Domtar Corporation
Q2 2012 Earnings Call Transcript

Published: 27 Jul 2012

[Operator:]

Good day, ladies and gentlemen. Welcome to Domtar Corporation’s Second Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this call is being recorded today, Friday, July 27, 2012. I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead.

[Pascal Bossé:]

Great, thank you, (Nigel). Good morning everyone and welcome to our second quarter 2012 earnings call. Our speakers for today are John Williams, President and CEO as well as Daniel Buron, Chief Financial Officer. So, 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 the website. As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar’s filings with the Securities Commissions for a listing of those. And 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 will turn the call over to John.

[John Williams:]

Thank you, Pascal. Good morning, everyone. This morning, we reported earnings per share of $1.61 and EBITDA before items of $202 million for our second quarter. Given weaker business activity in our anticipated and softer demand for some of our Paper products, this is a good financial performance. As a result, we took the necessary steps to manage our capacity and took 23,000 tons of lack of order downtime in our paper system. The ramp up of a volume of the 15-year apples and paper supply agreement will help reduce the amount of potential downtime for the back half of 2012. We expect to reach the full run-rates of an incremental 160,000 tons by the middle of next year. On that, the conversion of the Marlboro, South Carolina mill to lightweight specialty and packaging grades will remove high volume paper capacity from our system and Daniel will discuss the Marlboro conversion project in more detail in a moment. We also continue to see a beneficial impact from our growing position in specialty and packaging grades with year-to-date shipments increasing 12%. In Pulp, profitability improved from the first quarter mostly driven by price, but we remain cautious on the second half outlook for the business. On Personal Care, profitability was on target at $18 million in quarter two and the business continues its growth, reaching an annualized sales rate of over $425 million. We recently announced the acquisition of EAM Corporation, a strategic move that will add expertise and high quality absorbent core providing with search capabilities and technology to our business. So, we’re on track to more than double EBITDA by the end of 2016 through organic growth and we continue to scan the horizon for opportunities. Moving on to free cash flow it was robust at nearly $100 million for the quarter. And we’ve returned a significant portion of this cash back to shareholders buying back $69 million worth of our equity. So, in summary the business environment remains challenging, growth and employment remains slow and we face some uncertainties stemming from issues such as Postal Reform in the U.S. So, with these brief remarks I’ll turn the call over to Daniel and I’ll come back with the outlook. Daniel?

[Daniel Buron:]

