Domtar Corporation
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to today's Domtar Corporation Fourth 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. I would now like to hand the conference over to Mr. Nicholas Estrela. Please go ahead, sir.

[Nicholas Estrela:]

Good morning, and welcome to our fourth quarter and full year 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. 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 to the Securities Commission 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 David Williams:]

Thank you, Nick, and good morning, everyone. Our fourth quarter rounded off a solid 2016. Our businesses generated good cash flow, which helped us further execute on our growth strategy and return cash to shareholders. Our teams are agile and adjusting to market changes and executing well on things under our control, particularly in extracting costs and driving efficiencies. We generated $635 million of EBITDA before items and $465 million of operating cash flow, a strong conversion rate in a challenging macroeconomic and competitive environment. Our safety performance was excellent across the company. In particular, our Hawesville and Ashdown facilities exceeded 1 million hours without a recordable incident, their best performance in history. Turning first to Personal Care. The business is gaining traction in North America and Europe both in the adult incontinence and infant care categories, and growth is accelerating. New sales wins helped grow the top line by 6% and we made progress in operations by delivering on cost savings and driving operational excellence. We were also successful in securing additional new orders scheduled for delivery in 2017, another important priority. And we continue to invest in growth, specifically to complete our product assortment, enhance consumer and category insights, and bring more innovation to market. A number of key milestones made 2016 a successful year. First, we relaunched our product range in the North American health care channel as we bring a new clinical value proposition to market with our Attends brand. We executed on our launch of retail adult incontinence assortment through our partner brand model with two large retailers, where we have invested in innovation and associated product development. We completed a number of capital projects in Europe including the installation of new brief and bladder control lines. Finally, we completed the acquisition of HDIS, a complementary addition to our portfolio of brands and technologies, which will support our direct-to-consumer growth strategy. In Pulp and Paper, the division is proving resilient year after year and remains a strong cash engine. We generated solid margins and we believe we maintained our share in the North American uncoated freesheet markets. We remain a supplier of choice to a broad range of Paper customers and channel partners by staying focused on innovation, product quality and excellent service. We made important progress with our continuous improvement in reliability programs, unlocking value and savings across our mill networks. This, combined with the sharing of best practices, resulted in solid productivity, particularly in Pulp. In fact, we finished the year with record production at Kamloops, Dryden and Plymouth pulp mills. We expect our continuous improvement programs to generate further productivity enhancements in 2017 as we maintain on our low cost position. We stayed vigilant in balancing our paper production with our customers' demand by taking market-related downtime during the year, in addition to shutting the largest paper machine in the U.S. at our Ashdown mill. We successfully completed our largest capital project in quite a while with the conversion of the Ashdown paper machine to fluff pulp production. With the Ashdown fluff pulp line and the streamlining of Plymouth, we now have close to a 2 million ton market pulp business that's very well positioned for the long-term. Finally on innovation, we're focusing our efforts on becoming even more efficient in our pulp and papermaking processes. We improved the energy efficiency profile at some of our mills and reduced production costs notably with investments at Windsor and Johnsonburg. As fiber innovators, we're also accelerating our research and development program in bio materials including advanced fibers, extractives, lignin, biofuels and wood-based cellulose derivatives. They remain longer-term opportunities for us but we're making progress with attracting commercial partners. Our journey towards sustainable growth continues and our objective of generating $300 million to $500 million of EBITDA from growing businesses remains a realistic goal. The combination of our Personal Care business and the Ashdown fluff pulp conversion provides us with firepower to bring us half