieving Domtar's long-term objectives. Our strategy remains to make growth businesses, including Personal Care, an increasing contributor to our top line and EBITDA performance. Growth businesses represent approximately 37% of consolidated EBITDA, a significant increase since 2008, and our portfolio continues to move in the right direction. Looking ahead, we remain focused on M&A opportunities and accelerating Domtar's transition into a more diversified firm when the opportunity and timing are right. Our solid balance sheet and proven ability to sustain strong cash generation provide us with the means to make acquisitions while returning the majority of free cash flow to shareholders. We'll continue to pursue a balanced approach to the deployment of our capital, while maintaining the flexibility to carry out our growth strategy. Now, to our outlook for the rest of the year. We do expect the usual seasonality and mix in paper to impact the fourth quarter. Therefore, we remain vigilant when it comes to balancing our production with customer demand. We're expecting some increases in chemical costs due to higher caustic prices and seasonal increases in energy. As well, we expect fiber costs in the US South to be higher due to some wet weather following hurricane Matthew. In pulp, we remain optimistic with long-term market dynamics in softwood and fluff pulp, but we remain cautious about the mid-term outlook. We also continue to optimize our pulp manufacturing network -- for example, by the work down in Plymouth -- so we're well positioned to be successful. Finally, our Personal Care results will continue to benefit from underlying market growth, cost savings, and productivity improvements from our new manufacturing platform. Thank you for your time and support, and I will turn it back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. Both John and Daniel will be available for questions. So I'd ask our participants to ask a few questions at a time and return to the queue for follow-ups because we want to get as many people as possible. So Nick, you can open the lines for questions.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Anthony Pettinari at Citi.

[Randy Tull:]

This is actually Randy Tull sitting in for Anthony. Can you just give some more detail on the cost…

[John Williams:]

Good morning.

[Randy Tull:]

Related to the Plymouth right sizing. Good morning.

[John Williams:]

We wouldn't give you the number based around what that's done to our cost base, but 100 jobs are going, so that gives you an idea of what we're doing on headcount. And really, overall, we're just going to get slightly less out the door, but we think more effectively.

[Randy Tull:]

Okay, fair enough. We've seen some consideration from the government thinking about bumping up the required recycled content to from 30% to possibly 100%. What's your view on that situation? And then if the requirement were to go through, how would you be affected?

[John Williams:]

To be honest, as far as the governments go, we have some business, but we don't have very much business. Of course, this has been thought about before and didn't happen, so obviously, as an industry, I think it's not an individual company issue. As an industry, we would all make our case. So to be honest, we'll just have to see. I think it will have plenty of twists and turns before anything actually happens.

[Randy Tull:]

Okay, fair enough. I'll jump back into the queue. Thank you.

[Operator:]

Our next question comes from the line of Chip Dillon at Vertical Research Partners.

[Chip Dillon:]

Yes, good morning, John and Daniel.

[John Williams:]

Chip, good morning.

[Chip Dillon:]

Listen, I had a question for you about the -- as we look into next year, and I know that we do live in an uncertain world, but one thing that seems to be more certain is your CapEx, I would expect, will come down now that the Plymouth -- I'm sorry -- the Ashdown conversion is behind you. I have two questions. One is, what is an early look at what you think CapEx will be next year? And then secondly, I was frankly surprised because everybody tells me you guys are not growing. I differ with that. But I noticed you've raised the dividend seven years in a row from when you came in from zero, but it is seven years now. Any reason why that streak couldn't continued with lower CapEx next year?

[John Williams:]

Well I think we normally -- let me talk about those two things separately, Chip. If I believe, I think, in our fourth quarter call when we do it, we normally give you the CapEx numbers, which we will obviously do. Your premise, however, that it should come down in terms of direction is right. If you then look on the dividend side, we normally engage with our Board around the annual general meeting time, and we will do that, and they and we will make our recommendations.

[Chip Dillon:]

Okay, thank you.

[Operator:]

We'll now take next question from the line of Brian Maguire at Goldman Sachs.

[Kia Pourkiani:]

Good morning. This is actually Kia Pourkiani sitting in for Brian.

[John Williams:]

Good morning.

[Kia Pourkiani:]

So the first question I had for you guys is on Personal Care So you've obviously been even benefiting a lot from recent customer wins. As you look across the competitive landscape, what opportunities are you seeing to continue to grow that business? Are your customer wins mostly being driven from bidding on contracts, or is it your complimentary sales analysis services that you are providing that are helping you win those contracts?

