Domtar Corporation
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Domtar Corporation's First Quarter 2015 Financial Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. As a reminder, this call is being recorded today, Thursday, April 30, 2015. I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead sir.

[Nicholas Estrela:]

Thank you. Good morning and welcome to our first quarter 2015 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. He will be supported by Michael Garcia, President – Pulp and Paper Division; and Michael Fagan, President – 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 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-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. So with that, I'll turn it over to John.

[John David Williams:]

Thank you, Nick, and good morning, everyone. We reported first quarter EBITDA before items of $180 million on sales of $1.3 billion. In Paper, we had good demand across most product grades, with volumes increasing 2% when compared to quarter four. We ran at near capacity resulting in strong productivity, which offset the impact of some weather-related costs. Specifically, some of our Pulp and Paper operations experienced higher than normal energy and fiber costs due to the cold winter. In Pulp, the current cycle in global markets led to downward price adjustments. However, softwood prices did stabilize in North America and China in April. In Personal Care, same currency sales increased year-over-year and adult incontinence volumes grew mid single-digits. Our North American business had a strong performance and we further advanced on production and in-source savings from our new manufacturing platform. Overall for the quarter, we generated $57 million in free cash flow and returned $37 million to shareholders through dividends and share buybacks. We continued to provide a top-tier dividend payout among our peers. And in February, we announced a 7% dividend increase in addition to a $300 million expansion in our buyback program. During the quarter, we announced an investment by Schlumberger in our CelluForce joint venture to explore the use of NanoCrystalline Cellulose to enhance the productivity of drilling for oil and gas. Schlumberger is the world's leading supplier of technology to the oil and gas industry. So, we are pleased to have the opportunity to collaborate with a recognized innovator in hydrocarbon recovery and production. Finally, health and safety remains a core value at Domtar, and we continue to deliver a world-class performance. We ended the quarter with a total frequency rate of 0.78, the fifth consecutive month below 1, and our 12-month average continues to trend down. To summarize, we had a solid first quarter on the back of a strong 2014. We continue to focus on the fundamentals that drive our long-term performance and we remain optimistic about our prospects continuing to generate attractive shareholder returns. With these brief remarks, I will turn the call over to Daniel for the financial review and I will come back with additional comments on our performance and the outlook for the rest of the year. Daniel?

[Daniel Buron:]

