Domtar Corporation
Q2 2014 Earnings Call Transcript

Published: 24 Jul 2014

[Operator:]

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Second Quarter Financial Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Nicholas Estrela, please go ahead, sir.

[Nicholas Estrela:]

Thank you, Iona. Good morning, and welcome to our second quarter 2014 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 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 to the Securities Commission for a listing of those. Finally, certain non-U.S. GAAP financial measures will be presented and discussed, and you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release, as well as on our website. So with that, I'll turn it over to John.

[John D. Williams:]

Thank you, Nick, and good morning, everyone. This morning, we reported second quarter EBITDA of $175 million on sales of $1.4 billion. Despite improved year-over-year results, our financial performance compared to the first quarter was negatively impacted by higher scheduled maintenance and higher unit costs resulting from lack-of-order downtime in our paper system. Our Pulp and Paper business benefited from higher selling prices in both pulp and paper, and from the nonrecurrence of weather-related costs in quarter 1. Our demand profile was consistent with the market. And as is our usual practice, we managed our production to customer demand which resulted in 51,000 tons of down time. In Pulp, we shipped all of our production, including 10,000 tons from inventories, a solid performance given the impact of our scheduled major maintenance downtime. In Personal Care, Indas performed according to plan and we continue to build out the division with the installation of new converting lines. However, higher raw material costs and some higher expenses related to the startup of the converting lines negatively impacted our earnings. So in summary, we operated well in a high maintenance quarter, but lack-of-order downtime impacted our unit costs. Pricing momentum continued in both Pulp and Paper. And finally, in Personal Care, we were impacted by higher costs in the quarter, but we're still on track to deliver on our capacity growth plans by the end of the year. 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 this morning net earnings of $0.61 per share for the second quarter compared to net earnings of $0.60 per share for the first quarter of 2014. Adjusting for items, our earnings were $0.61 per share in the second quarter compared to earnings of $0.65 per share for the first quarter. EBITDA before items amounted to $175 million compared to $182 million in the first quarter. Free cash flow totaled $48 million compared to $96 million in the first quarter. Recall that the first quarter free cash flow included $34 million of payment received from the Spanish government to repeat past due receivables. Turning to the sequential variation in the earnings on Slide 5. Consolidated sales were $9 million lower than the first quarter, mostly due to lower paper shipments. Depreciation and amortization was $3 million lower than the first quarter due to certain assets reaching the end of their useful lives. SG&A was $14 million lower than Q1, mostly due to the positive impact of mark-to-market on some stock-based compensation, as well as lower merger and acquisition expenses in the quarter. Interest expense was $26 million, $1 million higher than last quarter. Finally, we recorded a tax expense of $13 million or 25%. Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $104 million, while capital expenditures amounted to $56 million. This resulted in free cash flow of $48 million in the quarter. As previously announced, our Board of Directors approved a two-for-one split of our common stock effective through a stock dividend. As a result of the stock split, the total shares of common stock outstanding increased from approximately 32.5 million to 65 million shares at the end of the quarter. During the quarter, we also redeemed all of the outstanding exchangeable shares. Turning to the quarterly waterfall on Slide 7. When compared to the first quarter, EBITDA decreased by $7 million due to higher planning maintenance costs of $25 million, higher productivity cost of $11 million, which included lack-of-order downtime costs of $14 million, and unfavorable exchange rate of $7 million, lower volume and mix of $3 million and higher other costs of $1 million. These were partially offset by lower raw material costs for $14 million, lower SG&A costs for $14 million and higher selling prices for $12 million. I'm now on Slide 8. In the Pulp and Paper segment, sales were down 1% when compared to the first quarter, and down 4% when compared to last year. This decline, when compared to the second quarter of last year, is a result of the sale of our Ariva U.S. business last July, partially offset by higher sales in the rest of our Pulp and Paper business. EBITDA before items was $148 million compared to $152 million in the first quarter. As you may recall, our Pulp and Paper business -- our Pulp and Paper results were impacted by extreme weather condition in Q1. In fact, higher energy, fiber, productivity and transportation costs negatively impacted our Q1 results by approximately $22 million. While overall fiber and energy costs have not yet returned back to normal, approximately 75% of this cost increases are not behind us. As John mentioned, our Pulp and Paper mill ran well in the quarter with some mills exceeding plant production. Now our Paper business on Slide 9. EBITDA before items increased an estimated $14 million when compared to the first quarter. Manufactured paper shipments were 25,000 tons, or 3.1% lower when compared to the first quarter and down 22,000 tons, or 2.7% when compared to the same period last year. Since the beginning of the year, our manufactured paper shipment in North America were down by 2.6%, in line with North American market demand declines. Our average transaction prices for all our papergrade were $9 per ton higher than the last quarter. As mentioned earlier, during the second quarter, we took 51,000 tons of markets-related downtime in order to balance our production to our customer demand. Our Pulp business on Slide 10. EBITDA before items decreased by an estimated $18 million when compared to the first quarter. Pulp shipments were sequentially higher by 6% versus the first quarter and average pulp prices increased by $13 per metric ton versus the first quarter. Paper inventory increased by 9,000 tons compared to the last quarter while pulp inventories decreased by 10,000 metric tons. Our Personal Care business on Slide 12. Sales in that division were flat when compared to the first quarter, and up 117% when compared to last year. EBITDA before items was $31 million compared to $35 million in the first quarter. This decline is a result of higher raw material costs in particular, fluff pulp and nonwovens and costs related to the startup of some of the new converting lines. Turning to our maintenance schedule on Slide 13. Recall that due to severe weather in the first quarter, we adjusted the timing of maintenance of certain of our facilities. To that effect, maintenance costs in the third quarter are expected to be in line with those of the second quarter. So this concludes my review. And with that, I will turn the call back to John. John?