[John Williams:]

That is a great question. A couple of reasons. Obviously, the underlying market is growing, so providing the we have got business with the right customers, they're going to see the growth. We are also -- we've relaunched our product offering in the US healthcare space, and that is beginning to give some very interesting traction, which we think will lead to growth and some margin improvement. Because obviously, let's be honest, we're a little disappointed we haven't seen our margins move as we might have liked. There are number reasons for that. Where with one business, those customers are doing fairly well. So I would like to see us growing above market, certainly, for the next two or three years at least, just to really show that we can win these new customers. We've got something really important to tell the consumer in terms of the healthcare space. And of course, our move into the gloriously named HDIS is really around building a direct-to-consumer relationship because, of course, surrounding the product buy, there's a whole issue of dignity for the consumer, a whole issue of embarrassment, so the buying in home, if you like, through a very high-touch caring customer service model we think is extremely compelling. So if you take those three prongs, I think we're going to find the growth of we need from those three prongs. Does that give you bit more context?

[Kia Pourkiani:]

Yes, that makes a lot of sense. And then second for me was just on SG&A. So SG&A as a percentage of sales has tracked a little bit higher this year versus 2015. I was wondering, is that just a result of the mix shifting more towards personal care, or how should we think about SG&A moving forward?

[John Williams:]

That is a great question. There's no doubt, if you take our Personal Care business specifically, we have made six acquisitions. We've had to build a business from a number of small businesses, and that has led us to have more cost in the center than we would normally have had. Within Pulp and Paper, we've had a little bit more incentive accrue this year than we had prior year because we're doing a little bit better versus our expectations. So I think those are the main reasons. What I would hope to see is as the Personal Care business gets its volume, it doesn't need to incur additional cost to actually service that volume in terms of SG&A, so over time, as those $100 million come in, or more, we should start to see that stay flat and then start reducing. Quite frankly, in Pulp and Paper, we're always thinking about how we can make sure it stays as tight as possible.

[Kia Pourkiani:]

Got it. That's helpful. Thank you. I'll jump back in the queue.

[John Williams:]

You're welcome. Thank you.

[Operator:]

Our next question comes from the line of Mark Connelly at CLSA.

[Mark Connelly:]

Thanks John. Are you seeing enough Personal Care M&A opportunities at this point to be confident that you will be doing more deals in 2017?

[John Williams:]

I think there are some bolt-ons that we can see, Mark. I'm not, to be truthful, at this moment in time, seeing something major in Personal Care, but we can see some bolt-ons. I think just looking across the M&A space generally, we've always said we'll think around fiber-based product, preferably where we can find some growth. So -- how would I put it? We're looking across more than just that Personal Care space to see if there are opportunities. We've always felt, providing we can bring value, we have the right to do things in fiber-based businesses. You can see what we did on HDIS, a small bolt-on. If we could find more in that space, I think we'd probably would do it. But I'm not saying a large move at this point in that space.

[Mark Connelly:]

Okay. That is helpful. And just one more question. When you think about the white paper import situation, we've seen some producers trying to make an end run around the rules. As you think about 2017, are you anticipating higher white paper imports?

[John Williams:]

Well, you've got the Brazilians and the Portuguese continuing to import and paying the duty. We think that's probably 350,000 tons in total, probably 200,000 from the Portuguese, a bit less for the Brazilians. You've got some of these alternative sources of supply, like the Europeans trying to find a little bit of space here and there, sometimes around the bid business. I think there will be a bit of noise around it, I would say, in 2017. I'm not sure I see anything like the volumes building that used to be there, but think there will be a bit of noise.

[Mark Connelly:]

Okay. That's very helpful. Thank you.

[Operator:]

Our next question comes from the line of George Staphos from Bank of America Merrill Lynch.

[John Babcock:]

Hey. Good morning. This is actually John Babcock sitting in for George. Quickly back to Personal Care here, clearly year-over-year revenues have improved, but EBITDA was down a little bit. And on that note, I was wondering if you touch on some of the items that impacted the year-over-year comparisons, but also, are there -- essentially, are all aspects of the Personal Care business profitable at this point?

[John Williams:]

Yes, they are. But I think you've had a little bit of price pressure here and there, particularly in healthcare space.

[Daniel Buron:]

Currency is…

[John Williams:]

Currency is a bit of an issue for us, and sometimes when we drive the baby business, which is not as inherently profitable as the adult incontinence business, that can throw the margin around a little bit. But currency, we have one, a couple of major customers where we're shipping out of the US into currencies that are struggling, so that has been quite a factor for us. The real issue for me is nothing has happened that suggests to me over the life of that business that we shouldn't be seeing higher-teen EBITDA margin. There's actually a lot's gone against us in terms of currency and pricing, and we're still a few points away from our goal, but it doesn't look completely out of sight.