way to this target. On capital allocation, our confidence in our strategy and cash flow generation allowed us to reward shareholders with a high payout ratio. Our cash generation remains strong and we'll maintain a balanced and disciplined approach deploying resources by investing to fuel growth in our core businesses and returning capital to shareholders. With that, let me turn the call over to Daniel for the financial review before making comments on our fourth quarter results 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 $0.75 per share for the fourth quarter compared to net earnings of $0.94 per share for the third quarter of 2016. Adjusting for items, our earnings were $0.75 per share in the fourth quarter compared to earnings of $1.13 per share for the prior quarter. EBITDA before items amounted to $159 million compared to $194 million in the third quarter. Now let's turn to the sequential variation in earnings on slide 5. Consolidated sales were $4 million higher than the third quarter mostly due to the addition of HDIS sales partially offset by lower pulp and paper prices. Cost of sales was $34 million higher than the third quarter mostly due to higher manufacturing and maintenance costs, and the addition of the cost of sales of HDIS. Depreciation and amortization was in line with the third quarter, while SG&A was $6 million higher due to the inclusion of HDIS. Fourth quarter earnings include a closure and restructuring credit of $1 million in addition to the negative impact of purchase accounting for $1 million, netting our items for the quarter to zero. In the fourth quarter, we recorded an income tax expense of $10 million or an effective tax rate of 18%. The effective tax rate for the fourth quarter and the full year was impacted by certain Arkansas R&D credits related to fiscal year 2014 and 2015 for which the formal approval was obtained in 2016. Let's turn to the cash flow statement on slide 6. Cash flow provided from operating activities amounted to $155 million while capital expenditures amounted to $45 million. This resulted in free cash flow of $110 million for the fourth quarter. For the full year, cash flow provided from operating activities amounted to $465 million, and capital expenditures amounted to $347 million. This resulted in free cash flow of $118 million in 2016. Cash returned to shareholders in 2016 amounted to $112 million or 95% of our free cash flow. From January 2011 to December 2016, we've returned a total of $1.4 billion to shareholders through dividends and share buyback, representing 73% of our free cash flow. At the end of the quarter, we had 62.6 million common shares outstanding. Turning to the sequential waterfall on slide 7. When compared to the third quarter, EBITDA before items decreased by $35 million due to lower selling prices for $25 million, higher raw material costs for $12 million, lower productivity for $7 million, higher maintenance costs for $5 million and higher freight costs for $1 million. These were partially offset by higher volume and mix for $7 million, lower other costs for $6 million and a favorable foreign exchange impact of $2 million. Now let's go to the review of our business segments starting on slide 8. In the Pulp and Paper segment, sales were down 1% when compared to the third quarter and down 6% when compared to the same period last year. EBITDA before items was $140 million compared to $175 million in the third quarter of 2016. Our Paper business on slide 9. Sales decreased 4% versus last quarter and 8% versus the same quarter last year, while estimated EBITDA before items was $117 million. Manufactured paper shipment were 1% lower when compared to Q3 and 7% lower versus the same period last year. Average transaction prices for all our paper grades was $19 per ton lower than the last quarter. As a point of reference, our average prices for all of our paper grades in January 2017 was $20 per ton below the fourth quarter average. In the fourth quarter, we took 45,000 tons of market downtime to balance our production to our customer demand. Let's move to the Pulp business on slide 10. Sales increased 9% versus last quarter and 2% versus the same period last year. Estimated EBITDA before items decreased $12 million when compared to the third quarter. Pulp shipment were higher by 12% versus the third quarter and up 8% when compared to the same period last year due to strong productivity and additional volume from the recently converted Ashdown pulp line. Average pulp prices decreased by $20 per metric tons versus the third quarter. Our Paper inventory decreased by 22,000 tons when compared to last quarter, while Pulp inventories increased by 19,000 metric tons. Personal Care business on slide 12. Sales increased 10% when compared to last year as a result of new customer wins and the acquisition we made (12