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on slide four. We reported this morning net earnings of $0.56 per share for the first quarter compared to net earnings of $1.10 per share for the fourth quarter of 2014. Adjusting for items, our earnings were $0.75 per share in the first quarter, compared to earnings of $1.41 per share in the fourth quarter. EBITDA before items amounted to $180 million compared to $208 million in the fourth quarter. Free cash flow totaled $57 million compared to $107 million in the fourth quarter. Turning to the sequential variation in earnings on slide five. Consolidated sales were at $31 million lower than the fourth quarter, mostly due to lower Paper and Pulp prices and a lower exchange rate for our Personal Care European sales. Depreciation and amortization and SG&A were each $3 million lower in the first quarter in large part due to a stronger US currency when compared to the Canadian dollar and the euro. Our first quarter earnings included an impairment charge of $19 million related to the accelerated depreciation of part of a paper machine at our Ashdown facility that will be converted into a fluff pulp line in 2016. I would like to remind you that a similar charge will be recorded every quarter until Q2 2016. Our results also included the following items, a charge of $1 million for closure and restructuring, and a gain of $1 million on the sale of a piece of land. Other operating loss in the quarter also included the bad debt expense in our Paper business. Interest expense was $26 million, $1 million lower than last quarter. Finally, we recorded a tax expense of $9 million. The 20% effective tax rate for the first quarter of 2015 was positively impacted by the accelerated depreciation of equipment occurring in a high-tax jurisdiction. Excluding this element, our effective tax rate would be at the lower end of our expected 2015 tax rate of between 26% and 28%. Now, turning to the cash flow statement on slide six. Cash flows provided from operating activities amounted to $127 million, while capital expenditures amounted to $70 million. This resulted in a free cash flow of $57 million for the first quarter. In the first three months of the year, we repurchased share for a total amount of $13 million. Including the $300 million increase in our buyback program approved by our Board of Director in the first quarter, we currently have $369 million left on this buyback program. From January 2011 to March 2015, we returned a total of $1.2 billion to our shareholder through dividend and share buyback, representing 70% of our free cash flow. At the end of the quarter, we have 63.7 million common shares outstanding. Turning to the quarterly waterfall on slide seven. When compared to the fourth quarter, EBITDA before items decreased by $28 million due to lower selling prices of $19 million, higher raw material cost of $15 million, the one-time insurance recovery benefit recorded in Q4 of $11 million, higher other cost of $8 million, which is mainly related to a $5 million bad debt provision recorded in the quarter, and lower volume and mix of $1 million. These were partially offset by a higher foreign exchange benefit net of hedging of $14 million, higher productivity of $7 million, and lower expense for plant maintenance of $5 million. Before starting the discussion on our segmented results, I would like to share with you some changes that we've made to our segments. As a result of changes in our organization, namely a more formal divisional structure with the addition of a President of our Pulp and Paper Division, we have changed the way we allocate certain centralized general and administrative costs to the segments. A portion of this cost that is related to segment activities as well as the mark-to-market impact on stock-based compensation awards will now be reported on the corporate line. As a result, we have revised our 2014 disclosure to conform to the 2015 presentation. So I invite you to refer to the reconciliation slide in the appendices for further detail. Excluding the mark-to-market of stock-based compensation, we expect the non-allocated corporate costs to be in the range of $45 million to $50 million per year. Now, on slide eight. In the Pulp and Paper segment, sales were 1% lower when compared to the fourth quarter and down 2% when compared to last year. EBITDA before items was $168 million compared to $195 million in the fourth quarter. Now, our Paper business on slide nine. Sales were flat, while EBITDA before items decreased by an estimated $16 million when compared to the fourth quarter. Manufactured paper shipment increased 2% when compared to the fourth quarter and were flat when compared to the same period last year. Our average transaction prices for all our paper grades were $18 per ton lower than last quarter. In the first quarter, we took no significant markets related downtime. Our Pulp business on slide 10. EBITDA before items decreased by an estimated $11 million when compared to the fourth quarter. Pulp shipments were sequentially lower by 5% versus the fourth quarter, and up 10% when compared to the same period last year. Average pulp prices decreased by $17 per metric ton versus the fourth quarter. Our paper inventories increased by 5,000 tons compared to last quarter, while our pulp inventory increased by 14,000 metric tons. Our Personal Care business on slide 12. Our EBITDA before items increased by $1 million versus last quarter, mostly due to our efficiency gains and to slightly lower raw material costs and despite a $3 million currency headwind. Same currency sales in the division were 3% higher when compared to the first quarter of last year, and AI volumes were 5% higher than a year ago. Before ending my remarks, I would like to remind you that our second quarter is an active Pulp and Paper maintenance quarter and that we plan to spend approximately $25 million more, mostly in our Pulp business than what was spent in the first quarter. This high level of maintenance activity will also impact our production volumes and therefore the absorption of fixed costs. I expect the unabsorbed fixed costs will affect our Q2 2015 results by approximately $10 million to $12 million when compared to Q1. So, this concludes the financial review. And with that, I will turn the call back to John. John?

[John David Williams:]

Thank you, Daniel. Our Paper business continued to deliver a strong performance in the first quarter. Operationally, we ran well with improved productivity at our mills despite the weather conditions. Paper shipments were solid with strong demand in a number of channels. Lower imports in the quarter drove incremental volume in business papers from some strategic customers. And specialty paper continued to grow, reflecting our strong customer relationships and collaborative efforts to bring new products to market. Year-to-date our specialty volumes are 8% higher when compared to the fourth quarter, led by strong growth in food packaging and thermal grades. We also continue to make more of our Xerox branded volume with the in-sourcing process now completed. As mentioned on our fourth quarter call, average selling prices were expected to be lower by $20 for the first quarter, but our price realizations were actually slightly better than our expectations. In regards to the trade case, we are pleased that the US International Trade Commission is moving ahead to consider anti-dumping and countervailing duties on imports of certain uncoated freesheet grades. The affirmative vote is an important first step in our fight to end the unfair trade practices targeting the US market and to restore a level playing field. We look forward to hearing from the Department of Commerce and their decision on preliminary tariff determinations over the next few months. In Pulp, prices declined and our shipments were lower due to the low trend purchases from China following an extended Chinese New Year, but our shipments per day improved as we exited the quarter. We are entering the quarter two pulp maintenance outage season. So, we expect some stability in the near term in softwood markets. In the quarter, we also begin to do the initial work for the fluff pulp conversion project at our Ashdown mill. We received permit approval from the Arkansas Department of Environmental Quality, the equipment is ordered and on schedule, and we hired the needed engineering talent. With the conversion of the Ashdown paper machine into a world-class low-cost fluff pulp line, we will expand our position with customers and capitalize on our reputation as a sustainable, high-quality supplier of fluff pulp. In Personal Care, we did have another quarter of steady progress. Currency continues to be a headwind but the underlying performance of our businesses was strong. Same currency sales increased 3% year-on-year, as volumes are up nicely across a number of our brands and categories. Of note, sales volumes in adult incontinence rose mid-single digits as we continue to benefit from innovation, expansion of the product line, and category development. Our North American business significantly improved, while results in Europe were in line with expectations on the back of their record fourth quarter performance. Our cost savings initiatives also continued to build according to plan. We completed the transition of several outsourced adult incontinence SKUs to Domtar manufactured product. And we further reduced unit costs through better manufacturing uptime and procurement initiative savings. I'm pleased with our overall progress, but we've got more work to do to deliver the sales growth and cash productivity the business is capable of delivering. Looking forward, we will continue to focus on completing our product assortment, enhancing consumer and category insights, and delivering innovations to drive additional growth. In quarter two, we will begin shipping volume from new business we won late last year and earlier this year. In addition, our new bladder control pad line is in the process of starting up, which will complete our retail adult incontinence product assortment. We expect to realize the benefit of lower oil derived costs to further support our results in the second half of the year. Now moving to capital allocation, our Board authorized a 7% increase to our regular dividend and an additional $300 million expansion to our share buyback program. The expansion of the share repurchase program and dividend increase reflect our confidence in our growth plans and continuing ability to generate cash flow. We will continue to pursue a balanced approach to the deployment of our capital while maintaining the flexibility to execute on our growth strategy. Finally, we have no new updates to provide on Master Limited Partnerships. The IRS has lifted the moratorium on issuing private letter rulings and is expected to provide further guidance. As we have more information to share, we will keep you informed. To conclude, we are off to a solid start in 2015 and we remain optimistic for the balance of this year. We are focused very clearly on our customers, on our cost position, on generating cash and on our growth initiatives in order to build a stronger and more stable future for Domtar. Now, turning to our outlook. Our Paper shipments are expected to trend with market demand that should benefit from lower import volumes in North America. Pulp demand for the remainder of 2015 is likely to be dominated by customer inventory swings. The second quarter will be affected by seasonally high maintenance activity in our Pulp and Paper business as we move into the annual shutdowns at some of our major facilities. Most input costs should return to more normal levels for the remainder of the year. Finally, Personal Care results are expected to benefit from market growth, cost savings from the new manufacturing platform, and favorable oil-based input costs. So with that, I would like to thank you for your time and support, and I'll turn it 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 to as many people as possible. So, John, can you open up the lines for questions?

