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Edited Transcript of UFS.TO earnings conference call or presentation 25-Oct-19 3:00pm GMT

Q3 2019 Domtar Corp Earnings Call

FORT MILL Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Domtar Corp earnings conference call or presentation Friday, October 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Buron

Domtar Corporation - Senior VP & CFO

* John D. Williams

Domtar Corporation - President, CEO & Director

* Nicholas Estrela

Domtar Corporation - Director of IR

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Anthony James Pettinari

Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst

* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Domtar Corporation Third Quarter 2019 Earnings Conference Call with Financial Analysts. (Operator Instructions)

As a reminder, this call is being recorded, today is 25 October, 2019.

I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead.

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Nicholas Estrela, Domtar Corporation - Director of IR [2]

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Good morning, and welcome to our third quarter 2019 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. They will be supported by Michael Garcia from our Pulp and Paper division; and Michael Fagan from the Personal Care division. John and Daniel will begin with prepared mark, after which, they 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 a 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.

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John D. Williams, Domtar Corporation - President, CEO & Director [3]

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Thank you, Nick, and good morning, everyone. Earlier today, we reported EBITDA before items of $147 million. This is a significant quarter-over-quarter improvement, driven by good operating performance across the board and lower maintenance and costs, notably wood, fiber and freight. These factors offset lower prices for pulp and market downtime costs incurred by several of our paper mills. In our Paper business, industry uncoated freesheet demand was lower than expected in quarter 3, but our volumes were relatively stable. We took approximately 125,000 tons of market downtime during the quarter and also reduced our inventories by nearly 19,000 tons.

Despite the downtime, our paper machines ran well and cost performance was strong, resulting in a 300 basis point margin expansion for this business.

In Pulp, downward price adjustments continued in most regions, but we are beginning to see an improvement in supply and demand fundamentals.

Global shipments for softwood pulp were higher in July and August, driven by increased volume to China, which helped reduce global inventory levels.

In Personal Care, we made excellent progress in executing our business plan, with a strong focus on commercial initiatives and cost performance. EBITDA finished ahead of quarter 2, driven by improved input costs and better manufacturing efficiencies as our teams continue to deliver on our margin improvement plan. We're also ramping up new business and looking forward to volume growth in the future.

On a consolidated basis, we generated $108 million of operating cash flow in the quarter and $282 million year-to-date. So we continue to trend well.

We did take advantage of our strong balance sheet and the reduction of our stock price during the quarter to return additional capital to shareholders through share repurchases. Our solid financial position gives us the flexibility to reward shareholders and fund long-term opportunities and we remain committed to allocating capital to both.

Looking forward, we will continue to maximize profitability and cash flow by focusing on the things we can control. This means balancing our paper production with our customer demand, expanding our market pulp volumes, continuing to improve our Personal Care business and continuous improvement in productivity and manufacturing costs in our Pulp and Paper business.

During the quarter, we released our 2019 sustainability report that details some of our environmental, social and governance achievements. The new report highlights our progress and challenges towards our 2020 goals and shows what we have achieved.

This includes a 57% reduction in our recordable safety incident rate, a 15% reduction in greenhouse gas emissions of pulp and paper mills, 38% of the fiber procured for our pulp and paper mills was certified, 72% of the energy used in our pulp and paper mills came from renewable biomass fuels, and we had a 19% reduction in waste to landfill from our network.

We, and our investors, care about how efficiently we use natural resources in our manufacturing, how we support our communities, how we reduce greenhouse gas emissions and how we develop our employees and keep them safe.

We believe that caring about our environment, our communities and our people helps us better meet our business objectives and deliver returns for the long term.

With that, let me turn the call over to Daniel for the financial review before making some further comments on our third quarter performance and fourth quarter outlook. Daniel?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [4]

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Think you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on Slide 4.

We reported this morning net earnings of $0.32 per share for the third quarter compared to net earnings of $0.28 per share for the second quarter of 2019. Adjusting for items, our earnings were $0.89 per share in the third quarter compared to earnings of $0.57 per share for the prior quarter. EBITDA before items amounted to $147 million compared to $133 million in the second quarter.

Turning to the sequential valuation in earnings on Slide 5. Consolidated sales were $34 million lower than the second quarter. Depreciation and amortization were $2 million lower, while SG&A was $11 million lower than the second quarter, largely due to mark-to-market of stock-based compensation.

In the third quarter, we recorded an income tax benefit of $1 million, due mostly to the recognition of previously unrecognized R&D tax credit and a reduced expected tax rate for the year 2019.

Now turning to the cash flow statement on Slide 6. Cash flows from operating activities amounted to $108 million while capital expenditures amounted to $56 million. This resulted in free cash flow of $52 million in the third quarter.

During the quarter, we paid $28 million in dividend and repurchased approximately 3.9 million shares for a total of $137 million or $35 per share. $131 million of the share repurchase were cash settled in Q3 and the rest was cash settled in the first few days of Q4.