[John Babcock:]

Is it possible to get a little bit more color there on the pricing pressure you're seeing and ultimately what is causing it?

[John Williams:]

Yes, sure. So you've got the healthcare space, essentially, the various government agencies or whoever it may be in Europe are squeezing where they remunerate people through prescription for adult incontinence. So that says maybe I would've given you €60 a month to help you solve your problem; now I'll give you €40 a month. So what does that mean? I have less product or I have a choice of buying lower-value product. I then need to go retail to go and buy that. That's causing a squeeze in that healthcare space. And of course, in the United States, the entire healthcare industry is under earnings pressure, particularly for a nursing home or if you're a hospital, so there's pressure in all that space. And quite frankly, that's been reflected in some of the pricing we've been seeing.

[John Babcock:]

On a constant FX currency basis, would earnings be up year over year, or would they -- flat or down? How should we think about that?

[Daniel Buron:]

I think would be flattish this versus last year. We've added costs, and we're actually n the ramping mode of a couple of big customer wins. There's always investment in the first few quarters when you're ramping up a new customer. I think if you look at it on a currency-neutral and you actually remove a little bit of that investment, I think we're probably up a little bit, but this is if and if, so I want to be careful with that answer.

[John Babcock:]

Okay. Then the next question I had is back to CapEx. We touched on this a little bit earlier, but I was just wondering, as we look out to next year, I assume -- first of all, is there going to be any CapEx associated with Plymouth, and then on top of that, are there any other major projects that are going to be taking place next year?

[Daniel Buron:]

We're in the middle of the planning process. This is the budget season in all businesses right now, so it's early to answer that question. But I can say that there is no CapEx associated with the Plymouth streamlining, and we're looking at what's available to us. We'll look at the normal maintenance, and we won't compromise in maintaining our confirm asset. And if there's good projects that are presented by the business with a good return, I will analyze them, and we'll be more in place to share that result of that exercise with you in the Q4 earnings call.

[John Williams:]

We normally give you that number in our Q4 call, and that will continue to be our practice.

[John Babcock:]

If you don't mind, just one last question here. I was just wondering if you talk about the Ashdown facility and ultimately how the qualification process is going there with customers, and also how we should generally think about the ramp up from a volume but also earnings perspective if you can provide that.

[John Williams:]

I won't talk to the earnings perspective. I'm happy to talk to the volume. I think in a way one fairly obviously leads to the other. But if you think about that, we're going to use our Personal Care business as the qualifying customer. So as we make that fluff pulp, it will actually go to our Waco facility, which is our converting facility for baby diapers -- one of our converting facilities. That will be the first test facility, and then we'll move that around Personal Care. As that happens, the usage within our Personal Care business of fluff pulp when we finally get through will be a run rate of about 100,000 tons out of Ashdown. Obviously, then we have the pulp that we'll no longer be supplying out of that second Plymouth machine that we'd qualify on Plymouth, and some of those customers could well migrate to Ashdown. So I think we've said third quarter 2017, we'd be seeing probably a 50%-50% split between softwood bales and fluff in Ashdown as we ramp up over time because it's the qualification period, obviously, with customers that take the time given the fact that this is a consumer product. I think we've given you, if I recall, the volumes we're going to produce other Ashdown machine. So you should see rough and ready between Plymouth and Ashdown about 850,000-ish tons of fluff pulp from us. We probably won't get to that full run rate of fluff pulp until the end of 2017, early 2018, but we will be ramping up as we go through, and those tons that we don't sell as fluff pulp, we will sell as softwood bales. Does that give you a bit more color?

[John Babcock:]

That's helpful. Thanks.

[John Williams:]

You're welcome.

[Operator:]

Our next question comes from Paul Quinn at RBC Capital Markets.

[Paul Quinn:]

Thanks very much, and good morning, guys.

[John Williams:]

Good morning, Paul.

[Paul Quinn:]

Just a question on HDIS. You describe it as a leading provider of direct-to-consumer incontinence products. What percentage of the market share does it have? Is there other competitors out there that you could buy? And is regional? Where is it geographically? Is it is in one area of the US? And then lastly on it, while I get a chance here, is the margin of that business versus other adult incontinence businesses you've got?

