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Edited Transcript of UFS.TO earnings conference call or presentation 5-Feb-19 4:00pm GMT

Q4 2018 Domtar Corp Earnings Call

FORT MILL Feb 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Domtar Corp earnings conference call or presentation Tuesday, February 5, 2019 at 4:00:00pm 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

* Ashish Ravi Gupta

Stephens Inc., Research Division - Research Associate

* 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

* John Charles Tumazos

John Tumazos Very Independent Research, LLC - President and CEO

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

* Sean Steuart

TD Securities Equity Research - Research 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 Quarter 4 2018 Earnings Conference Call with financial analysts. (Operator Instructions) As a reminder, this call is being recorded.

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 Fourth Quarter and Full Year 2018 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 remarks, 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 with 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. This morning, we announced a great quarter to cap off a solid year for Domtar. In terms of financial performance, we delivered EBITDA before items of $725 million and free cash flow of $359 million, a significant improvement versus last year.

In Communication Papers, the market reached an inflection point. And we were well positioned to support the increased demand from our customers while in Market Pulp, the business proved to be a significant contributor to our results.

From a strategic standpoint, 2018 was a pivotal year. We provided investors with a viable and actionable road map for how Domtar can continue to create meaningful, long-term shareholder value as demand for Communication Papers declines.

We ended 2018 with a sense of achievement with where Domtar sits today and in our positioning for the long term with good visibility on short-term performance, the best paper assets in the business, great optionality and flexibility in the timing of future conversions.

Looking at our performance in 2018. We improved our pricing, expanded margins and grew volume in our paper business. As competitors shut capacity, we grew our business with our strategic customers, improved our customer mix but also capitalized on opportunities to grow in Specialty Papers.

In light of the announced capacity that will be removed from the market, we will maximize paper production to supply our customers and remain their partner of choice for the long term. Making and selling uncoated freesheet in the current market environment is highly attractive, and our absolute commitment is to serve our customers.

In Pulp, we more than doubled our EBITDA in 2018 compared to prior year. Our average selling prices trended higher as we benefited from robust global demand with tissue, hygiene and packaging markets driving strong global growth. Our Market Pulp business has grown significantly in recent years, becoming a vital part of our portfolio as we position Domtar for the future in growing markets.

Given the favorable outlook in the business, we have initiative in place to further enhance our customer value proposition and drive growth in high-margin product segments. This is supported by a disciplined investment and operational plan over the next 3 years on high-return projects to optimize and improve efficiencies with the objective of driving cost performance. Operationally, teams across our mill network were agile and adjusting to market changes and executing on things under our control. This was particularly the case with extracting costs and driving efficiencies through our continuous improvement and reliability programs. These efforts help drive annual production records at several mills, resulting in lower costs and margin expansion.

In Personal Care, 2018 was a transition year. Long-term growth trends for adult incontinence and infant products remain favorable, and we continue to focus on building a more profitable business. However, adverse market conditions, including price pressure and some raw material headwinds, made for a difficult year in 2018. We've responded with an aggressive plan to drive margin improvement and enhance our competitive position. Our actions have included streamlining SG&A, cost reduction across our operations, SKU rationalization and the optimization of our manufacturing footprint.

We also exited 2018 with sales momentum as new customer ramp-up accelerates and we realized some benefits of our commercial initiatives. We're confident in our ability to generate cash. And we'll maintain a balanced and disciplined approach to deploying resources by investing to fuel growth in our core businesses and returning capital to shareholders.

As I noted at the beginning of my remarks, the opportunities of our world-class paper assets provide us with an important lever for further positioning Domtar in growing markets. We believe our repurposing road map represents a significant de-risking of our business by clearly identifying generating alternatives for our mills when they are no longer needed. We will greenlight the conversion of individual assets to produce containerboard and/or softwood pulp only when necessary to balance our paper production with our customers' demand.

Moving to health and safety. Domtar's consolidated frequency rate improved by 5% versus last year. This establishes new record lows for event frequency for Domtar. All in all, we're very pleased with what we were able to accomplish in 2018 and look forward to even better results in 2019.

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

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

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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 $1.38 per share for the fourth quarter compared to net earnings of $1.57 per share for the third quarter of 2018. Adjusting for items, our earnings were $1.63 per share in the fourth quarter compared to $1.46 per share for the prior quarter. EBITDA before items amounted to $228 million compared to $193 million in the third quarter.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $23 million higher than the third quarter due to higher sales in our Pulp and Personal Care businesses. Depreciation and amortization was flat when compared to the third quarter, while SG&A was $15 million lower than the third quarter due mostly to the mark-to-market of subbase compensation. In the fourth quarter, we've recorded an income tax expense of $35 million or a tax rate of 28%, higher than our forecasted tax rate, due to the finalization of the repatriation tax under the new U.S. Tax Reform.

Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $217 million, while our capital expenditure amounted to $84 million. This resulted in free cash flow of $133 million in the fourth quarter. For the full year, cash flow from operating activities amounted to $554 million. And capital expenditures amounted to $195 million. This resulted in free cash flow of $359 million in 2018.

Turning to the quarterly waterfall on Slide 7. When compared to the third quarter, EBITDA before items increased by $35 million due to lower SG&A costs for $15 million; lower maintenance costs for $14 million; higher selling prices for $12 million; lower other costs for $5 million; higher productivity for $5 million; higher volume and mix for $2 million and a favorable exchange rate of $1 million. These were partially offset by higher raw material costs for $19 million.

Now the review of our business segments, starting on Slide 8. In the Pulp and Paper segment, sales were 1% higher when compared to the third quarter and 6% higher when compared to the same period last year. EBITDA before items was $211 million compared to $197 million in the third quarter of 2018.

Our Paper business on Slide 9. Sales were flat versus last quarter and were 9% higher versus the same quarter last year, while estimated EBITDA before items was $129 million or a 16% margin. Manufactured paper shipments were 1% lower compared to the third quarter and also 1% lower versus the same period last year. Average transaction prices for all our paper grades were $11 per ton higher than the last quarter.

Let's turn to the Pulp business on Slide 10. Sales increased 3% versus last quarter and were 2% lower versus the same quarter last year. Estimated EBITDA before items was $82 million or 24% margin. Pulp shipment were 1% higher versus the third quarter and down 15% when compared to the same period last year. Average pulp prices increased $8 per metric ton versus the third quarter. Our paper inventory increased by 34,000 tons when compared to last quarter, while pulp inventory decreased by 7,000 metric tons.

Our Personal Care business on Slide 12. Sales increased 7% when compared to last quarter and were 2% lower versus the same period last year. EBITDA before items was $20 million, $6 million higher than the third quarter.

Finally, consistent with our practice at this time of the year, you'll find on Slide 13 through 15 our estimates for some key financial items for the coming year. With respect to maintenance, our total cost for the year are expected to increase slightly, but our quarterly audit schedule will change from last year, with Q2 being the most active quarter. Capital spending is expected to be between $220 million and $240 million, while depreciation and amortization is expected to be between $290 million and $300 million.

So this concludes my financial review. And with that, I'll 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. So let's take a closer look at the fourth quarter. We ended the year on a strong note, with quarter 4 EBITDA before items of $228 million, one of our best quarters in several years. We also generated over $130 million of free cash flow in a high capital spending quarter. Our results were driven by solid performances by our Paper and Market Pulp businesses. I'm especially pleased with our cost performance despite some fiber availability issues, which impacted wood costs at several of our facilities.

In our Paper business, favorable market conditions and strong productivity underpinned a very good quarter. Our average paper prices were higher following the implementation of our announced price increases, partially offset by the seasonally unfavorable product and customer mix. We do expect additional price momentum in the first quarter and a slightly improved mix.

Despite the usual seasonal slowdown in the quarter, Communication Paper volumes remains steady and backlogs remain strong. Our sales momentum continued in January, and we expect a good first quarter in volume. We had fewer maintenance outages, while total production tonnage reached record levels at some of our Communication Paper mills.

We did take a marginal amount of tactical downtime in order to manage some of our wood supply at several facilities. In Pulp, our prices were higher when compared to quarter 3, as prices increased in most regions and more than offset year-end price reductions in China. We had solid demand for NBSK in North America, while fluff pulp markets continue to see good end use growth dynamic. While we have seen some segments of the softwood markets soften, the tissue and specialty sectors remain robust, and the Chinese market is already showing signs of stabilization. Our expectation is for demand to remain stable through the Chinese New Year, and we're optimistic for a return to volume growth and some price recovery by quarter 2.

In Personal Care, results improved from the third quarter. Sales in Europe increased 7% year-on-year, while new customer volume began to ramp-up in North America. Higher volume and cost improvements also drove operational efficiencies and resulted in lower overall unit costs. Although markets remain challenged with raw material cost inflation, we do see the underlying fundamentals beginning to improve. Our near-term focus is on the execution of our margin improvement plan and building value for our customers.

The Waco closure, which includes the relocation of infant and adult lines to our Delaware and Greenville facilities, is expected to begin during the first half of the year. These initial steps will optimize infant diaper production, which will reduce fixed cost and improve cost absorption.

Overall, in 2018, we had a strong finish and a great year. We're confident that the positive momentum in the Paper and Pulp markets will continue, driven by healthy demand and solid fundamentals across our portfolio. Our teams across the system continue to do great work in improving [the] efficiency and reliability, supported by targeted capital spending.

Looking ahead, our paper shipments will increase as we respond to demand from our customers following the announced capacity closures. Our paper prices will continue to improve in the wake of our recently announced price increases across the majority of our grades. We expect that softwood and fluff pulp markets will remain balanced through the year due to continued steady demand growth and expected limited new supply. We anticipate that cost of freight, labor and raw materials will marginally increase. Wood cost and availability issues will likely persist into early 2019 at several sites.