[Operator:]

Yes, absolutely. Your first question today will come from Mark Connelly with CLSA. Please go ahead.

[Mark W. Connelly:]

Thank you, two things. First, can you give us an update on how you are thinking about M&A? I mean you had a lot going on with the expansion and all that, but a year or so ago you talked about looking for critical mass. And so, I'm wondering is that still the priority that it was then? And then the second question is just about softwood fluff pulp, that market hasn't turned out to be as robust as people expected and I'm curious beyond China coming back seasonally, I guess what I am really trying to get at is how important are these fluff pulp conversions to bringing that market back to the strength that we were expecting early on?

[John David Williams:]

Mark, good morning, let me, I'll start with M&A, if I may. So just to sort of remind ourselves, our criteria when looking for M&A typically has been and remains really that it should be fiber based that we can generate growth from it and the business has to be competitive and must remain sort of low cost where we feel we can get value. So, we remain I think pretty disciplined when looking at M&A. Obviously, we have that objective – over time, can we find $300 million to $500 million of EBITDA from growth businesses. Why are we doing that? Because obviously the core business – some aspects of the core paper business are obviously in decline and also to generate more stable cash over time. So, I think when you look at that, that still the lens, if you like, through which we look at M&A and are determined, as I've said a number of times I think, to do something of an appropriate size and an appropriate value where we either feel we're not betting the store. So, that stays very much in place. So, if you look at the absolute pipeline, there are one or two things that may be of interest out there over time and we will always take a look if we feel it's appropriate. Does that help on that one?

[Mark W. Connelly:]

Yes. That's very helpful. Thank you.

[John David Williams:]

All right. On fluff pulp, I think what you have to look at, 5.5 million to 6 million ton market, growing probably at about 3 million tons a year. We, with our Lighthouse brand...

[Daniel Buron:]

3%.

[John David Williams:]

Excuse me, 3%. We, with our Lighthouse brand, have a pretty I think compelling story to tell our customers in terms of quality and the things they need from fluff pulp. And in addition, of course, we own a business that is a major user of fluff pulp. So I think that gives us some pretty good insights. Now when we look at sort of the expansion that's happening, we've got a very good sales plan, it's pretty granular, that is very granular. We know the customers we're going to approach; we know how we're going to qualify; we know we're going to be a low-cost producer of a strong product, as I said earlier. And it puts us with a million tons of fluff pulp in a year or two which suggests we're meaningful supplier. I think one of things we feel differently about now is because we will have two facilities, there are some customers who I think will be more comfortable buying from us just on a security basis, i.e., if you only got only one mill, a number of people I think don't buy from you as they might otherwise do so. So, my view is I think we're in a pretty good place. Does that help?