[John Williams:]

Certainly. Let me see if I can remember because there were a lot of questions in there. I will try and start at the beginning. If you look at the geography, it is focused, obviously, in places where the demographic suits it to be, right. So it's got a strong business in Florida. It's got a strong business in a couple of other retirement states. Its market share in the spaces is very difficult to get a hold of because there are a lot of very small businesses in that space, but it's definitely the largest business. So if we it make a proxy, I don't know, you could make at 25%, 30% market share pull within that specific business, but don't kill me on that, but it's somewhere around there. Let me, if I may, it has huge growth opportunity. I think of the margin front, I don't think we've given you those numbers, and if you don't mind, I won't. But it's obviously a distribution business, so you should expect to see distribution-type margins as opposed to manufacturing margins. What's actually the most interesting thing about it, which we haven't really shared with you all, is it has its own brand called Reassure. And obviously, we're going to generate synergies, we hope, over time by manufacturing that ourselves, which would then improve our margins in that overall business.

[Paul Quinn:]

Great. That is very helpful. And then just over on pulp, in the forecast, you see a lot of capacity additions coming on, and then you've also got the warehouse or IP transaction in the fluff side, so just wondering how you're thinking about the business going forward into 2017.

[John Williams:]

That's a great question. We now find ourselves really, post that transaction, when it finally happens, it's number three in the world. We are one of only three suppliers who actually have more than one mill. So we think that gives us great credibility, and we've got two very strong mills post the Plymouth work we think in a very strong place in terms of productivity and cost. And we have a unique opportunity based on the fact that, of course, we have our own launch customer, which means we can move that product into market through our own launch customer. So I'm confident that we can find that volume over time. Obviously, post the consolidation of the warehouse or IP transaction, it will be interesting to see how they choose to look at those assets and what they're going to run and what they're not going to run. To my mind, I think it might be a little rocky on pricing for a while, but I still really like the underlying dynamics in that market over time. An interestingly, if you look at the pulp stats that have come out, you actually see softwood is only one day over balance, right, which is interesting given what you've seen on capacity addition.

[Paul Quinn:]

Fair point. Thanks very much. Good results.

[John Williams:]

All right. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Gail Glazerman at Roe Equity Research.

[Gail Glazerman:]

Hi. Good morning. Just on white paper, can you talk a little bit maybe on the underlying price direction? Have you gotten all you expect to get from the spring price increase? And in general, if that's the case, are you satisfied with that? And if not, what you do you think held it back?

[John Williams:]

That's a great question. Are you satisfied with the price you got? The answer of that is always no, of course. But if you look at it, yes, we think it's done. We think we've got what we're going to get. We probably got about $30 across the piece versus what we announced. Obviously, in the fourth quarter, the mix changes on us a bit because we're doing some the tablet grade, some of the filler grades that have a lower margin. So I'm not expecting price pressure, if you like, in quarter four, but we will have to see. But certainly, that price increase is done.

[Gail Glazerman:]

Okay. And just to maybe take a step back, when you think about the second half of next year, you are more fully ramped up on the machine at Ashdown, you've moved past some of the cost on some of the new business you took in Personal Care. Where do you think you are relative to your $300 million to $500 million gross business goal.

[John Williams:]

If we put it all together, maybe halfway. Probably halfway to the $500 million, not the $300 million, just to be clear.

[Gail Glazerman:]

Okay. And is this something that you might be reassessing then at that point and thinking about you doing it? And also, just in terms of your M&A answer, it seems like there is maybe a slightly better chance you might do something outside of Personal Care versus some of the bolt-ons you've been doing. Is that a probability?

[John Williams:]

I wouldn't -- it's a bit like criminology here. I wouldn't over interpret what I said. We like the personal care space. If we can find things to do in it, we would do. If there's something that the we think is compelling that would add value, we would do that. But I think I'd just reiterate, it's always around fiber, Gail. That is where we think we have permission, if you like, to operate, and that is where we'd continue to operate.

[Gail Glazerman:]

Okay. We haven't talked to this in a while, but can you give any update on your off-the-radar-screen initiative, nanocellulose fertilizer and things like that? Any update whether those may materialize into…

[John Williams:]

Whether that will become anything? That is a great question. If you take nanocrystalline cellulose, actually, we've just done a major test. We have a new shareholder in that space, which is Schlumberger, who are of the oil services business, and they've just done a test for using that material really as a fluid additive, I would say, in fracking. The initial tests have been incredibly successful. So we still have some work to do around some of the production processes, but we're feeling pretty in better shape. So actually a good sign that we actually have a product that people who are going to want over time. In addition we have some other tests that another company are doing within paper chemistry, which also looks pretty interesting. So I think there, we may have something over time. I always said, you have to kiss a lot of frogs before a prince turns up. It's looking less like a frog and more than a prince, but it's very early days. In our lignin business in Plymouth, we certainly have a product, and we have a little business. And we're looking around, really, we hired a chap called Mark DeAndrea to look around our whole biomaterials space. Where I think historically there are products that we just waste, can we just sell them to somebody for a price? And we're now thinking, actually, are there business opportunities around that? And I think you're going to see as -- again, I don't think any of them are transformative in the short term, but you're going to see us really focusing around that space to see if there is a revenue stream to be built.