Personal Care is expected to benefit from our margin improvement plan and new customer wins, partially offset by further raw material cost inflation.

So thank you for your time and support. And I'll 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) Carolyn, you can open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to George Staphos with Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [2]

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John, could you give us a bit, and Michael, some commentary and, maybe, a little bit more color in terms of how the volatility that we saw and, I guess, continue to see in Chinese fundamentals, obviously, from [more] commodity grades, filtered back to your operations and your business? And what gives you some comfort, recognizing there are no guarantees in life, why you think we should remain more or less in balance in the markets through the first quarter?

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

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Sure. So I mean, I think, if the premise, George, is that pulp that was bought for the paper grades was not used to some extent because the paper grades was soft in China. So there was pulp available to be sold, if you like, to our customers. And our customers, of course, are mostly tissue customers in those kind of grades. And of course, our fluff pulp customers and absorbent products. So there was a sort of slight buyer strike. We think agents were adjusting their inventory based on having bought, perhaps some expensive inventory. As you know, we don't use agents. We have a direct sales organization in China. So we're very happy that we have real visibility of what's going on. And as you can see, Chinese prices have moved slightly up from the bottom. So our view is there's nothing inherent -- I mean, this is still an economy, obviously, that's growing at, say, 5%, if you can believe the statistics. So to our mind, there's nothing inherently wrong with the demand of end-use products into which pulp is going. And certainly, we see the midterm, post-Chinese New Year that, that will settle down. So there's nothing inherently problematic with end use demand.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [4]

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Okay. I appreciate that. One related question to pulp and then one for tissue and I'll turn over. Recognizing, again, things are going to move around a bit and there are no guarantees, the run rate that we are seeing in pulp shipments right now, should we more or less consider that as a relatively good rate into the first and second quarter maintenance adjusted? And where do you see fluff winding up as part of your mix for this year? Are you going to be materially above the low 40s as a percentage of your overall production? And then in tissue, it sounds like sequentially, we should see some improvement. Could you give us, if not quantify, maybe some qualitative waterfall in terms of how volume, inflation and productivity and mix should benefit you 1Q and 2Q?

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

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So if I can answer the last bit first because I think you meant Personal Care?

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [6]

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Yes. That's what I meant to say.

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John D. Williams, Domtar Corporation - President, CEO & Director [7]

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Rather than tissue?

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [8]

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Yes.

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John D. Williams, Domtar Corporation - President, CEO & Director [9]

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So, I think, on Personal Care, I think we see improvement. It may not be linear. But certainly, in 2018, we had a really choppy sales line. Even though at the top line, it looks very stable, customers came, customer went. So now we're much more stable. So I think we're going to see the benefit of that stability. We, obviously, had a lot of tailwind on raw materials last year. We think that will lessen. So yes, we see improvement in Personal Care moving through. On the pulp side, I think the volumes are probably about right in terms of quarter-to-quarter, the numbers you are now seeing. There was one very large quarter where we were actually selling out of inventory. That's not the number to use. I think it's more the numbers you see today. And yes, on fluff pulp, I think we're largely at the run rate we're going to be at. There might be a little bit of an increase, but I think it's going to carry on very much as it is now. Does that help?

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [10]

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It does.

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Operator [11]

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And we'll go next to Anthony Pettinari with Citi.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [12]

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John, you outlined your road map late last year to convert [4] white paper mills. And given the GP closure, maybe it's safe to assume the time line probably gets pushed back a bit. So just given a more attractive freesheet market and your debt-to-EBITDA of down to 1 turn, just wondering how you think about capital allocation here. Are you getting to a point where maybe the balance sheet is inefficient? Or any kind of broad thoughts you have?

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

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Yes. Certainly. So -- I mean, just to remind ourselves, I think in the last sort of 10 years, we've given back about 66% of free cash to shareholders. So we wish to continue to reward shareholders. I think our promise is still very much that more than 50% will go back to shareholders. So that's why there's an attractive dividend. There's no question, though. You see...

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [14]

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Was that for -- that's...

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

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Yes. Sorry. I mean, there's no doubt that you see an increase in CapEx this year. And there are reasons behind that. So we now have a really great plan by individual mill in our Pulp businesses to how we're going to drive both cost and productivity in our Pulp business. As you recall, I've said historic -- in a way, we were sort of a reluctant pulp supplier. Now we've got, I think, one of our best leaders running it. We've got a very clear plan. It does not mean for one minute that capital is going to sort of blow out of the water in terms of historical behavior. But you'll see, we've slightly increased CapEx in '19 in order to really drive that plan forward.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [16]

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Okay. That's helpful. And then, you called out tactical downtime due to wood cost in 4Q. But it seems like paper inventories increased more than they typically do in 4Q. So I just wondered if you can explain that dynamic?

