Domtar Corporation
Q1 2012 Earnings Call Transcript

Published: 27 Apr 2012

[Operator:]

Good day, ladies and gentlemen. Welcome to the Domtar Corporation First Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Today is Thursday, April 26, 2012. I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, Mr. Bossé.

[Pascal Bossé:]

Great. Thank you Valerie, and good morning. Welcome to our first quarter 2012 earnings call. Our speakers today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. John and Daniel will begin with prepared remarks, after which, we will take questions. During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of our website. As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements and are subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings with the Securities Commissions for a listing of those. And then 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 the call over to John.

[John D. Williams:]

Thank you, Pascal. Good morning, everyone. This morning, we reported first quarter EBITDA before items of $210 million. Both our Paper and our Personal Care businesses delivered according to plan in the first quarter. However, these results were overshadowed by trough market pulp prices and higher costs when compared to the fourth quarter. Moving to my business review in Papers. Volumes were modestly higher than quarter 4, driven by stronger demand for commercial printing grades, as well as some seasonal strength. Worth noting is the decline in our paper volumes from prior year, which is mostly attributable to larger-than-usual export volume in the first quarter of 2011. In specialty paper grades, our volumes continue to grow. Specialty and packaging papers increased to 13% of our total paper shipments, mainly through the realization of new business opportunities. The recent supply agreement with Appleton Papers will allow us to further expand into areas that provide a stronger platform for growth while compensating for the decline in high-volume communication paper grades. In Pulp, the negative impact of market pulp prices affected our quarterly results by about $15 million versus the fourth quarter. Nonetheless, the announced price increases will positively affect our financial performance in the second quarter. Finally, we announced and completed the acquisition of Attends Europe, further expanding our Personal Care segment. Daniel will discuss further, but we incurred acquisition costs that affected our SG&A line. We will realize a full quarter of earnings in our Personal Care segment beginning in the second quarter. In summary, we had a good start to 2012 despite lower prices in pulp. Our Paper business continues to deliver a strong performance. We sold all of our paper production, maintained margins, continued to improve our product mix and signed a key supply agreement with Appleton Papers. With these brief remarks, I'll turn the call over to Daniel for the financial review, and I'll come back with the 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 net earnings of $0.76 per share for the first quarter compared to net earnings of $1.63 per share for the fourth quarter of 2011. Adjusting for items, our earnings were $1.65 per share in the first quarter compared to earnings of $2.49 per share for the fourth quarter. EBITDA before items amounted to $210 million compared to $243 million in the fourth quarter. Cash flow provided from operating activities amounted to $30 million, capital expenditures were at $29 million, therefore, free cash flow totaled $1 million. Excluding premium paid in relation to our tender offer on certain notes, free cash flow was $48 million in the quarter. Turning to earnings reconciliation on Slide 5. Our first quarter earnings included the following after-tax items

[John D. Williams:]

Thank you, Daniel. We've had a good first quarter, with solid execution in the core business, and we took significant steps on a strategic front to improve the business for the future. In paper, we signed an historic 15-year supply agreement with Appleton Papers valued at about $3 billion. As part of this agreement, we will further grow our long-standing business relationship with Appleton by becoming their lead supplier of several uncoated base papers for the manufacturing of specialty papers. For Domtar, this is an opportunity to immediately repurpose high-volume communication paper capacity to specialty paper grades while securing a growing business for the long term. In Pulp, price pressures in global markets are to further down with adjustments throughout the first quarter, but prices did bottom out late in the quarter. While our Pulp business was only marginally profitable in the quarter, we have significantly improved our cost position and grade mix since the last down cycle. We expect a gradual improvement in pulp prices after implementation of price increases on NBSK and fluff pulp in most of the geographies we serve. On the cost side, we had increases during the quarter, notably for sodium chlorate and for starch due to renegotiation following the exploration of favorable contracts that ended in 2011. With these new contract prices reflected in our raw material costs, we expect our input costs to remain relatively flat from the first quarter. We also announced and completed the acquisition of Attends Europe in the first quarter, which is now under the leadership of Mike Fagan, who now has responsibility over the whole Personal Care business. Our strategy will be to initially grow the business in the markets we're in. We now own the Attends brand name in most geographies, providing us with opportunities as we look to expand and significantly grow our Personal Care segment in the years to come. We believe our Personal Care business segment represents a solid foundation to help us attain our target of $300 million to $500 million of EBITDA from growth businesses in 5 years time. Turning to our outlook. Pulp demand for the remainder of 2012 is likely to be dominated by consumer inventory swings, especially in China, but we do expect an overall improvement in prices in the quarters ahead. In paper, our volumes are expected to trend relatively steady for the quarters to come, with a shift in our product mix as we gradually phase in the 15-year Appleton deal that we expect to reach full steam by the fourth quarter. Looking forward to the second quarter, we'll see the full impact of results for Attends Europe and the increase in major maintenance costs as we move into the usual annual shutdowns with several of our major facilities. To conclude, our teams are implementing our strategic roadmap very effectively, delivering attractive financial returns and increasing value for our shareholders. We did pause on our share buyback activity in the first quarter but remained firmly committed to returning the majority of free cash flow to shareholders, using the $458 million left on the current $1 billion authorization. Finally, health and safety is a sign of whether our business is being run effectively, and we will continue to focus on that very closely. Thank you for your time and support, and I'll turn it over to Pascal.

