Domtar Corporation
Q3 2014 Earnings Call Transcript

Published: 23 Oct 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Domtar Corporation Third Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded, and today is Thursday, October 23, 2014. I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead, sir.

[Nicholas Estrela:]

Good morning, and welcome to our third 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 a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings to the Securities Commissions 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 EBITDA before items of $200 million on sales of $1.4 billion. When compared to both prior quarter and prior year, our much-improved results were driven by a strong performance in Pulp and Paper. Specifically in pulp, results were better than the second quarter, with a $31 million EBITDAR improvement due to lower maintenance costs and higher shipments. We also had a solid performance in our paper business despite the lack-of-order downtime we took to balance our production to our customers' demand. Our paper shipments were stable quarter-over-quarter, and prices remained firm in a very competitive environment. Year-to-date, our paper volumes declined, with North American uncoated freesheet demand which is trending in line with our 3% to 5% assumption. In Personal Care, we had a good performance, with a number of our key product groups showing strong momentum. However, our top line was impacted by some seasonality in our European business and the lower euro. We are executing on our capital expansion plans, and we're making progress with the ramp-up of 5 newly installed machines at 3 of our facilities while further integrating operational and product improvements. Free cash flow was very strong in the quarter at $147 million, and we continued with our balanced approach to allocating cash by funding strategic growth initiatives and rewarding shareholders through share repurchases and our increased dividend. In summary, we executed well from both an operational and financial perspective, reflecting the hard work, focus and commitment from all of our employees. With these brief remarks, I'll turn the call over to Daniel for the financial review, and I will 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 $4.33 per share for the third quarter compared to net earnings of $0.61 per share for the second quarter of 2014. Adjusting for items, earnings were $0.94 per share in the third quarter compared to earnings of $0.61 per share for the second quarter. EBITDA before items amounted to $200 million compared to $175 million in the second quarter. Free cash flow totaled $147 million compared to $48 million in the second quarter. Turning to the sequential variance -- variation in earnings on Slide 5. Consolidated sales were $20 million higher than the second quarter, mostly due to higher paper prices and higher pulp shipments. Depreciation and amortization was in line with the second quarter, while SG&A was $1 million lower. Our third quarter earnings include closure and restructuring costs of $2 million related to the closing of our converting center in Guangzhou, China. During the third quarter, we concluded IRS tax audits for year 2009, 2010 and 2011, resulting in the recognition of previously unrecognized tax benefit in an amount of $204 million. These were mostly related to the nontaxability of the 2009 alternative fuel tax credits. In the same context, we also recognized $18 million of deferred alternative fuel tax credits, which were accounted for under other operating income in our P&L. Excluding those items, our tax rate in the third quarter would have been 23%, slightly below our forecasted tax rate. Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $203 million, while capital expenditures amounted to $56 million. This resulted in a free cash flow of $147 million in the quarter. Our free cash flow this quarter benefited from approximately $40 million from additional accounts payable linked to major maintenance work done late in September. So far this year, we invested $157 million in capital expenditures, and our best estimate for the full year is now between $240 million and $260 million. In the quarter, we repurchased 531,000 shares of common stock for a total cash consideration of $19 million, and we still have $102 million available under our current program. As a reminder, the dividend paid this quarter were at the new amount of $0.375 per share, a 36% increase from our previous payment. Since 2011, we have returned to our shareholders, through dividends and stock buyback, a total of 72% of our free cash flow. At the end of the quarter we had approximately 64.5 million common stock outstanding. Finally, in the first few days of October, we successfully extended our $600 million revolving credit facility by 2 years. The new 5-year facility will now mature in Q4 2019. Turning to the quarterly waterfall on Slide 7. When compared to the second quarter, EBITDA increased by $25 million due to lower raw material costs, primarily consisting of fiber and energy of $11 million, lower maintenance and better productivity of $6 million, higher price, volume and mix of $5 million and lower cost of $5 million. These were partially offset by an unfavorable foreign exchange impact of $2 million that primarily impacted our Personal Care segment. Now Slide 8. In the Pulp and Paper segment, sales were 2% higher when compared to the second quarter and 2% down when compared to last year. This decline, when compared to the third quarter last year, is the result of the sale of our U.S. Ariva business last July, partially offset by higher sales in the rest of our Paper and Pulp business. EBITDA before items was $172 million compared to $148 million in the second quarter. Now our paper business on Slide 9. EBITDA before items decreased by an estimated $7 million when compared to the second quarter. Manufactured paper shipment were flat when compared to the second quarter and down 38,000 tons or 4.7% when compared to the same period last year. Our average production prices for all our paper grades were $9 per ton higher than last quarter, mostly as the result of better product and customer mix in the current quarter. Finally, we took a lack-of-order downtime of 51,000 ton in the quarter in order to balance our production to our customer demands. Our pulp business on Slide 10. EBITDA before items increased by an estimated $31 million when compared to the second quarter. Pulp shipment were sequentially higher by 9% versus the second quarter, and average pulp prices decreased by $12 per metric ton versus the second quarter. On Slide 11. Our paper inventory decreased by 18,000 ton compared to last quarter, while pulp inventory actually increased by 1,000 metric tons. Our Personal Care business on Slide 12. Sales in the division were 1% lower compared to the second quarter and up 32% when compared to last year. EBITDA before item was $30 million compared to $31 million in the second quarter. The quarter-over-quarter decline in sales and EBITDA is mostly the result of some seasonality in our European business as well as the effect of a weaker euro. On Slide 13 of the deck, you will find the planned maintenance schedule spending for the fourth quarter, where we expect to spend $14 million less than the third quarter. So this conclude the financial review, and with that, I will turn the call back over to John. John?