[John David Williams:]

Thank you, Daniel. Let's take a closer look at the fourth quarter. This morning we reported EBITDA before items of $159 million and sales of $1.3 billion. Earnings were impacted by lower pulp and paper prices and higher production costs. Nevertheless, we generated $155 million of operating cash flow, our best quarter of the year. We also took some added maintenance due to project timing, as well as 45,000 tons of market downtime. Both of these decisions impacted our costs. In Pulp, prices were lower versus the third quarter but are increasing in quarter one as a result of the current momentum we're seeing in the pulp markets. On volumes, they were strong across all grades. We had record softwood pulp shipments and new volume from the A1 line at Ashdown. In 2016, pulp volumes were 7% higher while global softwood shipments increased 3% with double-digit growth in China. The ramp-up at Ashdown progressed well. We produced just shy of 100,000 tons of softwood and fluff pulp on the A1 line. Our Personal Care facilities in Waco, Texas, and Delaware, Ohio, have already manufactured baby diapers using Ashdown fluff pulp. The initial trials and evaluations across all the Personal Care locations and with selected customers have provided positive results. This is the first step towards qualifying Ashdown fluff pulp for the hygiene market. In Personal Care, our top line continues to grow above market trend. Sales increased 10% year over year which did include the results of our recent HDIF acquisition. Operationally, Personal Care ran well with procurement and operational cost savings initiatives in addition to favorable raw material pricing. In baby diapers, we successfully relocated an infant line from North America to Europe. The line is currently operating and will help support growth in that region. In adult incontinence we continue to make progress on our European capacity expansion plans by extending both our capacity and capabilities on key product platforms. These expansions are going well. Several sizes and SKUs have been qualified and we've already begun shipping product for sale. These expansion efforts will continue through the end of 2017. Our businesses are showing their resilience in a competitive market environment and we ended 2017 from a position of strength. Our focus is on execution and our strategy remains to maximize long-term profitability and cash flow. Now to our outlook for 2017. We expect paper shipments to be in line with market demand. Pulp shipments will be higher than in 2016 as a result of the Ashdown conversion. We do expect some market volatility due to the strong U.S. dollar and new capacity additions. Costs including freight, raw materials and labor are expected to marginally increase. In Personal Care, investments in advertising and promotion as well as new customer wins are expected to drive higher sales. Thank you once again for your time and support and I'll turn the call over back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. So both John and Daniel will be available for questions. I'd ask our participants to ask a few questions at a time and return to the queue for follow ups as we want to get as many people as possible. So moderator, you can open up the line for questions, please.

[Operator:]

Thank you. We'll go first to Mark Connelly with CLSA.

[Mark Connelly:]

Thank you. John, it looks to us like white paper industry operating margins are probably too low to support higher prices right now and that U.S. market prices are already high on balance relative to the rest of the world. So two questions, first, am I in the ballpark to think that you ran at about 95% in white paper for the quarter and the year? And second, if we assume a normal decline in volume, do you think you can grow profitability in white paper without a price hike? You did say that you don't have as much input cost pressure as we're seeing elsewhere, so I'm sort of wondering what you can do on the cost side.

[John David Williams:]

Right, let me see if I can answer. That's a lot of question in one question. Let me see if I can take it. (19

[Mark Connelly:]

I promise I won't ask any more.

[John David Williams:]

So if you look at operating rate, undoubtedly we are running – we took a little bit of market downtime but actually we also – if you think about the way all that works and we took some inventory out, in my view, we're largely running full. We certainly run full in a very low maintenance quarter. And if you look at quarter one with its higher maintenance costs, we feel we're going to pretty much balance supply and demand out within our own system, Mark, during that period.

[Mark Connelly:]

Right.

[John David Williams:]

I still think there are things quite frankly that we can do just in terms of driving cost, driving productivity improvement, driving our continuous improvement program, building a kind of one Domtar operating methodology across Pulp and Paper, where we can continue to reduce costs. Every year, we have sort of high objectives, we're trying to reduce the cost base. If you take our Pulp business – not moving away from white paper but just to sort of allude to it while I'm answering your question, undoubtedly where there's work to be done at both Ashdown and Plymouth sort of to drive our competitiveness way up into that sort of first quota of our (20

[Mark Connelly:]

Okay. Yes, that's very helpful. Thank you. I'll let go. I'm done.

[John David Williams:]

You're welcome.

[Operator:]

We'll go next to Gail Glazerman with Roe Equity Research.

[Gail S. Glazerman:]

Hi. Good morning.

[John David Williams:]

Gail, good morning.

[Gail S. Glazerman:]

Can you just talk a little bit more about what's going on with paper pricing? The weakness you saw in the fourth quarter, that was underlying pressure and not mix adjustments? It doesn't seem so since you're kind of even below that now on the first quarter and do you see any signs of stabilization?

[John David Williams:]

Yes, certainly. So there is undoubtedly a little bit of mix but it is mostly price pressure. As far as stabilization is concerned, we look at our own supply, demand balance. We're going to be running full in the first quarter. So we're not sitting here thinking there's more to come, but, again, it's a supply, demand game across the piece.