[Gail Glazerman:]

That's great. And just one last one. The closure at Plymouth, as you look maybe a little bit further down road, does that accelerate your opportunity to ramp up and use the full 515,000 tons at Ashdown? Or is that just way too far down the road?

[John Williams:]

No, that's a great question. Really, that's going to be driven by -- there are two paper machines still in Ashdown. It's really driven about the future of those paper machines more than it's driven by Plymouth.

[Gail Glazerman:]

Okay. Thanks very much.

[John Williams:]

All right. Thank you.

[Operator:]

Our next question comes in Chip Dillon at Vertical Research Partners.

[Chip Dillon:]

Yes just a quick follow-up. One is on the -- John, you mentions that there is nothing you see in the structural fundamentals of the Personal Care business to prevent that from getting to a mid- to high-teens EBITDA level. Would you think it might take it a couple, three years to get there, or do you think it's something that is like 2018, or would you think it might take a little longer?

[John Williams:]

Well, yes, who knows? I'd look at the slightly differently. We have a business now capable, Chip, of $1.5 billion of sales in terms of its capacity. So I think to feel confident that I could answer that question with any precision, I would have to see that momentum really building because obviously, then I start to really get the drop through as I use these machines more efficiently in terms of overall operating efficiencies of the machines. But I believe if we get to that level -- and then the economies of scale of our central SG&A go away because we're big enough, I would absolutely say that when we're seeing that momentum, that is when we will start to see those high-teen returns.

[Chip Dillon:]

Got you. So basically, it's a function of really getting better utilization through what you've already got.

[John Williams:]

Yes. So what you've had now, it's about volume, and really, what' you've had now, you've had a lot of noise around machines because we've done two things really. We characterize it internally as flying the airplane while we're putting the wings on it because we've rebuilt the whole product platform in terms of the CapEx we've had to spend. So that is largely done, and now, of course, we're selling the capabilities of the platform for major accounts. As that comes in, that's really when those margins starts to move.

[Chip Dillon:]

Okay. And then on the -- the second thing is, it's interesting, the last three years, you guys have had a nice pop in the fourth quarter on EPS, and I recognize a lot of that is the way the maintenance schedule has fallen, and this year, you just don't have that decline because maintenance was pretty low in the third quarter. But the other wild card, and you've mentioned this, is the hurricane effect, and I know, especially in eastern North Carolina where you have Plymouth and some of your Personal Care converting operations, there's probably been some lingering impact. Are we talking -- do you think the effect could be $5 million? Do have some ballpark you could give us that you would regard as the one-time impact of the hurricane on your financials this quarter?

[Daniel Buron:]

I think we're going to see very little in the Pulp and Paper. We had power outages more than anything else, and some wood costs will go up because of that. Our plant in Greenville in Personal Care was actually closed for a week because of the flood. So that one we're trying to get back on our feet in terms of shipment to our customers. They're a little bit of a financial impact very likely, but I don't think it's going to be to the tune of $5 million. I think it's going to be lower than that.

[Chip Dillon:]

Are you including the wood cost?

[Daniel Buron:]

Including the wood cost.

[Chip Dillon:]

Okay, that's helpful. Thank you.

[Operator:]

Our next question comes from the line of Hamir Patel at CIBC World Markets.

[Hamir Patel:]

John, apologies, I jumped on late, so this may have been asked already, but --

[John Williams:]

No worries.

[Hamir Patel:]

I was just wondering if you had any thoughts on what the softwood lumber dispute might have on your wood cost, your pulp mills in Canada?

[John Williams:]

Hard to tell. Obviously, where we're buying chips, we need a healthy sawmill environment, so if the saw mills aren't healthy, there are less chips, which means that some of the prices might go up. We are taking action around all that to try and minimize anything that may happen, obviously, largely on the West Coast. So it really mostly is impacting our Kamloops mill if it's going to impact us anywhere. So we might see a little bit of an uptick in some in terms of some of the chip costs, but I don't think it's going to be life threatening in any way.

[Hamir Patel:]

Fair enough. That's all I had. Thanks, John.

[John Williams:]

Thank you.

[Operator:]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Nicholas Estrela:]

Okay. Thank you. So just as a reminder, we will release our fourth-quarter and full-year 2016 results on Thursday, February 9, 2017. Thank you for listening, and have a great day.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.