[John D. Williams:]

Thank you, Daniel. Our pulp profitability improved following a busy second quarter of planned maintenance outages. Shipments were stronger, and our pulp mills run well. In fact, our Plymouth, North Carolina mill achieved the highest level of production since its conversion to a fluff pulp mill due in part to the positive impact of our lignin separation plant on the mill's productivity. Our average selling prices for pulp were lower in the quarter, but we saw good momentum in fluff pulp markets. We're slightly more cautious on the short-term pulp outlook due to the recent strengthening of the U.S. dollar, but we remain optimistic with long-term market dynamics in softwood, which now represents about 88% of our pulp sales. Moving to my business review on paper. Despite stable paper volumes, we stayed vigilant on balancing our production with our customers' demand. We shipped at 102% of our production capacity in the quarter, reducing inventory levels while taking 51,000 tons of lack-of-order downtime. And our focus on productivity and operating efficiency allowed us to reduce market-related downtime costs versus the second quarter. We also continued with our efforts to size the business appropriately with the closure of 2 of our converting assets. The closure of our Indianapolis facility will allow us to optimize and increase utilization rates at other locations. And in addition, we closed our Guangzhou paper converting operation in order to focus our sales capabilities on our growing pulp customer base in China. Now let me say a few words on the paper markets. Imports, particularly in cut size, have continued to grow over the last 12 months, reaching record levels in July and are up 36% year-to-date, resulting in market downtime within our system. For these reasons, we're determined to continue to leverage our supply chain and high-touch customer service model to provide a higher-value solution for our customers. Before I turn it over to questions, I'd like to highlight some of the key initiatives we were able to advance during the quarter. We relaunched our Xerox paper and specialty media line with a realignment of the brand and product mix, as well as a series of product enhancement and impactful new packaging. The goal is to broaden the brand's appeal across new consumers and within new channels. Our leadership position with sustainable products also translated into market success with the sale of our 5 millionth ton of FSC-certified paper. This is a first for the North American market and another milestone in our commitment to sustainability. Finally, we were well represented at the recent Pulp and Paper International Awards. Our Windsor Mill won the Environmental Strategy of the Year Award for their efforts in reducing greenhouse gas emissions, water consumption, energy use and waste. In addition, our Paper Fun Truck initiative, a part of our PAPERbecause campaign, won the Innovative Printing & Writing Campaign of the Year Award. On innovation, we're focusing our efforts on improving our cost position and becoming even more efficient in our pulp and paper making processes. During the quarter, our Nekoosa mill successfully completed the conversion of one of its coal boilers to natural gas, a project aimed at reducing air emissions and production costs. The conversion of a second boiler is currently underway, and I'm pleased to announce that the mill will soon meet the new boiler max standards. And at Rothschild, the pulp mill sourced all of its steam energy from the new We Energy's biomass boiler. The mill ran very well, with 100% uptime, and virtually no natural gas was fired. Turning to Personal Care. We delivered positive results with our product categories and reached some new milestones. In North American AI and Baby, we had good volume growth in the quarter. In AI, we won new business with a major institutional private label distributor; and in Baby, we grew our business on the back of product innovation and digital customer engagement as well as with the launch of our Comfees brand in the institutional infant diaper channels. In Europe, our business performed well despite the summer slowdown. Our capital expansion plans are progressing, and we are improving manufacturing uptime and began producing product for customers on the new lines. Our goal over the coming quarters will be to further extract cost savings from lower raw material usage and from insourcing more product. With the new capacity, we're now in a position to pursue additional volume opportunities. The store-brand absorbent hygiene industry is driven mostly through a bid process. Therefore, our top line growth may well be choppy over time. With personal care markets fast growing and with our new and efficient manufacturing lines, [indiscernible] our products and research and development capabilities, we are positioning the business to be the leader in its targeted sales channels. Finally, master limited partnerships have become a recent subject of interest for many of our investors. Our commitment to our shareholders is to explore any opportunity that can unlock value, and therefore, we are currently investigating the structure and whether it's appropriate for our business. Now turning to our outlook. Our paper shipments are expected to decline in the fourth quarter when compared to the third quarter due largely to seasonality. As I mentioned earlier, we're slightly more cautious on the short-term pulp outlook due to the recent strengthening of the U.S. dollar, but we remain very optimistic on long-term market dynamics. Finally, we expect higher input cost due to increased raw material and energy usage in the winter months, but the fourth quarter will benefit from lower maintenance activities in our network. Let me conclude by saying that I'm pleased with our improved operating performance and how quickly we're adjusting to changing market conditions, as we always have. Equally important is that our execution in Personal Care remains a critical success factor as we start to deliver cost savings and accelerated top line growth. Thank you for your time and support, and I'll turn it back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. [Operator Instructions] So with that headline, we're ready for questions.

[Operator:]

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

[Mark W. Connelly:]

Just 2 things. First, is the environment for diaper acquisition still as attractive as you suggested it might be earlier this year in terms of viable candidates? And has your attention shifted either geographically or in terms of products with what competitors are doing and currencies are doing?