[Mark W. Connelly:]

Yes. Just – so, as you think about the softwood fluff – the softwood market, the paper grade market, that's – is it critical to get these tons out of that market to bring it back into balance?

[John David Williams:]

You mean specifically pulp sold for paper in softwood grades, is that what you're talking about?

[Mark W. Connelly:]

Yes.

[John David Williams:]

Yes, okay. Let me talk about our portfolio because I think it's quite important. It's a great question. If you look at where we sell now the majority of our softwood, we're actually selling into tissue manufacturing as distinct from paper manufacturers, even in the developing markets in China. So, we don't really – we feel we've moved our portfolio quite strongly to the tissue grades and other places, I mean we have a great relationships with Hardi out of Kamloops. So I was selling some specialty pulp into Hardi Board which is really sort of cement equivalent. So, we've very, very small exposure to selling softwood pulp into paper grade.

[Mark W. Connelly:]

Very helpful. Thank you.

[John David Williams:]

All right. Thanks.

[Operator:]

Thank you. Your next question will come from Paul Quinn with RBC Capital Markets. Please go ahead.

[Paul C. Quinn:]

Yes. Thanks very much and good morning.

[John David Williams:]

Good morning, Paul.

[Paul C. Quinn:]

Just a question on the cost, I saw the fiber costs up $8 million, and energy $8 million, do you expect that to come back in the next quarter, and what about the balance of the year?

[John David Williams:]

Yes, so I think as I said in my published remarks, we have our expectation well reduced to more normal levels, if you like Paul. Obviously embedded in wood cost is the fuel cost but actually a lot of people I think in the transportation industry are using kind of fuel reduction to build margin and actually some rates are increasing. So, my guess would be we should see it come down a little bit going forward but I don't think it's not going to come down dramatically.

[Daniel Buron:]

Let me add, John. The Q1 is typically, in terms of usage, a little bit more expensive and we had a very cold winter this winter again. So, there is probably – let's call that $6 million of weather or winter-related issue will cause increase in the number you are referring to Paul.

[Paul C. Quinn:]

Okay, that's helpful. And then just a question on the comment that you made on paper shipments, where you said 2015 probably dominated. I don't know if dominated was the word by customer inventory swings, may be if you could just expand on that?

[John David Williams:]

I think it was Pulp, Paul. I think what we saw certainly in the first quarter, of course, we saw suddenly the Chinese weren't buying, then they were buying, that allowed some people to move price particularly on hardwood. So, I think it's that kind of inventory movement around the marketplace that will dictate what happens in terms of some of the dynamics there. What you are reading right now is a lot of traders buying very heavily in China because they've got low stock. If they move through that behavior and then perhaps demand doesn't really happen for them, obviously that will one effect. If demand really picks up, I think there's quite a lot of runway potentially in softwood. I think what is very interesting now is that in China, softwood and hardwood are actually the same price pretty much. I mean within $15 to $20 and if you recall, a few months ago, the differential was about $150. So that might mean that some of the tissue manufacturers, who perhaps have been thinking about, because of that price differential between hardwood and softwood, they've been running a little bit more hardwood, might come back to softwood, which might create some positive dynamic. So I think it's going to be those kind of things that are going to really dictate how that market operates over the next year or so. Does that give you a bit more color?

[Paul C. Quinn:]

Yes, that's helpful. Thanks very much.

[John David Williams:]

Okay, thank you.

[Operator:]

Your next question will come from Mark Wilde with BMO Capital Markets. Please go ahead.

[Mark Wilde:]

Yes, good morning John; good morning, Daniel.

[John David Williams:]

Good morning.

[Mark Wilde:]

I have a couple of them. One, John, just on the question of paper imports, it seems like there is kind of a put and a take here, and one is that you've got this trade case and so maybe that's making some exporters a little more cautious. At the same time, I think even since you filed the case, the dollar is stronger. So that incrementally should be drawing in more paper because this market has become more attractive for people. So I wondered if you could just talk about the interplay of those two things as you see it. And then, second, there is this story out of Brazil that Suzano is going to put in a hardwood fluff pulp line. And I wondered, without getting too technical, if you can kind of talk about how you see the kind of the threat from fluff made out of hardwood?

[John David Williams:]

Certainly, so let me talk about the import question, first of all. You've seen year-to-date they are down fairly considerably. I think to your point, Mark, that's really been about people thinking well depending on the outcome of the trade case; I don't want to be stuck with inventory in market if you like. So I think that's what has driven a little bit of caution from some of these people. I do actually think also – if you look at what's been happening in some of the ports, I do think it's a little bit more opaque than unusual because it's difficult to know is this stuff on the sea, is it in the port, is it stuck and if you – there is an interesting article in the Wall Street Journal this morning, if you look at US ports that suggest actually that supply chain is still going to be under a bit of a stretch. So, I think there are customers now thinking, "Well, am I really wanting to give my supply chain to that?" I think with the stronger dollar, we so far haven't really seen that impact in the very short term and hard to build a supply chain just on currency. And of course, in the last couple of days, things have changed slightly between the dollar and euro; I think the euro at its lowest is $1.05 and I think it's about $1.11 right now.