Thank you, John and good morning everyone. Let’s start with the financial highlights on the quarter on slide four. We reported this morning net earnings of $1.61 per share for the second quarter compared to net earnings of $0.76 per share for the first quarter of 2012. Adjusting for items our earnings were $1.61 per share in the second quarter compared to earnings of $1.65 per share for the first quarter. EBITDA before items amounted to $202 million compared to $210 million in the first quarter. Cash flow provided from operating activities amounted to $175 million. Capital expenditures were $76 million therefore free cash flow totaled $99 million. Turning to the sequential valuation in earnings on slide five, consolidated sales were $30 million lower than the first quarter due to lower shipments for paper and pulp partially offset by the increased business in our personal care segment. SG&A was $10 million lower in Q2 mostly due to the positive impact of a mark-to-market on stock-based compensation and some transaction costs incurred in the first quarter. This was partially offset by the addition of a full quarter of our new European business. Interest expense was $18 million in the quarter, $53 million lower than last quarter due to charges related to the tender offer completed in Q1. In the second quarter we reported a tax expense of $27 million or 31%. Now turning to the cash flow statement on slide six, cash flows provided from operating activities amounted to $175 million for the quarter. Capital expenditures amounted to $76 million therefore free cash flow totaled $99 million. In his remarks John referred to the conversion of the Marlboro Mill into a specialty and packing mill as a result of our 15 years supply agreement with Appleton. The capital costs related to the repurposing of this high volume communication mill to specialty and packaging grade is approximately $32 million phased over the next 12 months. Because of the light weight nature of the specialty and packaging grade after the full ramp-up of Appleton volume, our communication paper capacity will effectively be reduced by an estimated 270,000 tons. This is the equivalent to the closure of 800 tons per day paper machine. Let me take this opportunity to update you on our CapEx assumption for the year. We now believe that our CapEx for the full year 2012 will be between $240 million to $260 million or $20 million more than what was communicated at the beginning of the year. Also in the quarter we’ve repurchased 869,000 shares for a total cash consideration of $69 million. Turning to the quarterly financial waterfall on slide eight, when compared to the first quarter EBITDA decreased $8 million due to lower volume and mix for paper and pulp for $21 million, higher costs for plant maintenance of $11 million, higher costs for raw material and other of $5 million. These were mitigated by lower G&A for $40 million, higher selling prices for paper and pulp for $11 million and the addition of Attends Europe for a full quarter in Q2 versus only a month in Q1 for $4 million. Now slide nine, in our Pulp and Paper segment sales were down 5% compared to the first quarter and down by 10% when compared to last year. Operating income before items was $96 million on depreciation and amortization charge of $88 million. EBITDA before items was $184 million compared to $203 million in the first quarter. Our Personal Care segment reported an EBITDA before items of $18 million on sales of $107 million. Slide 10, our Paper business had a net estimated decrease in EBITDA before items of $30 million when compared to the first quarter. Paper shipments were sequentially lower by 51,000 tons and down 82,000 tons when compared to the same period last year. Our average transaction prices for all our paper grades were $5 per ton higher than in the last quarter. In the second quarter, we took 23,000 tons of lack-of-order downtime in our Paper business. Now, on our Pulp business on slide 11, EBITDA before item increased by an estimated $11 million when compared to the first quarter to $16 million. Pulp shipments were sequentially lower by 5% versus the first quarter and average pulp prices increased by $18 per metric ton versus the first quarter. Paper inventory increased by 13,000 tons while pulp inventory increased by 15,000 metric tons in the quarter. Finally, on slide 13 of the deck, you’ll find our usual schedule of plant maintenance for the rest of the year. So, this concludes the financial review. And with that, I’ll turn the call back to John. John?

[John Williams:]

Thank you, Daniel. Let me start with safety, which remains a top priority across the business as we drive towards world-class safety performance. I am pleased to note that year-to-date, we’ve reported fewer injuries and a notable improvement in our recordable incident rate versus last year. Employees across all of our facilities that committed to driving improvement as we believe putting health and safety front in center is vital to our operational performance. Moving on to Paper, we are operating in an environment where there are pockets of both strength and weaknesses across the spectrum. We discussed on the quarter two earnings call last year, the opportunity we saw around the export market. At the time, we’ve tactically taken our export volume up to about 200,000 tons on an annualized basis and our export volumes were back to half that run-rate in the first half of the year, but our focus on profitability has helped us to maintain our EBITDA margins at around 20%. In Pulp, price realizations improved slightly from the first quarter, but have drifted lower again at quarter end. This reflects weak economic conditions in Europe and China and the recent strengthening of the U.S. dollar against pulp producing currencies. As Daniel mentioned, the results in our Personal Care segment included the full impact of Attends Europe and we were very pleased with the performance of the segment. Pro forma sales increased 5% versus the same quarter last year. So, overall, the business is seeing strong growth in all channels and product categories. As previously mentioned, the acquisition of EAM will give us long-term research capabilities to further differentiate our full line of products while integrating the best available technology to grow the existing business. Absorbent hygiene products are highly technical. They require advanced production techniques and we want to leverage innovation to become the product innovator and the category leader in this business. To conclude, we continue capitalizing on positive demand trends within our specialty and packaging paper products category and we believe this provides opportunities for further growth. We also see excellent prospect and significant value creation potential in Personal Care and are very focused on the profitable growth of the business. Now, a quick run down of our second half outlook by business. In Paper, capacity will be impacted by the conversion of communication paper to specialty grades as we ramp up the Appleton volumes. Worthy of note is that these grades are lightweight meaning that the additional 160,000 tons of Appleton volume on an annualized basis will remove approximately 270,000 tons of commodity paper capacity. We believe pressure on average selling prices for Pulp will continue, but we will closely monitor the markets that we sell in and take action when necessary. And finally, although we expect overall cost inflation to remain flat for the balance of the year, we are closely monitoring the impact of the recent heat wave in the U.S., most particularly on our corn starch input costs. So, thank you for your time and support. And with that, we’ll take questions. I’ll hand you over to Pascal. Pascal?