[John D. Williams:]

Mark, certainly, I think there are some opportunities out there on the diaper front. They're not that large. So they're sort of within the -- a reasonable level as we anticipated. I don't think they're sort of to be executed that soon, but I think they're out there. And in terms of geography, we still stay focused really on Europe and the Americas. And just one quick thing just on our sort of criteria that -- for M&A. It's -- the way we look at it, it's got to be fiber-based. We really have to find some growth, and it's got to be a business where we can be competitive. So if you go back to that sort of $300 million to $500 million, I'm confident that we can get to that kind of objective over time. Quite frankly, if we need to go a little bit past the 2017 date, just to be certain that we're not doing anything stupid, I'm prepared to do that. Does that help?

[Mark W. Connelly:]

Sure. Yes, that's very helpful. And just one other question. Has the Appleton deal changed the parameters of your white paper business very much? And should we assume that most of the benefits of that deal are in place at this point?

[John D. Williams:]

Well, I mean, yes, it has. So I think it's running -- I'm going to pluck a number out of the air at about 180,000 tons a year right now. So of course, it's given us that growth profile and has, if you like, avoided us having to do anything different with the network. It's really turned our Marlboro mill into much more of a kind of technical specialty mill in terms of the grammage of the paper we're doing. And of course, in that thermal market and the market for that [indiscernible] serving, it's allowed us to have some growth. That business is growing double digit, and certainly, as it settles down, we'll grow at GDP or better as they move into new markets. So that's given us some runway of volume growth in the tonnage that we wouldn't otherwise have had. Does that help?

[Mark W. Connelly:]

Perfect, very helpful.

[Operator:]

The next question comes from the line of George Staphos from Bank of America.

[George L. Staphos:]

A couple of questions. I guess to start, first of all, can you comment at all as to how your efforts to emphasize your supply chain, your position in North America, what effect, thus far, is that having in terms of stemming, if you will, the tide of imports into North America? Are there any early returns where it's beginning to be successful? And how would you guide or -- guide investors to think about the progress of imports over the next couple of quarters, if that's possible?

[John D. Williams:]

Yes, sure. I mean, I can't get too granular with you, George, obviously, but I think if you look at the macro level and you look at our market share overall, we are tracking pretty much to market. So that suggests to me, with that level of import coming in, our supply chain, the value we offer our customers, still resonates with the customer base. I think if we were to see our overall market share really struggling, we'd be sitting here thinking well we have to do more to leverage our position. In a number of places, I have to say we have given people the opportunity to produce a private label that has a kind of "Made in America" sticker on it. That's been very successful with a number of small customers in our enterprise group area. So right now, I sit there and say, import levels, they have accelerated. They did reach record levels in July. Their cut-size position has increased. And we need to consider all the time looking at alternatives to protect our profitability over the long term and leverage our supply chain, but so far, quite frankly, I think our high-touch service model has proved its worth.

[George L. Staphos:]

Can you comment at all in terms of how the annual portions of your negotiations might be kicking off and whether you expect to be a relatively normal process or perhaps a little bit more animated process the next couple of quarters? And then switching gears to MLPs, can you give us a bit more color, if possible, in terms of what steps, thus far, you've taken to investigate whether the MLPs are an appropriate structure or not for Domtar?

[John D. Williams:]

All right. So obviously, on the first part of your question, I really can't comment because those discussions are happening as we speak, but I'll let Daniel talk to the MLP aspect.

[Daniel Buron:]

Yes. So George, we actually are the necessary experts because it's a rather complex structure that involves a lot of expertise. So we're currently doing what I would consider a feasibility study. The first thing that needs to be done is to do -- to have an opinion, to form an opinion if producing [indiscernible] can be considered or qualified and come under the MLP rules. If the answer to that question is no, obviously, the rest is useless, but we're going through that process. At the same time, we're actually looking at our, actually, the characteristic of our business and how can an MLP be formed assuming that we have a yes to the first answer. So we're both -- we're working on both aspects of the -- of an MLP thought process, and we're progressing well. So I mean, we'll continue, and if there's something there that could create shareholder value, you'll see us doing something or sharing something with the market.

[George L. Staphos:]

Daniel, and one last one. I'll turn over. I apologize. Is the yes you're currently seeking to get an answer to or the question behind that, is that being driven by your council and/or experts that you've hired? Or are you trying to get a yes from the IRS or the...

[Daniel Buron:]

But the first thing you have to do is form your own opinion because the -- once the IRS will reopen the door for those discussion, I mean, you have to present to them kind of a paper saying why you believe your business would be considered -- qualified and come under MLP. So for the time being, this is using our experts. On due course, when the IRS will open back, if we believe we have a case, we'll definitely sit down with them and discuss.

[Operator:]

And the next question is from Chip Dillon from Vertical Research Partners.

[Chip A. Dillon:]

What -- just a quick follow-up on that one question. I assumed that you -- it's futile or otherwise not allowed to apply for a PLR until that window is open. In other words, you can't put something in the mail and wait for them to open the window again. It's better to wait first for the window to open.