[Mark Wilde:]

Yes, that's right.

[John David Williams:]

So, I don't, I haven't seen that because obviously you've to get an order, you've got to ship product. There is lot of things going to happen if you just start doing that for a deal. So, I don't think that's going to have much impact. On the Suzano question, I think they also said it's for the local market. I don't know if they're thinking of some kind of hybrid fluff that's sort of okay for a bit of substitution, but I don't know enough to be frank to say whether they can substitute softwood fluff pulp so to speak, and I do think a lot of major customers are going to be pretty leery because actually the diaper business, the adult diaper business, the feminine hygiene business, it's a very technical business in terms of getting approval for product. So, I honestly struggle to see how they're going to position that product in global markets; maybe in the local market, there's a different dynamic.

[Mark Wilde:]

Yes, okay. I just – I go back 40 years ago, Brazil was a net importer of pulp and nobody wanted to use eucalyptus pulp for much of anything.

[John David Williams:]

Right. You make your point – you make your point.

[Operator:]

Your next question on the line will come from Sean Steuart with TD Securities. Please go ahead.

[Sean Steuart:]

Thanks, good morning, everyone.

[John David Williams:]

Sean, good morning.

[Sean Steuart:]

Couple of questions. With respect to Personal Care, it feels like things have stabilized there. Can you give some context, John, on – with respect to the new manufacturing platform and the cost savings you're anticipating there, how quickly and what magnitude should we expect that to roll out? It's a difficult segment to forecast given the absence of any volume metrics or anything along those lines.

[John David Williams:]

Right, well, I mean, I think over time, I am sorry to be so vague but I do think over time that benefit will come through. Certainly in the first quarter, we had fairly substantial benefit from those cost savings and feel pretty good about them to be honest and there is no reason why they won't keep running through the business. And we do expect further margin improvement throughout the year from the cost savings and in home manufacturing, bringing the manufacturing back into Domtar, if you like, rather than just using third parties to manufacture. And we will get a little bit of a tailwind from lower oil-based raw material. So, my view this year, I'd like to see kind of what we said before which is those mid to high-teen EBITDA margins coming through that business. Does that help?

[Sean Steuart:]

That does.

[John David Williams:]

Okay.

[Sean Steuart:]

Second question, this focus on growth with respect to your company. Can you speak to any assets you have in the system that you might consider non-core and may be not identify any specific assets but, as you rationalized the operating platform, is there anything you might consider non-core and would be willing to divest?

[John David Williams:]

Okay. I mean, obviously I wouldn't talk specific assets. But I think if you think of the portfolio of the business, you've got a growing specialty paper business, you've got a growing pulp business at GDP. Sometimes you see that growth; sometimes you don't depending on – we divested a hardwood mill, if you recall, some years ago. But obviously, when we have Ashdown fully up and running, we're going to have 2 million tons of pulp to sell. And then of course, you've got the core business and within the core business, some of those grades are doing slightly better, but overall it's in decline. So we think the job there is to find the repurposing opportunities for those mills that are challenged, witness Ashdown fluff pulp. I think if you put all that together, you'd say our job over time is to generate more from those growing businesses to sort of minimize the impact that a 3% to 5% decline has on the core paper business. So that's how we see the portfolio, if that helps.

[Sean Steuart:]

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

[John David Williams:]

Okay, all right. Thank you.

[Daniel Buron:]

Thank you.

[Operator:]

Thank you. Your next question will come from Alex Ovshey with Goldman Sachs. Please go ahead.

[Alex Ovshey:]

Thank you. Good morning everyone.

[John David Williams:]

Alex, good morning.

[Alex Ovshey:]

John, on the paper business you outperformed the market in the first quarter and then the outlook is that you would be more in line. So the question is, what changes beyond the first quarter that would preclude you from continuing to outperform?

[John David Williams:]

That's a great question. I think I might ask myself and marketing people the same question, Alex. If you actually look at it, the reason this has happened is because a number of our customers, with whom we have strong relationships, have been if you like winning in their markets. It's not really we think for us to second guess whether that continues to happen. So I think we've been relatively conservative in saying we'd expect to grow at market. Interestingly, if you look at April on a daily sales rate, we're almost exactly where we were in March. So, we might be being slightly conservative in that, but I think it's a fair assumption.

[Alex Ovshey:]

Okay, that's helpful, John. And then on the pulp business, would you be able to shed some light on how the contracts for fluff differ relative to the NBSK business, if there are any sort of take or pay clauses in fluff, just any kind of key differences between the two?