[Pascal Bossé:]

Great, thank you, John. So, to take questions, we have John and Daniel and we have Dick Thomas, Senior Vice President of Sales and Marketing as well as Mike Edwards, our Senior Vice President, Pulp and Paper Manufacturing. So, before we start polling for questions, I’d ask our participants to ask a few questions at a time and return to the queue for follow-ups. We want to get as many people as possible. So, with that Nigel we’re now ready to take questions.

[Operator:]

Thank you. (Operator Instruction) The first question is comes from Alex Ovshey from Goldman Sachs. Please go ahead.

[Alex Ovshey:]

Good morning everyone.

[John Williams:]

Hi, good morning.

[Daniel Buron:]

Good morning.

[Alex Ovshey:]

Just uncoated freesheet we saw a pretty meaningful fall off in the June volume number. Can you just talk about what happened and whether you’ve seen any sequential up-tick. And on then the pricing front I know there is a couple of price increases out there both the cut size and offset grades can you just talk about any progress that you think you maybe able to have and those over the next couple of months?

[John Williams:]

Yeah, certainly, I guess the best way to talk about June is probably to say July is running slightly ahead of that June number in terms of bookings. So, I’m not sure it’s an up tick but it’s certainly not lower than June. And then on the pricing front we don’t think we’re going to get the full realization. So, we believe probably tens of fifteens of dollars rather than the $40 to $60, it really depends on the grades and the specific dynamics, if that helps you.

[Alex Ovshey:]

Yeah. Thanks John. Would it be fair to say most of the pricing but you expect to get is already in the second quarter realized number or is there a little bit more that you think you can get…?

[John Williams:]

We think there is a little bit of momentum still to come. But I don’t think its going to be substantial.

[Alex Ovshey:]

Okay, understood. And then just strategically and then thinking about the conversion out of the commodity into this specialty paper grades and so at this point is it just specialty paper grades that you are going to be supplying to Appleton or there will be other customers of that product and then just the appetite to potentially get into packaging paper grades at some point online?

[John Williams:]

Right, let’s – I mean let’s be clear what we mean by packaging. These will be substrates but we’ll then go to printer that means sort of liner board type grades Alex just to be clear. Well, if you take Appleton we’re currently running at about 14,000 tons a quarter. We think that’s going to move up quarter three to four to around 28,000 tons of full run rate though new business is about 38,000 tons which we’d expect per quarter again which we’d expect to realize probably by the second half of next year just based on trials and the work we need to do that. So, when you look at that we obviously have a specialty business which is several 100,000 tons. And some of that business has opportunities in it which will allow us to build more business. But we think the core of our specialty business is probably a GDP growth business and then we place Appleton on top of that, if that helps?

[Alex Ovshey:]

Yes. Thanks John.

[John Williams:]

Alrigth.

[Operator:]

The next question comes from Anthony Pettinari from Citi. Please go ahead.

[Anthony Pettinari:]

Good morning.

[John Williams:]

Good morning.

[Daniel Buron:]

Good morning.

[Anthony Pettinari:]

With regards to the Appleton agreement on an EPS accretion basis should we continue to think of that as being sort of flat for 2012 or is there potential for it to be modestly accretive?

[John Williams:]

I think you have to see that as a way for us to cope with the decline in our core business. So there is definitely accretion if you compare to without the Appleton business.

[Anthony Pettinari:]

Okay and then with regards to export you talked about running it kind of half of the run rate at last year and does Appleton in the conversion of Marlboro do those impact your export exposure at all either positively or negatively?

[John Williams:]

Not really know, it’s not an either row to be honest.