[Daniel Buron:]

To be honest, Chip, I'm not sure I know the answer. I mean, as far as we now, they don't issue PLR. They're waiting for new guideline from the IRS. So it's very likely to be -- I mean, maybe not a lot useful or not creating a lot of positive to file right now because you'll have to tailor whatever you present with the new rules that will be available.

[Chip A. Dillon:]

I see, that makes sense. And then jumping back, just one more tax question is, you mentioned the success -- or the resolution of the tax audit, and I know in other -- on that other line, you recognized a little bit of the alternative minimum -- I'm sorry, the alternative black liquor credits. Are there more of those to be recognized?

[Daniel Buron:]

No. Actually, that was the end of that story. So our balance sheet is now empty of everything that is linked to alternative fuel tax credits.

[Chip A. Dillon:]

Okay. And then on the import side, John, it's interesting. We've known for 25 years that, say, from Brazil, it's -- arguably, they've got the lowest-cost fiber in the world, and yet, over and over, they've indicated no real interest in getting into our uncoated market perhaps because of freight and distribution. I think something has changed there, and are there -- I mean, I can sort of see the Indonesian influence being more longer lasting, but are there other countries where you think it might be more temporary in terms of the imports?

[John D. Williams:]

Well, I think when we take a look at their cost base -- remember that other than the Brazilians and the Indonesians, if you take the Chinese, of course, they're buying pulp largely from Western companies or Brazilian companies. And you think about the fact they really don't have much of a labor advantage, and they certainly have a huge power disadvantage and then shipping cost, I mean, I think it's fairly obvious that their choice would be to sell domestically if they could. I do think that post Courtland, when you think that Courtland was running at full tilt, Chip, before it shut, that was a lot of tonnage to disappear, and there was a view, I think, that domestic producers just did not have that capacity. And if you do the math, domestic producers running at 92%, 93%, you take away nearly 10% of the market and -- the customer has to find the volume from somewhere. So I think to some extent, it was driven partly by that, and so we're just going to have to see where it settles. And I think, for us, imports are just another competitor. So we have to tell our story. It's the way I see it developing, and again, if you look at that Brazilian market, they're mostly small machines. So they may have a competitive pulp position, but I think when they turn that into paper, they're not wildly competitive because they on the whole on much smaller machines than we are.

[Chip A. Dillon:]

Very helpful. One quick last one. John, it seems like you have -- you're being a little bit more, I guess, measured in terms of the -- not at all backing off, but just more measured in the growth rate of Personal Care, and I'm just curious to what extent -- do you feel -- when you look at an acquisition, do you also look at where your stock might be knowing that stock prices move around? But once you buy a share, it's obviously bought forever, and when you buy a company, it's bought forever. And so I wondered -- from this last quarter, I think some of us were, I guess, pleasantly surprised you took advantage of the lower stock price, and I just wanted to know how you kind of think about those 2.

[John D. Williams:]

Yes, I mean, I guess, in a way, it's really a capital allocation question, Chip. So we will do what we think is appropriate based on the value opportunity we see ourselves faced with. So I think 2 things to your question. On the M&A side, we made it pretty clear that what I'm not going to do is take that 2017 deadline and sort of somehow get there by overpaying for acquisitions. So if we feel out there things are overpriced, that deadline will move a bit. I still think, over time, that's a good objective for the business because that's the moment, if you like, the business balance changes and we should start to see the multiple move a little bit. I think on the share buyback, as we generate cash and we think that's compelling on the share price, we'll continue to do it. We've got about $100 million, I think, left right now on the current share buyback numbers. So we'll keep doing that, and then when we get there, we'll readjust, if that helps.

[Chip A. Dillon:]

Very much.

[Operator:]

The next question comes from the line of Anthony Pettinari from Citi.

[Anthony Pettinari:]

I just wanted to follow up on personal care. I guess, the results for 3Q was the weakest of the 3 quarters year-to-date. In the last couple of years, 3Q has, I guess, been the strongest. So I was wondering if you could quantify the impact of the weaker euro and the weaker -- the seasonality impact in Europe. And then as we go forward to 4Q, understanding you've got these machines ramping up, what kind of step-up in EBITDA we might see from 3Q to 4Q? And maybe even to '15, if you can comment.

[John D. Williams:]

Yes, I mean, we obviously, we don't give forward guidance, but I'll try and give you a bit of color. So about $1.5 million, we think, was the effect of the seasonality in the currency in Q3 on our -- really on the European business, and of course, that's a big chunk of the business in our AI business. If you then look going forward, these machines are now beginning to be up and running. We have won a major customer, and actually, we're getting pretty good sales out of those distribution centers that we supply, actually, to one of our largest reseller accounts in baby diaper, really, I think, through some very imaginative comarketing we've done with both of them. So if you -- I don't really want to give you a scale, but I'm looking for a pretty solid step-up in quarter 4 on the EBITDA from that business and that run rate sort of moving through into 2015.

[Anthony Pettinari:]

Okay, okay. Is it safe to assume 4Q would be the strongest EBITDA for Personal Care year-to-date or...

[John D. Williams:]

I mean, that's what I'm looking for. I don't want to be a hostage to fortune, but that's what I'm looking for.

[Anthony Pettinari:]

Okay, okay. And then maybe just a quick follow-up on freesheet. Your comments on the Courtland closure, I think, were interesting, and if I were to read them correctly, the Courtland closure may have incented some of this capacity, some of this import pressure. And I'm wondering, does the experience of Courtland, given it was a much larger closure, does it impact how you think about adjusting your footprint over the next 12 to 18 months in favor of maybe something more gradual than something larger? Is that fair?

