Domtar Corporation
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Domtar Fourth Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is February 6, 2015. I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead.

[Nicholas Estrela:]

Good morning, and welcome to our fourth quarter and fiscal 2014 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and 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; 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 Williams:]

Thank you, Nick and good morning everyone. Our results this morning rounded off a successful 2014. We delivered strong results in our pulp and paper business and we reached new milestones in personal care. Our journey from pulp and paper maker to fiber innovator continue to gain pace and our growth strategy is now firmly on track. All these initiatives resulted in the year of strong cash flow, would enable us to continue to look for value creating opportunities and to return capital to our shareholders. Let me take a moment to discuss the fourth quarter. In paper, we had strong shipments but imports continue to be a challenge for our markets resulting in price adjustments in certain channels. Nevertheless, we had a 120 basis point margin improvement, so a solid performance overall. We shipped at 101% of our production in the quarter and we took 39,000 tons of market related downtime. Moving to pulp, we had a very good operating performance driven by strong productivity. Price realizations were down slightly from the third quarter and drifted lower early in the year, due mostly to the strengthening of the U.S. Dollar against pulp purchasing currencies. During the quarter, we announced the conversion of our biggest paper machine at our Ashdown mill, to produce fluff pulp. Ashdown, together with our Plymouth mill, will provide a platform to further strengthen our leading position as an efficient producer of high quality fluff pulp with nearly 1 million metric tons of product capacity by the second half of 2016. This will result in a permanent curtailment of 364,000 short tons of uncoated free sheet. Turning to personal care, we had a good top line growth with same currency sales increasing by 3%. Our European business had a strong quarter posting a record sales performance, but this was partially offset by lower North American sales following an inventory restocking at two of our major customers in the fourth quarter. In addition, our ramp up period for our new production lines is taking slightly longer than expected, but we made significant head way with cost savings coming out of the quarter. In December, we began transitioning from outsourced adult incontinence supply to Domtar manufactured finished products. We expect the full cost saving benefit of this transition to be realized over the next few months as inventory becomes fully depleted. Productivity also began to stabilize with better manufacturing up time and lower unit costs. Finally, we began the changeover of some of the Attends brand products onto the new lines which will also result in cost savings. Additional savings are expected once the conversion is completed, the old lines are shot down and labour redundancies are eliminated. Existing the quarter, we have reached the inflection point by cost savings and now fully offsetting the ramp up cost. So we're beginning to make excellent progress. Overall, Domtar generated free cash flow of $107 million and we continue to buy back stock in the quarter. Summary, we delivered a strong finish to a good year. I'm pleased with the progress we've made in improving operating performance, adjusting to changing market conditions and executing on our growth plans. 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 $1.10 per share for the fourth quarter compared to net earnings of $4.33 per share for the third quarter of 2014. Adjusting before items are earnings were $1.41 per share in the fourth quarter compared to earnings of $0.94 per share for the third quarter. EBITDA before items amounted to $208 million compared to $200 million in the third quarter. Free cash flow totalled $107 million compared to $147 million in the third quarter. Turning to the sequential valuation earnings on Slide 5. Consolidated sales were $26 million lower than the third quarter mostly due to lower paper and pulp prices. Depreciation and amortization was $3 million lower than the third quarter, while SG&A cost was $4 million higher. Our fourth quarter earnings included an impairment and write-down of $4 million related to the accelerated depreciation of part of paper machine at our Ashdown facility that will be converted into a fluff pulp line in 2016. It also included closure in restructuring cost of $25 million related to a non-cash charge of $19 million for the buyout of one of our Canadian pension plans and a charge of $6 million related to the Ashdown paper machine conversion and the closure of a converting center in the quarter. Other operating income of $12 million included $11 million of insurance recovery for a loss incurred at two of our facilities in 2013 and 2014. Interest expense was $27 million, $2 million higher than last quarter. Finally, we recorded a tax benefit of $12 million in the quarter. This tax benefit is largely due to a change in tax rate in Spain, the recording of all 2014 U.S. are in the credit in the same quarter due to lease [ph] extension in December and the recognition of some tax benefits following the completion of tax audits and returns for our total impact of approximately $27 million of $0.43 per share. Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $186 million while capital expenditures amounted to $79 million. This resulted in a free cash flow of $107 million in the quarter. For the full year 2014, cash flow provided from operating activities amounted to $634 million and capital expenditures amounted to $236 million. This resulted in a free cash flow of $398 million for the full year. In the quarter, we repurchased shares for an amount of $19 million. We had approximately $83 million remaining under our $1 billion buyback program at the end of the year. From January 2011 to December 2014, we have returned $1.1 billion to our shareholders through dividend and share buyback representing 70% of our free cash flow. At the end of the quarter, we had 64 million common shares outstanding. Turning to the quarterly and waterfall in Slide 7. When compared to the third quarter, EBITDA before items increased by $8 million due to lower maintenance cost of $14 million insurance recovery of $11 million, better positivity for $9 million, a favourable exchange rate impact for $6 million and higher volume and mix for $2 million. These were partially offset by lowering selling prices for $25 million, higher SG&A cost of $4 million, higher raw material cost for $2 million and higher freight and other cost for $2 million. Now on Slide 8, in the pulp and paper segment sales were 2% lower when compared to the third quarter and down 3% when compared to last year. EBITDA before items was $183 million compared to $172 million in the third quarter. Let's now turn to the paper business on Slide 9. EBITDA before items increased an estimated $7 million when compared to the third quarter. Manufactured paper shipment increased 1% when compared to the third quarter and were down 31,000 tons or 4% when compared to the same period last year. Our average transaction prices for all our paper grades were $20 per ton lower than the last quarter. On average, pricing for all our paper grades in January, 2015 were lower by approximately $20 per ton when compared to the fourth quarter average and we believe will remain stable at that level for the remainder of the first quarter of 2015. Finally, we took lack of order downtime totalling 39,000 ton in the quarter in order to balance our paper production to our customers demand. Our pulp business on Slide 10. EBITDA before items increased by an estimated $4 million when compared to the third quarter. Pulp shipment were sequentially higher by 1% versus the third quarter and average pulp prices decreased by $4 per metric ton versus the third quarter. Our paper inventory decreased a 1,000 ton compared to last quarter, while our pulp inventories increased by 21,000 metric tons. Our personal care business on Slide 12. Our same currency sales in the division were 3% higher when compared to the third quarter. EBITDA before items was $27 million compared to $30 million in the third quarter. The quarter-over-quarter decline in EBITDA before items is a result of a write down of finished goods inventory for approximately $2 million as we were converting customers to our new product platform and the effect of a stronger U.S. Dollar when consolidating our European business. Finally, as is usually our practice at this time of the year. You will find in Slide 13 to 15, our estimates for some key financial item for the coming year. So this concludes, the financial review and with that, I'll turn the call back to John. John?