[John David Williams:]

Well, interesting question. So, I mean I don't want to go into the details, if you don't mind, because obviously it's different customer by customer. But there is no doubt fluff, because it's so integral to the absorption levels and the way it has to interact with the super absorbent polymers and absorbent cores for these key incontinence and key baby and feminine products and the technology which goes with that, the qualification ramp up is very often slightly longer. However, I would argue most customers then will talk about a supply agreement that may last a year in terms of guaranteed volume and then if they are renegotiating, they are going to renegotiate around the volume going forward. Typically there is some kind of price mechanism in place. So, when you got through the technical hoops, they have a product that works in the marketplace. They are inclined to stay with you. But, they many have two or three suppliers where they are kind of balancing volume based on where you are shipping and how competitive you are on freight, et cetera. So, you put all that together, once you've really got your year's sales plan in place and you've done the negotiating, it's pretty reliable in terms of where the volumes comes from.

[Alex Ovshey:]

Appreciate it.

[John David Williams:]

That gives you a bit more color?

[Alex Ovshey:]

That's great. Thank you very much, John

[John David Williams:]

All right. Thank you.

[Operator:]

Your next question will come from Stephen Atkinson with Dundee Capital Markets. Please go ahead.

[Stephen Atkinson:]

Good morning.

[John David Williams:]

Stephen, good morning.

[Stephen Atkinson:]

I have to apologize for the bad hearing but how many shares outstanding? I didn't get the number.

[Daniel Buron:]

63.7 million.

[Stephen Atkinson:]

63.7 million, thanks. I have better questions, in terms of the Personal Care, are there additional lines coming on, or are you finished on that and just going to optimize what you have?

[John David Williams:]

We have two more coming in, Stephen, this year. So, there might be a little bit of noise around those in terms of the cost of start up. But, now we're so far in, we are better at it than we were. So, we're going to get productivity up faster than we did at the beginning I think. And of course, we're now better resourced because we have build our business from a number of separate businesses.

[Stephen Atkinson:]

So, like the – if I can call it the geographic expansion then will help you on the logistics?

[John David Williams:]

Well, exactly. Remember now, those – say for example, we have a very strong business in Spain, we want to build – we want to really make sure we protect that. We put a pan-European sales and marketing organization in place. So now, there was some sort of white spaces in the geography in Europe that we're hoping to fill both from Aneby and from Toledo facility in Spain. And if you look at our Waco business, where we have the baby diaper plant, obviously put machinery in there for adult incontinence to make sure we can reach the West Coast effectively. So, that's how we're looking at it now.

[Stephen Atkinson:]

And I assume that you have additional capacity – look I'm not looking for numbers, but you're not...

[John David Williams:]

No, no – we have headspace that if we get the market growth plus some specific wins, yes, we still – we think that's got a lot of run rate from today's EBITDA level with the asset base we'll have in place by year end.

[Stephen Atkinson:]

Great. And in terms of the $3 million currency headwind, is that a one-time deal?

[John David Williams:]

Well, there is two issues in it. There is the translation issue from the euro. So today, that's a bit less than it was a few days ago. And of course, there is a number of currency moves within the portfolio. So the UK pound to euro, the euro to Swedish krona. So of that, some of it is a pure translation, but some of it is actually embedded in the business.

[Daniel Buron:]

Except it's about $1 million that is within the business, which I call kind of a real currency headwind, and there is $2 million that is actually just converting our European business EBITDA into US dollar.

[Stephen Atkinson:]

Great and last question. In terms of the, should we say conversion at Ashdown, now assuming – I'm not asking to comment on the duties, but assuming there is a duty of significance. Then, would you be able to swing back into paper like I know you're doing one machine, but let's say the North American market is stronger than, should we say, it is right now, then is there a possibility to do that to meet that market?

[John David Williams:]

Well, let's talk about that, Stephen, I think that's a great question. So if you look at it, of course, there will still be two paper machines in Ashdown post conversion. In addition, if you look at our network, a number of our mills, what they really like to do is cut size and patently the trade case is all about cut size. So there are two things we would do, there is a number of grades that we're in now really because there wasn't sufficient cut size, so we think long and hard about our grade mix to make sure that we could manufacture more office paper. The other thing we are looking at and we have a plan for, we're not just looking at it, we've got a plan is obviously our converting capacity, because most of this stuff will have to be converted and then go through sheeters. A number of our sheeters now are maybe running at 3 to 5 days, so if we open that to 7 and made some great choices in the core business, we're confident that we could supply the volume required.

[Stephen Atkinson:]

Oh, that's great. So, you have it in-house, super. Thanks so much.

[John David Williams:]

All right.

[Operator:]

Your next question on line will come from Chip Dillon with Vertical Research Partners. Please go ahead.