[John D. Williams:]

I mean, it's a very good question, and the answer is it is fair. As we've talked about before, when you look at our network, there's no doubt we know what we would do if we felt the closure was appropriate. So the minute we feel that, we will do, what, if you like, we already have in our thinking. And just talking about that, let me, if I may, talk about market downtime for a bit because I think it's an interesting bit of color that might help. So we took 51,000 tons of market downtime. Now of that, really, 18,000 tons was -- as we took our inventory down. So then, we're down to really 30[ph] true market downtime as we readjusted our inventory. From that, we also made about 14,000 tons of pulp from it. So that market downtime is not just a pure -- this company is not making any money on those tons. Actually, on probably nearly half of those tons, we were making pulp. So I just wanted to kind of give you that color. I hope that's helpful because I think it shows you there is a sort of engine here, still, of income and EBITDA or even when we do take that market downtime. So you can't really just add up our market downtime, multiply that by 4 and said, "Well, here's the 200,000-ton closure coming any minute now." It doesn't really work that way. So I hope that gives you a bit of color on that.

[Operator:]

And the next question is from Mark Wilde of Bank of Montreal.

[Mark Wilde:]

Let's just follow on that last question of Anthony's. At one point, you had talked about converting capacity potentially in the packaging grades. Can you update us on whether those kind of options are still on the table?

[John D. Williams:]

Yes, sure. So we look across the piece. We look at the dynamics, Mark. I hate to repeat myself, but if you look at what we've done so far, take Plymouth, we shot paper machines. We liked the fluff pulp market dynamics. We already had a reputation in that market. We had a well-regarded brand. Why wouldn't we do more? So we chose to do more. And of course, when we signed up Appvion, in essence, we took out hundreds of thousands of tons of capacity on uncoated freesheet in Marlboro. So again, the way I look at it is we have to have a compelling story in the marketplace, and we have to have a compelling technical story that will allow us a competitive cost base. So looking at those -- that's the way I'll -- we would look at any conversion that we would do. So I think that would tell you the kind of places where we're focused and the kind of places where we wouldn't, if that helps.

[Mark Wilde:]

Yes, that does help a lot. Just switching gears a little bit to the acquisition market, I think in the past, you've kind of had tissue, kind of, on the side. It didn't sound like it was really a core focus. Is that still a safe assumption?

[John D. Williams:]

Well, let me just recalibrate that a bit because I think that's an important question. So we've always said growth is what we're looking for and growth really in absorbent products. And to date, we've been able to stay pretty pure play on Personal Care. If we felt that M&A pipeline was -- if, pardon the pun, drying up on us, I think there is -- we would look on a broader spectrum, and patently, if we'd look in a broader spectrum, tissue would be in there.

[Mark Wilde:]

Okay, all right. And just in general, with these absorbent products, John, in North America, do you see a general trend with just a private label? I mean, it's kind of where the European market, I think, is already.

[John D. Williams:]

Yes, exactly. So let's talk about that. I think that's an important point. So if you will take Europe, in most major categories private-label penetration is probably twice what it is in the U.S. in a number of places. Why is that? Well, the European retailer really is saying, "The consumer is mine," right. So there is such a thing as a Tesco consumer or an Aldi consumer, and the brand assortment that I make available to that consumer is kind of down to me because I'm the brand, not the individual brand manufacturer by fast-moving consumer goods companies. Now patently, the fast-moving consumer good company is going to market very hard to convince the consumer that actually, their brand is the reason the consumer goes into the retailer. So it's always a balancing act. Now what that has meant in Europe is that the retailer typically, on store brand, has done a good, better, best implementation, so maybe a 3-tier approach to private label. Still, to some extent in the U.S., it's kind of a cheap stuff in the corner. So I think for it to really get more momentum in the U.S. in key categories, it would have to have that good, better, best implementation. And take tissue as a good example as we happen to be discussing it. The TAD lines in private label are really all about positioning private label as a similar quality product to major brand at a reasonably discounted but not a knock-down, drag-out price. So I think that is a trend, Mark, we're going to see more, and I think it's is very interesting. If you look at retail, it's becoming almost binary that the sort of prosperous person who's shopping at Whole Foods and the person shopping on the dollar store and it's the middle that is suffering. On one way, the middle, who can kind of rebuild its business, is an aggressive and well-thought-out private-label model. So sorry, a very long-winded answer, but I think it's an important question.

[Mark Wilde:]

You're right. It's exactly what was on my mind because you're watching all of these TAD machines that are aimed at the private-label market go in. So it just seems like the market is kind of ripe for that shift to go even further over toward private label in North America.

[John D. Williams:]

That's certainly my view.

[Operator:]

And the next question is from Al Kabili of Macquarie.

[Albert T. Kabili:]

Just a follow-up on Mark's question on the possible conversion to packaging grades. Given and layering this in with the -- some of the recent excitement with MLPs, is the upside related to MLPs on some of those containerboard assets as maybe as strong as some are hoping? Would that influence your thinking on your -- as you evaluate maybe looking at conversions?