[John Williams:]

Thank you, Daniel. We turned at important corner in 2014, on our journey to build a growing fiber based business through acquisitions, strategic investments in capacity and the repurposing of assets. We also enhance the energy in fiber efficiency as some of our pulp and paper mills and we continue to streamline our network to create a more cost effective distribution channel. Against that backdrop, we delivered a strong performance. Our consolidated sales increased 3% to $5.6 billion and we generated $765 million of EBITDA and nearly $400 million of free cash flow, a meaningful increase when compared to 2013. In pulp, we significantly improved full year results driven by good productivity, stable global inventory levels and good momentum in softwood markets. In paper, demand for uncoated free sheet was softer than the prior year, but our shipments trended better than industry. Our specialty paper volumes grew 6% compared to last year, mostly driven by strong sales to Appvion. We also had additional volume opportunities from our Xerox paper and print media products. Nonetheless, we continue to stay vigilant on balancing our production with our customer's demand, by taking market related downtime during the year. As mentioned, the conversion of the Ashdown paper machine result in the closer of PM 64 in the spring of 2016. In the interim, we'll leverage the flexibility of the two remaining paper machines. This strategy allows us to adjust our paper production while selling paper grade pulp reducing our cost of lack of order downtime. In personal care, I'm pleased with the progress we've made and the milestones we've reached throughout the year, but disappointed that it's taken us longer than planned. I'm particularly happy with the further integration of our acquired businesses, building up of our commercial and innovation capabilities and the expansion of our manufacturing platform to support growth and bring new product innovations to market. We successfully completed the installation of five new production lines, three of our allocations in addition to beginning the building expansion of two other facilities. We experience growth with several channel leading customers in both North America and Europe and we gain national distribution of three major North American retailers to begin shipment in early 2015. With approximately 1,900 employees and six manufacturing facilities, we now have the state-of-the art, low cost global manufacturing platform providing our customers differentiated product solutions. We are in the process of embedding innovation and realizing cost savings, while rolling out a very aggressive strategy, so execution going forward remains key. Our overall performance and confidence in the future enable us to increase our dividend by 36% back in April and further execute on our share buyback program. We will continue to pursue balanced approach to the deployment of our capital, while maintaining the flexibility to execute on our growth strategy. Finally, I'm very proud to report Domtar recorded a total injury frequency rate below 1 for the second consecutive year. This is a world class health and safety performance. I want to recognize the collective efforts of our 9,800 employees looking after the safety of their colleagues as well as their own. Congratulations to all. To summarize, we delivered a solid finish to a good year and emerged better position to deliver on earnings for the long-term. Now turning to our outlook, we expect North American paper demand to decline with long-term trends in 2015. As Daniel mentioned uncoated free sheet prices drifted lower during the month of January and trended below the quarter average and we expect prices to trend, at a similar level. Global demand for pulp will likely be dominated by consumer inventory swings especially in China and we anticipate some volatility in pulp rising due to the recent strengthening of the U.S. Dollar. In personal care, our new manufacturing platform is expected to generate revenue and earnings growth. A weak Canadian Dollar will benefit our pulp and paper mills in Canada. Following Euro, is expected to negatively impact the translation of our personal care, Euro results to U.S. Dollars. Our oil based input cost should be down year-over-year, while other raw material inflation is expected to remain flat. Overall, I'm pleased with the financial performance we achieved in 2014 and we remained focused on execution, growing the company and creating additional shareholder value as we begin in 2015. Thank you for your time and support and I will turn it back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. Before we start pulling for questions. I'd ask our participants to ask a few questions at a time and return to the queue for follow-up as we want to get as many people as possible. Sabrina?