[Pascal Bossé:]

Great. Thank you, John. So to take questions, we have John and Daniel, but we also have Dick Thomas, Senior Vice President, Pulp and Paper Sales and Marketing; as well as Mike Edwards, Senior Vice President, Pulp and Paper Manufacturing. [Operator Instructions] So with that, Valerie, we're now ready to take questions.

[Operator:]

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

[George L. Staphos:]

The first question I had was on Appleton. Might there be a couple of quarters over the rest of this year where rather than it being a like-for-like exchange with your existing uncoated freesheet? Wondered if you might have some incremental tonnage as you ultimately manage that shift to higher value-added papers. And then I have a couple of follow-ons.

[John D. Williams:]

I'm just trying to understand what you mean, George. What? That we'd actually sell more than the run rate because we're building stock and trialing. Is that what you mean?

[George L. Staphos:]

Well, basically. I mean, the way ultimately Appleton was presented to us, at least our interpretation was that it was more or less not going to add incremental tonnage. You were just going to use it as a way to replace existing uncoated freesheet demand that you have right now. Long term, that obviously looks to be a very good strategy. I was just wondering in this transition if you, by the premise of that, whether there might be some quarters where you actually still have some incrementally higher tonnage than you will ultimately have as you manage that transition.

[John D. Williams:]

I mean, it's possible. I don't think I can quantify it for it to be meaningful. If you mean well, we think the business declines at about 3%, but in the short term, it may not. And therefore, as Appleton clicks in for a couple of quarters, we might see a bit of a bump. I mean, it's possible. Just to give you sort of the sense of the Appleton deal, we already did about 50 million tons -- excuse me, yes, 50 million tons with them -- 50,000 tons, pardon me. We have now increased that by 120,000 tons. So the run rate at full tilt is 170,000 tons. The issue is that extra 120,000 versus the commodity system is closer to 200,000 because of the lightweight and the time it takes to run. So that's what it does to the system. So you're going to see that. So if the core business were not to decline at the rate that we always expect and that we share with you, it obviously would look like sort of net extra business, so to speak.

[George L. Staphos:]

Okay. That's helpful color, especially on the basis weight, if you will, shipped. In terms of the $17 million in price mix that you called out, I assume that's mostly from the fluff pulp side, but was there any other components to that $17 million positive?

[Daniel Buron:]

Most of that is paper price, George. Mix is a little bit positive in Paper. It's more or less flat in Pulp in the quarter.

[George L. Staphos:]

Okay. Fair enough. I appreciate that, Daniel. Last question and I'll turn it over. You've called out the $4 million of incremental maintenance expense. Since you did, I figured I would ask why -- what drove that, if there was anything significant. And also, if you could comment on current run rate pricing in Pulp on average versus what your average in the first quarter was, that would be helpful.

[John D. Williams:]

Yes. Certainly, on the maintenance, it's sort of across the piece a bit. Once you shut something and you really have a look, you occasionally have to spend a little bit more money. So I don't think it's anything systemic, George. And I'll let Daniel talk to the...

[Daniel Buron:]

I just want to add on the maintenance. It was -- when you're looking at Pulp versus Paper, it was a heavy quarter for Pulp maintenance. When you look at our Pulp profitability in the quarter and you compare it to Q4, there was a lot more Pulp maintenance in Q1 than in Q4. So the $4 million more is in Pulp maintenance versus what we guide the Street to -- in Q4.