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

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Yes. That's sort of partly mixed, to be honest. So sometimes, we've got more of some grades than other grades than we need. But on the wood side, if anything, we were a bit tight on wood here and there. So we have to take a bit of downtime just so our wood inventory increase to reasonable levels. So that was what we were involved in there. It wasn't that meaningful, to be honest.

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Operator [18]

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And our next question comes from Brian Maguire with Goldman Sachs.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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John, you used to target something in the neighborhood, I think, it was around $200 million of EBITDA from growth businesses, Personal Care, fluff pulp. Just wondering, in light of the Georgia-Pacific news and the repurposing road map, that seems like it might not kick in, in the next couple of years. Is that target still in place? And do you have any sort of updated thoughts on the time line for it?

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

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Yes. Sure. I'd be happy to help. So I mean, certainly, if you look up now the size of our fluff pulp business, obviously, we're don't really give you the earnings by fluff pulp. But when I look at what we're making on fluff pulp, what we're making in Personal Care, I mean, we're not far away from that objective. And I think, over time, we'll get closer. I mean, certainly, on the conversion, the containerboard plan, over time, we're going to see strong earnings. Now of course, we're already earning money from those assets. But one has to remember that if we're not making paper, you have to compare, if you like, our containerboard earnings to nothing in the next few years when we make those conversions. So to my mind, over time, the shift of -- the business will shift in terms of its earnings profile, which it already has, to some extent. But of course, we now find ourselves with runway, I guess, one might say, on the white paper that is slightly longer, perhaps, than we were thinking a few months ago.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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Okay. Great. And then just another question on the pricing dynamics. You mentioned in the fourth quarter, they were up in most of the markets, offsetting the declines in China. But just wondered how you think about the declines in China impacting the other markets? And we've already seen a little bit of weakness here in the U.S. and Europe. Just wondering how you think about where prices in those markets go, and if they just lag movements in China. Or if you think that they're discrete markets and so you're not expecting any additional price declines from here?

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

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Yes. I mean, I never have liked to speculate about pricing. So if you don't mind, I won't, but I'll certainly give you the facts. I mean, the facts are quite straightforward. A lot of our pulp business that we sell domestically, and if you like, in the U.S. and Canada, is contract-based, with very specific pricing mechanisms, which kick in or don't kick in. Very often, there's a lag, one way or the other. So I don't really perceive the Chinese weakness as something that will dramatically impact North American pricing.

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Operator [23]

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And next we'll go to Steve Chercover with Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [24]

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My first question, forgive me if I missed it, are there any brands that were associated with the GP product that you might be available to make?

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John D. Williams, Domtar Corporation - President, CEO & Director [25]

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Not to my knowledge. There was one brand they used, but most of it would have been private label, and most of it would be -- a lot of it would be cut-size.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [26]

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Okay. But it's safe to say that you have had inquiries from the former company's clients?

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

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Well -- so yes -- well. So I mean, obviously, that is such a shock to the customer base. 60 days is not very much time. So those customers have clearly been looking for volume. To be absolutely frank, what we've really been doing is making certain we supply those customers that we've had over the long term who've been loyal to us and to make sure we keep supplying them. Now there are some moves we can make, perhaps, of reducing our export business slightly and, how would I put it, increasing productivity in some of our mills to generate some more volume. But our #1 priority is actually to maintain our supply chain to our current customer base.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [28]

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And that certainly seems appropriate. And then, on the pulp side, if there's not much growth currently, do you foresee any shortages on the fluff side that perhaps you can fill down the line?

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

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Well, I mean, if you look at the demand -- I think you actually go to, Steve, the end use demand of fluff pulp. So this is obviously driven by absorbent hygiene products. So Fem-Hy, baby diapers and adult diapers. Unquestionably, particularly on the adult diaper side and the feminine hygiene side, those are fast growth, 5%, 6% growth markets in volume as people adopt these products more. So our view on fluff pulp is that the runway on fluff pulp remains very strong.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [30]

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And one of your competitors in fluff acknowledges that they made a mistake, so to speak. Did that have any impact on you?

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John D. Williams, Domtar Corporation - President, CEO & Director [31]

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I have no idea what the mistake was.

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Operator [32]

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And next, we'll go to Sean Steuart with TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [33]

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Couple of questions, following on Steve's point with filling the GP gap. You're guiding to higher 2019 shipments. It looks like you ran more or less full load in 2018 based on your stated capacity. Can you give us a sense of incremental volume you're expecting this year in terms of paper shipments?

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John D. Williams, Domtar Corporation - President, CEO & Director [34]

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Well, certainly, I mean, I wouldn't give you the exact number because as -- the world moves around on us. But our plan is to bring back some of the export volume that we're shipping into Europe, where we know there's a margin enhancement opportunity for us. Not all of it, but some of it. And to squeeze the system, we think, to sort of 40,000 to 50,000 tons. And we'll dry furnish a bit some maintenance downtime that we were not in the past. So maybe 100,000, 150,000 tons.