[John D. Williams:]

Well, Al, sorry to sort of wrap myself up again in the same reply, but I think the real issue is, do -- would we have something compelling in that marketplace that allows us to be competitive? It has to be our first question, yes. If we feel that, then we'd think about that marketplace and whether or not we can technically make a product that has some advantages. So I think we have to think about that first, and quite frankly, if -- on the MLP side, if white paper gets sort of the right answer, so to speak, it's just as compelling as containerboard, in my view. So I don't necessarily see that, that would drive us to think about containerboard or packaging grades any more than it would already.

[Albert T. Kabili:]

Okay, I appreciate that. That's helpful, all right. Now looking to Personal Care, can you help us with maybe what the -- if there are any start-up costs that you had incurred with the 5 machines, and if that helps an uptick in 4Q as well on EBITDA and the sales progression that we should be maybe thinking about on the top line now that the 5 machines are starting up?

[John D. Williams:]

Yes, sure. No, no, I'd be happy to. So I mean, as you'd expect, the sort of added cost per piece, which is a key performance metric of the business, was negatively impacted over the last couple of quarters because we have some redundant labor. You have training costs. You have underutilized lines. You have a bit of excess scrap, which is fairly typical in a start-up. One of the issues on the sales line is, if you recall, we lost a chunk of one of our major accounts on the Baby business and a little bit from another one, and we lost that fourth quarter, I think it was, 2013. So you don't see our underlying growth come through, and you really won't see that on an aggregated basis probably until the first quarter 2015. So we've made great progress, I think, in integrating the businesses, but to be frank, I'm not as -- I'm not happy with where we find ourselves in terms of that business, what we've achieved to date, but I think we've now built a very strong platform. We have dramatically upgraded our sales and marketing leadership from some really blue-chip consumer products companies that we've got people in. So my view is we're in that moment where we're ready, and from here on in, I think, we're going to begin to see that business perform to the levels that we wanted to perform at. I mean, there will be a knock or two along the way just because in that private-label business, you'll kind of win some and you'll lose some, but I think we've got a very strong program to sell to our customers. And actually, we're getting pretty good feedback right this minute on that program, if that helps.

[Albert T. Kabili:]

Okay. That does. So just to clarify, if I'm reading through your comments correctly, in the fourth quarter, you could still be down organically given the issues you mentioned, and then once you lap that, then we'll start to see some better sort of year-on-year organic performance.

[John D. Williams:]

You will, but I would -- just to remind yourself, some of this production capacity is also about cost savings. So what we'd hope to see really is those cost savings beginning to come through in quarter 4, and then you will see the overall top line growth start to come through in 2015 to your point as we lap that loss from prior year.

[Operator:]

And the next question comes from the line of Sean Steuart of TD Securities.

[Sean Steuart:]

Just a couple of questions, maybe the first for Daniel. Can you give us any CapEx guidance over the next couple of years? And I guess, specifically, we're wondering discretionary CapEx broken down between the Pulp and Paper segment and Personal Care, how we should think about that over the next couple of years.

[Daniel Buron:]

Actually, Sean, we're in that tail end of the year where we're planning for 2015, and so I have nothing I can share at this moment. But as usual, in the Q4 earnings call, I will be more than pleased to give you our review for 2015 and breaking down a little bit more so that you can understand a bit more what will be maintenance, what will be actually cost and profit improvement in Pulp and Paper and Personal Care.

[Sean Steuart:]

Okay. We'll wait for that then. With respect to your appetite for potential acquisitions again, and I don't want to harp on this, but you guys have taken on leverage the last few years as you've grown Personal Care. If there is an accretive opportunity out there and you see a pretty good pathway for ongoing free cash flow generation, at what sort of reach leverage metrics should we be looking at for an acquisition if you can convince yourself it's accretive out of the gate?

[Daniel Buron:]

I think the -- it all depends on the acquisition and the type of cash flow we believe we can deliver. I mean, our goal is to continue to act prudently when we're doing acquisition. So we're definitely willing to leverage our balance sheet further. Actually, we're probably not at the optimal point as we speak right now. There's probably a little bit of room given our current business profile. So we're willing to take a bit more leverage through an acquisition as long as we can prove to ourselves that through cash flow, we'll be able to bring that business back to a reasonable leverage. So I hope I'm answering your question. I don't think I can be more precise on than that.

[Sean Steuart:]

Okay. And then maybe just one quick one to finish off for John. You guys have -- whether you're going to hit the low end of the $300 million to $500 million target by 2017 or not, I guess the question I'm wondering is, where do some of the non -- whether it's Personal Care or other absorbent products, some of the other sort of outside-the-box business streams that you guys have started, where do those stand right now? And how should we think about that growing?

[John D. Williams:]

You mean things like the sort of -- the stuff we've done organically, Sean, like nanocrystalline cellulose or lignin, et cetera?

[Sean Steuart:]

Exactly.

