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Edited Transcript of UFS.TO earnings conference call or presentation 1-Nov-18 2:00pm GMT

Q3 2018 Domtar Corp Earnings Call

FORT MILL Jun 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Domtar Corp earnings conference call or presentation Thursday, November 1, 2018 at 2:00:00pm 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

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Derrick Laton

Goldman Sachs Group Inc., Research Division - Associate

* George Leon Staphos

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

* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - 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 Q3 2018 Earnings Conference Call with financial analysts. (Operator Instructions) As a reminder, this call is being recorded. Today is November 1, 2018.

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

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

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Thank you. Good morning, and welcome to our third quarter 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 reported impressive third quarter results. EBITDA before items of $193 million was a significant year-over-year and quarter-over-quarter earnings improvement and included a $6 million unfavorable impact due to Hurricane Florence. Our strong performance was driven by solid business fundamentals and accelerating price realizations within our Pulp and Paper businesses. Operations also ran very well with productivity gains across the mill system and we continue to generate strong cash with $70 million of cash flow from operations.

In our Paper business, favorable market conditions and margin expansion underpinned the solid quarter. The recent price increases that we announced are coming in as we expected and they more than compensated for rising input costs. Our shipping volumes were strong and we continue to demonstrate that we are the partner of choice to our customers in the North American uncoated freesheet market.

In Pulp, results were driven by strong global demand along with robust pulp sales and favorable pricing trends. We had solid operational results, particularly in pulp productivity. The strong performance in our Pulp and Paper business more than offset a difficult quarter for Personal Care. We are seeing escalating raw material costs combined with lower prices and these are compressing margins in adult incontinence and baby diapers on both sides of the Atlantic. We have discussed the personal care industry environment at length over the past several calls. In recent quarters, I've spoken about the numerous actions we've been taking to reduce SG&A and costs, increase efficiency and productivity in manufacturing and grow our top line. Our actions have generated tangible results but the benefits have been offset by significantly higher raw material costs.

Given prevailing market conditions, we've launched a division-wide margin improvement plan to enhance profitability. Overall, we expect annual benefits of approximately $25 million to $30 million from these actions with full run rate effect by the end of 2020. This will include streamlining SG&A, cost reductions across our operations, SKU rationalization and the optimization of our manufacturing footprint. Our Waco, Texas facility, which employs 148 full-time people and supplies baby and adult incontinence products will be permanently shut by the middle of next year. Some equipment of that facility will be relocated as part of a division-wide optimization of our manufacturing footprint.

Our guiding principle is to reduce complexity to improve efficiency and productivity. We're also undertaking pricing initiatives and ways to maximize top line contribution through our commercial means wherever conditions allow. The sum of these actions will reduce our cost base and strengthen our long-term competitive position. Challenging market conditions in Personal Care aside, we have strong momentum to finish 2018 on a high note. And the confidence with our Paper and Pulp businesses will enter 2019 with the best momentum in many years.

With that, let me turn the call over to Daniel for the financial review. 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 $1.57 per share for the third quarter compared to net earnings of $0.68 per share for the second quarter of 2018. Adjusting for items, our earnings were $1.46 per share in the third quarter compared to earnings of $0.65 per share for the prior quarter. EBITDA before items amounted to $193 million compared to $143 million in the second quarter.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $14 million higher than the second quarter due to higher prices in our Pulp and Paper businesses, partially offset by lower paper volume and the lower sales in our Personal Care business. Depreciation, amortization was $4 million lower while SG&A was $3 million lower than the second quarter. In the third quarter, we reported income tax expense of $3 million or 3%. This is lower than our expected tax rate due to benefits related to some pension contribution done in Q3, but deductible at last year Federal tax rate, income tax effect of the U.S. tax reform and the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. Excluding these 3 elements, our tax rate would have been in line at 21%.

Some of our operation were impacted by Hurricane Florence during the quarter. As a precaution, we proactively idled our fluff pulp mill in Plymouth, our paper mill in Marlboro and our Personal Care facility in Greenville ahead of the hurricane. Even as our team managed the recovery extremely well and safely, it was nevertheless a $6 million headwind in the quarter. This estimated impact is related to advanced on preparation cost across our regional mill and converting network, less production, increased operating costs, higher regional input costs, including wood, transportation and logistics.

Now turning to the cash flow statement on Slide 6. Cash flows from operating activities amounted to $70 million while capital expenditures amounted to $49 million. This resulted in a free cash flow of $21 million in the third quarter.