[John D. Williams:]

Thank you, Daniel. In Paper, results improved and pricing momentum across all of our grades drove EBITDA margins, 2 percentage points higher. Our paper volumes were lower quarter-over-quarter, but we continued to see signs of improved demand in direct mail and we had a record quarter for sales to Appvion. Our operations ran well with some of our mills exceeding plant production. But inventory levels were a little higher than where we would have liked them to be, which drove us to take 51,000 tons of lack-of-order downtime in our paper system. So we'll closely monitor and address this as we enter a heavy quarter of maintenance in our paper mills in quarter 3. We also continued with our efforts to find innovative ways to improve our cost position and become more efficient in our paper-making process. During the quarter, we completed the commissioning of the We Energy biomass boiler project at our Rothschild mill. The cogeneration power plant will use wood, waste wood and saw dust from our mill as fuel to generate electricity. This allows us to shutdown 2 inefficient boilers and purchased indirectly from the new facility. Sourcing this power externally, immediately improves the mill's cost position and also will reduce our overall emissions. Pulp. Our shipments improved in steady demand and continued tight supply of softwood pulp from low global inventories supported further price increases. In the quarter, we completed the Espanola softwood streamlining project during their annual outage in May. This project will allow us to further transition out-of-market hardwood pulp to softwood and improve our overall market pulp mix. Moving to Personal Care. Our capacity expansion plan is well underway, and we continue to realize several significant milestones. The newly installed equipment, designed to fill out our assortment of briefs, lighting components and underwear is ramping up, and we are beginning to see the early stages of some cost savings. In addition, we introduced several new innovations in the second quarter, and we're in the process of launching new products for strategic customers. I'm pleased with the progress we've made so far and our teams are pretty agile, especially in the context of our rapid M&A expansion. We find a balance speedy execution and increasing capacity, but also capitalizing on consumer insight to make good, long-term decisions. The strategy is allowing us to identify, invest and integrate operational and product improvement opportunities to better partner and win with the channel leaders. By the end of this year, we'll start to see this strategy manifest cost savings, incremental volume opportunities and early breakthroughs in the quality of product performance. Finally, we continue to build talent and fill critical positions with the right individuals to help drive sales and execute on our strategy. On capital allocation, we increased our dividend by 36%, reflecting our confidence in our future as we continue to transform Domtar. We remain committed to deploying capital to those areas that will achieve the best possible return to our shareholders. On the strategic front, we entered into an agreement with UPM to become the exclusive European distributor of our Bio-Choice lignin, which is produced at our Plymouth, North Carolina mill. Bio-Choice is a 100% bio-based sustainable alternative to fossil-based products and holds the USDA certified bio-based product label. We're excited with the partnership and look forward to developing the market together and offering customers sustainable, value-added products for a growing variety of end users. Finally, on health and safety, our second quarter total frequencies at rate was 0.63, one of the lowest rates on record at Domtar, and an impressive performance during a busy maintenance quarter. We were also recently honored at the Pulp and Paper Safety Association's Annual Awards ceremony, where 11 of our facilities were recognized for Safety Performance Excellence. I'd like to congratulate our 10,000 employees across all of our facilities that are committed to driving improvement as we believe putting health and safety front and center is vital to our operational performance. Now turning to our outlook. Our paper volumes are expected to decline with market demand, while global softwood pulp markets are expected to remain balanced. Our priority remains to stay vigilant on balancing our paper production with our customer demand, and we continue to closely monitor our order entries. The ramp-up of the new production lines were expected to positively impact the Personal Care business results towards the end of the year. And finally, input costs are expected to remain relatively stable going forward. Thank you all for your time and support. And I'll turn it back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. [Operator Instructions] Iona, I'll let you open the queue.