[Anthony Pettinari:]

Okay. And then maybe just one last question given underlying demand conditions in Pulp and Paper have maybe been a little bit weaker than some has expected maybe six months ago. And your Personal Care business seems to be going quite well, is that caused you to maybe recalibrate or think about your goal of how much EBITDA maybe over the next five years is coming from new streams of business or sort of M&A strategy, if you could just kind of give us your thoughts there.

[John Williams:]

Sure, let me reiterate what we’ve said perhaps, we said over three to five but we’re looking for sort of $300 million to $500 million of EBITDA from other business. Right now we have a run rate business around $75 million of EBITDA are on the Personal Care. We believe we can double that organically. So, if you like the gap between those numbers gives you a sense of the M&A activity. But let’s be very clear we’ve said we’re not going to erupt into some transformative transaction, but we’re going to sort of move along sort of move along carefully. And to be frank, we don’t talk much in a way about the paper business, but the paper business is still a very strong, very profitable. We are a world-class producer with a market leader. So, we still see plenty of run way in our Paper business going forward. So, I don’t think, I mean, sorry a longwinded answer to a simple question. I don’t see we are going think, oh, my god, we are going to go and find $750 million of EBITDA from other businesses. Does that answers your question?

[Anthony Pettinari:]

That’s very helpful. Thank you.

[John Williams:]

You’re welcome.

[Operator:]

The next question comes from George Staphos from Bank of America-Merrill Lynch. Please go ahead.

[George Staphos:]

Thanks everyone. Good morning.

[John Williams:]

Good morning, George.

[George Staphos:]

Okay, John, I want to maybe peg you back on that last answer you gave to Anthony’s questions, so in terms of the runway that you see in the Paper business, what is it exact to that you are looking to. Is it primarily the specialty business and why do you think you’ll be uniquely able to given your asset mix to take advantage of that runway that others perhaps if they’re attracted to it wouldn’t be?

[John Williams:]

Well, I mean, I think you have to think about we definitely have a very strong cost base, I’m not saying for a minute that I want to compete on cost, because I think that led this industry to some pretty strange places over time. But I think what we are proving, particularly, with the Appleton deal is that there are things we can do. If we see ourselves as a fiber transformer as distinct from a paper maker, I think there are ways to use some of this capacity that will still ensure an earnings stream. And that’s really what we see is the key task in that business. And there will be somewhere a base for that paper business and when we get there, I think none of us know, but there will be a base case. So, that’s the way we see it.

[George Staphos:]

Okay, I appreciate that. I want to switch gears, the inventory position for the quarter was up for both Pulp and Paper, are you reasonably comfortable with where your inventories are, the last couple of years, the 2Q was actually down sequentially. I know you are going to take me a little bit of downtime, but do you feel that your inventories are maybe a little bit more and you like to see them or are they relatively comfortable about this juncture and why?

[John Williams:]

I think George if you remember we’ve discussed in Q3 and Q4 that we felt our inventory level were maybe on the Paper side a little bit on the low side having some time – some difficulty to serve customers. So, the build that you saw in Q4 was to bring us back to where we felt was comfortable in terms of servicing our customer. So, we are just 13,000 tons over that point, where we believe it’s perfect for us. So, we’re going to work that out in the coming months. And as for Pulp, we were very low – to serve customer again, we are happy with the level we are right now.

[George Staphos:]

Okay, fair enough. And it’s coming up a couple of months, couple of quarters, where you had pretty significant decline sequentially. You mentioned caution in Pulp and obviously their understandable reasons for that given the macro outlook. There is one thing that gives you the most pause is it specific to any region or is it that you see capacity perhaps coming into the market and that’s giving you the most if you will pause relative to pulp over the next several quarters? Thanks John. I’ll turn it over.

[John Williams:]

Yeah, it’s interesting. I mean, there is one consensus George that says come before there might be a move up, because the Chinese will be buying again. I think there are two straws in the wind really, which would be Terrace Bay will open up again for a bit before it gets the dissolving pulp. So, there is some land locked in BSK, which may cause some issues. And with the euro doing what it’s doing, the Europeans are definitely looking to ship. So, I think those two effects make you think about whether or not there is a catalyst for pulp to move up.