[John D. Williams:]

Yes. I don't think any of them will be sort of major contributors for a while, although it's kind of interesting. So on the CelluForce business, we have a couple of unbelievable opportunities with a couple of potential customers where as we develop that product I think we're going to have a great little business, but I think it's going to be a great little business. On the lignin, we're selling pretty much everything we can make. It's not that dramatic. We probably make about 50 tons a day. It's all going out, and as you may know, we've actually signed up UPM as our agent in Europe, and they're pretty excited about it and buying quite a number of tons. But I don't think any of those, as I think I've kind of said before, are really going to make a huge difference to the top line of the business. Quite frankly, if you look at our business today, you have some pretty attractive underlying growth in Personal Care. You can't see it because we lost a couple of customers. We have a growing pulp business. So today, with 88% of our softwood -- of our pulp being softwood, we think we've got a good runway there as -- it's a 1%, 2% growth business a year, but it's growing. And if you look at our technical specialty business, it's probably growing about GDP, a little bit higher because of the Appvion. So there are growth elements in this business, but those kind of, as I always call it, kissing a few frogs to some of the smaller stuff. We may monetize them over time, but I don't think they're going to be sort of a major contributor to the top line, if that helps you.

[Sean Steuart:]

Yes, that helps.

[Operator:]

And the next question is from Paul Quinn from RBC Capital Markets.

[Paul C. Quinn:]

Just a couple of questions on Personal Care, just the 5 machines that you cited, is that all capacity adds? Or what percentage of that is replacement?

[John D. Williams:]

Yes, so it's a great question. So if you look at it, a couple of them are really us replacing, getting our cost down by several dollars per case, yes?

[Paul C. Quinn:]

Okay.

[John D. Williams:]

So it's not all about growth. So we were essentially sold out, and some of them are very much about new product which will replace old products with a lower cost position. So one cannot add up all that capacity and say there is the top line growth. One should just remember, I think, because we're so used to talking about how can you appreciate on a declining market, the add-on in confidence [ph] business is growing 3% to 5% a year. So I mean, to get growth, one of the things we have to do is just hold on to the customer base. It's not as if we need new customers every time. So yes, it's not all growth, growth, growth. Some of it is actually just producing a better product at a lower cost on new machinery.

[Paul C. Quinn:]

Okay. So it's sounds like you're going to assume 2 of the 5 machines are replacement, 3 are capital adds. In terms of -- over the course of the summer, we saw that successful IPO with Ontex. Has that pushed up valuations in the personal care space? And is that one of the reasons why you're more cautious on the 2017 deadline?

[John D. Williams:]

I mean, certainly, as I've said before, I think, if we feel valuations are too toppy, then we're not going to go there because we want to be a -- I mean, Daniel uses the word prudent. So I mean, we want to be a prudent buyer, but I still think there are opportunities out there. So we'll keep looking, and there are some conversations that we have on a pretty continuous basis. But as I've said to you before, Paul, I'm determined not to blow my brains out in terms of an acquisition.

[Paul C. Quinn:]

Well, I'm wishing you luck there. Just on paper, you said that 37% year-to-date increase in imports. Just when I take a look at that envelope and it's down sort of 5.5% kind of thing, and we've got a recovering U.S. economy here, do you look at that number and some of the other drops as sort of offsets as to what you'd expect with a recovering economy? Or is that sort of more in line?

[John D. Williams:]

Sorry, Paul. I'm being thick. I don't really understand the question.

[Paul C. Quinn:]

Well, I would have expected the envelope side not to be down as much as it is given sort of the growth in direct marketing with the recovering economy, but maybe I'm totally out of line [ph]. So I'm just curious if -- when you break down that uncoated freesheet demand into those buckets, I mean, I can definitely see the cut-size issue, but on some of the other ones, are they in line with what you're thinking?

[John D. Williams:]

I think pretty much, to be honest, yes. I mean, I'm with you a little bit on the direct marketing piece. I mean, there's no doubt the kind of the mailed item is still very powerful in terms of response and is seen actually, versus calling you up in the middle of your supper, as a much better way to market to people. But there's no doubt, if you look at marketing budgets, a lot more marketing budgets are going to that digital piece and going to be instant coupon on the cell phone. So I think that area will be under pressure. I think also you have to -- one of the things on envelopes, the credit card guys are a huge influence over that volume. So if 1 or 2 them choose not to promote, you see what looks like a fairly terrifying number, but then when they do promote, you see a better number. So it can get a bit -- I mean, to use that word, it can get a bit choppy in the envelope business for that reason.

[Paul C. Quinn:]

Okay. And just to slip in a last one, share buybacks in Q4 to date, are they material at all?

[John D. Williams:]

I'll let Daniel answer that question.

[Daniel Buron:]

We'll, obviously, report that in our Q4 earnings call, Paul.

[Operator:]

And the next question is from Alex Ovshey of Goldman Sachs.

[Alex Ovshey:]

A couple of questions for you, John. First, as you've gone back to the uncoated freesheet imports, when you take a step back and take a look at how they're competing, how the importers are competing, would you guys -- do you think it's fair? And I think where I'm going with this is a couple of years ago the coated guys didn't think so and on the successful trade case there. So what are your thoughts on this [indiscernible]?

[John D. Williams:]

Well, I think they have grown significantly, and quite frankly, it's something -- we've been monitoring that situation very closely. And I mean, I think if we felt that, we would take what action we consider appropriate.

[Alex Ovshey:]

Do you know if they're selling at a price that's below where the domestic price is for them? Do -- are you still trying to figure that information out?

[John D. Williams:]

We're still trying to figure that out.

[Alex Ovshey:]

Okay. And then just on the Personal Care side, you embarked on this process of really blowing out this business over the last couple of years. Can you just remind us what your cash return hurdle has been on the Personal Care acquisitions?