[Operator:]

[Operator Instructions] The first question comes from Mark Connelly from CLSA.

[Mark W. Connelly:]

John, just 2 questions. First, where there any big surprises in the maintenance cost and the productivity hit this quarter relative to your expectations? And second, you say that you're expecting shipments to decline in line with demand, you're already taking a lot of downtime. So should we expect you to announce capacity closures or more downtime?

[John D. Williams:]

Mark, let me take the first one first. So undoubtedly, we entered thinking that we were going to be flat in volume terms as opposed to sort of down, but in line with the market. So that meant we had little bit more inventory than we were expecting. So we took that adjustment, and we'll continue to behave in that fashion if we see that happen again. We have a pretty high maintenance quarter in quarter 3. So I'm not really sort of expecting too much. I mean, again we're just -- if you look at the way our order entries come in, you only get a couple of weeks visibility. So sometimes you have to move pretty quickly. On the closure front, we always have a plan if we feel we need it. So as I think I've said to everybody before on some of these calls, it's not as if we don't know what we're going to do next if we need to. If we feel that need, we would certainly take action. If we are right on sort of a 2% to 3% or 3% to 4% decline this year, and we maintain our market share, I don't see it in the immediate term. But over time, of course, it may well happen. I would just remind everybody on that though, of course, the other issue there, is it's not just a pure shot, very often it's a repurposing. So if you look at what we've done in recent years, particularly with Plymouth, and to some extent, with Marlboro, where we've repurposed the specialty, we're also looking to sort of do the best we can to maintain an earnings stream from the facilities, does that help?

[Operator:]

The question is coming from Alex Ovshey from Goldman Sachs.

[Alex Ovshey:]

Just on the paper pricing side. So sequentially, you picked up $9 versus the first quarter. I think, on the first quarter call, we talked about there was incremental $8 to be had from the first price increase. So the implication is that essentially, there was no realization on the second price increase. So in terms on the second price increase, is it really difficult to be able to get an essentially, it seems like we're not going to really be able to get anything on that second increase?

[John D. Williams:]

Well, I think across the entire range of papers, Alex, we won't get it. But I think there's a grade or 2, I mean, particularly in some of the technical specialty grades where there's a little bit of pricing momentum, I think we might see some pricing movement. But on the majority of the grades, I wouldn't expect it at this point. I think it's supply demand driven, of course. And there's no doubt, imports were a little higher, that creates a slightly more competitive environment. So we don't have an expectation at this point.

[Alex Ovshey:]

Got it, John. And then just on the lack-of-order downtime, so you took 51,000 tons but inventory still went up by 9,000 tons sequentially.

[John D. Williams:]

Indeed. But they were considerably higher than that in the middle of the quarter, so that was why we took the adjustment.

[Alex Ovshey:]

Right. Rather than just thinking on the forward basis, I mean, do you sort of have to build off of that 51,000 in order to get the inventories to move there [indiscernible]

[John D. Williams:]

Well, we've got a lot of maintenance in quarter 3. So we have to have a little bit more stock in the system perhaps than we would have on a normal run rate because we've got more maintenance in quarter 3 than we're used to, Alex. So I think we're in pretty reasonable shape.

[Operator:]

The next question comes from George Staphos from Bank of America Merrill Lynch.

[George L. Staphos:]

First question I had on pricing and, John, you just mentioned, maybe just a little bit more competitive with imports this year. In past calls, we've talked about a chain of custody and sustainability being important barriers to entry into the North American market from some of the producers in other regions, probably South East Asia most importantly. If that was relatively true back a while ago, is it less true now? And if so, what's changed for your customers in evaluating that? And how do you regain momentum and have them focus on that if given factor is going to change, I had a follow on.

[John D. Williams:]

No, okay. Let me -- I mean, it's a bit like chasing smoke to answer that question, but let me do my best with it. So undoubtedly, a number of producers, I think 1 or 2 in particular, who have put a lot of effort into telling a more compelling story around sustainability. And they have made their case to a number of NGOs who perhaps, some of whom historically, were a bit more aggressive with them. So that has kind of blurred the line between ourselves and some of those producers. Now I think time will tell, I think there are a couple of questions. If you think sustainability is just a marketing story, you couldn't be more wrong. So the key really is to behave in a sustainable fashion in the core of your business, which we've been doing for a number of years. So I think whether this stuff is real or whether it's just a marketing story remains to be seen, George. But it does mean that I think we have to increase our efforts. For example, by getting hold, if we can, of more FSC-certified fiber, actually where the demand for that is still growing to set ourselves apart, if you like, to create more differentiation kind of back to the levels we've had 2 or 3 years ago. Does that help?