[George Staphos:]

Understood. Hey, one last one, and I’ll turn it over, the specialty packaging grade that you are thinking of producing, what exactly would you be?

[John Williams:]

Yeah, I mean, just we say, we do them already. So, it’s going to be sort of paper grade that then gets printed. I mean, there is some confectionery wrap and few other things.

[George Staphos:]

Okay. I understood.

[John Williams:]

Okay.

[George Staphos:]

Thank you.

[Operator:]

The next question comes from Phil Gresh from JPMorgan. Please go ahead.

[Phil Gresh:]

Good morning guys.

[John Williams:]

Phil, good morning.

[Phil Gresh:]

John, I think you had said at the end of your commentary, there might be some operating cost impacts on the conversion, is that the right – did I hear that right that we should be thinking about something in the upcoming quarters there?

[John Williams:]

Sorry, Phil. In terms of the mobile conversion?

[Phil Gresh:]

Yeah. You should $32 million in CapEx, but I think there are some operating impacts as well.

[John Williams:]

Well, not really, I mean, the issues is going, it’s really about we are doing a lot of trialing right now, so we’re losing a little bit of efficiency as we trial. But actually interestingly yesterday we just had a run on one of the new grades. We didn’t have a single break. And actually we have very good quality. So, I think we are doing a very good job of ramping that up.

[Phil Gresh:]

Got it, okay. And then just looking at the Pulp prices today if you are to kind of look at the run rate right now relative to kind of where you ended the quarter do you have any sense of what the impact would be so far?

[John Williams:]

I mean it’s not enormous Phil, but I mean in the fives maybe nothing gargantuan.

[Phil Gresh:]

Okay and then this I guess a broader question Pulp demand I mean it does generally grow a bit globally, but it’s obviously pretty cyclical and it created quite a bit of volatility in your earnings over the past couple of years and in your stock prices to some degree. So, as you think about this business in the context of what you’ve talked about with your very stable albeit somewhat declining Paper business that generates very good cash flow, would you ever consider selling some of these standalone Pulp assets if there are right opportunity presented itself or that’s something that’s completely off the table strategically?

[John Williams:]

Well I don’t think anything is off the table strategically at any point in time. I mean I can answer is how we felt about it now and the answer is right now we are not a seller. We feel like sort of add strategically to our business, but we felt for one minute they didn’t I mean we’d take different actions.

[Phil Gresh:]

Okay, right. Thanks. I will turn it over.

[Operator:]

The next question comes from Chip Dillon from Vertical Research Partners. Please go ahead.

[Chip Dillon:]

Yes good morning John, Daniel and Pascal.

[John Williams:]

Good morning.

[Daniel Buron:]

Good morning.

[Chip Dillon:]

First question is you mentioned the higher CapEx for this year. And I believe the conversion projects excuse me will be pretty much done and I’m assuming that most of what you are doing to your footprint on the Personal Care side will be done, so could you give us an idea of first if that’s correct. And kind of how much of a decline we should expect in CapEx next year given your current footprint?

[John Williams:]

It’s a little bit early to tell, every year we’re asking in the budget process we’re asking our people to come with projects. And based on the merits of those projects we are making decision of how much capital we’ve been allocated to the CapEx, so that process is in fact started and that’s going to end sometime in October and we’ll be in a better position to share with you how much CapEx we may spend next year. But this year if you look at our historical number appears to be a high year, so you should see some lower number next year. But I mean to what extent, too early to tell.

[Chip Dillon:]

Okay and then John you mentioned the Pulp restarted (indiscernible) and I am assuming they are doing that I guess to hold on to the labor force in part. But when you look at Europe do you have sort of a range of estimates as to how much will be converted out of Paper into market Pulp and sort of over the next year or so?