[Operator:]

[Operator Instructions] and our question comes from Mark Connelly from CLSA. Please go ahead.

[Mark Connelly:]

John, just few things. Can you give us an update on your thoughts about organic growth rates across your different diaper businesses and geographies. Obviously you're going to be doing M&A and that's going to give us both growth and synergies, but I'm just trying to get a sense of how you might feel about the organic growth rate till now? We're hearing very different things out in the market right now.

[John Williams:]

So let's talk about that. I'll try and give you a better colour, Mark. I mean, obviously on the infant diaper side, you'd expect obviously it's about population growth and it's about sort of GDP growth. So 1% to 2% is a pretty good growth in the diaper business, I'm talking units obviously what the pricing is, the pricing will be but certainly in terms of units. If you take adult in continents, you see a growth business probably 3% to 4% globally across about $9 billion marketplace. It will be different in certain places, but I think that's a reasonable proxy across all the geography for an idea of kind of market growth in AI. Does that help?

[Mark Connelly:]

Okay, so you're not seeing much difference between your European and U.S.?

[John Williams:]

Not really, I mean I think what you're saying the dynamics are very different. So of course in Europe, you have a prescription system. So if you look at the institutional business or the non-retail business which across the market place is sort of in the 62% is institutional, the balance is retail. There is obviously some pressure in that space on remuneration just because it goes National Health Services across the world are under pressure. What that means is, some of that business is moving into the retail space. So you see that growth coming out of retail. I'll give you a very good example. If you take boots to the chemist in the U.K. they're co-branding their store brand with the tens [ph] in order as patients are sort of pressure by the National Health Service, to bring them into the retail environment, so they buy product. So that's the dynamic, something relatively similar is happening in the U.S., but it's not so extreme because there is no prescription system. It's a bit more colour, maybe than you wanted, but I hope it helps.

[Mark Connelly:]

No, I think that actually helps explain why, we're hearing such different things. Thank you. So just one more question, as you look across 2012 at your fluff business, how much would you say your customer base is going to change in 2013 relative to the kind of competitive jockeying we saw in 2012? Is it steady now, I mean do you think if your customer base is going to see less turnover and less challenges in 2015?

[John Williams:]

I'm not sure, it was particularly churning in sort of 2012 and 2013, but certainly at 2014 it was pretty stable. If I look at our business, about 85% maybe even more is contracted business on volumes on an annual basis mark. So we're not sort of chopping and changing and the customer is not chopping the changing during the year. Does that answer the question?

[Mark Connelly:]

Yes, that's very helpful. Thank you.

[Operator:]

We'll now take the next question from George Staphos from Bank of America. Please go ahead

[George Staphos:]

Maybe segueing as well, off of Mark's question in personal care, John can you remind us or Daniel what the rough EBIT approximate break in is between Europe and U.S. right now for personal care, just so we can do our own modelling on foreign exchange?