[George L. Staphos:]

And then the price run rate versus average?

[Daniel Buron:]

Yes, price in run rate, I think in both cases, Paper and Pulp, the price -- average price of our product at the end of the quarter were very, very similar than the average of the quarter. So I think it's a couple of dollar up on Paper and $2 to $3 up on Pulp. So what's been announced, I think, will be more seen in the second quarter.

[Operator:]

And our next question comes from James Armstrong of Vertical Research Partners.

[James Armstrong:]

The first one is on the shipment levels. According -- well, the trade publications in January and February, they were roughly flat year-over-year, but they were down a lot in March. Was that just due to higher -- to harder comps or was there something else going on in the market?

[John D. Williams:]

No, March was dramatically high in prior year, James, dramatically high. So I don't think -- we don't see that there's been some shift for us. We had a lot of export in the first quarter last year that we haven't had this year. So I think that's part of the effect from us.

[James Armstrong:]

Okay, that helps. Switching to the Attends acquisition, could you help us a little bit with this segment? What should sales look like quarter-over-quarter given the timing of the acquisition? And do the Attends Europe margins roughly equate to the Attends U.S. margins? Is there much of a differential there?

[John D. Williams:]

Let me, if I may, just talk to what the division on a run rate basis should look like. I mean, it doesn't sort of shift around too much quarter-to-quarter other than we should participate in that market growth annualized of about 5-or-so percent on the top line. The business at a dollar run rate basis now is about $370 million at run rate, $370 million to $390 million. And EBITDA that we sort of said to the world is $70 million to $75 million. So that's what you should be seeing. And if you look at the first quarter, on the business we own -- that we own for the full quarter, it was pretty much on that run rate. And the month where we've owned Europe is pretty much on that run rate. So at the minute, we're feeling pretty comfortable around those numbers.

[James Armstrong:]

That's helpful. And lastly, regarding the Appleton deal, is the market -- is the pricing set to market prices? And also, do you see any other opportunities to do a deal like Appleton?

[John D. Williams:]

Well, I mean, obviously, the pricing to be frank is between us and Appleton, and we were already the supplier. So we already have a commercial relationship. Are there other opportunities? We'd obviously scan for them, but I don't think they're going to be thick on the ground, to be honest with you, James.

[Operator:]

[Operator Instructions] And our next question comes from Paul Quinn of RBC Capital Markets.

[Paul C. Quinn:]

Just a couple of questions. One, on export volumes on the paper last year, you seem to have some growth in that area. What has happened year-to-date? And what do you expect for the balance of the year?

[John D. Williams:]

Yes, I mean, in the first quarter, we felt -- we have a sort of base load business for export, Paul, that we keep shipping because essentially, it's contracted business with major customers. And then there's some business we come in and out of. And to be frank, in the first quarter, given what was happening in some of the markets we were exporting to, we chose not to export. And to be honest, if you look at our total shipments, we sold every ton we made. So when you're looking to manage your mix positively, some of that export sales is stuff you move away from. So that's what we did.

[Paul C. Quinn:]

Okay. And then just over on the Attends, and I know it's probably not fair to ask. And Mike Fagan has only been there for -- I guess, in charge of both for a month now. But what does that build-out look like for you guys? I mean, obviously, there's growth in that segment overall, but I know you'd like to build out the product lines. Any ideas on what CapEx would look like in the coming years and what that build-out would be?

[John D. Williams:]

Yes, I mean, to be honest, it is a little bit early to tell. But certainly, going forward, we see opportunities to fill out, if you like, the product range. I think the good news is, if we look at that product range on a European and U.S. basis, there are certainly some opportunities actually to move some CapEx around to make certain we're not duplicating spend. So we see some potential benefit there over time. We said pretty clearly, we want to double that $70 million number over the next 5 years. And we see that's possible from an organic basis, but there will be CapEx involved.

[Daniel Buron:]

And just to give another magnitude, a full line is more or less $15 million. So we're not talking just through the rest of our business, not a huge amount of money.

[Paul C. Quinn:]

Okay, great. And just the last question, just if you could remind us what price increases Domtar has announced on paper so far.

[John D. Williams:]

Yes, certainly. Well, we announced on cut size yesterday $40. Dick, you'll have to help me to remind me of the others.