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Sean Steuart, TD Securities Equity Research - Research Analyst [35]

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Okay. And second question. The incremental CapEx this year that you're spending. I gather some of it's going to go into the pulp optimization initiatives. Maybe just go into a bit more detail there and expected returns on the discretionary -- the incremental discretionary capital you're going to be spending?

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John D. Williams, Domtar Corporation - President, CEO & Director [36]

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Let me -- if I may give you the macro rather than the micro just because we don't really talk about it mill to mill. But obviously, our Market Pulp mills have done some great work in setting out probably a 3- to 4-year road map on what they need to do to really be more cost-effective and to enable us to drive the productivity we want. So not all of these projects would give us a return within sort of 5 years and drive our cost position in what are already very competitive mills to an even better place. Really, to make certain, I mean, we all know pulp's a volatile market to make certain that we're making all the money we can make regardless of the state of the marketplace. So that's where the -- that's where that increase in CapEx is going. So -- and of course, you know those Market Pulp mills. So it's going to be Plymouth, it's going to be Kamloops, it's going to be Dryden, to make certain. And of course, Ashdown, to make certain that we can really drive productivity in those mills.

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Operator [37]

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And we'll take our next question from Mark Connelly with Stephens.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [38]

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This is Ashish for Mark. Just wanted to dig a little bit further on white paper pricing. Daniel, I think you've said on the third quarter call, you exited with pricing in September at $20 higher than the average for the quarter, and then you came in around $11 higher. I'm just wondering how much of that is mix. And then, if you could also just give us a sense for where we were with the September 1 hike, the $50 hike? I think you'd said that, that would -- expected to all be in by December, but it seems like that hike is kind of dead. And I just wanted to kind of get a sense for how to think about things in aggregate.

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Daniel Buron, Domtar Corporation - Senior VP & CFO [39]

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So let's answer the first part of the question. You're right that mix is the explanation in Q4. You may remember that we used to have a significant mix impact in Q4 this year. We've been able to manage that through a smaller amount. So we've improved our mix significantly or improved the price of the [full] mix, if you will, in 2018. So we have a mix impact in Q4, but very limited versus prior year. So we're pleased with the mix improvement we've seen. And when we made the comment on the price increase, the last one, the last one last year, it was a 3-month implementation when we spoke. So there was a portion that was actually in Q1. And we're still expecting that to happen in Q1. So we're -- without the price increase that just was announced, we were expecting a price improvement in Q1. And the new price increase will give us a little bit of further benefits, probably late in the quarter and mostly in Q2.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [40]

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Okay. Great. That's really helpful. I -- that's more than we thought. And then, just kind of thinking about -- you made some comments about your contracts in Pulp, and the lag is there and the mechanisms. And just trying to -- still focused on price. Pulp ended up coming in a little bit better on pricing than we expected. And there's been this kind of historical difference in where we've seen list and spot versus your realizations. Can you get a -- just give us a little bit more clarity in kind of how to think about 2019 in terms of when those contracts are rolling off or where you might see some volatility, if at all?

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John D. Williams, Domtar Corporation - President, CEO & Director [41]

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Yes. So I mean the short answer is no, not because I don't want to, just because of how events unfold. But essentially, I think the thing to think about, major accounts in North America will have mechanisms that protect them on the way up and protect, to some extent, the supplier base on the way down in terms of the lag and delay in those pricing mechanisms. So typically, what you're inclined to see is at the point that maybe prices erode very slightly, that actually, the major accounts in the United States, their prices continue to increase versus prior quarters because the supplier is getting paid, if you like, for some of the margin that wasn't available to them based on the contracts in the quarter where the prices were going up. And I think that's probably an impact you might well see in quarter 1 versus quarter 4. Now there -- so rough and ready terms, you could almost think of a 3-, 4-month -- These are quite complicated formulas. You could think of a 3- or 4-month delay, up or down, with some of the major accounts. Now of course, they don't contract all their volume. So if there's a spot opportunity, they'll take it. But of course, they want to stay with their major suppliers because they know they get security of supply. So when you put all that together, it's kind of -- everything moves slightly more slowly than one anticipates because of those contracts driving the pricing mechanism. Does that help?

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Operator [42]

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And for our next question, we'll go to Mark Wilde with BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [43]

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John, I'd like to come back to the couple of questions on this pending closure. The first is, about 5 years ago, we had another big closure in the industry, and everybody got very bullish. And then within about 6 to 12 months, everybody had to get more cautious. Are there any lessons learned from the last time we had a big slug of capacity drop out of the market like this?