[Daniel Buron:]

Actually, George we're giving you sensitivity to the Euro exchange rate in the slide.

[George Staphos:]

Oh! You did that on the slides, first.

[Daniel Buron:]

But as we peak right now, the EBIT is a little bit bigger rather than in the U.S. so I hope you'll be able to model properly with that.

[John Williams:]

It's driven George, obviously by Indas right, which is the largest most profitable with the highest level of EBITDA, so that's what swings it towards Europe that recent acquisition.

[George Staphos:]

Okay, that's very helpful, appreciate that. John, on your comments regarding personal care, you on the one hand, you've reached an inflection point, on the other hand if I heard you correctly there are another few months of inventories you need to work through, integration issue that's not exactly how you phrased it, but nonetheless friction in the P&L. So when do we see a 2015, the world we're in and obviously foreign exchange is going to do, what it's going to do. When do we see a normal "margin" for personal care? Is it 2Q, is it 3Q, it doesn't sound like its 1Q.

[John Williams:]

I would say, I'd be disappointed well if it was in the second quarter. George, I think we are much more stable now than we were in the fourth quarter. In terms of the ramp up of these machines. I think to give you a bit of perspective. I would could easily be accused of being overoptimistic here, but we've really built the business from the desperate parts of the businesses that we purchased. So we've had to drive the product platform, we've essentially re-launched our product platform and re-launched our ability to innovate to the customer saying to the customer, we will build you a product which is suitable for your marketplace. That is taken longer than I wanted it to take, I'd be absolutely truthful about that. My view right now is, we're carrying some momentum in from quarter four into quarter one and through into quarter two. We've had some wins, they haven't been large wins, but they've certainly been sizable wins with some accounts, who are really beginning to see that our story has resonance for them. So I'm looking for that momentum to come through in the sales line slightly later in the year, just because these customers will negotiate with you and then you know, they'll maybe a 6-month or even 9-month period between you winning the business and starting to ship the business. Also just winning it, you need to do in-home testing, you need quite a lot of consumer involvement. So this is not a kind of business where, you go in you make your pitch, when you're shipping on Friday. It's got a longer run up, in terms of all the department, but when I look at our pipeline both in product in customer relationships and innovation. We've upgraded the gene pool of the people, very strongly. We've bought people in from blue chip FMCG backgrounds to drive this business. I really do feel, we built something very interesting that is really going to deliver over the next few years.

[George Staphos:]

Okay, so the platform is stabilized you're getting relatively normal margin in 2Q and then we get some accelerated growth, realizing you're not guiding but as things play out, you get that accelerated growth in second half into 2016 as the pipeline etc., carries the momentum.

[John Williams:]

Yes, but let me be clear. I think one of the issues, one needs to remind oneself, is actually a lot of this earnings improvement is going to come from cost savings. In a lot of cases, we've been actually buying in products as oppose to manufacturing in ourselves. This can be worth several cents in some cases, dollars per case to manufacture ourselves. So it's not as if, unless the top line rules along, we're not going to see earnings improvement because some of this coming actually, in fact quite a large proportion is coming from cost saves.

[Daniel Buron:]

And John, if I can add, we've added five machines that start up in 2014, there is three more that's going to start up in 2015. So I think, one should expect a little bit of ramp up cost and noise still in 2015. I think we've learned a lot in 2013, 2014. So it should be of lesser extent, but I mean ramp up or a ramp up, so you will have a little bit of noise on the margin, in 2016 also.

[George Staphos:]

Okay, one quick one off and I'll turn it over to everybody else to share. Remind me, the insurance recovery of $11 million including that in EBIT, whereas the cost related to that insurance recovery not excluded from operating earnings back 2013, 2014 I just don't recall. Thanks and then I'll turn it over.

[Daniel Buron:]

I mean we had the debate internally, should we exclude the entrance proceed or recovery and the answer was no because the cost related to those two equipment failure were actually in our normal EBIT.

[George Staphos:]

That's fair, understood. Thanks guys, I'll turn it over.

[Operator:]

We'll now take the next question from Steve Chercover from D.A. Davidson. Please go ahead.

[Steve Chercover:]

I'm just wondering, if the pulp segment should become a separate business unit, once you hit a 1 million tons.

[John Williams:]

Well, let's be clear our pulp business is already about 1.5 million tons, Steve.

[Daniel Buron:]

Actually, we're producing north of 4 million ton of pulp in our business, not much.

[John Williams:]

That we use ourselves, so I think you're referring to the fluff pulp piece.