[Gail S. Glazerman:]

Okay. And on the supply side, are you seeing any incremental pressure from trade flows, or do you think any adjustments that might have been made post the duties that have been made at this point?

[John David Williams:]

Well, I guess with the current – with the new administration, trade flows could do almost anything. What we are seeing – so versus where the duties are – so the Brazilians are still importing and taking the duty. The Portuguese are importing and taking the duty. And then some of the other countries, so some of the Europeans who don't have duty, Thailand, et cetera, are bringing some product in. It's not to the level of the old volumes but it's still – and, of course, it's mostly cut size. It really still looking for a home in some of the big business around the country. But as you can see by the RISI numbers, it has reduced versus historical levels but is now on a slight uptick again but only at single digit.

[Gail S. Glazerman:]

Okay. And just curious on this. You referenced the new administration. I'm just wondering particularly in terms of the potential Sun pulp expansion project, is there anything that you're hearing being talked about down in D.C. that might change your perspective on that project and their ability to get permits?

[John David Williams:]

Yeah. Not at this moment in time. Obviously, we know this administration are anti-regulation, so there's a large rollback approach in terms of the regulatory atmosphere, I guess I'd say, around Washington. So whether that makes permitting easier or more difficult or is indifferent, we just don't know.

[Gail S. Glazerman:]

Okay. Thank you.

[John David Williams:]

All right.

[Operator:]

We'll go next to Anthony Pettinari with Citi.

[John David Williams:]

Anthony, hi.

[Randy Toth:]

Good morning. This is actually Randy Toth sitting in for Anthony.

[John David Williams:]

You're a little faint. Could you possibly speak up? I'm having a bit of trouble hearing you.

[Randy Toth:]

Yes. Will do.

[John David Williams:]

Okay.

[Randy Toth:]

With multiple customer wins in 2016 and the HDIS acquisition, how should we think about run rate sales for Personal Care now? And would you expect margins to remain kind of flattish in 2017? Or are you expecting any new sort of lift there?

[John David Williams:]

All right. That's a great question. So we hope to grow at kind of twice the market. If you assume the market, maybe, is growing at 3%, we'd be hoping to be at – double that. Or you know obviously I want to grow as fast as I can possibly grow. Basically by saying that, I'm really saying the businesses we have today will grow at market. But as we win new business, that will help us to grow faster than market. I'd be upset, I have to say, if HDIS didn't grow considerably faster than the marketplace. And really on margins we've just got to keep winning new business until we get that drop through into this, we think, highly competitive manufacturing environment that we now have in terms of the machine part we've built. Because obviously as we've been in start-up mode, there's a noise a little bit around the margins. So with all that in mind, my view is I still believe over time that is a mid-teens to high-teens EBIDTA business. And I'm – no way am I going to lose sight of that as we move through.

[Randy Toth:]

Okay. Okay. Fair enough. And then I guess just more on the Pulp side, with Ashdown beginning qualifications and the large transaction in the fluff pulp space completed, have you seen any noticeable conversations with new or existing customers that may be uncomfortable sourcing from only one large supplier?

[John David Williams:]

I mean, I wouldn't want to get into the detail, but obviously, at the kind of macro level, there are now people who had a competitive environment and now find themselves with one supplier, and will talk to us about whether we can sort of tuck in as their second supplier, or become a more important supplier to them. And those are conversations we're having. I think I would just focus on who we are as a fluff pulp supplier because I think it's quite interesting. Other than the big three, of which we now are one, everybody is a single-mill supplier. So actually there are only three of us with more than one mill. We, of course, now have two very strong mills in the fluff pulp space. So I think both that transaction and the fact that we are now a much more credible supplier with two mills in great geography, with a fantastic wood supply, and really good skills in making these products, I think that also helps us in that space to face up to these major accounts. And perhaps a way we couldn't when we were a single mill supplier.

[Randy Toth:]

Okay. Perfect. That's very helpful. I'll jump back in the queue.

[John David Williams:]

All righty.

[Operator:]

We'll go to George Staphos with Bank of America Merrill Lynch.