[John D. Williams:]

Well, I mean, I can talk to you about sort of long-term return on capital. I mean, our goal is...

[Alex Ovshey:]

That's fine, yes.

[John D. Williams:]

Yes. Our goal is to build a business over time that meets and beats its WACC. So we're patently not yet -- there yet because we have sort of very early days, and we've, quite frankly, taken a few knocks along the way that we weren't expecting. But I still remain pretty confident that over time, we'll make that hurdle. I mean, otherwise, quite frankly, we're chucking money away, and that's not our intent.

[Alex Ovshey:]

Sure. If I can just ask, what is that WACC for the business, longer term?

[Daniel Buron:]

I mean, if -- I mean, a WACC -- the WACC -- a WACC for a business like ours right now looks like between 8% and 8.5%.

[Alex Ovshey:]

Okay, perfect. And maybe if I can just slip one last one, and just on pulp. So just to clarify, your commentary on caution in the near term, does that mean that your prices have been moving down here so far in the fourth quarter? Does that mean you see incremental risk of potentially prices moving down given the changing currency?

[John D. Williams:]

No, no, a good question. So I mean, you saw a little bit of erosion in quarter 3. We don't see that happening in quarter 4, but if they're not moving up, they're very often potentially moving slightly down. So we're just watching carefully.

[Operator:]

And the next question is from the line of Stephen Atkinson from Dundee Capital Markets.

[Stephen Atkinson:]

We've been reading about massive shots in the other advertising grades and then, of course, pushing for price increase. So do you think that -- should we say the restructuring or whatever is going on there will help your situation in uncoated freesheet?

[John D. Williams:]

I'm not sure that it will have much impact, Stephen, to be honest. I'm not sure it will have much impact.

[Stephen Atkinson:]

Okay. In terms of the MLP, a very good question from me, but would fluff pulp classify?

[Daniel Buron:]

I mean, that's a very, very technical question. So I'm afraid I won't be able to answer other than basing that's to the best of my knowledge, there was a private letter of ruling issued a long time ago, '89, '86, something like that, that was actually pulp, not fluff pulp, but pulp. But because it's so company-specific, I mean, you cannot just look at -- because there was a [indiscernible] wherein it's going to actually apply to mild [ph] pulp or it's going to be -- it's going to apply to fluff pulp, but I mean, given that precedent, I think the likelihood is probably higher than if you go downstream the process.

[Stephen Atkinson:]

Yes, yes. No, I was thinking if you put an off-site converting facility as it were, then you could sell the pulp to be converted, but -- anyway. So moving on, in terms of the fourth quarter, it looks like you're going to spend about $90 million. Can you -- are there any major projects you can talk about?

[Daniel Buron:]

Actually, this is -- a big portion of that is actually in our Personal Care business still. We're still receiving pieces of equipment. We're expanding a little bit our Spanish business, the building, so that it can receive equipment next year. So it's a lot of CapEx linked to the finalization of our 5 new machines.

[Stephen Atkinson:]

Okay. Now that the 5...

[John D. Williams:]

Stephen, just on that, to give you a bit of color, I mean, patently, typically, the way you buy these machines is sort of 1/3, 1/3 and 1/3. So you put the deposit in. They build the machine for you. Then they -- and then you really don't pay the balance until you're comfortable that you've got the output you want at that kind of design speed. So chunks of money can go there, and that's what we're expecting, if that helps.

[Stephen Atkinson:]

Yes, it does, so that as they qualify...

[John D. Williams:]

Exactly, precisely.

[Stephen Atkinson:]

Okay, yes. And so that might explain -- because my next question was the -- on the revenue line, but I assume you're still capitalizing these projects?

[John D. Williams:]

Say again?

[Stephen Atkinson:]

Oh sorry, I jumped some logic steps.

[John D. Williams:]

You did rather, but that's okay. Keep going.

[Stephen Atkinson:]

Yes, and that comes with old age. With the service [ph] -- with the Personal Care, then I saw that there was very -- there was no increase in revenues.

[John D. Williams:]

Correct.

[Stephen Atkinson:]

And these lines are coming on. So I assume that you're still in the ramp-up phase.

[John D. Williams:]

Well, remember, there are 2. Let's just be clear. Some of it is actually capacity, which is making up for old capacity. So we're actually making a better product at a lower cost in order to be competitive in the market, and some of it is, patently, to sort of drive new volume particularly in sort of the light inco[ph] area. So -- and the other thing you can't see is there is underlying growth in that business, but as I was saying earlier, because a couple of our -- we lost a chunk of one customer and a chunk of another in the baby side of things, that masks some actually quite dramatic growth in certain product groups. So once we get sort of over that hurdle come, sort of, first quarter 2015, you're going to start to see the true underlying growth capacity of that business, if that helps you.

[Stephen Atkinson:]

Yes, it does. And I'm assuming the margins in the -- should we say, in the other businesses would be higher than in retail baby diapers.

[John D. Williams:]

Yes. I mean, certainly, the tightest margins are in that retail baby diaper business, absolutely.

[Operator:]

Thank you, and I'll turn the call back to the speakers for closing remarks.

[Nicholas Estrela:]

Thank you, Padlani [ph]. As a reminder, we will release our fourth quarter and full year 2014 earnings on Friday, February 6, 2015. Thank you for listening, and have a great day.

[Operator:]

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