Turning to the quarterly waterfall on Slide 7. When compared to the second quarter, EBITDA before items increased by $50 million due to higher selling prices for $39 million, lower maintenance costs for $15 million, better productivity for $4 million, lower SG&A costs for $4 million, and lower raw material costs for $4 million. These were partially offset by lower volume and mix for $8 million, higher other costs for $4 million, higher freight costs for $3 million and an unfavorable foreign exchange for $1 million.

Now turning to the review of our segmented -- segment starting on Slide 8. In the Pulp and Paper segment, sales were 2% higher when compared to the second quarter and 9% higher when compared to the same period last year. EBITDA before item was $197 million compared to $143 million in the second quarter.

Our Paper business on Slide 9. Sales increased 1% versus last quarter and were 7% higher versus the same quarter last year while estimated EBITDA before item was $134 million or a 16% margin. Manufactured paper shipment were 4% lower when compared to Q2 and 1% higher versus the same period last year. Average transaction prices for all our paper grade were $40 per ton higher than the second quarter.

Let's turn to our Pulp business on Slide 10. Sales increased 6% versus the last quarter and were 12% higher versus the same period last year. Estimated EBITDA before items was $63 million or a 19% margin. Pulp shipment were 3% higher versus the second quarter and down 8% when compared to the same period last year. Average pulp prices increased $23 per metric ton versus the second quarter.

Our paper inventory increased 17,000 tons when compared to last quarter while our pulp inventory also increased by 17,000 metric tons.

Our Personal Care business on Slide 12. Sales decreased 4% when compared to last quarter and were 6% lower versus the same period last year. EBITDA before items was $14 million, $6 million lower than the second quarter.

As John just mentioned, this morning we announced a division-wide margin improvement plan that will lower cost and strengthen our long-term competitive position. The plan includes, among other things, the permanent closure of the Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of its manufacturing assets and a workforce reduction across the division. The Waco, Texas facility is expected to seize operation in Q3 of 2019 and will result in the reduction of 148 full-time employees as well as certain temporary positions. The aggregate pretax earning charge in connection with the margin improvement plan is estimated to be $57 million, which includes $29 million related to accelerated depreciation and write-down and $7 million related to contractual obligation of the Waco building lease. The bonds of approximately $21 million, the incremental cost of this restructuring, covers severance costs, asset removal and asset relocation costs. The estimated total charge expected to be recognized starting in the fourth quarter of 2018 through the third quarter of 2019.

Let's turn to Slide 14. As you can see, the fourth quarter will be a less active quarter with regards to major plant maintenance shutdown in our Pulp and Paper business. We expect to spend approximately $13 million less than what we spent in the second quarter -- third quarter and this decrease should largely impact our pulp business.

So this concludes my financial review. And with that, I'll turn the call back to John. John?

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

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Thank you, Daniel. As indicated in previous calls, we expected top line and margin erosion in Personal Care in quarter 3, but the margin compression was more severe than we anticipated. Competition remains intense, raw material costs continue to surge while pricing pressure persists. We anticipate these conditions will continue and we expect pressure on margins will remain, but we do believe they were at the trough. We also expect some top line improvement in quarter 4 as our new customers ramp-up accelerates. I'm confident that the margin improvement plan that we announced today will help the business weather the storm and will allow us to be well positioned in the future.

In our Paper business, we continue to see very positive market conditions. EBITDA before items was $134 million in the third quarter for an EBITDA margin of 16%. This is a 300 basis point margin improvement over the second quarter so a very solid performance. On paper prices, our recent increases are being realized with average prices $40 per ton higher when compared to top quarter 2. We've made meaningful progress implementing price increases this year and we expect to fully realize the recent $50 per ton September increase within the next 3 months. Our volume momentum continued with every channel performing well in the third quarter.

Some September orders rolled over into October due to weather, but year-to-date shipments continue to be strong with our volumes up 4% versus last year. This has been driven by higher demand from our customers, new business growth in our specialty business and we are capitalizing on every opportunity to improve mix. We're well positioned for margin expansion over the balance of the year and we should see continued momentum as we move into 2019. We expect supply and demand to be balanced over the short- to medium-term.

North America uncoated freesheet demands down 1.1% year-to-date, a significant improvement over the 5% decline in 2017, and offshore imports remained at low levels. We're encouraged by what we see in the paper markets and by the volume and margin improvements that we continue to drive. Our paper price realization should further improve over the next 2 quarters as our recent increases take hold.