[George L. Staphos:]

It helps. Does it suggest that maybe margins or cost associated with the business relative to what would've otherwise been the case may actually go up because you have to further market and further demonstrate your capabilities on sustainability relative to your peers, whether they are Johnny-come-latelys or not?

[John D. Williams:]

Right. Well, I think the question then becomes -- it's not really about advertising and promotional support, it's more about telling the story on a granular level to the customer. So it's really more about sales effort, which I don't think has huge costs attached to it.

[George L. Staphos:]

Okay, fair enough. My follow on, and I'll turn it over. I just want to be clear. I think you're answering Alex's question, are you suggesting now that you've pretty much seen all the pricing increase you're going to see in the Paper's business for the majority of your grades, or did I misunderstand that?

[John D. Williams:]

No, you understood that exactly correctly.

[Operator:]

The next question comes from Chip Dillon from Vertical Research Partners.

[Chip A. Dillon:]

First question, John, is on the Pulp segment EBITDA, you mentioned on the slide that it went down $18 million from the first to second quarter. And I'm really scratching my head because I know that the weather was better and certainly, we saw softwood prices and particularly fluff, at least on the published basis, averaged higher. So could you just help us understand, is there something seasonally that would have caused that to happen?

[John D. Williams:]

Well, we had a very high maintenance quarter in our Pulp business, Chip, that's really what's driven it. We don't kind of -- if I recall, split that out. But that's really what's driven most of that.

[Chip A. Dillon:]

Okay, that's helpful. And then when you look at the 51,000 tons of downtime, and I know these are all ballparks. But obviously, you're not only missing the potential revenue if you'd sold that paper. But you also have fewer tons absorbing all the costs. I mean, is it roughly fair to say that might have been all in, maybe a $15 million issue for you in the quarter?

[John D. Williams:]

It's $14 million in the quarter, Chip.

[Chip A. Dillon:]

Good guess, I don't know if you said that, but I promise you I didn't hear that.

[John D. Williams:]

Well, we were close enough. Yes, that's the number.

[Chip A. Dillon:]

Okay, I see. And then I guess, the last question is, what's interesting is when I look at last year and it looked like your maintenance was roughly similar second to third quarter. But your earnings virtually doubled from second to third, even though we know prices were actually edging downward, and we didn't know about Courtland until September. So it wasn't like your customers were jumping in there. And in fact, the volumes were roughly flat. But yes, the EBIT in the Paper segment, jumped pretty big. Again is there something seasonally that was unusual last year? Or do you think would you expect that there's something there to the seasonality that might help us in the third quarter?

[John D. Williams:]

I think, Chip, I will have to go back and look at the difference between the 2. But we've rescheduled a lot of maintenance downtime this year because of the cold weather in Q1. So normally, Paper downtime are a little bit more split between Q2, Q3. This time around, I mean, Q2 was mostly a pulp maintenance shot quarter, and Q2 was pulp and Q3 will actually be a paper. So I think that's probably again a big explanation for the gap year-over-year.

[Chip A. Dillon:]

Got you. And one last quick one. Is -- I know on the last call, John, you pointed out how your goal the last 3 years had been to return about half the cash by virtue of dividends and buybacks. And now -- and then actually, you pointed out that it actually, have been 80% over that 3-year period. And it seems like your focus is now moved much more toward acquiring market -- a greater market position in Personal Care. And I guess, my question is, in light of the stock performance, it's actually, I think, actually near your average buyback price, so it’s actually come in a bit. And secondly, when you look at the potential move from, on major, company in Cincinnati, is there any thought that you might, while maintaining that posture, you might balance it a little bit more than you may be thought you would?

[John D. Williams:]

I don't know how many answers there are to that question, Chip. But let me start with, I think, on capital allocation, you really have to see as a long-term commitment, I mean, not sort of quarter-over-quarter, yes, we didn't buy any stock back in quarter 2. But I mean, we're definitely committed to that balanced approach on capital allocation and capital return, but really provide the best return for shareholders. So we're committed to executing what's left on our authorization. And we'll buy back stock when we feel it's the optimal use of capital, so that we can create value for the shareholders. You alluded to our friends in Cincinnati, I think, would it be helpful if I gave you a little bit more color on what they're actually doing with this product?