[John P. Babcock:]

Hey. Good morning. This is actually John Babcock on the line for George. Just – the first question.

[John P. Babcock:]

Hi.

[John P. Babcock:]

Hi. The first question I just want to tap on here. If you could talk about the fluff pulp market and also generally provide some observations on the quality of the fluff pulp that's being produced outside of North America, and also the potential impact from some of the tariffs there that were introduced in Brazil?

[John David Williams:]

Are you thinking about the Brazilians moving from 4% to 14% for fluff pulp?

[John P. Babcock:]

That's right.

[John David Williams:]

That is the tariff question. Yes. An interesting way to protect your domestic business, I thought. So really, the product that is made in that geography is on test in a few places. It's being seen as a potential substitute for part of what may go into a diaper, but it's not really seen as kind of a complete substitution for the quality of fluff pulp you're seeing from loblolly pine. So we think it'll find its spot but we don't really think that there's going to be a sort of wholesale world where suddenly it takes the world by storm just because of the sheer quality of what loblolly can do with fluff pulp and the expertise of those producers. So it'll find its place, but I don't see it as a kind of game changer, to be absolutely honest. If you look at our marketplace, it's about a 6 million ton market we think, probably growing around 250,000 tons a year. And now, certainly if you look at what's happening in terms of adult incontinence product, baby diaper in a few geographies has softened a bit just because of birth rate, but birth rate will come back. So I think, the long-term outlook for that marketplace still remains extremely positive and I mean that's why we did what we did, to be honest. It might get a little bit choppy in the short term although at the moment, as you know, there's momentum in pricing. But long term that looks a very solid market to me. And I think for us, where we also have an element of forward integration, that puts us in a very nice position. I think witnessed by the fact that we can use our own business actually as sort of a launch platform as we bring on Ashdown. Does that help?

[John P. Babcock:]

That definitely helps. And then as far as Ashdown is concerned, how much – generally if you could provide some sense of the mix that you were producing there and also the contribution of that conversion during the quarter.

[John David Williams:]

Well, we made 100,000 tons roughly, so I think that gives...

[John P. Babcock:]

Was that just in the quarter?

[John David Williams:]

Yeah, that was just in the quarter.

[John P. Babcock:]

Okay.

[John David Williams:]

So that's a reasonable run rate for next year. We probably will be a little bit higher than that next year. And over the year the mix between fluff and softwood bales will shift more towards fluff, but quite frankly probably by the year-end it might be running at about half and half, but I think that's the way we see it going. I think we've said to you before that from – at kind of midmarket pricing for fluff pulp when we're running, we think that's about a $70 million EBITDA contribution to the Domtar, if that helps.

[John P. Babcock:]

That's great. And then next, we are talking about the new administration a little bit earlier there and I was just wondering if you could provide some perspective on the border deductibility tax and how that would impact Domtar.

[John David Williams:]

Yes. That's an interesting question. Well, I think certainly, my issue is I could give you an opinion of that on its own but then, of course, other people and other countries are going to respond. So eventually, that won't be the end; that will only be the beginning of whatever may happen because, of course, in the end one man's trade protection is another man's trade barrier. If you look at where we export particularly, so we export some paper to Europe and, of course, we have a very large export business on Pulp into Asia and particularly China. In terms of South America, we have a very small position. We do export some pulp to Mexico. So, to my mind, it's very difficult at this moment to tell what that impact is going to be just because who knows?

[John P. Babcock:]

Okay. Thank you for that. And then the last question before I turn it over. Just was wondering if there was any sort of impact on Paper volumes from the election during the quarter? And if so, if there's any way you can quantify that, that would be helpful.

[John David Williams:]

No. Not really. No. That would be too hard to tell. I couldn't say.

[John P. Babcock:]

Okay. Appreciate it. Thanks.

[John David Williams:]

All right. Thank you.

[Operator:]

We'll hear next from Brian Maguire with Goldman Sachs.

[Derrick Laton:]

Hey. Good morning. It's Derrick Laton on for Brian this morning. How are you guys?

[John David Williams:]

Good. Thank you.