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John D. Williams, Domtar Corporation - President, CEO & Director [44]

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Well, I think one is, don't apply the revenge theory of customer management. So I think, you have to be balanced in your approach. I think you have to remain loyal to your customers. I also think, Mark, the difference here is that I think, the duties make a difference this time around. So certainly, some of those people who've flooded in the previous time can't flood in this time. And I think, we just have to take a balanced approach. Now there's no doubt, versus historical numbers, there's no way paper prices are ludicrously high at this point. But at the same time, I think, we have to be measured in our approach, and watchful and careful. And that's exactly what we're going to be.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [45]

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Okay. And then, the other question I have, John, and I don't want you to speak for this Atlanta-based company. But if we'd look at the mill that's going down, it's a large and, from what I can tell, a low-cost asset. And the current owner is a big existing player in both pulp and containerboard. And yet, they're opting to close this mill down and start buying pulp from their tissue operation. So does that tell us anything about the economics or the attractiveness of your own conversion plants in the pulp and containerboard? I mean, they've got a big mill. And they could be doing it, and they're not.

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John D. Williams, Domtar Corporation - President, CEO & Director [46]

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Right. I mean, I guess, if you think about Domtar, we are in the Pulp and Paper business. If you think about Koch Industries, they're in a whole raft of different businesses. I'm assuming, and I -- as you say, I cannot speak for them, that they make their own capital allocation decisions. And here's a decision they've made saying, "Well, this is the decision we're going to make in these terms." I have no idea of the details. We all know, I think, Mark, that mill has had its challenges for a while. And it just looks like they have decided that they just weren't going to invest. I think the implications for us are when I look at the returns we would realize, over time, by moving into containerboard, they are attractive returns. So I don't think it impacts particularly our numbers.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [47]

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Okay. But you see what I'm saying. They seem to have kind of a built-in runway, John, in the bulk of those markets.

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John D. Williams, Domtar Corporation - President, CEO & Director [48]

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I agree.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [49]

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Because they're a huge fluff pulp player and they're a 4 million ton containerboard guy.

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John D. Williams, Domtar Corporation - President, CEO & Director [50]

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I agree. I think -- I mean, to be honest with you, I just don't know, to be frank. I mean, my view is they've made that choice. I can't imagine why they made that choice. I think I can absolutely understand from an uncoated freesheet standpoint. But to your point, I don't really understand from a conversion standpoint.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [51]

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Okay. All right. Well, last question I had, John. Just on the pulp market. We've kind of walked around China and everything. But it does seem like there's a lot of pulp inventory sitting out their global, including over at the European Court. Can you just help us kind of understand how you're thinking about that element in the equation?

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

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Yes. Certainly. I mean, I think about our supply chain to our customers. And I think about our ability to know the inventory in those accounts because we're actually calling them on ourselves as opposed to through agents. We don't do that much business in Europe, truth to tell. I think about the stock in our system. And I feel -- I think Chinese New Year will have to get past that to really get clarity. But I certainly don't sit here and think -- and I'm really talking about 2019 in its entirety, I think we may have -- there's a potential for a little shocker or 2 at the beginning. But the underlying demand is still very strong. So this stuff will work its way through that. And we always start the year assuming no one's going to have any capacity issues. And every year, there's 1 million to 1.5 million tons of stuff that goes wrong. So I think that inventory will work through pretty straightforwardly.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [53]

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Okay. And are these Chinese tariffs -- are they having any effect?

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

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Actually, not. No. I mean, the one -- obviously, it's fluff pulp, largely. It's -- I think it's 5%, if I recall. And 87% -- nearly 90% of global fluff pulp comes from the Southeastern United States. So not so far.

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Operator [55]

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And we'll go next to Adam Josephson with 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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Daniel, just one for you on the stock-based comp. It was a $19 million sequential benefit, just given the move in the stock in the fourth quarter. The stock has obviously reversed course through the first month of 2019. Should we expect the opposite to happen in 1Q sequentially or not necessarily?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [57]

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I think you should expect something similar in the first quarter. I mean, rough rule is $1 per share is $1 million in impact. So whatever the closure price of the stock on March 31, you'll be able to assess what you believe is the impact for Q1.

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

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On freesheet prices. You were asked earlier about how the last increase is still flowing through. And Daniel, you said you've got 1 more quarter of that. Can you just help me with kind of what your exit prices were versus your quarterly average price? And then, if we were to factor in the remainder of that fall increase, what the exit price would have been, just to help us for modeling purposes?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [59]

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Quarter end, the average was very similar. And I'll have to do the calculation, but I think there's probably, I mean, less than $10 a ton left, if you look at the full portfolio. Probably -- I mean, the $6, $7 per ton improvement in Q1 because of last year increase.

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

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Okay. So that would be the sequential increase. Okay. And then just on -- John, on containerboard for a moment. I'm sure you've seen there's been -- John, that there's been, in containerboard, flattening domestic demand. There's been deteriorating export markets, falling export prices, bloated inventories. Does that affect your thinking at all about the medium- or long-term attractiveness of the North American containerboard market, particularly given the seeming profound weakness in export markets that's developing?