[Steve Chercover:]

Yes, I suppose.

[John Williams:]

When fluff pulp would be, to be honest I don't really think that's what we do. I think we'd include that in the pulp and paper piece and then as we do now, sort of split up, split out the pulp piece.

[Steve Chercover:]

Okay, that's fine, but when you first announced the Ashdown conversion, I think you mentioned that the earnings or the contribution would be part of your growth business bucket and I want to just to be clear though, that does not comingle with personal care and the EBITDA target there remains $300 million.

[John Williams:]

Well, let's be clear. So we have a personal care business today, that we think will get into the 200s and the 220s and certainly, when we said between $300 million or $500 million or even up to $300 million, the contribution from Ashdown we see as part of that and the reason behind that quite frankly is, fluff pulp is a growth business. Does that help?

[Steve Chercover:]

Got it. Yes, thank you for the clarification.

[Operator:]

We will now take the next question from Sean Steuart, TD Securities. Please go ahead

[Sean Steuart:]

Couple questions. The CapEx guidance for 2015, can you give us an idea of the split between personal care and pulp and paper and how that would break out between maintenance and discretionary project?

[Daniel Buron:]

Absolutely, so let me give you a little bit feedback on 204 first because I think it's, you'll see a lot of parallel with what can happen in 2015. So in 2014 about two-third of our CapEx was in pulp and paper and a third was actually in personal care and you should expect more or less the same thing in 2015. 2015 is a little bit higher than the past, I mean as you know we've announced the fluff pulp conversion, so they're $40 million there that are the kind of the first half part of that conversion. We also have kind of couple of other big projects, one being a pulp baler [ph] for $30 million and also some new evaporator at one of our location that is actually a very profitable cost saving project. So it's a little bit higher than normal, but good I think return projects are part of that and overall, I would say 2015 closed to 50% of our spending will be maintenance and the rest is actually cost reduction or profit improvement projects.

[Sean Steuart:]

Okay, thanks Daniel for that and then, John wondering if you can give a little bit of detail on what you're seeing in fluff pulp markets rate now and how you differentiate that versus I guess on U.S. Dollar strength related price weakness and paper grade software?

[John Williams:]

Right again sort of NBSK selling into paper grades. I mean it looks pretty solid, so the demand curve looks good. Obviously the users of the product are growing and so consequently we see some growth patently, we obviously see that growth otherwise, we wouldn't have thought about the Ashdown conversion. So I mean, yes the dollar creates a little bit of pressure here or there, but it still looks pretty good.

[Sean Steuart:]

Okay, thanks guys. Appreciate the detail.

[Operator:]

We'll now take the next question from Al Kabili from Macquarie. Please go ahead.

[Al Kabili:]

I guess, John the first question is one the pricing. You mentioned, some slippage in the fourth quarter, can you just help us with what the exit run rate pricing would have been in 4Q relative to the quarter average?

[Daniel Buron:]

Let me take that question and I'll refer to my prepared remarks. I mean, there was virtually no movement in January and our price in January were $20 lower than the average of Q4, that's why I made the statement that we believe that average over average Q1 will be $20 per ton lower than Q4.

[Al Kabili:]

Okay, that's helpful. Alright and have you noticed any recent changes in recent weeks as far as market dynamics relative to some announcements that have been made out there?

[John Williams:]

Not really, sorry I wonder what informs the question.

[Al Kabili:]

Oh! Just, well there's the, and I know in this forum it's hard to talk about, the trade case filing in this forum, but I was wondering since that announcement has there been any, have you seen any changes in dynamic?

[John Williams:]

Not really. We've seen a few price increases from one or two importers, but that's it. I don't think anything dynamic is particularly shifted. Does that helps?

[Al Kabili:]

Okay, that helps. Alright and then finally, I guess John on the personal care side, on the cost savings that you mentioned is going to drive a bulk of the, to get you back to more normalized margin, can you help us with where those cost savings are and what you see as the biggest risks related to that and getting back to that normal margin.

[John Williams:]

It's a great question. So they're mostly coming from product redesign even though, we're offering kind of better functioning product to our customer, they're coming from product redesign and they're also of course coming from bringing external manufacturing in house and they're coming from getting throughput on lines that are new today, where obviously the ramp up learning curve in those lines is quite considerable. So when you put all that together, that's where those costs are coming from. Does that help?