[Richard L. Thomas:]

This is Dick Thomas. On the converting and printing grades, we announced, depending on the product, $40 to $60 on rolls and then $30 on folio sheets. And that was announced earlier in March, actually to be effective kind of the middle of April, if you will.

[Operator:]

And our next question comes from Sean Steuart of TD Securities.

[Sean Steuart:]

A couple of questions. I guess just first on pulp costs. And I guess based on Daniel's comments, there wasn't much of a quarter-over-quarter mix issue, but the unit costs were up, I guess, a lot more than we might have forecast. Can you speak to any specific elements that might have led to that inflation?

[Daniel Buron:]

A big portion of that, Sean, I think, is coming from a significant difference with maintenance costs between Q4 and Q1. And there's a typical usage winter that was later this year, but nevertheless, there's still a bit of usage question in the first quarter versus the fourth quarter. A little bit of price increases in the chemicals. I think we're recording $4 million in the slide deck, and most of that is in the Pulp business. So it's a combination of all that, that created that cost increase that you see. So as maintenance is going back to more normal, you're going to see a portion of that disappearing.

[Sean Steuart:]

Okay. So then just to finish that off, Daniel, I mean, you talked about higher maintenance for pulp quarter-over-quarter, but the overall maintenance cost, you showed, even though it was $4 million, higher than you expected it to be. It still looked like a sequential -- there wasn't that much of a sequential issue, so the rest that's in Paper was lowered?

[Daniel Buron:]

Paper was more heavy in Q4 than in Q1.

[Sean Steuart:]

Okay. Okay, that helps. And then John, I guess just your thinking on -- you touched on potential CapEx for the Attends part of the business, but you guys weren't as active on the share buyback this quarter. And I know you had a lot of cash to pay for Attends Europe and debt refinancing and everything else, but can you speak to your thoughts on the share buyback program and...

[John D. Williams:]

Certainly. I mean, as I said, we have that sort of $540 million left to go, and we are still very committed to return the majority of our free cash to shareholders. And we will keep so doing. I think if you look at our average by -- it's been about $80.34. I mean, cash was reasonable in the quarter, but it wasn't magnificent. So we just thought, well, maybe it's just time to pause for a while and see where it leads us. But we still remain committed to it.

[Operator:]

And our next question comes from Phil Gresh of JPMorgan.

[Phil M. Gresh:]

Just a couple of questions on the Pulp side. Do you typically have a bit of a lag in terms of pricing, whether it be on the way down or on the way up? Just thinking about the fact that a lot of it is export-related.

[John D. Williams:]

Some -- I mean, it really depends on how much stock is in the system, but there's not much of a lag. I mean, Dick, if you want to talk, add a bit more detail. But it might be 20, 30 days. Sometimes it's 24 hours. It just depends, really.

[Richard L. Thomas:]

That's right. It depends on the market and what the common practice is, but it shouldn't be more than 30, as you said.

[John D. Williams:]

Does that help, Phil?

[Phil M. Gresh:]

Yes, that does. So I guess just a follow-on on the pulp side. I mean, the NBSK prices have moved up here a little bit, but then like you're talking about China, the commentary is a little more cautious. And actually, it looks like the pricing is actually lower there. So can you just remind me how much of your pulp business is to China, how that should kind of factor in to our thinking?

[John D. Williams:]

It's about 40% of the softwood.

[Phil M. Gresh:]

Okay. And on fluff?

[John D. Williams:]

And on fluff, Dick, will probably know the detail better than I do, probably. Dick, what would you think on fluff?

[Richard L. Thomas:]

Around 20%.

[Phil M. Gresh:]

Got it. Okay. And just as we think about then, the second quarter, I don't know if you can calibrate this for us. But with the maintenance being $20 million higher quarter-over-quarter, do you expect to be able to offset that fully. Or just given the timing of these price increases, should we think of it as a bit more of a headwind?

[Daniel Buron:]

I think, Phil, you should look at -- there's probably $4 million saving available on the SG&A line. There's the addition of 2 months of Attend. So if you look at -- forget about price because, I mean, price realization is something in the future difficult to...

[John D. Williams:]

Predict.

[Daniel Buron:]

To get, to predict. I think all in all, we have a positive in the business that should balance with the increase in maintenance costs, and price will be what's going to be on top of that.