[John Williams:]

No Chip, to be honest I don’t always we see as we see products moving onto the East Coast, but was in china. So, the East Coast United States based on the currency I mean that’s what we are seeing at the minute. We think if China reawaken that will move somewhere else. I couldn’t really give you the volumes just to be frank I don’t know them.

[Chip Dillon:]

Okay so you were referring to actual capacity that’s been they are making paper had been integrated turning in the market Pulp, you are just talking about the shipping?

[John Williams:]

I mean opportunity – I mean think that’s what they are doing, but I couldn’t quantify the number.

[Chip Dillon:]

Got you and then last question real quickly. You mentioned your price realizations in paper were up about $5 I believe a ton and yet it seems like you have been sort of very consistent saying that don’t look at the trade publications to tell us what you’re getting per ton, but could you just help us understand is some of this mix or is it pretty much all direct pricing?

[John Williams:]

I mean some of its mix to be honest and there are some places I don’t really go into the details where we have moved the price, so it’s a little bit of both, but mostly mix I would say right now.

[Chip Dillon:]

Okay and we should continue to obviously see that improve quite significantly as you ramp up the Appleton process?

[John Williams:]

Over time maybe, but I don’t think in the short-term Chip.

[Chip Dillon:]

Okay. Thank you.

[John Williams:]

You’re welcome.

[Operator:]

The next question comes from Mark Connelly of CLSA.

[Mark Connelly:]

Thanks. Two things is Appleton going to give Domtar a significant opportunity to re-optimize production. You’ve got more machines than anybody else and in the past sometimes you had the ability to move your commodity grades around and meaningfully impact your costs. I’m just curious whether this is big enough and whether we’re headed into another round of that?

[John Williams:]

Yes, it is, Mark. It is big enough.

[Mark Connelly:]

Okay, so there is some upside opportunity. And just a simple question what’s happening to pricing in the Personal Care business?

[John Williams:]

Really, it’s very stable at this moment in time.

[Mark Connelly:]

Perfect, that’s all I need. Thank you.

[John Williams:]

Alright.

[Operator:]

The next question comes from Mark Wilde from Deutsche Bank. Please go ahead.

[Mark Wilde:]

Good morning, John.

[John Williams:]

Good morning.

[Mark Wilde:]

As long as we’ve got Dick Thomas, I wondered if we could talk about sort of trade on both ways in a uncoated freesheet business, I’m particularly curious with both the euro down and the Brazilian real down and Europe weak and Brazil at least slower than it has been, whether you are seeing more paper come out of those regions and either come to the U.S. or go to other markets that Damtor might have been shipping to?

[John Williams:]

Dan, you want to take that?

[Daniel Buron:]

Sure, happy. Mark, how are you?

[Mark Wilde:]

Good, how are you.

[Daniel Buron:]

Yeah, excellent, thanks. I think obviously as you now talked over the quarters we watched these flows very carefully, Europe is up, but it’s really a bit of Portugal. It’s not so much of rest of Europe frankly that was a concern I had over the winter. But it’s pretty stable other than a bit of a bump from Portugal. And Latin America is up some that looks to me that actually was an issue that started later last year. So, I’m not sure that’s directly currency related. I think that was more of a response to the weakening conditions in Europe just kind of my view. But again none of these have been overwhelming and overall as you know imports were up just about 10% year-to-date compared to last year.

[Mark Wilde:]

And are you seeing any change in momentum there Dick or take your comments to read it has been pretty stable?

[Daniel Buron:]

It seems more kind of episodic and as we’ve absorbed you will see a particular region that will seemingly step-up for a month or too or quarter or too. And so for example, you see an increase from Australia that kind of came out to nowhere, but we don’t know how long that’s going to last. So, I don’t see anything that I’ve seen is alarming and given the swing in the exchange rate particularly versus the euro, I guess it’s on the low-end of kind of what I was expecting or may be worried about.

[Mark Wilde:]

Yeah, okay, alright. Second question, John you talked about – thinking about yourself is specialty fiber transformer and there is a high end of fiber transformer over Norway, it’s pretty publicly for sale, use that a type of business that would want to be and I don’t – you don’t want to get too specific about core but moves, but is that kind of business in your real house at all?