[Al Kabili:]

That does and I suppose then the biggest risk if you will and appreciate, your confident, you'll get there, but I suppose the biggest risk to there I guess would just be the productivity of the equipment, how long it takes to ramp that up and the redesign performance.

[John Williams:]

Absolutely, so and I mean, that's why sort of, I'm a bit disappointed by it, it's taken us longer than I would have liked. I think as newer machine comes in, to Daniel's point we're further up the learning curve, therefore our ability to put that machine in place, learn how to make the product on it, ramp it up is improving every time we do it. So I'm, how would I put it? Reassured by that, but it won't be as bumpy as it has been at the very beginning. We're to be honest, we've also operationally and from an operations leadership standpoint had to make a couple of changes to make sure, we have the skills rooting it. So I think that's why, you know I'm happy to say I believe very strongly that we're in a inflection point. We built the base, we're getting more stability. Our product offering is resonating with the customer. So you know going forward, I'm feeling pretty good about it actually.

[Al Kabili:]

Okay, great. Alright, very good, appreciated and thanks, good luck.

[Operator:]

We'll now take the next question from Alex Ovshey from Goldman Sachs. Please go ahead.

[Alex Ovshey:]

The uncoated free sheet side, so the pricing information you're talking to suggest that we're seeing a pretty sharp decline in uncoated free sheet pricing, can you maybe just talk about what you're seeing in the market place and running through the numbers you've given where the sensitivities in the slide deck is sort of implies or maybe $80 million to $100 million headwinds, the EBITDA in the business from the correction and uncoated free sheet prices, if they don't' get better from here. Can you just talk to that?

[John Williams:]

So we've said, I mean obviously pricing is always something we talk to individual customers about. So there is no doubt, that current market conditions have been challenged by the increase in imports and we had to make some price adjustments in certain channels in the fourth quarter. So I think just to be very clear, we're not expecting that there'll be more adjustments required going forward, but the results of those adjustments will lead us to see pricing 20 below the quarter average in the first quarter. I just want to make that very clear, so this isn't about a view that there is more erosion to come, this is more about we made an adjustment just to use that term, a one-off adjustment to be competitive in certain channels and as far as we can see, that's it. Does that help?

[Alex Ovshey:]

Yes, it does. John. Then the other question I had is on the MLP side, any updates there you still doing work, still think it's a potentially interesting opportunity for the company to consider?

[John Williams:]

It's good question, I mean we continue diligently on it, with sort of tax, financial and legal advisors. So I think we've got a great external team and a great internal team looking at it. I mean we're still evaluating whether it's the best structure, but we are sort of PLR ready, so and as you know, the moment the IRS is actually not approving any of these structures within the industry. And we continue to re-interest it and to be frank, if we feel it's compelling, we're not going to walk away from an opportunity to create value and as we have more information to share, we'll make sure we share with everybody.

[Alex Ovshey:]

Appreciated that, John. Thank you.

[Operator:]

We'll now take the next question from Mark Wilde from BMO Capital Markets. Please go ahead.

[Mark Wilde:]

BMO!

[John Williams:]

Sorry, about that Mark. I apologize for it. It is only down the street, so we at least understand.

[Mark Wilde:]

Yes, alright. I've got three areas I want to probe with you really quickly. First just use of cash over the next three years sort of return to shareholders versus internal growth.

[John Williams:]

I guess, I can tell you about what we've done so far, right and that is, I think Daniel said in his prepared remarks or I said, we've returned about 70% of free cash flow to shareholders over the years. I think, we've always said wherever we find compelling value that's where we're going to place our money. So of course, we have undertaken now the Ashdown conversion because we think that's the smart thing to do, that's $160 million cost that's a fair bit of our cash. As far as sort of dividend share buyback, now is the time of year we engage with our board, which we will so do and then, we would announce our thoughts on that going forward in the next few months.

[Mark Wilde:]

Okay, is it safe to say, John when you think about growth you still kind of not inclined towards tissue, but you're more inclined toward other kind of products like the AI and the diapers?

[John Williams:]

That's an interesting question, I guess as I've said before on these calls, my concern had been with tissue that with the amount of capacity being built, I always got a feeling that price pressure may well hit because I was always convinced the three big branded incumbents would do everything they can to not have happen in the U.S. what happened to them in Europe, where essentially they left. Yes?

[Mark Wilde:]

Yes.

[John Williams:]

Now having seen some of the events of the week, it looks like some of that might be coming to pass and if we could find compelling value on a forward integration basis in that space, we would not be adverse to looking at it pretty closely, Mark.