[Derrick Laton:]

Good. Just wanted to stay on Pulp for a second. We've seen several price increases across the market in recent weeks. What is the expected lag before we start to see some increases begin to start to offset the impact from higher costs?

[John David Williams:]

Well, on the whole, there's about a 30-day lag from the announcement to that beginning to show up just based on stock and our ability to convince the customer we should invoice them differently. So that's about the lag. That was the question?

[Derrick Laton:]

Okay. Yeah. That's helpful. Okay. And then – so you mentioned kind of a similar run rate for Ashdown in 2017 in terms of total production, but any rough idea when the fluff pulp from Ashdown will be fully qualified? Are you expecting that in the first half of 2017?

[John David Williams:]

Yeah. I mean that happens customer by customer, site by site. So it's not as if I can then go out to the world and say here's my fluff pulp, it's ready to go, I've tested it in three of my own businesses. They're going to want us to test it and qualify it to their product. Typically, the way it would work, and that's why the qualification period can be quite long, is they may well then make finished product with our fluff pulp. They then run an in-home usage test with consumers to make certain that this product was not in any way altering the finished diaper or the finished adult incontinence product. So it's almost a customer by customer, site by site process rather than a now we have a product that is fit for purpose. Some of the – how would I put it – less technically-driven customers might be comfortable with that, but the larger accounts are going to want to make sure that this is a product that they're happy with in their finished product with their consumer. So that's why it takes time. Does that give you a little color?

[Derrick Laton:]

Yeah, that's helpful. I'll turn it over. Thanks.

[John David Williams:]

Thank you.

[Operator:]

We'll go next to Chip Dillon with Vertical Research Partners.

[Clyde Alvin Dillon:]

Good morning, John and Daniel.

[John David Williams:]

Good morning.

[Clyde Alvin Dillon:]

Just wanted to ask you about the big drop in depreciation. It looks interesting given that you actually have some new equipment, a lot of new equipment actually, starting up, whether it's what you build in the Personal Care area or certainly Ashdown. So are you changing the useful lives? Is that what might be driving that?

[Daniel Buron:]

Actually, no, Chip. And if you like history, you'll remember that 20 years ago Weyerhaeuser was going hostile against Willamette and the life of those assets are around 20 years when you revalue them. So we have some of the former Willamette mills that have very little value anymore to depreciate, so this is why you'd see that decline.

[Clyde Alvin Dillon:]

Okay. So that doesn't mean that EBITDA would go down, it just means that some of the DA goes away and sort of that all things being equal helps EBIT some?

[Daniel Buron:]

That's it.

[Clyde Alvin Dillon:]

Okay. Okay. That's good. And then I noticed you were saying how the price of paper I believe you said – which I think you said was down $19 and there might be a mix there, in the fourth quarter versus the third is down another $20? Did I hear that right? And what could be driving that?

[John David Williams:]

Yeah, you did. Certainly, I mean competitive pressure Chip, a few negotiations, the marketplace in general, that's what has led that to happen.

[Clyde Alvin Dillon:]

Okay. I see. And then when you look at – you mentioned a hit from, I forget what mill or what facility, but there was some kind of an event or something that's going to cost you?

[John David Williams:]

So Kamloops is on its turbine, so what that means is we cannot generate the power we were generating or sell some of the power we generate for profit. So that's that; probably $10 million of earnings, $2 million to fix it, so $12 million. Our insurance will probably pay the $7 million so it's a net hit of $5 million. But the timing of that could well be you're going to see that hit in the numbers for six months, then of course we go to get our money back from the insurance company, and then that flows back in. So there'll be a little bit choppiness around that number probably for six months.

[Clyde Alvin Dillon:]

And so maybe expect like $5 million per quarter for six months? Is that a fair way to look at it?

[John David Williams:]

Something like that. Yeah.

[Clyde Alvin Dillon:]

Okay. Okay. That's good. And then I heard you mention that the run rate and Ashdown would likely be 50/50 at year-end. If you could just remind us of the cumulative capacity, and where did we enter the year in terms of that mix? I think you mentioned it; I just must have missed it.