[John Williams:]

Mark to be honest, I think we have to feel, I mean, two things really, one, I mean, specific asset you discussed is not for us.

[Mark Wilde:]

Okay.

[John Williams:]

And I think if we feel it would add to the network meaningfully and create synergies in the network. We would consider, but would be very careful. I don’t think it’s, I mean, we have to feel we could do something and folded into the network more than it being standalone, is that helps us.

[Mark Wilde:]

That helps me a lot, okay and the last question I had was for Daniel, you guys mentioned watching corn starch prices and the implication for (indiscernible). Can you give a some sense of what your starch purchases per year because I know most of this paper has surprising on it?

[Daniel Buron:]

That’s more or less $100 million per year, Mark.

[Mark Wilde:]

$100 million a year of starch?

[Daniel Buron:]

Yeah.

[Mark Wilde:]

Okay and what would be kind of the baseline kind of cost per unit right now, but we look at and have you seen anything yet?

[John Williams:]

Well, we can get.

[Mark Wilde:]

That’s fine John, (indiscernible) good work in the third and fourth quarter.

[John Williams:]

Thank you very much.

[Operator:]

The next question comes from Mark Friedman from Gates Capital. Please go ahead.

[Dax Vlassis:]

Yeah, it’s actually Dax. I am just wondering if I look at the profitability of just the standalone paper business going back about three years, it’s – this quarter was probably the worst quarter in three years from that business if you look at on a segment basis just the paper excluding the pulp. Can you pass out how much of that is just what you see a temporary change and sort of just a one quarter phenomenon? And then also including the downtime and then also the impact that you think Appleton will have, but then I’m just kind of wondering on the trajectory of the cash flows from that specific business. What expectations we should have in looking at this particular quarter which was seemed to be one of the worst in three years?

[John Williams:]

It’s slow quarter. Well, I mean, I think you have to look at it over the continuum to your point. I mean, our view is over that continuum through the actions we’ve taken, we’ve maintained our market share around that 33%, 34% mark. And even in this world, I still think we are generating fairly strong margins. I think the way you have to look at Appleton is not necessarily net extra margin, but the avoidance of sharp closure market downtime over quite some period of time. So, to be honest with you, I mean, I think giving you the numbers of that level of granularity is not something I do in the conference call, but I think that’s the way you have to see it. And no doubt, the demand softness in quarter two caused us to take short-term action that if you had asked us a while back, we weren’t expecting to take.

[Dax Vlassis:]

Fair enough. Have you repurchased any shares after the end of the quarter?

[John Williams:]

Yes, we did. And that number I don’t have with me, but we’ll be publishing in our Q sometime next week.

[Dax Vlassis:]

Is it substantial relative to the amount you purchased in the quarter?

[John Williams:]

We’ve been quite steady after quarter end and just before quarter end.

[Dax Vlassis:]

A lot of share repurchases have been in excess of current share price, and it seems like most of the issues that you are facing right now are temporary in nature. Can you talk about how aggressive you plan to be or whether it’s if there is something that would prevent you from buying shares currently?

[John Williams:]

Well, there is nothing that prevents us from buying share and our commitment is to assign the majority of our cash flow to shareholders in the form of our regular dividend and share buyback and we still have $389 million less on our $1 billion program. So, we’ll continue to march towards finalizing that program within our commitment.

[Dax Vlassis:]

And if I look at your cash balance currently, its $276 million, what would you view as the available cash that you could use from that portion, not just the free cash flow that you are generating, but what do you view as excess on the balance sheet currently?

[John Williams:]

A business like ours probably need around $50 to $60 million cash balance to run the rest is cash that is available for growth for other users. It’s also, I mean, look at corporate America, cash is a nice asset to have in terms of political and economic environment. So, it was excess cash three years ago, that this is a nice cash to have right now, so that’s our view on our cash position.

[Dax Vlassis:]

Okay, thank you.

[John Williams:]

Thank you.

[Operator:]

(Operator Instructions) The next question comes from Al Kabili from Credit Suisse. Please go ahead.