Turning to the quarterly waterfall on Slide 7. When compared to the second quarter, EBITDA before items increased by $14 million due to lower maintenance costs for $27 million, lower raw material costs for $19 million, lower SG&A cost for $10 million, lower freight cost for $7 million and lower other costs for $5 million. These were partially offset by lower average selling prices for $47 million and lower productivity, all related to paper market downtime for $7 million.

Now the review of our business segments, starting on Slide 8. In the Pulp and Paper segments, sales were 2% lower when compared to the second quarter and 7% lower when compared to the same period last year. EBITDA before items was $126 million compared to $123 million in the second quarter of 2019.

Our Paper business on Slide 9. Sales were 1% lower versus last quarter and were 3% lower versus the same quarter last year, while estimated EBITDA before items was $139 million or 18% margin.

Manufactured paper shipments were 1% lower when compared to the second quarter and 8% lower versus the same period last year.

Average transaction prices for all our paper grades were $3 per ton lower than the last quarter, and our September exit price for paper was $13 per ton lower versus the quarter average.

Let's turn to the Pulp business on Slide 10. Sales were 5% lower versus last quarter and were 15% lower versus the same period last year.

Estimated EBITDA before items was a negative $13 million. Excluding the extended maintenance outage at our Espanola mill, pulp EBITDA would have been positive in the third quarter.

Pulp shipment were 12% higher versus the second quarter and up 7% when compared to the same period last year. Average pulp prices decreased $106 per metric ton versus the second quarter, and our September exit price for pulp was $18 per metric ton lower than the quarterly average. Our paper inventory decreased by 19,000 tons when compared to the last quarter while pulp inventory decreased by 9,000 metric tons.

Our Personal Care on Slide 12. Sales decreased 4% when compared to last quarter and were 4% lower versus the same period last year, largely due to planned exit of unprofitable customers.

EBITDA before items was $25 million, $4 million higher than the second quarter.

Finally, on Slide 13. Planned maintenance expenses expected to be $8 million higher in the fourth quarter when compared to the third quarter.

So this concludes my financial review. With that, I will turn the call back to John.

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John D. Williams, Domtar Corporation - President, CEO & Director [5]

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Thank you, Daniel. Paper markets remained challenging in the third quarter, but we are seeing signs that the inventory bubble experienced throughout 2019 is beginning to normalize.

We've been responding to imbalances in supply and demand by matching our production to our customers' demand. In addition to market downtime in both the second and third quarters, we recently announced the permanent closure of 2 paper machines: one at our Ashdown Arkansas pulp and paper mill; and the second at our Port Huron Michigan paper mill. These actions reduced our annual uncoated freesheet paper capacity by approximately 204,000 short tons while providing us with 70,000 tons of additional softwood market pulp at Ashdown.

I wish to sincerely thank our colleagues impacted by the closures and recognize their hard work and contributions to Domtar over many years.

This announcement is a step towards our next repurposing project as we discussed with you late last year. We still have the flexibility to convert 4 facilities into growth markets, with significant optionality for both linerboard and pulp.

In quarter 3, imports retreated somewhat compared to quarter 2 but do remain high when compared to 2018. And we're pleased that the U.S. Department of Commerce has decided to initiate an inquiry on the anti-circumvention case on converting rolls. The decision is an important first step in our fight to end the unfair trade practices targeting the U.S. market and to restore a level-playing field. As the trade case progresses, we will closely monitor our paper supply in relation to our customer demand.

In pulp, our average prices were down quarter-over-quarter. Our volumes were higher sequentially, with a solid volume performance in China as we supported key customers and increased our shipments in growing end-use markets. Fluff pulp volume was up, with growth in key markets and key customers.

Looking ahead, global pulp markets remain uncertain and will continue to be influenced by a number of factors, including macroeconomic conditions, trade disputes and inventory levels.

We have, however, begun to see indications of a floor for our pricing. On operations, we went well despite the lack of order downtime in paper, and the extended maintenance work at our Espanola mill. As mentioned at our second quarter earnings call, we're planning for an additional 40-day pulp outage at Espanola to start in late October and run through November to replace the recovery boiler generating bank and complete some remaining repairs.

Paper machines are running well and will operate through the boiler repairs.

In Personal Care, we had a solid performance and continue to make progress against our targets. It's been 12 months since we announced our margin improvement plan, and I'm pleased with the milestones we have achieved. Quarter 3 EBITDA was one of the better performances in several quarters, while margins improved to 11%, the highest in nearly 2 years. We've streamlined our manufacturing footprint and repositioned our assets to match our markets.

We've optimized our supply chain and standardized our operational work systems, and we reduced complexity in our products and customer mix.

All of these initiatives have allowed us to rightsize this business for profitable growth in 2020 and beyond.

Turning to capital allocation. We'll continue to pursue our balanced approach by investing to support our core businesses while returning capital to shareholders.

In quarter 3, we returned $159 million to share owners, consisting of $131 million of share repurchases and $28 million of dividends. For the year-to-date, we've returned a total of $222 million in dividends and share repurchases compared to $81 million for the same period last year.