[Operator:]

And our next question comes from Mark Connelly of CLSA. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division 2 questions. First, back to this pulp cost and higher maintenance, typically, when we see higher maintenance, it has a meaningful effect on volume, and that's how the costs get out of line, operating leverage in reverse. But your volumes actually look very strong in Pulp, maybe not quite as strong in Paper, which seems to go the opposite way of what you're saying happened to cost. So was this just more spending with limited impact on production? I'm just trying to understand because it just doesn't line up with what we normally see.

[Daniel Buron:]

Mark, there's -- we've reduced inventory 26,000 tons in pulp in Q1, so we've been able to ship a reasonable or let's say close to what you should expect on a quarter-after-quarter basis but with a reduced production because of the maintenance shut. So if you take into consideration, I think, inventory depletion, it's going to answer your question. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division So 26 million -- 26,000 tons is what's causing the difference. Okay. And on the paper side, though, are you seeing the same thing in reverse there? Because the volume numbers were lower, but you didn't really seem to see a cost impact. In my numbers, your performance was fantastic in Paper.

[Daniel Buron:]

We sold more in Q1 and Q4. We produced more or less the same thing in Q1 and Q4. And in Q1, inventory was flat. In Q4, inventory was higher because we were rebuilding this safety stock or the minimum inventory we need to have to be able to serve our customers. As we said to the market, we felt toward the end of the year that inventory was a little bit too low and that we would take the opportunity of Q4 to rebuild that inventory to a reasonable level, and this is where we are at the end of Q1. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division Okay. 1 last question. Do you have any specific financial performance targets for the Distribution business?

[John D. Williams:]

Well, Mark, what a good question. I mean, as you can see, I think what it's going to look like if it's doing well? I mean, I think it's sort of 1%, 1.5% return, given that market and the pressure it's under would be a pretty strong performance. So I don't come away thinking we're going to see a major bump for the corporation in terms of earnings from that business, but it does still sell a fair amount of Domtar tonnage. And I like that route-to-market, but we just have to do a better job of getting that business to perform. But is a $16 million EBITDA going to be a great performance from that business given its size, given the pressure it's under? I think it is. And we're moving it into some of the packaging grades, we're moving it into the digital space. But it's a very tough market place right now.

[Daniel Buron:]

And Mark, if I may add to that. A couple of percent of EBITDA margin will equate to 10% to 12% return on capital employed because this is also a very low capital business. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division All right, great. Yes, I completely agree with you. I mean, we see a lot of companies spend a lot of time trying to turn this into higher value business, and it just never seems to work. So I think you're on the right track.

[Operator:]

And our next question comes from Bill Hoffman of RBC Capital Markets.

[Bill Hoffman:]

John, you talked a little bit in your commentary about some new commercial business, and I just wonder if you could help give us a little more color on what you're seeing there. Is this market share gains? Is it new product development? So where is it coming from?

[John D. Williams:]

Yes, it's coming -- it's not market share gain. It's coming mostly from the specialty grades where, when we can get sufficient volume, we can do things in terms of putting it on some of the larger machines and therefore be pretty competitive. So we have some bag business that we won last year, which is now running through the numbers at about 5,000 tons a month. And of course, the Appleton grades and our specialty business in paper and packaging is actually growing at sort of 2% or 3% a year just in the core business. So that's where this stuff is coming from, which makes up, to some extent, for some of the decline we see in, if you like, the commodity grade. The issue is that lighter-weight grades typically that we're winning, and that therefore means they're our operational challenges we have to overcome to make sure we can do them effectively. Otherwise, you get a complex piece of business. You put it in a commodity mill and the complexity wins over the cost base you thought you were building. So you have to be pretty careful. So that's what we're doing.

[Bill Hoffman:]

Right. And about how much tonnage is this sort of new specialty business in this quarter?

[John D. Williams:]

Total specialty in the business...

[Daniel Buron:]

It's 117,000.

[John D. Williams:]

117,000?

[Daniel Buron:]

Yes.

[John D. Williams:]

It's 117,000 tons.

[Bill Hoffman:]

And where is that? Like where would it have been like last quarter?

[Daniel Buron:]

Last quarter was 102,000. It's at the back of the last page of the press release if you want to refer to it.

[John D. Williams:]

That's the sort of GDP growth business apart from the Appleton business, which we'll report in that segment so you can see it, okay?

[Bill Hoffman:]

Yes. And then just also with regards to this Appleton, John, do you see any other customers when you have similar types of opportunities?