In Pulp, we had one of our best performances in recent years, driven by price increases and a solid operational performance. Prices were $23 per metric ton higher quarter-over-quarter. In addition, we have announced and continue to implement price increases across several softwood and fluff pulp grades. We do expect softwood prices to remain relatively stable in the fourth quarter and through 2019, supported by cyclical demand growth and a deceleration of capacity expansion.

Operationally, despite some outage days at Plymouth and Marlboro, in anticipation of Hurricane Florence, slush pulp productivity remained strong. Our shipments in the third quarter were impacted by weather, but also due to mills prioritizing paper over market pulp volume given strong paper markets. We're looking to further improve our customer mix and execute on growth opportunities, notably with our fluff pulp customers.

On the supply side, publicly reported downtime has recently started to accumulate in the market and this has increased demand for Domtar products. In addition, we believe producer and customer inventories remain at relatively low levels. During the quarter, China imposed a 5% tariff on U.S. market pulp and we are carefully monitoring trade policies but we don't expect any near-term impact to our business. We also continue to evaluate the potential repurposing of assets.

We are committed to being thoughtful and deliberate in our approach to how we leverage and repurpose assets to capitalize on market opportunities while being mindful of current market conditions. This will best position Domtar to drive both near and long-term value for our customers and shareholders. We will provide an update on our thinking regarding asset repurposing by the fourth quarter earnings call.

In conclusion, this is one of our best quarters in several years and we're pleased with our momentum going into the remainder of the year and into 2019.

Turning to our fourth quarter outlook, our Paper and Pulp business is expected to benefit from higher price realizations following recently announced increases. For both Pulp and Paper, we do expect maintenance cost to be lower. Finally, in Personal Care, we expect to benefit from higher volume and cost savings but this will be largely offset by commodity cost inflation.

Thank you for your time and support and I'll turn the call over 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) Vicki, 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 take our first question from Anthony Pettinari with 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, just following up on the mill conversion study, is it fair to say that containerboard is still kind of the focus of the study? Or are fluff or maybe other grades still in play? And do the recent capacity announcements in containerboard at all change the way that you think about the opportunity?

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

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Yes, sure. Let me start with the end first, if I may, Anthony. So I think we have to remind ourselves that whatever we choose to do, we're making a decision over a 30-year time horizon in terms of the investment. So sort of trying to time entry into a positive market whilst part of the judgment is far from all of the judgment and probably a minority part of the judgment, actually. So what's happening in terms of some of the capacity build we see, we think about, but I wouldn't say it dramatically impacts our thinking. And, of course, there are various arguments as to whether it's enough, too much, and what the implications of it are. In terms of what we're thinking about, we're open to a number of options. So it's not as if we're just thinking about containerboard. As you know, we've already taken 2 fluff pulp conversion so we look very carefully. Are there other opportunities there? And as I said, over the next -- certainly, around the fourth quarter earnings call or before, you'll hear from us about exactly what we plan to do. So I hope that will give you clarity at that point. Does that help?

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

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Yes, no, that's very helpful. And then just maybe switching gears to the personal care improvement program, I guess, 2 questions. First, is this going to result in a net reduction of your productive capacity? And then second, I know you've guided to $25 million to $30 million of benefits run-rating by the end of 2020, any thoughts on the timing of those? How that benefits flow through? Is it linear? Or is it kind of more back-end loaded as you close Waco?

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

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Well, that's a great question. So I would say on the SG&A reduction piece and the Waco closure piece, we'd obviously be wanting to see that run rate post the Waco closure as the business settles down. So I think you could see -- you'd look to see the SG&A benefit in the next few months and you look to see the Waco closure benefit towards the end of 2019 and then the rest of those benefits would flow through towards the sort of end of '19 and through to '20. So if you look at sort of what I would call the hard stop items, so the SG&A reduction and the Waco closure, that really ought to flow through by end of '19, early '20.

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Anthony James Pettinari, Citigroup Inc, Research Division - VP and Paper, Packaging & Forest Products Analyst [6]

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Okay. And then -- definitely -- and are you in a reduced capacity on the net basis with Waco?

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

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Slightly -- only on baby diaper. But we would still have enough headroom for the growth we're looking for from some of our key customers. So not on adult at all, but slightly on baby.