[Chip A. Dillon:]

Hi, yes, good morning, Daniel and John.

[John David Williams:]

Good morning.

[Chip A. Dillon:]

First question is on the, when you look at the – I don't know if you have done this in a while but if you step back and you look at some of the light paper dynamics, I know we sort of have seen about a 3% or 4% decline, but it seems to be choppy. And I bet below the surface, there is a lot of movement and it just strikes us that we've lost a lot of some categories, obviously there is few business forms left out there. But, on the other hand, it seems like that the postal service is indicating growth now in third-class mailings and I know some of that is coated paper. And so, are we seeing anything below the surface that might actually be propping up white paper demand, especially as advertisers are having more and more difficulty reaching people on television outside of live sports?

[Chip A. Dillon:]

Well, I think that's interesting. It's a marketing effectiveness question, almost more than it's a paper question. So if you look at direct mail, a lot of people now like direct mail. So one of the things we're seeing actually this year, particularly is a lot of mailing from the financial institutions looking for new credit card, new all that kind of stuff. And they get a higher response rate from that than they do obviously from, how would you put, e-advertising and e-mailing. Now, plainly the cost percent is that much greater, but actually the impact in terms of getting new customers is much more effective. So I think there are people out there they're thinking that is now seen as a less sort of obtrusive way of trying to get to consumers than calling them up during supper, and also gets a much better response rate. So I think in the marketing mix from various companies, direct mail has its place and will continue to have its place, Chip. So I think that's part of what's doing this. In terms of certain grades, some of the converting grades therefore – actually our converting business, is performing quite strongly, I think for that very reason.

[Chip A. Dillon:]

Okay, this is an interesting observation. Now switching gears a little bit. When you look at Personal Care, we noticed sort of a modulation in talking about your businesses in the last call, where you're switching to something called growth businesses and of course you're including fluff in that. Will there be any thought in the future of kind of thinking about fluff and Personal Care in the same vein? I know that competition isn't backward integrated. I know there are capital intensity issues there but – and I guess, as a follow up to that, could you update us on what your feelings are about making acquisitions in Personal Care in the near term?

[John David Williams:]

Yes, well, I think you'd have to be very – to sort to see it, I think if I interpret your question as, would you see it as a business, is that what I understand from your question?

[Chip A. Dillon:]

Yes. As not only fluff as a business, but as maybe something you would associate more with Personal Care than with pulp and paper.

[John David Williams:]

Right. So, I think you'd have to feel that the level of integration, i.e., what you were really selling to yourself was considerably – had grown considerably from where it is today for us. Think of it in those terms. So, I think that's not appropriate now, it might be appropriate in the future but I don't think now is quite the time. In terms of M&A, just to be clear, we're really saying M&A in growth businesses. So, it's not specific to Personal Care, but it is specific to fiber based businesses. So, you wouldn't see us build a business I think outside fiber. But, we're looking across a broader spectrum than just Personal Care. In the perfect world, if we can build more critical mass in Personal Care and that sort of – and that is what is available, we will. If that's not available, we'll think about other fiber based areas. Does that give you a bit more clarity?

[Chip A. Dillon:]

Yes, it sure does. Thank you.

[John David Williams:]

Okay. Thanks.

[Operator:]

Your next question will come from Anthony Pettinari with Citi. Please go ahead.

[Anthony Pettinari:]

Good morning.

[John David Williams:]

Anthony, good morning.

[Anthony Pettinari:]

You referenced the strength you saw in specialty paper and I think you referenced food packaging. I'm wondering, as you grow new businesses, if you would think about conversions into more specialty paper or there is opportunities to get into higher strength paper based packaging, how capital intensive could that be? If you just remind us, are these applications that are competing or displacing boxboard or even containerboard?

[John David Williams:]

Not really, no. So that, they are more specialty, so they might be paper wraps, they might be quick service restaurant paper wrap, they might be burger wrap, they are more that than kind of a substitute for a box, to answer your question. If I could talk about it, I think you raised a very interesting point. So, take Marlboro, now we've converted Marlboro to handle those specialty grades, largely those grades from Appvion because of course that's a very light weight, 25 pound paper versus what we used to doing. I have to say, all credit to our operations folks, I think they have done a fantastic job in doing that. But you need two things to make that really work for you. You need specialist grades with a different dynamic and you also need them to have sufficient volumes that you want to put them on a big machine. So one of the ways we use our network is some of our mills will actually trial product. They will manufacture those initial tons and then we will think about moving those tons to some our bigger machines to make sure actually we are going to make a better margin out of them than we could do if we just made them at some of the smaller mills. The issue is a lot of those specialty grades don't have sufficient tons to make that work. And what I think we'd be very concerned to do is to take the complexity of specialty, put it into a larger mill because my experience on that has been typically the complexity wins and the mill loses.