Moving now to our outlook for the fourth quarter. Maintenance costs are expected to be higher than in quarter 3, while paper is expected to be negatively impact -- impacted, in part, by a seasonally unfavorable mix. We do anticipate some volatility in softwood and fluff pulp markets, while Personal Care is expected to benefit from improved margins and increased sales driven by a stronger order book.

Thank you for your time and support. And I'll now turn the call back to Nick for questions.

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Nicholas Estrela, Domtar Corporation - Director of IR [6]

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Thank you, John. So both John and Daniel will be available for questions. (Operator Instructions) Tania, you can open up the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Anthony Pettinari from Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [2]

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John, you talked about supply-demand fundamentals potentially improving in pulp and maybe a floor on pricing. I was wondering if you could give a little more detail on what you're seeing. And then just looking at preliminary price for October, it looks like softwood grade fell despite a price hike that's out there, just wondering if you could provide a little more color on the kind of current North American market conditions?

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John D. Williams, Domtar Corporation - President, CEO & Director [3]

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Yes, certainly. So I mean as we said, a little bit of softness but nothing dramatic. So kind of bumping along the bottom, I think one would say probably in North America. I think more importantly, we obviously, have a large business in Asia, and we're seeing there strong demand and a sense that there is a little bit of a beginning of the lower part of the market moving slightly upwards. So to our mind, this looks like we're bumping along the bottom. It doesn't look as if there's sort of more to come. Obviously, quarter-to-quarter, our comparison isn't helpful just because it couldn't beat the quarter end pricing versus the average quarter pricing. So I think that's how I would categorize it. There's a report, I think, out this morning from PPI Asia, which I think gives you a pretty good sense of what's happening there, and we pretty much agree with that analysis.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [4]

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Okay. That's helpful. And then I'm wondering if you could provide an update on the current thinking around potential mill conversions into containerboard and/or pulp. And specifically, how does the closure of Ashdown and Port Huron impact that thinking? I think Ashdown was one of the 4 mills you've identified as a candidate?

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John D. Williams, Domtar Corporation - President, CEO & Director [5]

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Yes, sure. So obviously, we're still running a paper machine in Ashdown. So it's a ways away. And as we've said before, in that particular facility, we have the sort of optionality of pulp or containerboard. So our thinking stays very much the same. We know we have some very strong assets that are capable of manufacturing that grade and we have the optionality, we believe, as our core Paper business declines, to make those choices. That hasn't really changed in our thinking.

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Operator [6]

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(Operator Instructions) We will now take our next question from Brian Maguire from Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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John, just a question on the share repurchase in the quarter. Obviously, it's a lot bigger than you've done in quite a long time. I guess just how much of that, would you say, is opportunistic to try to take advantage of the depressed stock price versus might sink to a little bit of a pivot in the capital reallocation strategy. I know you have some targets out there for returning a certain percentage of net income across the cycle and that can be lumpy and maybe this is an example of the lumpiness there.

But if you look at the where the stock price is, even on a day like today, lower than where it's been in the past, do you think that, that is still a better use of cash than it's been in the past, considering your balance sheet is still in pretty good shape?

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John D. Williams, Domtar Corporation - President, CEO & Director [8]

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That's a great question. I mean you've almost answered it in terms of the way we see it. So yes, it's opportunistic. Yes, we felt it was great value. So of course, we have the choice to buy back and took it. We haven't done that over the last few years and felt here was a great opportunity so to do. So I don't think it represents a kind of pivot in our thinking, it's really more continuation of our thinking.

And we also -- I guess if you look at the way the money comes into the business in terms of our cash flow, because pulp is such a driver sometimes of our share price, we can still have a strong cash flow from our Paper business when the share price is low, and we felt we should take opportunity. We should take that opportunity, which we did.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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Okay. And just a question on the conversions. Obviously, when you initially kind of announced that a little over 2 years ago, virgin capacity for linerboard was looking attractive relative to recycled. Now the tables have turned and we've been hearing some virgin-based guys invest in OCC capacity to try and switch the feedstock more towards recycled.

Do you think in the current environment that it makes sense to really be pursuing conversion? I know you haven't announced you're going forward with it right now, but given the current kind of cost curve that's out there between recycled and virgin, do you think that this is something that's still a good idea?

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John D. Williams, Domtar Corporation - President, CEO & Director [10]

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Well, I think we have to continue to weigh our thinking. As I think I've said before, it's not a short-term decision you're going to make. I think if we felt that, that differential was structural forever and a day, that might change our thinking.

I think if we think it's temporary, our thinking remains pretty much where it is. And of course, one of our mills actually we will probably take to recycle because that just makes sense. So I don't think that's dramatically altering our thinking at this moment in time.

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Operator [11]

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We will now take our next question from Mark Wilde from BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [12]

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John, I do want to compliment you on the timing of the share repurchase, I think it was well executed. I want to, however, also turn to the closures at both Ashdown and Port Huron and see if you can give us a little more color on those decisions.

Port Huron, as I recall, is not really a commodity uncoated freesheet mill, it's more of a like a specialty packaging papers business. So it seems to me a little bit different than some of the others that you've been doing, and I wondered if you could help us understand that.

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John D. Williams, Domtar Corporation - President, CEO & Director [13]

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Sure. So I mean if you look at that particular machine, so we had 4 machines in Port Huron and we now have 3, post the closure. The tail end of that business had some grades in it that quite frankly, Mark, we felt over time, we were not going to be able to build the EBITDA to any level that was attractive to us.

So we felt we should just kind of, how would I put it, rationalize the product mix and that led to that machine being closed. Ashdown is a sort of simpler story, in a way, they're very much commodity grades. Some of those are attractive and we're going to make them in the rest of the network. So you're quite right, two different reasons for shutting.

And also from a productivity standpoint, we felt there were opportunities in Port Huron if we kind of downsized and drove our volume through the 3 remaining machines.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [14]

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Okay. And just kind of following on that, John. You've got a couple of mills with small machines up in Wisconsin and you've got a couple of small machines up at Espanola. So just give us a sense of how those all stack up right now?

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John D. Williams, Domtar Corporation - President, CEO & Director [15]

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Sure. So if you look at the Espanola, we make about 70,000 tons of paper in Espanola. And actually, we've got a very attractive mix in Espanola. So -- if you try and separate the Paper business in Espanola from the Pulp business in Espanola and you look at the margins in those Espanola grades, I mean, we are very happy with that. The grades out in Nekoosa, Nekoosa actually is almost acting as a pipeline for moving some of those grades into our commodity-type mills, where we can be more competitive.

A classic example of that would be the Appvion grades, where they were developed, really, with Nekoosa in mind. And then if you remember, we took that conversion in Marlboro to move those grades into Marlboro and, actually, they've turned out to be very nicely profitable grades.

So Nekoosa has its place in the network, I would say, and of course, Rothschild, you know there, we're really doing our higher, heavier weight grades. So that's kind of how the network fits together in terms of the appropriateness of these mills in our network.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [16]

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Okay. The last one I had is just going over to Personal Care. Can you give us some sense for kind of margin targets for Personal Care over time and what that trajectory might look like? I mean, I think if we go back to when you first bought in that business, you bought about $150 million or $160 million of EBITDA.

You probably put another $400 million or $500 million of capital in. I'm trying to get some sense of where that business may be able to go in the future.

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John D. Williams, Domtar Corporation - President, CEO & Director [17]

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Sure. So I see no reason why we can't get back over a reasonable period of time to mid-double-digit margin. So I take hope from 11%, but 11% is far from enough. So I want to see that growing, and I'd want to see the top line growing.

We have some new wins coming in, in the fourth quarter and into 2020, which I think should lead us to high single-digit sales growth in that business. And then I'm expecting to get some margin momentum. So the momentums, over the time I'm coming out of 2020 into 2021, I'm getting closer to those kind of numbers.

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Operator [18]

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(Operator Instructions) We will now take our next question from George Staphos from Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [19]

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I just wanted to -- my first question is going to be a difference swag on Mark's question. So if I understood you correctly, you're going to get volume momentum on the new wins and you get high single-digit growth. I realize you're not going to put a very fine point on what your margin expectations on those wins would be, certainly in a forum like this.

But are we to take that the starting up of those wins and the cost inherent means that you're really running more or less at current rates and then exiting at a higher margin in 2020 in the fourth quarter? Or should we see some rateable increase from what you can see right now in margin over the course of 2020 within Personal Care?

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John D. Williams, Domtar Corporation - President, CEO & Director [20]

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Well, I think it's more of the former than the latter. So obviously, as we absorb large chunks of business, there is a cost to absorption, there's a cost to startup. I think we should also remember, we've shut a facility and we've moved a number of machines on the baby diaper side into our Delaware, Ohio facility from Waco, which we shut.

We are recruiting people, that leads us to some operating inefficiencies. I think we're probably going to have to live with them for 3 to 6 months. So I think latter half of next year is when you start to really see -- you should see, anyway, that -- the beginnings of that momentum in margin.

I think the top line you're going to see sooner, but I think we might have some operational challenges just by absorbing that business in the shorter term.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [21]

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John, relatedly, is the business investable at a 15% or mid-double-digit margin level? Obviously, we've been waiting for that. The market hasn't been as positive for you as you would've expected. There are no guarantees in life, we understand that, but at 15% or better, is it a business that's really worth Domtar holding onto?

And one quick point, on the margin improvement, how much of that was just pulp pricing being lower?

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John D. Williams, Domtar Corporation - President, CEO & Director [22]

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Not a lot of it. A little bit of it, but not a lot of it. I mean a lot of it was -- we took large chunks of cost out by closing. So we have some benefit, but it wasn't a dramatic benefit.

To my mind, the answer to your question is yes. I think is it for Domtar or not? I think what I really want to focus on is getting that business to a performance level, where I'm comfortable, we know how to run the business ourselves and then we'll make our choices.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [23]

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Okay. Understood. My last one is a quick one, I'll turn it over and come back in queue. And perhaps you've already mentioned this in the past and if so, I apologize. How much do you expect the fourth quarter outage at Espanola will cost for the P&L? How much of that is in the maintenance expense budget for 4Q?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [24]

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It's -- I mean all is in the maintenance budget. As you can see, there's just the -- what's missing is the unabsorbed fixed cost that is probably $5 million or $6 million that we'll have to absorb without the sale on the other side. But the rest is actually on the maintenance slide that you have in the deck.

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Operator [25]

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We will now take our next question from Mark Connelly from Stephens Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [26]

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John, obviously, the strong dollar give imports a bigger boost than they might have otherwise gotten, but producers also had to change their mix and their configurations.

Have you now made all of the great changes that you wanted to make in response to GP, inclusive of what you're doing with Ashdown? Or is there still more to do?

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John D. Williams, Domtar Corporation - President, CEO & Director [27]

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I think we're pretty much there. I think we're there. I think if you think about our focus in terms of kind of R&D, we're thinking long and hard about how can we substitute plastic in all kinds of different applications, Mark, because we feel there is an opportunity for a fiber-based business to really take that by the scruff of the neck over the next few years and develop it.

But right now, the grades are sitting across our network in the appropriate assets. Does that answers your question?

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [28]

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Yes. No, that's helpful. And just a small second one. Weather impact across the South was extremely uneven, some states got hit really, really hard. How much did that impact you and are things back to normal more or less in your system right now?

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John D. Williams, Domtar Corporation - President, CEO & Director [29]

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Things are very much back to normal. And interestingly, if you look at some of the tailwind we got in quarter 3, some of that was really wood cost, particularly, the end of the quarter coming back to reasonable levels having been pretty high for longer than we were expecting in the year.

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Operator [30]

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We will now take our next question from Chip Dillon from Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [31]

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That's my French name.

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John D. Williams, Domtar Corporation - President, CEO & Director [32]

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It sounds so much better. It sounds so much better, Chip.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [33]

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Oh, I bet, especially to Daniel, I'm sure. And the first question has to do with capital spending for next year and maybe it's still a bit early but it is getting to the end of the year.

Would it be likely that you would not have a major bump in CapEx in '20, even assuming you make a plan to move forward with a project, it would seem like there'd be a little of time before you actually started to spend the money? Or am I putting you in a box? Could we actually see a ramp in the second half?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [34]

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We're still in the planning phase, Chip Dillon. We -- I guess the question we need to answer internally is how much we're going to invest in our pulp plan next year versus spreading that a little bit more.

So I expect, for the time being, something very similar to this year, and we'll update you when the reflection will be done at our Q4 call.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [35]

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And I guess on that, it's serendipitous to -- I mean, or should I say, one of the silver linings of a tough pulp market is it makes it less costly or there's less opportunity cost with maybe pushing a little faster on some of these projects, is that fair?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [36]

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That's fair. And that's what we've done in -- by fixing, if you will, Espanola in Q3 and Q4. And that's part of the thought process we're going through for next year in terms of CapEx.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [37]

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Okay. And then just last one quickly is, John, I don't know if there's any progress report you can give us in terms of the, I think it's called the circumvention investigation on some of the tariffs that some of the people have been shipping from third countries to try to get around it.

Where does that stand and maybe what's sort of your best guess as to when we think we'll get some information in terms of where that might -- where we might actually see some action?

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John D. Williams, Domtar Corporation - President, CEO & Director [38]

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Yes. So we think probably midpoint of next year or sort of late in the first half in terms of the timing. I think what it does do, Chip, is they're sort of prepared to listen and have announced they're taking the case, importers start to wonder about whether this is sustainable.

So that just makes them a little bit more careful around putting a lot of product through or at least, certainly, putting a lot of product into distribution systems. So it's going to take probably 6, 8 months I think before we really know.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [39]

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Got you. But at the same time, we're seeing maybe a little bit of marginal behavioral shift already?

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John D. Williams, Domtar Corporation - President, CEO & Director [40]

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Well, what is -- well, that's interesting. Also what we are seeing with some of those customers who bought imports when people were nervous about actually getting paper supply, a number of them actually have got pretty frustrated with the supply chain and in a couple of large customer cases, have actually come back to us.

So -- and as you saw in quarter 3, some of the imports reduced a little bit. So I think we'll just keep a watchful eye and see where that's headed.

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Operator [41]

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We'll now take our next question from Steve Chercover from D.A. Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [42]

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First of all, nice work on the repo. Can you remind us what is outstanding on the authorization, please?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [43]

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It's close to $150 million left on the authorization.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [44]

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And is there an expiry on that, Daniel?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [45]

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There's not. I mean we've managed that. I mean that's a program that was put in place, I mean, 8, 9 years ago, increased I think 3x. So there is no expiring date.

And when we're going to get closer to the consumption of the plan, we'll sit down with our Board and we'll decide if we increase it again to give us the flexibility to seize opportunity in the market when the stock goes to where it was or -- a couple of weeks ago.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [46]

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Great. And then, sorry, I just can't write fast enough. Can you repeat what the exit prices were for paper and pulp versus the Q3 average?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [47]

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For paper, it's $13 per ton lower. And for pulp, it was $18 per ton lower. That's the September average versus the average of the quarter, so that -- I mean, it's very clear.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [48]

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And then with respect to the capacity reductions, I know that, ultimately, it's based on matching supply and demand. But is it safe to say that those -- the machines in question were cash negative, and therefore, the closure is accretive?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [49]

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We took a large amount of lack of order downtime. Just in Q3, I think it was $125 million. So it's not -- we're -- I mean that downtime was kind of taken in many places. So it's not that we have paper that is not positive, it's that we have lack of order.

So yes, it's going to be positive to the extent that the fixed cost absorption that will disappear, the fixed cost that will disappear because of that.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [50]

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But at the end of the day, it's really about protecting the 3 million tons of freesheet, not the 200,000 that goes away?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [51]

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Absolutely.

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John D. Williams, Domtar Corporation - President, CEO & Director [52]

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Exactly.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [53]

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Okay. And then last one, with respect to Ashdown, I mean you're making -- I assume that the freesheet is mainly hardwood and the fluff is mainly softwood. Is there excess softwood in that particular wood basket?

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John D. Williams, Domtar Corporation - President, CEO & Director [54]

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There is. There absolutely is. So we know where we've talked about conversion with you, we've already done the work in terms of wood basket to know they are all possible based on wood supply, and we can be competitive on wood supply in those wood baskets.

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Operator [55]

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We'll take our next question from Adam Josephson from KeyBanc Capital Markets.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [56]

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John, just one on your import comments, talking about the supply chain issues that some freesheet customers domestically are having. If some of those imports are starting to leave, then why make -- why the need to permanently shut 2 of your machines?

It seems like that the biggest problem in recent months was these lower-priced imports, so if there are starting to leave, I wouldn't think that 2 permanent machine closures would necessarily be necessary.

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John D. Williams, Domtar Corporation - President, CEO & Director [57]

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Well, I think you'll have to think about -- if you look at market decline sort of over time, we believe this is a market that's declining at 3.5% -- between 3% and 5% year-after-year. Less last year, but of course, what we consider demand, to some extent, is also shipments. It's kind of a muddied, I think, in terms of what's really going on in the market.

So 2 things. I mean, Port Huron is not really a reaction to overall uncoated freesheet, it's really a reaction to mix and a productivity opportunity in the machine part we have left in the mill. So really, the Ashdown machine closure is about putting -- we took -- as Daniel said earlier, we took a lot of downtime. There comes a point where you have to consider some of that is temporary.

If you take our network and you look at -- you say yourself, in any year in a 3 million ton network, 90,000 tons if you take that 3% decline or 150,000 tons, if you believe, and 5% has to come out. So I don't think this is -- I don't think we've closed stupidly ahead of potentially increased demand as exports -- as imports come away.

Also, I think one has to remember, we kind of alluded to it in our remarks, but may be we haven't been clear enough. Our productivity, when we are running machines, has improved considerably. So actually, we can cope with a slightly smaller machine park and still generate good volumes. So I think those 2 things combined may complete sense for Ashdown. If that gives you a little bit more color?

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [58]

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No, I appreciate that, John. Just I know Brian asked earlier about recycled versus virgin in terms of a potential containerboard conversion. I want to take a look at the export angle.

So to the extent that exports would be a part of your strategy in the event you were to convert a machine or more, obviously, the export markets have changed pretty dramatically over the past couple of years for the worse. And I know you keep talking about this as a long-term decision.

But, I mean, when you look at all the capacity coming on globally, it could well be that export markets could be weak for quite some time to come. So how does that enter into your thought process about whether or whether or not to do this?

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John D. Williams, Domtar Corporation - President, CEO & Director [59]

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Well, the answer is of course it does. We have to weigh it. We really didn't have export as kind of a major chunk of what we were posing to do. We think there are plenty of domestic opportunities, particularly for the volumes we may or may not bring on in the very short term.

Obviously, we have the choices on pulp -- fluff pulp to make. I think if you kind of back off to all of this, you say to yourself, over the medium to long term, we are attracted by softwood. We like softwood. We like softwood and pulp and, obviously, containerboard is largely a softwood play.

So somehow, we're going to make that play, especially given how competitive our assets are. So we, obviously, weigh it, I mean, I think if we felt export was going to be horrible for a very long time, we'd put that into our thinking and decide what to do about it.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [60]

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Sure. And just one more on leverage and how you're thinking about capital allocation. So you went up to 1.2x to do the repurchase, what are you comfortable levering up to in the event you choose to go ahead with one or more of these conversion projects and do whatever else you're thinking of doing?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [61]

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I mean our belief is we can do a conversion project, which is the normal cash flow of the business. I mean it's a year where, I mean, we won't pay down debt or have cash sitting on the balance sheet. But I mean just the agenda -- cash agenda of the business, I mean that -- those projects are kind of a 2-year projects.

So it's adding to our normal CapEx but we don't believe we will need to leverage significantly to do a conversion.

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Operator [62]

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We will now take our next question from George Staphos from Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [63]

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A couple of questions on pulp and paper market. So John, you said earlier, you're girding for some volatility in the pulp markets, which is kind of the nature of the markets. I recognize this is a little bit more different period perhaps than what we've seen in the past.

But what are you seeing on the ground, particularly in China, in terms of inventory levels, recognizing fluff pulp is different than hardwood pulp, which is where you have a big increase in inventories, which look to be coming down as well?

So what are you seeing on the margin? And how much more volatile should we expect the pulp markets to be, given it's been pretty darn volatile for the last few decades?

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John D. Williams, Domtar Corporation - President, CEO & Director [64]

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Well, of course, people who forecast this market, I think, normally end up in a padded cell. But I think what I would say is you have to think about end use. So think about the market that this is serving. So think about the tissue grades in Asia or China, think about baby diapers, think about adult diapers.

All those are growth markets and continue to be growth markets, probably faster than GDP. So to my mind, there'll be inventory leverage in plays every so often in terms of how, especially, when people are selling through agents.

But to my mind, the underlying demand curve in this business is still very attractive. So we've seen a very fast decline in the pricing. So it may be that the future is a world of sort of choppier, faster, up and down cycles.

Right now, we believe this thing has largely bottomed out across most of the geography, not quite so much, I think, in the U.S. as we feel in China or in Asia. Our job, as I see it, we've got a very disciplined pulp capital strategy to make ourselves ever more competitive.

And actually, as we said in our published remark, if we took sort of Espanola out of this, actually we're still seeing positive EBITDA in our core pulp mills. So I think we've done a good job on cost. I like the demand in the end use for these products.

So I think it's a commodity marketplace, I accept that. But I still feel over time, it remains attractive. And as you know, when it's -- when prices are strong, it's a highly profitable enterprise.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [65]

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All right. Have you seen -- you're commenting earlier in terms of import restrictions perhaps causing customers to maybe rethink their supply chain.

Are you seeing, to the extent that you can parse this and talk about it live mike, are you seeing any change in purchasing behavior domestically related to what has been discussed, announced, commented on in terms of capacity over the next year or so?

Are you seeing any kind of lift in customers' willingness to purchase maybe inventory a little bit?

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John D. Williams, Domtar Corporation - President, CEO & Director [66]

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Well, so I can only talk anecdotally. But there's no doubt we've had a couple of customers who had gone for imports, thinking that was going to be a place where they could get regular supply. That supply chain has turned out to be painful for them, and they've come to us because we have this fantastic network where we can give you really strong delivery, strong service and strong quality.

So I think that -- I think if you think about it, I think we're probably going to see more of that over time as this inventory bubble kind of works its way out.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [67]

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Understood. And then lastly, I'm assuming with Espanola, most of the maintenance, both sequentially and then year-on-year, is in pulp versus paper. But could you provide a little bit more color on that?

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John D. Williams, Domtar Corporation - President, CEO & Director [68]

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That's true, George. You're exactly right.

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Operator [69]

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We will now take our next question from Paul Quinn from RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [70]

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Just want to get some color on the closures. I know these decisions aren't easy, but you've taken or are taking 200,000 tons roughly out permanently. But if I annualize the market-related downtime in Q3, that's kind of 500,000 tons.

You're, John, 3% to 5% out in the overall uncoated freesheet, it's kind of 250,000 to 300,000 tons a year. We've got the IP shut next year and then we've got the imports, whether they go way.

Maybe you could just help me understand how you came up with shutting those 2 facilities? Why not more? Why not less?

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John D. Williams, Domtar Corporation - President, CEO & Director [71]

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Well, I mean I think we view -- if you go back to 2018, we think kind of an inventory bubble got built of about 300,000 tons in various places in the market, either in merchants or just across the piece.

That kind of -- if you think about that versus an 8 million ton market, that is beginning to slowly work its way out. So we don't think that's a loss of 300,000 tons overall. So I would take that out of the calculation.

When we take that out of the calculation and we think of our network, and we think about kind of a 3% decline year-on-year and you look at the downtime we've had to take, we think what we've done is appropriate versus our view going forward.

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Operator [72]

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We will now take our next question from Mark Wilde from BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [73]

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Yes. John, I just wanted to come pick on the conversions one more time. I just -- it always seems to me one of the key issues for you when you think about this, particularly, in containerboard is those are channels to market. You're not in the business right now. You don't have any downstream converting.

If you look at people who have built merchant machines over time, the risk is always you bring that merchant machine up into a crappy market and then you're like having to sell at the worst possible prices. So just update us on your thoughts about how you mitigate that kind of risk?

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John D. Williams, Domtar Corporation - President, CEO & Director [74]

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Well, if you don't mind, Mark, I don't really want to talk about it, kind of...

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [75]

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Well, just broadly.

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John D. Williams, Domtar Corporation - President, CEO & Director [76]

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In open play. But I think we are aware pretty clearly that we have to think very carefully about our route to market, whether that's a partnership, whether that's integrating in some way, whether that's a partnership in terms of integration. So those are all discussions we continue to have.