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Operator [8]

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And we'll take the next question from George Staphos with Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [9]

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John, I wanted to actually piggyback a little bit off of Anthony's question, if I could. So would it be possible to delineate what the cost saves are, specific to SG&A? Specific to Waco? Or are those still somewhat preliminary? And if you've mention it somewhere in the release, I apologize for having missed them.

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

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Don't worry, George. I'll talk to -- let Daniel talk to that because we've got that for you.

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Daniel Buron, Domtar Corporation - Senior VP & CFO [11]

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Yes, George, actually there's -- let's call that 3 buckets of improvement. One is head count reduction, the second one is the Waco closure and the third one is operational and pricing initiatives. So head count should be around $8 million, Waco closure will bring around $7 million and other initiative that John referred to, SKU and rationalization, I mean pricing initiative, all kind of that stuff should bring more or less $15 million over time.

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John D. Williams, Domtar Corporation - President, CEO & Director [12]

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Does that help, George?

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [13]

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I'm sorry, Daniel. Yes. That was $15 million? Or $50 million? I assume it's $15 million?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [14]

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Yes, $15 million. 1-5.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [15]

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Okay. And then I guess the related question there is, certainly, Personal Care has been an opportunity that the company's been pursuing for a number of years. The performance there hasn't been necessarily where you had expected it to be. What makes you confident, John, and Daniel, that this initiative is really going to set the business up to be earning above cost of capital return? And what's your biggest concern about that?

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John D. Williams, Domtar Corporation - President, CEO & Director [16]

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It's a great question. So I mean you look at this and you see 2.5, 3.5 points of margin coming from this activity. The raw material issue, we shall see where that goes over time but obviously, we buy a lot of polyolefin-based product, so we're a large buyer of things that are driven by polypropylene pricing and the oil price so we think that's going to work its way out over time. We have -- if ones being truthful, a little bit of a scale issue, which I think the closure of Waco helps us. We can focus productivity into the Delaware facility, focused on baby. And Greenville really, very closely focused on adult incontinence. We've had a lot of costs this year. We've sort of swung out of a piece of business at 1 customer and had a ramp-up with another customer and these are large numbers here, tens of millions of dollars of sales moving about. So I think -- in fact, I still think over the long haul, this is a mid-teen EBITDA business. It has got very competitive. Currently, you can see everybody in the space taking actions to repair margins and you can see the large branded businesses actually moving price, which I think gives us opportunities as well. So I still think over time, we have a business that actually will make its cost to capital and give us a reasonable return. I think the challenge for us now is to really stabilize the cost position of that business whilst we continue to make sure we have a sales line, that's with the right customers at the right kind of margin. So I don't sit here thinking we're never going to get there, but you're absolutely right. It will be foolish to pretend otherwise. It's been a much tougher hoe to plough than we were anticipating.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [17]

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Understood. I guess my last one. I'll turn it over. When it gets to conversions, at this juncture, if we assume mid-cycle pricing, that's really your assumption. What return would be higher, a containerboard conversion or a pulp conversion? Obviously, with containerboard, there's a lot more work that has to be done on the back end but at this juncture, where would the returns be higher for you?

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John D. Williams, Domtar Corporation - President, CEO & Director [18]

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Well, that's a great question. So -- and it's very mill specific, George. And it's very specific to the particular project and the particular grade. But undoubtedly, in the very short term, if you have the opportunity, a inexpensive pulp conversion at today's pulp prices, in the short term versus the capital cost of doing liner board is a pretty attractive choice.

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Operator [19]

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Our next question will come from Paul Quinn with RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Just on the repurposing idea, you guys have been studying this for quite a while and you've involved consultants for seems like it's over a year, just wondering why it's taking so long?

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John D. Williams, Domtar Corporation - President, CEO & Director [21]

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Well, I think what one has to think about is that we had driven in our thinking, of course, by the status of paper markets, Paul, right? We're not in the containerboard business at this moment in time and what has actually happened, if I'm being truthful, is that the paper market, we actually believe, is at an inflection point. We're seeing reasonable growth as we remain clearly the market leader in the space. We're seeing a lot of price momentum. So as you look at that and you think about, our number 1 duty here is to serve our customers profitably in the current space. Quite frankly, when you then look at the containerboard conversion or any type of conversion, you have to see it in the light of a very strong paper business that we now have. So that has made us think very carefully around what will we do and, more importantly, when would we do it.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Okay. That's really helpful. And then just on the pulp side, I know you've said, you've restated a pulp transfer at cost. I guess that was market before and just wondering why you made the change.