[John David Williams:]

Yeah. I mean to be honest, at the minute we're making not a lot of fluff pulp, but we're making a lot of fluff pulp in Ashdown, but we're mostly making bales as we go to get the – qualify, if you like, with some of our major accounts. So it'll build a little bit over time. To be honest, I couldn't tell you quarter-by-quarter how it will build because it's really – we're in the hands of the customer and their qualification processes. But I'd be – so I think it's a fair bit to say we might be ahead of it. We might be behind it. But our objective would be by year-end to be at that 50/50 rate. Total capacity, I forget the number off-hand.

[Daniel Buron:]

I think we're pulp-limited (37

[John David Williams:]

Right.

[Daniel Buron:]

(37

[John David Williams:]

Yeah. That's what I have, 420,000 metric tons. So that kind of 100,000, 105,000 metric tons from Ashdown a quarter is, I think, a – it's a pretty good rate.

[Clyde Alvin Dillon:]

And what keeps you from getting to the 520,000 metric tons? Is that something we could see in the next year or two?

[Daniel Buron:]

We're using the pulp that it's producing down to do paper. So as paper is declining, if we take lack of order downtime, you might see a little bit more pulp being sent to the...

[John David Williams:]

Because we've still got two paper machines running there, Chip. That's why.

[Clyde Alvin Dillon:]

Okay. And I guess the last question is, I know an earlier question referred to like a permitting of a pulp mill. And I'm guessing is that the other one in Arkansas, which I understand they've re-filed to be a dissolving mill, not a fluff mill? Is that all? Are we talking about the same thing?

[John David Williams:]

Yeah. We understand the same thing. That is what was referred to; I'm sure, the Sun Paper mill.

[Clyde Alvin Dillon:]

Okay. Great. Thank you.

[John David Williams:]

Thank you.

[Operator:]

We'll go next to Sean Steuart with TD Securities.

[Sean Finlay Steuart:]

Thanks. Good morning. Couple of questions.

[John David Williams:]

Sean, hi.

[Sean Finlay Steuart:]

On SG&A, you mentioned for the fourth quarter that the HDIS acquisition was part of the reason SG&A was up for Q4. But we've seen the ratio of SG&A versus sales increasing steadily since the third quarter 2015. And I guess some of that's around optimization of the Personal Care business. But I guess my question is, is there a point at which you would expect that ratio to start to stabilize? And how should we think about that over the mid to long term?

[John David Williams:]

Great question. So let's take Personal Care first. I think as we've discussed before, we've been – you could argue over scaled at the center in order to be able to drive this business. That business really should be giving us over time $1.5 billion of sales, and so therefore I would hope over time to see, and it is my intent over time to see SG&A as a percentage both stabilize and really over time should come down a bit. Now one of the issues in SG&A for us, though, in the Personal Care business is of course our advertising expenses in there, and we do actually have consumer brands. And of course HDIS has a heavy SG&A because it's really a call center business, so we have a lot of people making phone calls. So I think on Personal Care, it's a growth business, that's the way we should see it. Obviously, the issue on Paper is we're in a declining Paper business. Just to remind ourselves, since 2007 white paper is off 40% as far as the marketplace is concerned. Of course, our share has remained consistent. So to some extent, we're always trying to catch a falling knife. In fact, we have just taken some action around SG&A in our Pulp and Paper business, particularly Paper, where we've reduced our sales organization slightly. So, it's just a constant work to try and make sure that we have what we need to support the network without actually having it balloon on us. So we're constantly vigilant around those issues. Does that help?

[Sean Finlay Steuart:]

That does. Thank you. Second question is the CapEx guidance for 2017; can you give us some detail on some of the discretionary initiatives you're pursuing for this year?

[John David Williams:]

By discretionary...

[Sean Finlay Steuart:]

(40

[John David Williams:]

...there's not really very much. Let me – if I may. Really, that CapEx in Pulp and Paper is kind of the basic stay alive CapEx with probably some dedicated towards some high return projects, but the vast majority of it is really just making sure the assets still run. In Personal Care, there's, I think, two machines in there just to support our growth. And there's one account we're negotiating with to see if we could get quite a bit of growth. If that's successful, we'll need a couple of machines, but that's about it. There's nothing particularly radical in that CapEx spend.

[Sean Finlay Steuart:]

Okay. That's all I had. Thanks very much.