[Chip A. Dillon:]

Yes.

[John D. Williams:]

So this is light inco under the Always brand really moving from Fem-Hy into light inco. It's a retail launch, it's about 32 SKUs, it's already out in market in Europe. To give you some view of our adult incontinence business, about 85% of our business is actually institutional and 60-odd percent of the market is institutional. So this is focused on a fairly narrow path of the inco business, really going up against the Kimberly-Clark Poise brand. I think, 2 things may well happen. Remember, in retail, we're largely private label. I think it will -- it may well be that some of our customers are thinking about their private label offering, given our position as we talk to them, there might well be opportunities there for us. And some of these spending globally, $300 million on the category, I think, could well lead to more interest in the category. So I thought it might be helpful just to give you a bit more color on that.

[Operator:]

The next question comes from Mark Wilde from BMO.

[Mark Wilde:]

I wondered if you could just give us a little bit of color right now on sort of where your pulp price realizations are at the moment versus second quarter.

[John D. Williams:]

They -- you mean right at this minute, as in...

[Mark Wilde:]

Yes, as we speak.

[John D. Williams:]

Right. So relatively flat, there's a little bit of pressure here and there in the usual kind of summer season slowdown, Mark. But if you look at the inventory numbers that came out the other day, we think probably consistent pricing quarter 3. And if there's an opportunity as the volumes come back at the end of the quarter, we will take it on the price front.

[Mark Wilde:]

Okay. If we turn over to Personal Care, John, you mentioned the increase in raw material costs, since the ramp-up in cost in front of the expansion. Is that going to be headwind for you again in the third quarter because it sounds like in the release and in your comments, you're really suggesting that the ramp-up isn't really going to have any benefits until late in the year, which I read to be fourth quarter and maybe later in the fourth quarter?

[John D. Williams:]

Yes, that's right, Mark. So the way we see it now, obviously, some of that raw material price comes back to us in fluff pulp pricing. But certainly, some of the super absorbent polymers, for example, have gone up, and we've had some machines bedding in and there will be more machines and they will bed in. So really, we're focused on the fourth quarter to see that uptick.

[Mark Wilde:]

Okay. And can you give us any quantification as sort of the benefit that we might see in the fourth quarter?

[John D. Williams:]

Actually, I can't really give you that detail. But certainly, it should be meaningful versus the current run rate.

[Operator:]

The next question comes from Paul Quinn from RBC Capital Markets.

[Paul C. Quinn:]

Just a question on the Pulp side. You've characterized that as the markets remained balanced for the outlook. And just trying to reconcile that given that you're over 85% softwood, and we got softwood down at 25 days of supply, which historically would say, it's an automatic price increase environment. So what is the disconnect between global pulp inventories and your outlook?

[John D. Williams:]

I think, it's -- to be honest, the outlook's really talking about the next quarter. And Paul, it's the summer season. So it's hard to see kind of where the catalyst comes from. But I would be -- I mean, if it continues the way it continues, I'll be sitting here thinking, by the end of quarter 3, there's a price increase opportunity. So I think that's where the disconnect comes.

[Paul C. Quinn:]

Okay. So just because generally pulp inventories build, I guess, in July, August, you would look for, if things stay the same, you'd look for something in the fall because [indiscernible].

[John D. Williams:]

Yes. I mean, there's no moment when we're not looking to move the price up obviously, and we're not sort of sitting I think, oh, well there's no opportunity, we'll look at the dynamics. And the minute we see that opportunity, we'll be out there.

[Paul C. Quinn:]

Okay. And then just around the Personal Care, if you can give any more detail in terms of the capacity or some kind of metrics, just trying to model it out, and it gets it's very difficult.

[John D. Williams:]

It does. I agree.

[Paul C. Quinn:]

And just wondering if you can assist.

[John D. Williams:]

Yes, certainly. Let me do the best I can. So 2 things, if you look at our Personal Care business, we obviously have -- the baby diaper business largely focused on Waco and focused on Delaware and then we have the adult incontinence business. So right now, in the European business, we have machines going in one machine going in October, one in December, one in the March '14. And then in our business in Spain, in Toledo, we have a light inco machine going in March '15. In our Greenville plant, we've got a brief line going into April '14, another line is just gone in actually. And in Waco, we have another line going in. So some of that is substitution where we're actually moving from an old product platform to a new product platform. Some of that actually is new business, if you like, to fill out our line. If you look at that marketplace, it should grow low sort of 4%, 5% a year. Our goal obviously is to grow a little bit faster than that. So what we ought to be seeing next year is kind of high single-digit growth in that business. It might be a bit choppy pool, and the reason it would be choppy is because in the private label world, you want to get the business, so you don't get the business. But that's what should be developing into 2015.