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Daniel Buron, Domtar Corporation - Senior VP & CFO [23]

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Paul, Daniel speaking here. It was a small amount of profit that was not properly presented, if you will, in the slides that we felt because of pulp prices going up. The kind of a -- the swing of profitability between paper and pulp was not reflecting the reality so we've made the change to be more accurate.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Okay. Then, lastly, I think you outlined $6 million for Hurricane Florence impact, do we have an idea on Michael?

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

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On Michael?

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [26]

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Yes.

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Daniel Buron, Domtar Corporation - Senior VP & CFO [27]

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Hurricane Michael.

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John D. Williams, Domtar Corporation - President, CEO & Director [28]

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Well, nothing. Nothing of any note.

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Operator [29]

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We'll go to Hamir Patel with CIBC Capital Markets.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [30]

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John, you've announced additional price hikes for pulp in North America, trade report suggests pricings coming off in China, so which market do you think is better leading indicator right now?

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

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Well, I mean I think they operate as 2 separate things. If you like the Asian and the Chinese market and the U.S. and European markets, so our judgment for the quarter is that there's probably a wash between the 2 of them. So there might be a little bit of softening in China or offset by some price increase in North America. So if you look at our mix and how we see it, we think that sort of averages out at about sort of flat pricing across the piece. Does that help?

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [32]

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Yes, no, that's very helpful. And then just turning to your pulp contracts for 2019. Are you expecting to see a similar level of discount inflation next year as you've seen in prior years? Or do you think the market's tight enough that producers can actually hold the line on discounts?

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John D. Williams, Domtar Corporation - President, CEO & Director [33]

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Yes. That's a simple answer, no. We are not.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [34]

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No, you're not expecting discount inflation?

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John D. Williams, Domtar Corporation - President, CEO & Director [35]

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We're not expecting discounts to open up.

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Operator [36]

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And we'll go to Brian Maguire with Goldman Sachs.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [37]

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It's Derrick Laton, on for Brian. Yes, so paper prices have continued to rise and I think this market's been a little bit stronger than any of us have expected. Just curious, what point do you become concerned of the threat of imports and have you started to see this materialize at all in the market? And over the longer term, do you see this potentially upsetting any supply in the market?

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

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Yes, that's a good question. So obviously, we have the trade case with some of the Asian producers that really is stopping them being here. If you look at capacity, any capacity growth is in that geography. And if you look at the dynamics of the regional markets where potential importers into the U.S. operate, those markets actually are looking pretty healthy and prices moving, again, in Europe, pretty dramatically. Obviously, we're an exporter to Europe, so we see that. So the answer is, yes. Of course, imports will be around but we're not expecting them to have a dramatic impact in the market. Obviously, the new news there is the navigator company, but in fairness, they've been importing into the U.S. for a number of years and will continue so to do. So I don't think we're going to see a dramatic impact from imports over the next 12 months.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [39]

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Got it. That's helpful. And then just a follow-up. I think you said your transaction prices in paper were about $40 per ton higher sequentially. Just curious if you can break that out? Or if you could quantify little bit how much of that was just your pricing realizations? And then how much of that is, as you guys continue to put forth effort to improve your mix going forward, how much maybe was impacted just from a mix effect?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [40]

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I think in the quarter, it was largely a pricing effect. We should see a little bit of benefit of our mix in Q4. You remember that Q4 is typically our lowest mix quarter. We believe that this year, it will have a small mix impact in Q4 and it'll get to mix impact, but way better than in prior year so we're very positive in our managing our mix.

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Operator [41]

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Adam Josephson with KeyBanc is next.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [42]

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John, just to try to tie together a couple of your responses for the asset repurposing issue. I think someone said, what's taking you so long and you talked about the inflection, your thoughts that uncoated freesheet may be at an inflection point for, however, long. Obviously, it was -- it turnaround pretty dramatically from 1 year to the next. And I don't know, precisely, how long you cycled less. On the other hand, you said it's a 30-year time horizon decision so how exactly are you balancing the short term factors i.e. uncoated freesheet suddenly having gotten much better versus this thing, what you've said is a 30-year decision?