[John D. Williams:]

To be honest, we scanned for them, but I mean, what you need is someone who does something to paper who is currently also making the base stock feels that the base stock for their manufacturing is not competitive for them versus what we could do. So, I mean, we always scan the horizon, but I don't think they're very thick on the ground, to be honest with you.

[Bill Hoffman:]

Okay. And just final question, just more on the Attends business. Any thoughts of other acquisitions that sort of complement that business, maybe in another geographical region, maybe around Latin America?

[John D. Williams:]

Well, I mean, let's be clear. We said very clearly we're not going to bet the shop, so you might see transactions of $1 billion, $1.5 billion. Right now, we think the key focus is to really deliver on the businesses we purchased. If opportunities come along, we'd certainly take a look at them but with only within the context of what we already told in terms of size. And we're just settling that business down, we're just developing the management team. So I don't think we're going to go roaring off and do something foolish.

[Operator:]

[Operator Instructions] And our next question comes from Stephen Atkinson of BMO Capital Markets.

[Stephen Atkinson:]

Unfortunately, I only have mundane questions. Anything left on black liquor credits?

[Daniel Buron:]

Anything left? No.

[John D. Williams:]

No.

[Daniel Buron:]

I just feel that the only pending question for all businesses is the taxability or not of the credit, that we'll know at some point in the future that may have an impact. But in terms of new credit, there's nothing that exists right now.

[Stephen Atkinson:]

So that -- how much was involved in that? I know you spoke about it in previous quarters.

[Daniel Buron:]

In terms of full tax for us, it was around $540 million. In terms of the credit I mean, and the tax impact of that is $190 million, something like that, around that range.

[Stephen Atkinson:]

Okay. Can you give me an update on the China project?

[John D. Williams:]

Yes, certainly. We'll be up and running. So the converting line is in and is being sort of tested as we speak, Stephen. And remember, it's a converting and sort of distribution business, so we're going to be selling to printers, mostly sheets, so it's not cut sized. It's sheets and some roll converting. So come July, we'll be up and running. And sort of by quarter 4, I should think we'll be at full tilt.

[Stephen Atkinson:]

Okay. And so the -- okay. And then in terms of -- do you have any energy projects where you could switch to a high use of natural gas?

[John D. Williams:]

Well, we look at them all the time. We're developing a pipeline of them, and we'll work our way through them. But yes, certainly, we're obviously looking at that right now.

[Stephen Atkinson:]

And in terms of the acquisition of Attends in Europe, correct me if I'm wrong, but the configuration rate now is you have the plant in Sweden and you have a distribution center in Scotland or -- is that correct?

[John D. Williams:]

Well, it -- essentially, you've got the plant in Sweden, in Aneby. [indiscernible] sort of in the middle. And then you have sales and marketing offices across the piece with a few subsidiary warehouses but not too many. So that's -- if you look at that business, it's really largely selling into the Nordic, the U.K. and the Germanic countries. That's where we have our sales offices. So we're not really selling into Italy, Spain, southern France. It's very much a northern European business right now in terms of geography.

[Stephen Atkinson:]

Okay. So there are opportunities down the road to grow the business?

[John D. Williams:]

Absolutely. Yes.

[Operator:]

And our next question comes from Mark Wilde of Deutsche Bank.

[Mark Wilde:]

As long as we got Dick Thomas there, I just wondered if he could give us any sense of whether sort of the combination of Europe being weak, plus the euro weakening, is triggering any changes in trade flows on paper at this point or whether you anticipate any.

[John D. Williams:]

Dick, do you want to talk of that?

[Richard L. Thomas:]

Of course. As you might imagine, we watch that pretty closely. And Mark, as you and I have discussed, you tend to see kind of quarter-by-quarter one part of the world that go up and another will go down. So I would say we went into the first quarter with a bit of concern that exactly what you described would happen, but it doesn't seem to have. So the shipments from Europe in total actually went down a bit through February. We don't have the March numbers. But the sense you have is that there wasn't any significant pickup.

[Mark Wilde:]

Okay. And what about going the other way?

[Richard L. Thomas:]

So it's obviously been a bit tougher at a $1.30, $1.31. There is a EUR 50 price increase on the table now that looks like it's -- the mills are going to work hard to implement. We've announced that as well on our business in Europe on cut size.