[Paul C. Quinn:]

Okay. So if I add up the machine installations is, it looks like about 7 machines and the majority is say, 5 would be new product and 2 would be replacement kind of ballpark in this?

[John D. Williams:]

Yes, somewhere. I mean, it's not as simple as that, but somewhere around there, yes.

[Operator:]

The next question comes from Al Kabili from Macquarie.

[Albert T. Kabili:]

John, first question -- first question, John is -- for you is the change in view on your paper shipments this year. I mean, we obviously know what's going on with imports. Did -- is domestic competition or competition from domestic competitors, is that factored at all in your change of view as well?

[John D. Williams:]

Not particularly. I think it's more driven by imports. But certainly, there was obviously an expectation that the marketplace would become tighter faster. That expectation has not been realized. So some behaviors have changed somewhat, if that gives you a bit of color?

[Albert T. Kabili:]

Yes, it does. Okay. It jives with what we've heard. Okay. Secondly is on the Personal Care side, the synergies that you were expecting from AHP, I think it's $10 million over 2 years. Have we started to see any of that yet reflected in the results, or is that still to come?

[John D. Williams:]

Well, let's talk about that because remember we've talked to you last quarter about how we've had our business downsize in one of our major customers?

[Albert T. Kabili:]

Yes.

[John D. Williams:]

We've talked about that last time. So the synergy from having that production base, which would allow us, actually, to sell adult inco into the west, out of Waco, that machine has only just gone in and it's ramping up now. So we should see some of that synergy come through. We've seen some synergies on the cost side, but that sales hit allied to the kind of overhead recovery that went with it. That's meant, you can't see them in the P&L although, we are getting them. But they get eaten up by the loss of that overhead recovery at this point.

[Albert T. Kabili:]

Okay. That's helpful. And then the follow-up to that is you talked about the downtime or the start-up costs related with some of the new equipment. When that gets fully up and sort of running year end, do you think that the benefit from that will sort of be enough? Because it looks like organically, the business is down in earnings on some of the headwinds you just mentioned. With the new equipment sort of fully ramped up in AI, do we sort of get back to sort of -- does that offset some of the business where you came in? Is it better? Can you give us a flavor for how that might look?

[John D. Williams:]

Yes, certainly, I will. So what you have to remind yourself, we've obviously built a structure to run this thing as a business as opposed to independent businesses. And then in the short term, that has cost us SG&A. Our view on that's pretty simple, that actually in the medium to long term, that made sense because then we can run that thing as a business as opposed to kind of 4 portfolio companies doing their own thing. So my personal view is I think, the view of all of us is that actually, over time, that will easily make up for kind of some of the headwinds we've got, we've had. And I think one of the things to think about, particularly in the baby diaper business is that it's a largely, a private label business that operates around bids that happen once every year or once every couple of years. So if we get our partnership right with these major customers and have a compelling story and a product story to tell, we can win that business back that we have taken away from us. So you can turn this ship around, I think, within 1 year to 2 years if you got a compelling enough story.

[Operator:]

The next question comes from Riz Hussain from Morgan Stanley.

[Rizwan Hussain:]

I just got a question. As it relates to again, I know you've been -- had talked at least during the quarter about the potential to get to about $250 million or so of EBITDA on the Personal Care side by 2017 compared to $300 million to $500 million generally with some acquisitions. Do you still see that view of the impact? And then I have one follow-up question as well.

[John D. Williams:]

Okay, sure. I mean, that's still the objective. I mean, patently, we have had 0 [ph] back or 2, certainly on the sale side in the short term. But we're still holding to that. So that's still how we're progressing. It's very aggressive. I don't think anybody would underestimate the aggression attached to it. But we have a plan and that's what the plan says, and we're implementing that plan. So it's not, how will I put it, it's not hope. I mean, there's a plan attached to it, there's a capital plan attached to it, there's a customer plan attached to it. So I'd still think that's where we're headed.

[Rizwan Hussain:]

Got it. Great. And I guess, maybe just a follow-up on that is. Again on the Personal Care side, as it relates to incremental build out of that business through a potential M&A, how would you, well what's your -- I guess, maybe if you can give us, provide a narrative around your view on the ratings on the debt side as well, just kind of are you still kind of targeting investment grade leverage credit ratings at this point, or is there any change in the view there?

[Daniel Buron:]

I think we're -- I'll answer that question. I mean, I think as we've said in the past, we'll manage our balance sheet right. So we'll make the right decisions for all our stakeholder. And so far, we've made rather a medium-size acquisition. So if we continue in that route, I don't think there's a risk on the balance sheet side. But if there's the right acquisition that's a little bit bigger, we'll have to make our decisions then.