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John D. Williams, Domtar Corporation - President, CEO & Director [43]

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Sure. So that's a great question and a relatively simple answer. So in the end, this is an economic choice in terms of return and in terms of the capital required to get that return and obviously at the moment, to get a strong return on uncoated freesheet, all we need is the CapEx we have in place today and the assets we have in place today. And right now, we're full and are able to make some customer choices at the lower end of the game here and certainly, drive our margins much higher on some of the kind of filled tons we used to have in quarter 4. So if we put all that together, it says, actually, we've got plenty of runway here on uncoated freesheet. What does that tell us in terms of the repurposing opportunity either in containerboard or pulp or whatever it may be, and what is the appropriate timing around that based on the runway we see on uncoated freesheet? And quite frankly, to reassure our customers that now we have the market share that we have, we are the 1 supplier of any size in this business who actually is driven by uncoated freesheet rather than their need to make containerboard when it comes to repurposing decisions. So when we put all that together, that just says, we should think long and hard about this and be very thoughtful before we decide what we're going to do next. Not necessarily in terms of the what, but certainly instead of the how and the when.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [44]

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Sure. And just relatedly, you made -- you got into personal care many years ago, and it obviously hasn't quite worked out as you hoped it would. In terms of your ability to forecast a market 5 years out, let alone 10 years, 20 years, 30 years, I mean is that part of it? To what extent is that factoring into your thinking that look, you have no idea what the containerboard market or the pulp market is going to look like 5 years from now, let alone 10, 20, 30, so what would give you comfort that in your ability to forecast the long-term health of those markets?

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John D. Williams, Domtar Corporation - President, CEO & Director [45]

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Well, I mean I think you're absolutely right because they move around a lot. I mean commodity -- excuse me, pulp is the classic commodity. I think paper one can be a bit more thoughtful about because they're all operating to some extent on a supply-demand balance as we are in our own business. So to my mind, you just have to make some choices and make some assumptions. I mean I think that's what strategy is all about. But are you going to be wrong at some point? The answer is, of course, you are.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [46]

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And Daniel, just last one on the -- your freesheet exit rate pricing in 3Q versus your average pricing just so I know roughly how much is left over for 4Q?

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

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I think we're a little bit shy of $20 per ton higher in September than we were on the average of the quarter.

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Operator [48]

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We'll go to Mark Wilde with Bank of Montreal.

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

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John, I wondered, just coming back to the paper business, can you give us a sense of what you're operating rates are right now in white paper? And kind of compare that with the kind of industry operating rates which appear to be in kind of the high 80s?

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

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Yes, I'm confused -- I mean our analysis is pretty simple. We sell everything we can make. And we have customers at the door who would like us to sell them more and we haven't got it. So that's our experience, Mark. I'm a little bit confused, perhaps is the wrong word, but I'm surprised by the operating rate that's out there because when I listen to customers, they don't seem to be experiencing a supply base that suggest the operating rates in the high 80s. It suggests low to mid-90s.

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

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Yes, okay. All right. That's really what I was asking, John. Also can you give us a sense on the pulp business? Where you are at in terms of your fluff proportion down at Ashdown right now?

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

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I think we're in the sort of the 75th percentile somewhere around that, but 75% fluff output versus softwood bales, and sort of moving forward as we go.

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Daniel Buron, Domtar Corporation - Senior VP & CFO [53]

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And bale prices is great right now so...

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

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Right. Yes, there's no harm in being in softwood bales currently, as you know.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [55]

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Yes, okay. The last one I have is just a -- one more shot on this repurposing. I wondered if you could just give us a sense of sort of what the 3 biggest hurdles are for you when you kind of -- when think about that repurposing options in front of you?

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John D. Williams, Domtar Corporation - President, CEO & Director [56]

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Yes, sure. I mean I'm not sure if hurdles is the right word but thinking. So number 1, as I said earlier, is all around the uncoated freesheet market and the margin and volume requirement in that market to service our customers. That's certainly the first thing we're looking at, patiently because that's what drives it. Second is really how we enter the market, have we got something sensible to do, have we got a compelling value proposition depending on how we choose to enter. And, of course, third, is the asset base. Have we got assets that will be competitive. Now to be frank, on the third, the answer is we absolutely know we have assets that can be competitive. I don't think that's in doubt from any of the work we've done. So it's those other 2 issues that are really focusing our thinking at this point.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [57]

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Okay. Would you say, John, that one of the outcomes might be some type of a joint venture?