[Mark Wilde:]

Okay. All right. Second question, in terms of the specialty business, John, where are you running that? Are you just running that at like Port Huron, in those little mills up in Wisconsin or are you running specialties in places like Johnsonburg?

[John D. Williams:]

Well, actually, more and more. It's across the system, Mark. So for example, some of that Appleton work will go into the Marlboro Mill, in fact, quite a lot of it, because when you get sufficient tonnage, it's really trying to move it into that machine base to make sure you can be very competitive is, if you like, the way you're going to secure those kind of volumes. So essentially, if you look at sort of what we would call the specialty mills, Port Huron and Espanola and Nekoosa and Rothschild, really. And then -- but some of that volume now moves into the commodity grade mills, which is -- I'll be frank with you, is a more of an operational challenge for the mills to make certain that -- as I said earlier, that the complexity doesn't kill the cost base.

[Mark Wilde:]

Okay. All right. And then finally, you've talked over time about repurposing some of the mills, and what we've seen mainly, I think, up to this point is doing things like fluff pulp down at Plymouth. Any kind of additional work that's going on, on that front right now?

[John D. Williams:]

Yes, well, I think that's an interesting question. Let me sort of go back to the philosophy of it. The issue, of course, is can you make sure these things generate revenue and earnings in a world where your -- the core business has that declining profile? So I actually see the Appleton agreement is almost as a repurposing because essentially, if you take the total tons we're going to be selling to Appleton, think about the lightweight and think about what that means. It's close to 250,000 to 300,000 tons equivalent, if you like, on the commodity system. So in a way, it has the effect of repurposing, so what you need to do next to move further out into the future. And we're always scanning the horizon. But I think, again, it has to be that we like the market dynamic, and we certainly like the market dynamic of fluff, and we've got some unique capabilities to bring to the party. So that's the way we look at it, and quite frankly, we scan the horizon all the time to see if now is the time to make those choices.

[Operator:]

And our next question comes from Anthony Pettinari of Citi.

[Anthony Pettinari:]

Regarding SG&A, you called out the onetime items that impacted the quarter, but going forward, when we think about SG&A, you're looking to double the Attends business and build out product lines. Do you have to meaningfully increase your sales organization or add new capabilities that might move SG&A higher?

[John D. Williams:]

Well, that's a very interesting question on Attends. I think nowadays, consumer products businesses is on the whole, what I would call, key account businesses because of the trade concentration involved. So you're going to see an absolute increase in dollars, but I'd be extremely disappointed if you saw an absolute increase in terms of the ratios. It might get a bit lumpy from time to time if you start to put in some resource ahead of your -- ahead, if you like, of the sales line. But I don't see any step-up as a percentage of sales required. If anything, I want to see the opposite over time.

[Daniel Buron:]

Anthony, if I can add a little bit to that, we've called out the item on the SG&A. That's the $5 million transaction cut in the quarter. But I just want to point out that this is not -- when we are referring to EBITDA before items or EPS before items, we've not considered that transaction cost as an item. So, I mean, for your model purposes, this is a $5 million that should not be recurring in the future. The run rate we've called, the $95 million, I think it's for you a good proxy for the future, with the current business we have, including the Personal Care business.

[Anthony Pettinari:]

Okay. Okay, that's helpful. And then shifting to Appleton, understanding the price agreements are between you and them. When we think about the deal in terms of EPS accretion, there's probably some costs with the shift into specialty grades. Is this something that we can think about as being sort of accretive right off the bat or does it take a quarter or so to sort of realize the benefit?

[John D. Williams:]

Yes, that's a very good question. I mean, I try to be helpful, but I'm not sure I can answer it effectively. I mean, we're doing trials on some of these grades, and obviously, there are costs attached to that, not necessarily the cost of the paper we're trialing but the fact that we're taking some downtime in order to do it. I would say when it's really running and settled, I mean, we've said end of third, early fourth quarter, I think then we could start to answer that question in a bit more detail. But right now, it's very hard to tell. But I mean, it should be obviously accretive over time.

[Daniel Buron:]

I think you have to look at it, Anthony. This is to replace the core that is forecasted to decline at 3%, 4% per year. So selling a ton of paper will be accretive, there is no doubt. The average profitability of that type of business is probably in our -- the middle of the pack, not at the top nor at the bottom. This is kind of nice profitability but better than downtime. I just want to make a last point on that deal. There was a question earlier. The price mechanism is it's market-based, and then from day 1, it's going to be market and then after that, there is a pricing mechanism to adjust based on our costs in the future. So this is market-based with cost adjustments.