[Mark Wilde:]

That's very clear and very helpful. Alright, the second thing I want to ask about, which is the impact on the paper business from two things, one is the likely combination of Staples and Depot and then the other thing is just whole West Coast back issues, I mean it's kind of hard to understand why people are bringing in more paper from Asia, if they've got to deal with all of these logistics issues at the dock?

[John Williams:]

Yes, so let me answer the second bit of first. So we're certainly hearing that supply chain is very wobbly because stuff is stuck in the docks. There is inventory on. I mean, it's a bit of a mess, is what we're hearing to your point. As I've said before, I always felt some of the major customers would be not that confident giving large pieces of their supply chain to those logistics on a key item such as paper because a lot of them are driving their business really through their position on paper, particularly Staples, who you referred to. So let me talk about Staples and the potential merger. Obviously it's a fairer way. At this moment in time, it's a bit of too early to tell, but I mean I think we're a, we've got a fantastic relationship with both of those customers and on a pro forma basis, so just a very rough number market at this point. The combination would represent about 14% of our sales. So I mean that's the impact, if you like at a corporate level, does that help?

[Mark Wilde:]

It does help, John. The last thing I'm curious about is just going back to Ashdown in the fluff conversion, it seems like that conversion is going to be coming up at about the same time of this new big Klabin pulp mill is going to be coming up and I think that they have talked about upwards of 400,000 tons of fluff pulp and that they want to basically displace fluff coming in from North America into the Latin American market because they'll have our freight advantage and now they have a weaker currency. How did you think about that when you kind of did you evaluation of this conversion at Ashdown?

[John Williams:]

Well this is what we did. We heard it was about 200,000 ton, but I mean I don't want to go back and forth, whatever it is, it has a potential impact. We think the market by the time, we appear is in the high 5 million to 6 million tons growing quite nicely. If I look at that market today, it's fairly tight. So I think there is room for us. We actually have a granular plan by customer, by geography for those tons. So we're feeling pretty good when we get to sort of full ramp, that the market is available to us, Mark. In addition, we will also be able to swing from bale pulp to fluff. So it's not like, we're going to sort of churn out fluff pulp from a standing start of massive volumes and then blunder around trying to sell it, we'll ramp up carefully using bales to learn, task the fluff pulp off that machine with our current customers, where our Plymouth material the lighthouse brand we sell has a fantastic reputation with customers. So I think, there will be, I think we know how to be careful entering that market with the key customers that we are talking to, that will do that in a pretty orderly way. Does that help?

[Mark Wilde:]

Yes, that's what I was looking for, thanks John.

[Operator:]

We'll now take the next question from Paul Quinn from RBC Capital Markets. Please go ahead.

[Paul Quinn:]

Just a question on overall M&A environment out there. It's been a while since your last acquisition and maybe you could just comment on a high level. Are you seeing adequate deal flow and is things getting more expensive or how is it going?

[John Williams:]

I think two things, the deal flow is been a bit quite, but you know what it's like in M&A, one morning you think there is nothing by 3 'o clock there is plenty. So we've got a couple of things, we're talking about where we feel at some point in time that may will be a chance to transact and I think the good news for us now is because we now have a strong management team running in our business. We can actually buy businesses, where we should be able to get pretty solid synergies pulls because if you think about it now, we have a network where we can absorb new product, new facilities without needing to take on all the cost of a business that is having to run those on its own, if you take my point. So going forward, I'm confident that we'll see, we've got some pretty good synergies already when we purchased AHP for example, but I think going forward we're going to see more synergies from that. I don't see prices getting top year at this year, but again I think as we do move around and look to buy, I think we can get more out of those businesses because now we've actually built a business capable of generating those synergies. Does that help?

[Paul Quinn:]

Yes, that's great and then just over on the characteristic that you described yourself as fiber innovators. I think a couple years ago, you invest in a number of different projects and options and one of things you talked about at that point is knowing when to invest and when to pull back that investment, maybe you could give us a quick summary of how those are going and whether pulled back on any of them?

[John Williams:]

Yes, sure. So let's take the first one selling force, how pure [ph] and pull back. So now have some very strong testing going with a couple of major businesses, one of them actually looks like they might be interested in partnering with us, a bit more deeply. So I think thereafter to be frank, a long slog. I think we see, light at the end of the tunnel. We haven't really deployed too much of our own money doing that, so that's I think looking better than it was. The other major one we did, of course is the LignoBoost and certainly there at the minute with selling pretty much, everything we can make and we have some good relationship with a few account, so that's moving along nicely to the point you made earlier, I was never sitting here saying that's going to be the answer to the world hunger and we look at other opportunities. So I think the way you have to see with us really, is that these are a series of experiments, we have a very disciplined gate process, so we are saying no to a lot of experiments and slowly see, can we begin to build out a revenue stream that might be interesting, but at the minute its peripheral to the cool business in terms of both EBITDA and sales, does that helps?

[Paul Quinn:]

Yes, I got it. Thanks. Best of luck, guys.

[Operator:]

[Operator Instructions] we'll now take the next question from George Staphos from Bank of America. Please go ahead.

[George Staphos:]

Just one quick, one-off the rest of my question is really been answered. John, Daniel did you mention why pulp inventories were up a bit fourth quarter versus third quarter. Are you comfortable with those inventory levels and did you need them ahead of any projects or the normal maintenance season or are they little bit higher than you would like to see this time of year. Thanks guys and good luck in the quarter.

[Daniel Buron:]

Thank you. I think it's just question of timing that inventory built, we're comfortable with the level of inventory. As you see, we prefer to see those sell every quarter, but I mean we're pretty much sell everything that we're producing on the pulp side. So it's more of a question of timing than anything else.

[George Staphos:]

Okay, thanks. I'll turn it over.

[Operator:]

We'll now take the next question from Mark Wilde from BMO Capital Markets.

[Mark Wilde:]

Much better, that time. Just a couple of things, one just coming back to the tissue business. It seems like a lot of capital has gone into like TAD type products or the private label market so, I just wonder when you look at this market, do you see the North American tissue market becoming more like the European market overtime in that, you know the private label is going to garnish air from branded product because kind of quality differences have narrowed.

[John Williams:]

Well, gosh. I can talk for hours, but I won't. I think, you have to go to kind of matter on private label or store-brand, Mark. So the way retailers in Europe deploy store-brand is typically as you know, with the kind of good, better, best strategy. So they're going to have maybe something sort of national brand equivalent as good. They may [indiscernible] and have a better product with different features as best and they'll have a price site [ph] value. I mean classic implementer of such a strategy would be somebody like, Tesco. Yes.

[Mark Wilde:]

Okay.

[John Williams:]

In the U.S., most of the time private label is priced well below brand maybe 20% to 25% below brand is historically has asked the consumer to make some kind of quality sacrifice to move from major brand to private label, right particularly obviously in the tissue space. Where you'd see TAD and brand and you'd see something relatively different in private label. Now obviously because of margin opportunity on private label for retail, they would be highly motivated to think about building a strong private label store-brand business for two reasons. One, category margin; two, then the consumer is loyal to that brand and that brand is available at that retailer. Probably the best, I'd argue the best people at this in U.S. retail are Costco right now. I mean that Kirkland brand none of us feel. Right, I mean none us feel we comprise when we buy Kirkland. So to my mind, if that is adopted as a retail strategy it seems to me highly likely that private label would increase penetration to getting closer to European levels and rough and ready terms that would be a doubling of the private label penetration in the U.S. going from about, I mean don't kill me on the number about 20% to 40%. The only issue I see is, that the incumbent branded folks this is the big place, they're going to have to turn and fight because obviously it's a huge threat to their business model, if that actually happens in the domestic market, if you take my point. So I think it will be potentially bloodier perhaps than it had been in Europe and may be well take longer.

[Mark Wilde:]

Yes, okay. The other question I had John, just coming back to the trade case. I heard some guys in the trade argue that when we've seen these cases filed before that it's kind of put the brakes on some of the imports, just in the short-term before there is even a verdict on these things. Do you guys anticipate any of that or do you see any sign of that occurring right now?

[John Williams:]

Right, so we haven't planned for that, Mark because I think who knows we're in such an early stage, who knows where this is going to fall. So all we have seen so far which I think is in the public domain is that some of those entities have actually increased price, very hard to tell because to your point on the West Coast issue. So much is coming through there, if that's getting stodgy you're going to see imports decline based on received [ph] data, but are they really would be almost impossible to tell.

[Mark Wilde:]

Okay, that's fair, John. Listen good luck in the first quarter, good luck in the year.

[Operator:]

[Operator Instructions] give me one minute please, I'm just going to open [indiscernible] line, one minute.

[Nicholas Estrela:]

Thank you, Sabrina. As a reminder, we will release our first quarter 2015 results on Thursday, April 30, 2015. Thank you for listening, and have a great day.