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John D. Williams, Domtar Corporation - President, CEO & Director [58]

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I mean we'd look at all choices, Mark. We don't have our mindset on any particular choice. I think when we look at our assets, there are a number of them. So depending on our timing and what we choose or not choose to do first or second or third or fourth or whatever, then we think about what's appropriate for us as we need to kind of have that much containerboard into the marketplace. But you know, this is a 10-year journey, probably, for the business even when we decide to do it.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [59]

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Okay. And then last one for me, John, it seems like some of the coated paper producers, the uncoated groundwood producers, they're moving into kind of specialty markets that you would also be in. And I'm just curious about how much pressure that's creating in those specialty markets when you have guys like Verso and others pushing in the Verso sappy, pushing in the kind of packaging grades, other specialty grades?

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John D. Williams, Domtar Corporation - President, CEO & Director [60]

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Yes, it creates a little bit more competition, but our specialty business, if I'm being honest, is relatively small. We have a little niche out of those 2 mills around sort of higher technical business with small tonnage type run rate, relatively small machines. I think we're pretty competitive and we have actually been able to move price on specialty this year. But yes, there's plenty of competition around as some of those assets change hands and new owners come in who have new ideas. So that creates a little bit of movement in that business that perhaps wasn't there before.

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Operator [61]

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

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [62]

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Daniel, just to clarify, did you say the charges for total $57 million or $67 million for the margin improvement plan in Personal Care?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [63]

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It's $57 million of which a big portion is actually a write-down in accelerated depreciation. The new money, if you will, to do the restructuring is around $20 million.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [64]

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Yes, I got all those other numbers. That's great. And then on the pricing, just to be clear, I think you mentioned the margin at which prices now, in paper, are above the third quarter average. I would imagine we would expect a little bit more based on your comments that you would get the full $50 by the year-end, I guess. So could we see the quarter-over-quarter average be $25, $30 across the mix per paper?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [65]

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I think we got to see the September price increase, a portion in Q4, and the rest early in the new year. We should have a small, as I said earlier, a small mix impact, smaller than normal. So aiming at more than the exit prices is totally right. So $20, $25 is not a bad assumption.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [66]

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Okay. And then when we look at the pulp business, I know that it's a little slushy in China, but you mentioned how good here it is selling softwood bales. And it seems like, I know, you guys announced another fluff increase and it seems like that's a monthly occurrence. Could we see the pulp realizations rise in that same neighborhood? Or maybe a little less, I guess, I don't know, $10 to $20, fourth versus third? Is that a good place to be right now?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [67]

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Let's start by our exit price was actually $5 higher than the average of the quarter. So we're right there, with stable pricing, I should -- we should get $5 more and you're right, we are implementing price increases. Don't forget that in North America, it takes a little bit more time for price to actually hit our bottom line. China is little bit more direct. So I'll be careful. I mean that's more than $5, it's probably less than $20 in Q4 but, again, we will see as we're successfully implementing price increase and we'll see what China will do for the rest of the quarter.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [68]

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Okay. And John, just -- so if I hear you correctly, you mentioned that you do want to give us something more tangible in terms of your -- of the future with the repurposing by actually early February. Could that -- are you putting yourself in a box? In other words, could you tell us it's going to be this mill but we might push it to x date because of all the factors you've pointed with how good the white paper business is? And, I guess, as a tie-on to that, could fluff pulp be a part of that repurposing as well, given how strong that market is?

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John D. Williams, Domtar Corporation - President, CEO & Director [69]

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So all I can say to both of those right now, of course, Chip, is yes and yes. So I mean you're going to see our thinking is around the assets, not around the timing, I guess, to be absolutely precise. So I think what we want the world to understand is this business where people think okay, that's a declining uncoated freesheet and its options are limited, but conversation is actually going to be about we have some of the very best assets in the industry. And these assets have a long-term future if we're thoughtful enough around the great opportunity, whether that great opportunity be pulp or whether it be containerboard. And that's really going to be the discussion. Does that help?

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Operator [70]

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We'll go to Mark Connelly with Stephens.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [71]

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It's Ashish Gupta, for Mark. Just wanted to follow up sort of a little bit on the paper price, maybe pulp a little bit as well. But more so on the white paper side. You've had sort of pretty nice price increases in the last 12 months and I'm just kind of trying to think about, as we think about where we are, your comments about inflection, the absolute price in paper looks pretty good, but relative to the margins you've had, in the past, if we go back several years, you still really aren't there because of all the inflationary pressures. And I just wanted to get your kind of view on how your thinking about where you are margin wise, which relative to where you think you could be over time certainly since you think operating rates are higher than where we actually -- than in the reported numbers.