[Anthony Pettinari:]

Okay. Okay, that's very helpful. And then maybe just one last question in fluff. You have a North American competitor that's bringing some capacity online, and we've seen some announcements in Latin America. Given that capacity addition over the next, I guess, 12 months or so, do you think that your fluff business on kind of a relative basis might take some headwinds that, I guess, the softwood or hardwood business doesn't really have to deal with? Or how do you think about that capacity addition?

[John D. Williams:]

I mean, it's going to be -- it will be difficult to tell. I think all one can think about is if you look at our cost base where we know we're in a very strong cost position, we know even in the tougher times we can remain competitive. And we'll kind of see where it takes us. And of course, we're in a very low wood cost basket there in Plymouth. So as someone else moves into the marketplace, we know what happens in this industry. But I think our position will still be a strong position.

[Operator:]

And our next question comes from Albert Kabili of Crédit Suisse.

[Albert T. Kabili:]

I guess, John, a question just to clarify on Appleton. Now, as this volume ramps, there is nothing that would, I guess, encourage you to step away from any of your existing volume to clarify, right?

[John D. Williams:]

I mean, right, unless, and there's always an unless, I mean, if there's an opportunity, we think, to improve mix, we'd obviously improve mix. I think Daniel made a very good point which I should have made earlier, to be frank, which is, this business sits in about the middle of our realization. So if there's some volume at the lower end, we think we should walk away from because if we want to do that business, then we obviously would.

[Albert T. Kabili:]

Okay. Okay. Got it. So as the Appleton deal ramps, all else equal, we would expect your volumes should outperform the industry, all else equal, we would expect, given the...

[John D. Williams:]

Yes. With the proviso, of course, that the core declines at whatever rate the core decline is at.

[Albert T. Kabili:]

Right. Okay. Understood. Okay. And secondly, I know you highlighted that exports were certainly a tough comp last year. Can you remind us for the remainder of the year -- do you foresee throughout the remainder of the year exports being a meaningful, difficult comparison to the magnitude like it was that we saw in the first quarter? Or how should we be thinking about that?

[John D. Williams:]

Probably not. I mean, I would say, as I said earlier, there's a kind of core that we keep supplying with a certain level of tonnage. And then if it's attractive and we feel we need the business on top of that, we'll come in and out. We have -- again, I don't want to talk ahead of myself. We have some thoughts about how we could make that tonnage a little bit more attractive to us and maybe maintain it at a slightly higher level. But -- so it will swing around a little bit, but I don't think it's going to be that dramatic.

[Albert T. Kabili:]

Okay. So it sounds like this quarter was just, from a comparison perspective, a little bit tough?

[John D. Williams:]

Yes.

[Albert T. Kabili:]

Okay, good. Okay, great. And then I guess the other question is on cash, free cash flow. And you touched on this a little bit in terms of, I guess, timing wise, you didn't do really much in the way of buybacks, given that working capital and the Attends acquisition. But is the intention that the majority use of free cash flow will continue to go to share repurchases?

[John D. Williams:]

Absolutely. And dividends.

[Albert T. Kabili:]

Okay. Okay, terrific. And then final question is on the Attends acquisition. I think you highlighted that the run rate of EBITDA right now is $70 million. Does that through -- do you expect that sort of run rate to stay constant throughout this year or show that be increasing as the Attends business continues to grow? I know you want to sort of double EBITDA over the next 3 to 5 years. How should that ramp sort of look? And do you see any of that this year?

[John D. Williams:]

I don't think you're going to see much of it this year. So I think that's a reasonable proxy. I mean, obviously, I'd like to do a little better, and if I can, we absolutely will. But I think that's a good number for now. Remember, we've really only owned Europe for a month, so, so far, so good, and so far, so good in the U.S. business. One of the offsets is obviously that fluff pulp is moving up. So they're a large buyer of fluff pulp, so there are issues there. I would use that number for now. I think that's a fair number.

[Operator:]

There are no further questions at this time. Please continue.

[Pascal Bossé:]

Great. Thank you very much, Valerie. I want to thank all participants to today's call, and I invite you to join us for our second quarter earnings, which are scheduled to be released on July 27. So thank you very much, and you all have a very good day.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great day.