[Operator:]

The next question comes from Mike Levine from Oppenheimer.

[Michael S. Levine:]

My question is actually -- it's actually been asked already, but it was on the capital allocation front. Just -- I understand the long-term plan here, it just seems with the stock down about 1/3 in the last couple of months that share buyback should probably move closer to the top of the list. So not a question, but more of an observation.

[John D. Williams:]

Right. Okay, I mean, Mike, you make a very good point. And certainly, we're always thinking about that value and how we can best create value, and if we feel that's the way, then you'd see us do that.

[Operator:]

The next question comes from Robert Howard from Prospector Partners.

[Robert Howard:]

So I just wanted to -- if you had a little commentary on the import situation. I mean, they really have gone up pretty dramatically. And I was wondering if it's just a matter of -- it's just kind of a simple matter of okay, prices are higher it's easier for them to import in here? Or are there even kind of further issues that maybe we pass some inflection point or threshold price where, the ease of imports coming into North America has greatly changed. And just sort of any commentary you might have.

[John D. Williams:]

I think, that's an interesting question. So certainly, if you look back over pricing, pricing at this point is not sort of at some kind of a all-time high that's never been seen before. So it's not as if the umbrella is enormous. I think 2 things have happened, when the closure of that amount of capacity is seen, customers are looking to see well, am I actually going to get what I need? Not unnecessarily am I going to get what I need at a very low price? So I think some of it is driven by that. Some of it is undoubtedly driven to your point by their domestic prices are lower than our price so they can get product here. However, our working premise is that when their domestic prices readjust, which they will over time, this level will reduce because in the end, they will make -- they're going to make a better margin in their domestic market, and they're going to make an export. And that's been to be frank, although the one particular supplier, anywhere globally, the paper industry's behavior. So it would be surprising if this was dramatically different over a sustained period.

[Robert Howard:]

So I guess, you're kind of thinking of a foreign pricing or that -- some strengthening of foreign pricing would actually be a big benefit. So it's not just your market, it's...

[John D. Williams:]

Yes. So if you saw their domestic market pricing move patently, they'll be thinking, well, if I can -- if you think about their cost space, typically a lot of them are buying pulp from Western companies because they don't have the trees in some instances. They have a little bit of a labor benefit, but labor is not a massive proportion of the cost position. They certainly have no energy benefit and then they have to ship it over here. And actually, if they're really going to be in the long term, they have to build the supply infrastructure. So you put all that together, they have to be very determined. And if I look at our overall market share, here are these imports coming in, and our market shares actually stayed pretty consistent, that's not as if we're declining in market share terms, we're just a little bit lower than our expectation was, hence the reason that we took a bit of lack-of-order downtime. So I mean, to be honest with you that that's kind of the way we see it at this point.

[Robert Howard:]

Sure. And when you make the -- examine the decision of whether or not to shut down a mill or remove production in that one.

[John D. Williams:]

Yes, yes.

[Robert Howard:]

Are you -- I mean, I guess, is this a sign that you really need to look at what the pricing is in those foreign markets, maybe more than you had before because it obviously has an impact?

[John D. Williams:]

Yes, we've always looked, to be honest. The dynamic hasn't changed that much. I think, the real catalyst for this had been that amount of capacity coming out at one-time was seen by a lot of people as potentially, they were going to have trouble getting the paper they actually needed. So I think that's what drove the behavior. The domestic market issue has been there for quite some time, actually.

[Robert Howard:]

Yes, yes, okay. Great. And then just one -- just quick accounting question, with the buyback of the exchangeable shares, so just kind of wondering where that went through on the cash flow statement because you got the stock repurchase line and it's not showing anything there it just...

[Daniel Buron:]

It was the redemption. But I mean, by the way it was done, it was actually the conversion of exchangeable share into share of Domtar Corporation. So it is just a small entry that you're going to see in the shareholder equity.

[Operator:]

The next question comes from Brian Lalli from Barclays.

[Brian Lalli:]

Just a follow-up on the previous question, focusing on more of the balance sheet on the leverage side. In terms of investment-grade rating, as you know, you talked about, obviously there's been a lot of questions on the current market condition and then also, M&A and growth in Personal Care, as well as share buybacks. I mean, how do you weigh those things? And I guess how important is that long-term access to maybe in the investment-grade markets versus trying to hit that inflection point in the short term on Personal Care?