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

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Sure, if you don't mind, I think that will be kind of speculation, which I don't think will be helpful. I think all one can think about is from a kind of opportunity basis, when we see a reason and an opportunity to raise price, we'll raise price. We have opportunities. Certainly, from a productivity standpoint, there are plenty of things we can do to try and also reduce the cost base. So those 2 things combined over time, if we can, will sort of do everything we can. But we're operating a very strong profitable business. Patently, we look every minute of every day to find other opportunities to drive that profit. And that's what we'll continue to do.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [73]

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I guess what I'm wondering -- yes -- no, I guess what I'm wondering maybe this -- I should ask the question in a different way, how do you think about your margins here relative to where you've been historically? Is this a reasonable rate of return? Or do you feel like these assets should be earning more relative to your cost of capital?

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

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Well, I think the question here is what momentum and runway have we got. And so actually, if you take current performance and you think about where we could be in '19, quite frankly, I think we've got some great momentum on margin to take in to '19.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [75]

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And -- no, that's helpful, John. And just in terms of the small inventory build you had on the white paper side, can you give us a sense? I mean maybe I missed this, I apologize. But does that have anything to do with transportation challenges or logistics?

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

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Well, certainly, it did around, obviously, some of the hurricane issues we had because not only we closed the mills but we weren't shipping. So I don't really see the 17,000 tons is neither here nor there quite frankly. So we're pretty much where we think the system should be on inventory levels. We haven't built unnecessarily. We're having a strong October, actually, in terms of sales, so I don't see it as an issue.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [77]

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So -- and then just last question, if I might, is in terms of the balance sheet and capital deployment and I know I think last quarter or the quarter before, you kind of signaled that in terms of share repurchase, you were essentially on the sidelines for a while as you balance the needs for future capital for the conversion projects. Is that sort of still where you are? Especially, given the outlook for pricing and cash flow is kind of getting a lot better as we look out?

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Daniel Buron, Domtar Corporation - Senior VP & CFO [78]

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This is where we are. I mean we like the flexibility that is embedded in our balance sheet. I mean don't forget Domtar is still largely in paper in the declining business, so we need to finish the transition of that business to grow businesses. And we're looking at the capital allocation on a regular business. We have a healthy dividend. We're looking at it yearly, should we increase, should we stay flat. And we're more opportunistic in terms of buybacks. So depending on what's happened in the economy and the stock market, we may merge in buying back but that's definitely not the first use of our cash.

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Ashish Ravi Gupta, Stephens Inc., Research Division - Research Associate [79]

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Yes, I know, I guess, I was just thinking about it and in terms of the -- your multiple and sort of where the earnings are going, it just seems like an opportunistic time.

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Operator [80]

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At this time, there is one name remaining in the roster. (Operator Instructions) And we'll go back to George Staphos with Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [81]

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I wanted to -- yes, I wanted to check in on your thoughts on the pulp markets, John. For example, and there was the last statistics for September showed somewhat, from my vantage point, unusual shipment patterns. We saw hardwood up significantly, saw softwood down sharply. One month isn't a trend, but from your view, was that -- is the premium coming in effect just softwood versus hardwood and, therefore, people doing where they could to use hardwood in the furnish and the recipes versus softwood? Was it timing? And was that at all in any of your declines in shipments year-on-year in the third quarter versus third quarter last year? Or was it more timing or hurricane-related that affected your volume in the quarter for pulp?

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

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Thank you. So I mean I don't interpret it as any sort of meaningful shift. There is a view that those people who are -- have that sort of hardwood, softwood choice, particularly tissue manufacturers have done most of the engineering to do what they can to purchase more hardwood. And certainly, our shipments, although down slightly, I mean some of that, if we're being honest was kind of slightly storm related, transport related, it wasn't really customer related. So let's wait and see what October shows us but I think it slightly proven, here we are with a price increase. I don't really think there's any great shift in the market, George, in that respect, if any, quite frankly, that I can interpret from September.

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Operator [83]

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And there are no other questions. So I'll turn it back for any additional or closing remarks.

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Nicholas Estrela, Domtar Corporation - Director of IR [84]

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Thank you, Vicki. We will release our fourth quarter and full year 2018 results on Tuesday, February 5, 2019. Thank you for listening, and have a great day.

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Operator [85]

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And that does conclude our conference for today. I'd like to thank everyone for your participation and you may now disconnect.