[Al Kabili:]

Hi, thanks. Good morning.

[John Williams:]

Good morning.

[Al Kabili:]

I guess, John if you could maybe talk a little bit about the fluff market, what you are seeing there some new capacity coming on here. How much risk that is to pricing here over the next few months?

[John Williams:]

Yeah, certainly, I mean, obviously as that new capacity finds a home, that new capacity does things to make sure, it finds a place in the market that creates some price pressure. And if you look at the new capacity that’s come onboard versus the size of the market, I think there will be a period of time, where the market has to absorb that. So, it looks like to us as if pricing there will remain stable, but I don’t expect the major wobble going forward.

[Al Kabili:]

Okay, alright. Thanks. And then on the personal care side, the margin in the second quarter kind of dipped a bit from the first quarter, and I’m just wondering if there is what drove that, is that seasonality, is that the run rate we should be thinking about?

[John Williams:]

Yeah, I wouldn’t read much into that. I mean, some of that is – there is one of the major buy there is super absorbent polymers as a raw material. And of course, that sort of polyolefin base, it’s based on some historical peaks in the oil price. So, some of that then feeds through and then as the delay before with sort of the lower price stuff feeds through. So, I wouldn’t – it’s a little bit of a peak on that side I wouldn’t worry about that.

[Al Kabili:]

Okay, alright. So, we should still be using kind of the type of margin we saw in the first quarter as a more normalized type of…?

[John Williams:]

I mean its somewhere between 18 and 20 is going to where it sits, yeah.

[Al Kabili:]

Yeah, okay, alright. And then final question is just on your appetite for more M&A over the next year how full of a pipeline of stuff where you may or may not be looking at right now?

[John Williams:]

Well I mean I think one doesn’t want to fall to temptation on M&A. So, our view is as we’ve said I think before we will build out that business carefully making sure that we don’t run anything foolish. We are not going to bet the shop. We will have a reasonable size of acquisition if we can find it, but it will be sensible. So, the pipeline one should remember if you look that industry above 55% to 60% of it is made up of smaller players, you’ve got the major players and then you have a group of smaller players. So, that ownership – a lot of that ownership is private equity ownership or obviously at some point they’re going to look to exit. So, the question for us is we are now logically consolidated, so we are going to hear about what’s happening in that space, but really the issue for us is to make sure we do sensible transactions in this space and we are committed to do that.

[Al Kabili:]

Okay and can I just quickly follow-up on now and just the Personal Care side with the recent small acquisition you’ve done and then Europe we are not too long ago. Do you feel like you’ve got all the major pieces there that you need to sort of to meet your goals for the business or are there still Bolt-on type of things that you could see yourself doing over the next year on the Personal Care side to kind of meet you’re helping your goal of doubling the business?

[John Williams:]

That’s a great question. So, if you take the run rate we’ve given you that kind of 70 to 75 of EBITDA and you say what are you going to do with that. We believe we can double that through organic growth of the businesses we are in today, does that help?

[Al Kabili:]

Yeah, it will help. So, I was just wondering.

[John Williams:]

And then you see I mean if your question is do you have kind of a big enough operating engine management structure to drive to fold other things in, I mean sorry that was the question maybe I misinterpreted. I believe we now do I think one of the things one should remember these are two ex-Procter & Gamble businesses and EAM was a little small business that came out of some time ago. So, we have acquired very professional consumer goods Procter & Gamble people who are now putting in we think the right structure to drive that business forward. So and especially with EAM where we’ve gotten that kind of R&D innovation engine that we can feed into our product, our belief is we do have the right engine that we could fold other things in.

[Al Kabili:]

Okay. Thank you.

[John Williams:]

Alright. Thanks Al.

[Operator:]

There are no further questions at this time please continue.

[Pascal Bossé:]

Alright. Thank you very much. So, I want to thank all our participants to today’s call and wish you a very good day. And we’ll speak to you for the third quarter results in October. Thank you very much. Have a good day.

[Operator:]

Ladies and gentlemen this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.