[Daniel Buron:]

Again, I think the way -- I mean, that question is asked regularly, I would say. And I think the way we end all of that within the Corporation is we like to have access to the debt and -- to the capital market, actually, at all times. And we aim at a solid balance sheet. We, unfortunately, don't have control of what the credit agencies are viewing the industry or us or the economy. So we're refraining ourselves from saying, we commit to a specific credit rating. But if you look at best behavior, we've been very prudent that we will manage our balance sheet and we will do the same in the future.

[Brian Lalli:]

And maybe just one follow-up on that, specifically agreeing that you can or you can't say what they're going to say about the industry broadly. Would you, maybe even with the stock price rate is referring from doing things like debt finance buybacks, so just [ph] M&A maybe a different argument. But how do you think about it on there's a different shareholder return there.

[Daniel Buron:]

I don't think that's different, I mean it's all about -- I'm sorry. It's all about the return for shareholder. So we actually view M&A buyback or dividend kind of all in the same bucket when we look at return overall. So we've done debt finance acquisition. We never did debt finance share buyback. But I wouldn't exclude that from the list of things we're considering.

[Operator:]

[Operator Instructions] We have a follow-up question from George Staphos from Bank of America Merrill Lynch.

[George L. Staphos:]

Two questions on repurposing and conversion and recognizing that, one, you don't see an intermediate need for this right now given the way you expect the market to evolve. And B, it's all a little bit difficult to talk about these things in a public conference call. Could you maybe sketch for us broadly what kind of capital cost would be associated with potential repurposing projects down the road? Or could you minus what some of the more recent ones have cost you? And then -- go ahead.

[John D. Williams:]

Sorry, George, let me talk to that because I think you raised a very important point. So 2 things have happen for it to make sense for us. I think, one, there has to be a marketplace. So do we like the market dynamics because to be frank, the paper industry has a bit of a record of kind of build it and they will come in terms of assets. So the market has to work. Two, we have to believe we have some expertise in terms of production and in terms of that market. Three, we have to believe our asset is asset appropriate. And of course, four, as important as anything as we have to believe, that there's a return there for us. So take a couple of things we've done. So when we shot Plymouth, and we were already in the fluff pulp market, but we had a great reputation, so we thought it is an opportunity, there's a decent seaport. So we spent $85 million in the end on that Plymouth conversion. So that's one example. Marlboro, where really we now lined up that business to be a lightweight paper mill, supporting largely our Appvion contract. I can't remember the exact numbers off hand. But I think we spend about -- yes, that was the number I had in my head, I would think we spend about $50 million. Now when you look across the sort of park, we will still view any opportunity to those 4 criteria. This time, will it be more expensive? Who knows it depends on how compelling it is. But that's the kind of money we spend so far, does that gives you a little bit of color?

[George L. Staphos:]

No, that's very helpful, I appreciate the review on it John. The other question then I had as a follow on, and I recognize there can't be no guarantees again on something like this, and you never say never. It sounds like whatever repurposing you may need to do in the future, would tend to be because of the importance as you put -- placed on it for expertise and customers understanding your presence in the market and your quality, would tend to be more again, around fiber and pulp and lightweight paper is in would be perhaps, less oriented towards packaging grades or could you -- would you would not choose to roll out conversions and repurposing down the road into packaging grades?

[John D. Williams:]

Sorry, George, I mean, I could only reiterate what I've said. I think, it has to be compelling for us, it has to make sense for us, and it has to be strategic meaning -- strategically meaningful in terms of our skill base. So I think that's just the way I see it. So it also complement in a perfect world, it also complement what we already do as distinct from sending us somewhere that we haven't been, if that make sense?

[Operator:]

We have a question from Mark Wilde from BMO.

[Mark Wilde:]

John, actually just kind of follow along those lines, I noticed that your specialty paper volumes were actually up slightly year-over-year the last couple of quarters. And I just -- I wondered whether there's an opportunity to do some more things on both some of the small specialty mills and some of the larger mills that have kind of small machines, that kind of grow that specialty business. And what different ways you might do that? Whether it's buy a book of business or create another venture like you have with Appvion?

[John D. Williams:]

Well, I mean, that's been a very compelling story for us, Mark, as you know. And we look, I don't want to put an advertisement out on the air, but I mean, we look constantly to see if we can find those opportunities because it's a compelling story. We're a very competitive papermaker, they're a great product developer and coater. So between the 2 of us, it makes through a strong combination. If we could find similar types of combination, we would.

[Operator:]

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

[Nicholas Estrela:]

Thank you, Iona. So as a reminder, we will release our third quarter 2014 earnings on October 23, 2014. So thank you for listening, and have a great day.

[Operator:]

Thank you. 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.