[Anthony Pettinari:]

Right, right.

[John David Williams:]

So, I think it will be specific cases if the opportunity is there for us, yes.

[Anthony Pettinari:]

Okay, okay that's very helpful. And then, as you get bigger in fluff pulp and you get bigger in Personal Care, are there going to be situations where you are selling fluff to companies that you are competing with on the Personal Care side, has that come up in conversations with customers, or do you see that as an issue potentially?

[John David Williams:]

Well, we are obviously completely transparent. So, and the answer to your question is absolutely yes. I mean there are people with whom we compete, who we also sell fluff pulp to, and they know we know and it works. So, I don't think it's – there are one or two who say no, but on the whole, it works pretty well. So I don't think it's an issue.

[Anthony Pettinari:]

Okay, that's helpful. I'll turn it over.

[John David Williams:]

All right. Thank you.

[Operator:]

. Your next question in line will from George Staphos with Bank of America. Please go ahead.

[George L. Staphos:]

Thanks, everyone, good morning.

[John David Williams:]

Good morning, George.

[George L. Staphos:]

How is everybody? I appreciate the details. I guess the first question I had back to Personal Care, there was some improvement in margin, we know you have two more lines coming. If we exclude those two lines from the discussion, given the operating efficiency that you currently have line of sight on for existing business, is there a way to size at all what kind of additional margin that might have meant in the first quarter?

[John David Williams:]

Well, let me try and unpick the question, George, if I may. So if you look at, there are two things that are happening. So there is the margin coming back into the business from not having third parties manufacture, placed on new machinery where we're just building up the productivity. If you put all that together, that's a fairly reasonably sized number and that number will both keep running through the business and it will improve as the productivity on those machines per se goes up. In addition, as the new volume comes in, both from a market growth standpoint and from us winning new business, that will also help. So, I think what we'd be hopeful for over time is that high teens, mid to high teens, EBITDA should come through from that effort. So, although we need to win some new business, probably half of our EBITDA improvement is also about embedding those cost benefits and making sure we got the productivity up. Does that help?

[George L. Staphos:]

I think so. So, roughly half of the path to high teens whatever high teens might be in any one model, that's going to get, we're going to get there from the two things that you enumerated at the beginning of your answer.

[John David Williams:]

Exactly.

[George L. Staphos:]

Okay, thank you for that incremental detail, that's helpful.

[John David Williams:]

Okay.

[George L. Staphos:]

Now, if we look at the fluff market, and this question I think has been asked in the past in different ways, certainly you're adding capacity, you have a right to add capacity based on your performance. Others have come up with the same great idea and it would be helpful if you reminded us what you think the barriers to entry are in the fluff market. Is it around, I'm sure it's all of the above, but what are the keys in terms of source of fiber, knowhow, commercial and regulatory testing, tell us why we're not going to start seeing a further swath of conversion that starts changing what your forecast economics are here down the road?

[John David Williams:]

Sure. I think of all the grades that we sell, so I would not include dissolving pulps especially the higher grades of dissolving pulp in this, this is by far the most technical sell for a number of reasons. Of course, it has to go through somebody else's process, so they have to put it through hammer mills, they have to really fluff it back up again from the real that we're sending them, they have to make sure it's got the absorbancy, they have to make sure it's got the cleanliness, they have to make sure it interacts effectively with the super absorbent polymers. So, they have a lot of engineering and product and consumer experience that relies on a very stable day in, day out product coming to their door. So, as a consequence, they're very careful as they qualify you and they're looking to make certain that they can re-pulp very effectively, i.e., the thing is they don't have to beat the living daylights out of the real to make sure they've actually fluffed it up. Obviously, things like wicking rates are incredibly important to them. So, this isn't really pretty technical product. But once you've gone through the hoops of qualification, they're really not going to sit there and say, well, for the sake of a we'll take a risk on our product, because typically this is being sold to major brands. So, to my mind, you got to have a very good technical story, we have beefed up dramatically actually the technicians and the engineers who make certain it sits with the customer. I do think we have one thing that's relatively unique, which is that we're also a manufacturer. So, we're not going to take risk with our own business, but I think that let some of our customers know actually that we have useful insights that will also help them, and we branded it. So, our Lighthouse brand of fluff pulp, which is what we launched from Plymouth, when we made that conversion, has an extremely good reputation in the marketplace and I think all of that matters.

[George L. Staphos:]

Thanks for that, John. It's late in the call, I will turn it over to next guy. Thanks very much.

[John David Williams:]

Thank you.

[Operator:]

And we seem to have no further questions at this time. I will turn the call back over to management for any closing comments.

[Nicholas Estrela:]

Thank you. So, as a reminder, we will release our second quarter 2015 results on Thursday, July 30, 2015. Thank you for listening and have a great day.

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. You now disconnect your lines and have a great day.