[John David Williams:]

Thank you.

[Operator:]

We'll go next to Paul Quinn with RBC Capital Markets.

[Paul Quinn:]

Yeah, thanks very much and good morning.

[John David Williams:]

Good morning.

[Paul Quinn:]

Just a follow-up question on softwood pulp here. In the short term, pricing looks pretty strong. Just wondering what you are thinking in the medium and long term given the capacity increases. And then second question would just be, are you aware of the investigation going on in the pulp among buyers? Apparently they've brought this forward and I suspect this is just a sign of the times when you get some of these price increases and people are wondering whether there's any kind of industry collusion.

[John David Williams:]

I'm not aware of the second item. Certainly on the first item, I mean, I guess in a way all I could sort of do here is mouth platitudes. But at a time when supply, demand balance is in the suppliers' favor, this is what happens in this type of markets if that were to swing, patently (42

[Paul Quinn:]

All right. That's all I had. Best of luck. Thanks, guys.

[John David Williams:]

Thank you.

[Operator:]

We'll hear next from Hamir Patel with CIBC Capital Markets.

[Hamir Patel:]

Hey. Good morning.

[John David Williams:]

Hamir, hi.

[Hamir Patel:]

John, in the retail channel, I was just wondering in the Personal Care business, if you could maybe speak to where private label market share sits right now for both baby and adults' diapers? Where that was maybe a year ago? Where you see that heading over the next couple years?

[John David Williams:]

All right. I'm not sure I have those numbers at hand. We'll get back to you specifically with those numbers, but my feeling around it is relatively constant. I don't think they're getting much growth. Certainly in baby, my recollection is actually the private label has lost a little bit of share. And it's lost a bit of share because the number one player in the market lost a lot of share maybe a year or so ago and is determined to win that share back, has been using price and heavy discounting to do that, has now stopped doing that and actually is on public record, which is why I can discuss it, saying really now they're going to position the value of the brand, if you like, with heavy advertising. So that has caused a little bit of compression in terms of market share for private label. As, of course, you've seen a slight reduction in the birth rate as well as some price pressure, so there's no doubt that the baby business has been highly competitive. Now we've managed to get quite dramatic growth out of that business. We've got that because we have a major win in the European business and we've had good runway in our U.S. business, but the marketplace is definitely highly competitive. In AI, it's remained relatively constant. Market share has remained relatively constant between private label and baby (45

[Hamir Patel:]

Yes. That does. That's all I had. Thanks.

[John David Williams:]

Okay. You're welcome.

[Operator:]

And we'll take a follow-up from Gail Glazerman with Roe Equity Research.

[Gail S. Glazerman:]

Hi. Just going back into the recent strength in pulp pricing, there have been some reports that it's been driven by a pick-up in the dissolving pulp markets. And I'm just wondering if you've seen incremental demand from your nontraditional customer base?

[John David Williams:]

Well, it's been driven – my judgment is a lot of it has been driven by demand out of China, where we have a very strong position. We sell direct so we don't sell through agents, so I think that gives us great insight into that market, and means that we can kind of take advantage of it effectively and find our way around it probably better I think than people who do sell through agents. So that's been driving a lot of it to be honest with you, Gail. And that's just kind of flowed back I think into the U.S. environment where that opportunity to export is that much greater and therefore, there's a bit of a tightness in the U.S. as well. Does that help? Does that...

[Gail S. Glazerman:]

No, it does. Can you just give an update, I know that we touched on this last call, but just your thoughts on potential risks to what supply would be – lumber trade dispute?

[John David Williams:]

Yeah. We don't see much of a risk. I believe we have one mill where we think there might be an issue around cheap supply for a very short time, but that's about it. So I don't think it's meaningful to us, to be frank.

[Gail S. Glazerman:]

Okay. Thank you.

[John David Williams:]

All right. Thank you.

[Operator:]

And it appears we have no further questions at this time.

[Nicholas Estrela:]

Thank you. As a reminder, we will release our first quarter 2017 results on Thursday, April 28, 2017. Thank you for listening and have a great day.

[Operator:]

Ladies and gentlemen, again that does conclude today's conference. Thank you all for joining.