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John D. Williams, Domtar Corporation - President, CEO & Director [61]

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Well, I don't think it changes my view of the sort of long term. I mean, I still think that's an attractive market. It seems to me, inconceivable that it won't continue to grow. I mean, it's not only is it driven by sort of GDP growth; it's, of course, driven by e-commerce growth at this point in time. But it has its highs and its lows, and it always has done. And so I think in -- right now, it's softened a bit. That's what that market does. And it will return as it always does. So to my mind, it doesn't really change our thinking dramatically. I think, as we said earlier, and as I said in my prepared remarks, obviously, we feel very confident right now in our core business with the GP closure and the sheer dynamics in the market. And quite frankly, our ability with our customers to supply them competitively. So do we feel we have, perhaps, a little more runway than we felt we had prior to the announcement of that closure? And I think the answer to that is obviously yes.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [62]

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Sure. And just, John, back to Mark's question about comparing the current freesheet situation to what happened 5 years ago. Can you just help us with the extent to which you think this situation is different because of the existence of the duties? In other words, how important -- just based on where the duties are, how significant are the differences now versus -- it -- how much different is it precisely because of those duties?

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John D. Williams, Domtar Corporation - President, CEO & Director [63]

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I think it's very different. This is -- one, this is a large number, although -- I mean, it's -- the closure is kind of focused on grades that go down particular channels. So it's not like it's a wide market issue. They're actually quite focused in certain channels. I think, importers now have a much -- I think people who are producing offshore actually have much better domestic markets. Look at the European market on uncoated freesheet. The market's been consolidated, prices have moved up quite dramatically. That's happening in market after market. So the idea that there's swathes capacity looking for a home, I think, is a little bit of a myth. And obviously, in some of those marketplaces where they imported like crazy the last time, actually, the duties, I think, prevent them. So I'm not being naïve here. I think you will see an increase in imports, but I don't think it's going to be wildly dramatic. And I also think we will just do what we do best, which is focus on supplying our customers competitively.

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Operator [64]

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And next, we'll go to Chip Dillon with Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [65]

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First one, John, you're doing great. You guys had a really good cash experience last year, even with the very good dividend. Looks like your net debt went down by about $4 a share and you're about at 1:1 leverage. And it looks like, from the CapEx program, that any re-purposing would take -- would happen after '19. Should we expect to see anything like what we saw 5 or 6 years ago in terms of buybacks? I mean, is that something that is moving up the chain? Or do you feel you need to still keep a lot of powder dry even though your leverage is down 1:1?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [66]

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First of all, we like our leverage. We like the flexibility it's giving us. I mean, we're now able or -- to seize opportunities if one arrives. So we like the leverage we're at right now. I think, in terms of capital allocation, I mean, we have a healthy dividend. And we'll resume discussion with our board, around the annual shareholder, to look at the dividend and to look at should we resume share buyback or not. But that's definitely part of the tool that we have to return cash to our shareholders. And our commitment remains: to have a balanced approach and to return more than 50% of our cash flow to our shareholders.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [67]

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Okay. And I do note that you've raised it 8 out of 9 times -- sorry, 8 years out of the last 9. So that's pretty impressive. And then, John, you mentioned in the beginning that your repurposing, again, would be containerboard or softwood pulp. And you didn't use the F word, the one with 5 letters. And I just wanted to make sure that you understood that you all regard fluff as either equal to or greater than SBSK as you think about repurposing.

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

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Yes. We do. We do.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [69]

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Okay, okay. And then the last thing. You -- I know -- I think, and you might expect I know the numbers, the pulp mill program is a 4-year program. I think it's around 120-or-so million all in. Will this year be sort of an average year or above average year for that, all things being equal?

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John D. Williams, Domtar Corporation - President, CEO & Director [70]

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Average. About average, I would say.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [71]

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Okay, okay. And this is year 3 or year 2?

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John D. Williams, Domtar Corporation - President, CEO & Director [72]

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Year 2.

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Operator [73]

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Your next question comes from Paul Quinn with RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [74]

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The $17 million increase in maintenance cost in '19, is that -- is this for the pulp program? Is that the increased cost?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [75]

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It -- there's a little bit more activity. You'll recall that we've moved to an 18-month schedule. So there's a little bit more days of shut, if you will. And the rest is inflation. We're expecting a little bit of inflation. I mean, steel is more expensive. Labor will be a bit more expensive, as always. So we've been able to beat inflation over the last 5, 6 years. I think we'll have a little bit of inflation in our maintenance next year.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [76]

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Okay. And that breakdown, on a quarterly basis, of the maintenance cost, that's really helpful. Is there any way that you can give us some color on how it's going to affect both Paper and Pulp through the quarters?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [77]

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For Q1, I can give you a small update, actually. A bit more maintenance -- let me see here. It's a bit more maintenance. $6 million more maintenance in Pulp and $3 million less maintenance in paper. And I'll have to look at -- I guess, that Q1 result. I'll give you the breakdown between Pulp and Paper for Q2.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [78]

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Okay. And that's great. And then, just on the 2019 CapEx budget, that $220 million, $240 million that you guided. Is there anything in there for conversion?