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Operator [77]

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We will now take our next question from Brian Maguire from Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [78]

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In the color on 4Q in the outlook, John, I think you talked about in paper, mix would be a little bit of a headwind. But you didn't, I guess, specifically, talk about pricing there, obviously, the color on where September prices were versus the 3Q average gives us some insight there, though.

Just wondering within that, the price declines on paper, both in 3Q and in September, were less than some of the indices published. And I know that those aren't always 100% accurate for your own business.

But just wondering if this is -- is that or is it more of a lagged impact that we would expect to see 4Q pricing even worse than where it was in September? Or maybe some of the recent published price declines impact 1Q '20 more than they do in the second half of this year?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [79]

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Let me take that one. I don't think we like to speculate on what future pricing would look like. I mean we've told all along I think that we deal that with our own customer. We have a very strong customer base.

So the best we can do is share the September price versus the quarterly average, knowing that add to that a little bit of mix, typically in Q4, and we'll just see where it's going to lead us at our Q4 earnings call.

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Operator [80]

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We will now take our next question from Adam Josephson from KeyBanc Capital Markets.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [81]

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John, just one on pulp end markets. I know you talked about short term, maybe there's a bottom, who knows. But longer term, pulp demand growth over the past really since 2009 has been 2% to 3% a year.

Last year, it went -- it was basically flat. This year, it's negative, partly because of what's happening with printing and writing grades around the world. I think tissue growth has slowed as well.

What do you think long-term pulp demand growth is, just particularly given that printing and writing grades, perhaps the declines, who knows, but perhaps the declines are accelerating, I don't know.

But if long-term demand growth isn't 2% to 3%, perhaps for pulp, what do you think it is? And how does that kind of influence your thinking about the long-term attractiveness of that business?

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John D. Williams, Domtar Corporation - President, CEO & Director [82]

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Well, I can only think in a way about our grades, right? So we are really a softwood producer. And we are largely, obviously, fluff pulp, we think, has a lot of runway. We're in a pretty good place on fluff pulp from a cost position, and we're in a pretty good place on Northern softwood and Southern softwood.

My view is, therefore, what I think of the end-use market that those products are playing in and we have some specialty grades, of course. I still think 2% to 3% is a reasonable proxy over time.

I think it gets lumpy largely because of inventory play, where the marketplace, obviously, China that is driving a lot of this. Agents will arbitrage their inventory position for price negotiation, which -- fair enough, that's the game they're in.

So I think you have to really look over a 2-year period to really -- maybe even a 3-year period to get a sense of the underlying growth. But that's kind of interesting. We sit in the Personal Care business, okay, we're a small player. But adult incontinence products and baby products, even in developed markets, I mean, diapers, they're softer than they used to be in terms of demand just because of birthrates. But they are still strong businesses.

So I don't feel nervousness around the sort of underlying demand profile of end-use products in the grades that we're operating in. And to be frank, we made the decision to be in those grades. We came out of hardwood a long time ago because we felt we couldn't be competitive.

So I mean I feel good about the pulp business, especially -- sorry, I'm giving you a long-winded answer, but I think especially allied to the work we are doing to make sure we are very competitive in the facilities. I mean we've got a 3- to 5-year plan to make sure we are.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [83]

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John, just one last one on that point. How would you -- fluff is supposed to be a premium grade, obviously, to softwood, but it hasn't really acted like that for the better part of a year, if not longer.

What do you -- how would you compare the profitability of those grades? And do you think that fluff will ever really de-link from softwood? Because we've heard in the past that, that was going to happen any day now and it rarely, if ever, seems to actually happen.

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John D. Williams, Domtar Corporation - President, CEO & Director [84]

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Well, I think one of the issues there, of course, is the swing capacity question because a lot of the capacity that can do fluff can also do softwood. So I could see people making choices that if softwood is looking very unattractive, they're going to try and do pulp to do a little better than they do on softwood.

I think as softwood kind of comes up, you will see fluff move up. But your point's well made. I'm not sure there's a true decoupling.

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Operator [85]

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We will now take our next question from Mark Wilde.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [86]

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John, just a short one. Can you just update us on the fiber supply situation for you guys out at Kamloops? I mean you're in an area that's been pretty hard hit by the beetle, we're seeing a lot of downsizing in sawmill capacity right around Kamloops. So what does that mean?

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John D. Williams, Domtar Corporation - President, CEO & Director [87]

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Well, we obviously looked at it pretty carefully. Yes, we've been impacted by some of those sawmill closures. When we look at it, it was a pretty small percentage of our supply.

So maybe $1 or $2 here and there on wood supply mark, but nothing structural that we have to be wildly concerned about.

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Operator [88]

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(Operator Instructions) It appears there are no other questions at this time. You may continue.

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Nicholas Estrela, Domtar Corporation - Director of IR [89]

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Thank you, Tania. We will release our fourth quarter and full year 2019 results on Friday, February 7, 2020. Thank you for listening, and have a great day.

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Operator [90]

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This concludes today's call. Thank you for your participation. You may now disconnect.