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John D. Williams, Domtar Corporation - President, CEO & Director [79]

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No.

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Operator [80]

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We'll go next to John Tumazos with John Tumazos Very Independent Research.

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John Charles Tumazos, John Tumazos Very Independent Research, LLC - President and CEO [81]

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With the $301 million of debt repaid and the prospects for very nice earnings gains in 2019, you have a lot of walking around money if you wanted to embark on a project. With the shares rising, do you think you've missed the boat for buybacks? Or could there be a special dividend? Or could there be, easily, a $0.5 billion larger project to integrate something in Personal Care or for that containerboard option 2, 4, 6 years down the road?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [82]

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I think I'll echo what we've said earlier. I mean, we like the flexibility that we have in our balance sheet. I'm sorry -- it's still in its journey to move from declining businesses to grow businesses. So having that flexibility on the balance sheet is making sure that if an opportunity is available, we can actually seize it. Just so -- just looking at it and say, "Too bad. We don't have the ability to seize that opportunity." And for the rest, I mean, we -- the tools we have for returning cash to our shareholders are healthy dividend. We'll look at it. We can buy back and we can do special dividend. And that's part of the discussion we'll have, as we're having on a yearly basis, with our board around the May time frame.

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Operator [83]

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(Operator Instructions) And we'll go to George Staphos with Bank of America Merrill Lynch.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [84]

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Guys, the first question is just around maintenance CapEx, specifically within the Pulp business. So John, I thought I heard you say that, obviously, you like the Pulp business. And the investments that are being made are to assure as much as possible that no matter the cycle, you're not leaving any money on the table and you're making as much as you can. Are the projects -- and this is maybe splitting hairs. Are the projects more aimed at reliability and improving reliability on a going-forward basis? Or is it there are areas where you can take variable cost and fixed cost out of the mills, and by which to not leave that money on the table? That's my phrasing, not yours. And then relatedly, the little-bit-larger-than-normal spike in 2Q maintenance, is there anything specific, project-wise, driving that? Or is that just the way the counter is coming together in terms of the project's alignments and the 18-month schedule?

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John D. Williams, Domtar Corporation - President, CEO & Director [85]

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Sure. So on the Pulp side, let me talk to that. So you've got some de-bottlenecking going on. So obviously, there's a benefit there in terms of balancing the mill and output and some reliability issues. We've -- challenge is the wrong word. But we've had some issues, I think, with where the right targeted investment, we can just run the place with more reliability. And we have some energy projects, which always pay well. So those are kind of the 3 focuses of that one. Maintenance is just the way it falls, to be frank. So if [a large] mill falls in the second quarter versus the third quarter, you'll see maintenance move around. But I'm not sitting here thinking there are large maintenance-type projects that are disproportionate to what we usually do.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [86]

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Okay. And my last question. And to some degree, I almost hate to ask it because again, it's hard, ultimately, to answer and to know with any certainty what the future looks like. You said earlier to the conversion question that always comes up on the calls for pulp or for containerboard, that you'll probably have some a runway here before you have to make that decision because of what's been happening in terms of supply demand in uncoated freesheet. How do you assess the risks? And what do you do as a result of pushing out, perhaps, the calendar here, but it being later in the cycle, which would mean that potentially, the next time you really get a window for that conversion, it might be pushed out even further? Because we really don't know what the macro cycle is going to look like, a couple, 3 years from now.

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

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Yes. So I'm going to -- I mean, I think what we have to do is kind of remain agile in our thinking. Keep an eye on the horizon. To be honest, what is a cycle these days? Is it 3 years? Is it 5 years? Is it 15 years? Are we in a super cycle? I mean, we could debate that until we were blue in the face. I think, for us, is if we look at our asset base and we look how competitive they are, we look at our ability to convert, in a market where there's a reasonable earnings potential from the -- from being in the containerboard space, we can be competitive in that space. So I think, that's our going-in premise. Then there's the how do we approach the market question. And of course, there's a technical question, "Can we do it and be competitive?" I think we've answered most of those questions. So to my mind, I come away feeling pretty confident that we know what we need to do. However, events keep conspiring, which I'm not unhappy about that say, actually, we get more runway in our core business as things start to happen. And that allows us, quite frankly, to make certain that we keep that balance sheet flexible and gives us choices.

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Operator [88]

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(Operator Instructions) And it appears we have no further questions. I will turn things back over to our speakers for any additional or closing remarks.

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

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Thanks, Carolyn. We will release our first quarter 2019 results on Wednesday, May 1, 2019. Thank you for listening, and have a great day.

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Operator [90]

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And that will conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect.