Q3 2019 Earnings Call
[noise] good day, ladies and gentlemen, welcome to be Domtar Corporation third quarter 29.
Earnings Conference call financial.
I'd be sized all talk just keeping our leasing.
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He site October 2019.
No not just on that meeting over to Mr. Nicholas Shala. Please go ahead.
Good morning, and welcome to our third quarter 2019 earnings calls for speakers today will be joining Williams, President and Chief Executive Officer, and they will be won't senior Vice President and Chief Financial Officer.
There will be supported by Michael Garcia from our pulp and paper decision, making fagan from the personal care Division.
The only thing ill 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. The investors section of the website. As a reminder, all statements made during the call that are not based on its true facts are forward looking statements subject to a number of risks and uncertainties and many of which are outside our control.
I invite you to review dancers filing so the securities commissions for listing of those.
Finally, certain non U.S. GAAP financial measures will be presented and discussed you could find the reconciliation to the closest GAAP measures in the appendix of this mornings release as well as owner web sites, so with that I'll turn it over to John . Thank your name and good morning, everyone earlier today, we reported EBITDA before items over 100 and.
$47 million.
This is a significant quarter over quarter improvement.
Hi, good operating performance across the board and lower maintenance and costs, notably wood fibre right.
These factors have set lower prices for pulp and market downtime costs incurred by several about paper mills.
No Paypal business industry uncoated freesheet, the mom was lower than expected in quarter, three but all volumes were relatively stable.
We took approximately 125000 tons of market downtime during the quarter.
Also reduced inventories by nearly 19000 Jones.
Despite the downtime of paper machines running well cost performance was strong resulting in a 300 basis point margin expansion for this business.
Hope downward price adjustments continued in most regions, but we are beginning to see an improvement in supply and demand fundamentals.
Global shipments will softwood pulp, Ohio enjoy an old was driven by increased volumes of China, which helped reduce global inventory levels.
In personal care, we made excellent progress in executing our business plan with a strong focus on commercial initiatives in cost performance.
EBITDA finished ahead of quota to driven by improved input costs better manufacturing efficiencies as our teams continue to deliver on on margin improvement plan.
We're also ramping up new business looking forward to volume growth in the future.
On a consolidated basis, we generated $108 million of operating cash flow in the quarter and $282 million year to date. So we continue to trend well.
We did take advantage of our strong balance sheet and the reduction of our stock price during the quarter to return additional capital to shareholders through share repurchases.
Solid financial position gives us the flexibility to reward shareholders and some long term opportunities and we remain committed to allocating capital to both.
Looking forward, we will continue to maximize profitability and cash flow by focusing on the things we can control.
This means balancing all paper production with on customer demand expanding our market pulp volumes continuing to improve our personal care business.
Continuous improvement in productivity in manufacturing costs.
Pulp and paper business.
During the quarter, we released all 2019 sustainability report the details some of our environmental social and governance achievements.
The new report highlights all progressing challenges towards our 2020 goals.
And shows what we have a cheese.
This includes a 57% reduction in our recordable safety incident rate.
A 15% reduction in greenhouse gas emissions of pulp and paper mills.
38% or the five up procured for all pulp and paper Mills was certified 72% of the energy use and all pulp and paper Mills came from a renewable biomass fuels and we had a 19% reduction in waste to landfill promo network.
We and our investors care about how efficiently we use natural resources at all manufacturing, how we support our communities, how we reduce greenhouse gas emissions and how we develop our employees and keep them safe.
We believe the carrying about our environment all communities and all people helps us better meets all business objectives and deliver returns for the long term.
With that actually let me turn the call over to Daniel for the financial review before making some further comments on also go to performance and fourth quarter outlook Daniel.
Thank you John and good morning, everyone, let's start by going over the time satellites over the quarter on slide four.
We reported this morning in their needs of 32 cents per share for the third quarter comparison. This earnings of 28 cents per share for the second quarter of 2000 and Mike.
Adjusting for items, our earnings were 89 cents per share in the third quarter compared to earnings of 57 cents per share for the prior quarter.
BW four items amounted to $147 million compared to $133 million into second quarter.
Turning to the sequential valuation in the earnings on slide five consolidated sales were $34 million lower than the second quarter. If we see usher in a more decision were $2 million doors for wireless Ginnie was $11 million lower than the second quarter, largely due to mark to market of stuff because based company.
Patient.
In the third quarter, we recorded an income tax benefit the $1 million due mostly to the recognition of previously unrecognized R&D tax credit and reduce expected tax rate for the year 2019.
Now turning to the cash flow statement on slide six.
Cash flows from operating activities amounted to $108 million well kept through expenditures amounted to $56 million. This resulted in free cash flow of $52 million into third quarter.
During the quarter Weve paid 28 million dollar in dividend and repurchased approximately 3.9 million share for for a total of $137 million or $35 per share.
131 million dollar of the share repurchase where cash settled in Q3 and the rest was cash upsell into first few days of Q4.
Turning to the quarterly waterfall on slide seven.
When comparing the second quarter EBITDA before items increased by $14 million due to lower maintenance cost forthwith $27 million lower raw material costs were $19 billion lower as ginny cost for $10 million lower freight costs for $7 million and or other costs for $5 million.
These were partially offset by lower average selling prices were $47 million and lower productivity all relate to paper market dog fight for $7 million.
Now I'll review, our business segments, starting on slide eight.
The pulp and paper segment sales were 2% of the word when compared to the second quarter and 7% lower when compared to the same period last year EBITDA before it them was $126 million compared to $223 million into second quarter of 2019.
Paper business on slide nine.
Sales were 1% lower gross this last quarter and were 3% lower versus the same quarter last year, well is submitted a bid up before items was $139 million or 18% margin.
Manufactured paper shipments were 1% lower when compared to the second quarter and 8% of the work. This is the same period last year.
Average transaction prices will all our paper grades were $3 per ton lower than the last quarter and our September exit price for paper was $13 per stone lower guests as the quarter average.
Let's turn to fall because it sounds like then sales were 5% or Augustus last quarter and were 15% of work. This is the same period last year submitted a bid up before them was a negative $13 million.
I think the extended maintenance outage I thought we're spending a meal faulted bid, though would have been positive into third quarter.
Well shipment were 12% higher versus <unk>.
The second quarter and up 7% when compared to December last year.
Great pulp prices decreased $106 per metric ton goes to the second quarter and our September exit price for pulp was $18 per metric ton lower than to quarterly average.
That brings entry decreased by 19000 ton when compared to last quarter, while pulp inventories decreased by 9000 metric tons.
Our personal care.
Slide 12.
Sales decreased 4% when compared to last quarter and were 4% of the work versus the same period last year largely due due to planned exit of unprofitable customers it'd be though before its end was $25 million $4 million higher than the second quarter.
Finally on slide 13 planned maintenance expense is expected to be $8 million higher into fourth quarter, when compared to the third quarter.
So this concludes my financial review with that I will turn the call back to John . Thank you Daniel paper markets remain challenging unless of course, yet, but we are seeing signs that the inventory bubble experienced throughout 2019 is beginning to normalize we've been responding to imbalances and supply and demand by matching our production to our.
Customers demand.
Addition to market downtime in both the second and third quotas, we recently announced the permanent closure of two paper machines, one at a Ashdown Hawkins, so pulp and paper mill and the second at all points, you're a Michigan paper mill.
These actions reduce our annual uncoated freesheet paper capacity by approximately 200 and full thousand short tons, while providing us with 70000 tons of additional softwood market pulp that ashdown.
I wish to sincerely. Thank all colleagues impacted by the closures, but recognize that hard work and contribution to dawn so over many years.
This announcement is a step towards on next Republishing project as we discussed with you late last year.
We still have the flexibility to go up four facilities into growth markets with significant optionality for both linerboard and pulp.
In quarter, three imports were treated somewhat compared to go to too, but do remain high where compared to 2018 and we're pleased that the U.S. Department of Commerce has decided to initiate an inquiry only an anti circumvention case on converting roles.
So decisions and important first step it off flight to end the unfair trade practices targeting the U.S. bucket and to restore a level playing field.
As the trade case progresses, we will closely monitor all paper supply in relation to a customer demand.
In pulp our average prices went down quarter over quarter, although volumes were higher sequentially with a solid volume performance in China as we supported key customers and increased our shipments in growing end use markets.
Softball building was up with growth in key markets and key customers.
Looking ahead to global pulp markets remain uncertain and we'll continue to be influenced by a number of factors, including macroeconomic conditions trade disputes and inventory levels.
We have have begun to see indications of a floor for our pricing.
On operations, we when well despite the lack of it would have downtime in paper and the extended maintenance work, what our Espanola mill.
As we mentioned that our second quarter earnings Cool, we're planning for an additional 40 day pulp outage at Espanola to start in late October and run through November to replace the recovery boiler generating bank and complete some remaining repurchase the paper machines running well and will operate through the boy the repairs.
In personal care, we had a solid performance and continue to make progress against our targets.
It's been 12 months since we announced on margin improvement plan and I'm pleased with the milestones we have achieved.
So to Threex EBITDA was one of the better performances in several quotas, while margins improved to 11% the highest in nearly two years.
We've streamlined on manufacturing footprint and repositioned our assets to match our markets, we've optimized our supply chain and standardized our operational work systems, and we reduce complexity and approaching customer mix.
All of these initiatives have allowed us to rightsize this business for profitable growth in 2020 and beyond.
Turning to capital allocation will continue to pursue a balanced approach by investing to support a cool businesses, while returning capital to shareholders.
In quarter, three we returned $159 million to shareowners, consisting of $131 billion or share repurchases and $28 million of dividends.
For the year to date, we've returned a total of $222 million and dividends or share repurchases compared to $81 million for the same period last year.
Moving now to our outlook for the fourth quarter.
Maintenance costs are expected to be higher than in quarter. Three wallpaper is expected to be negatively impact.
Patented impart by seasonally unfavorable mix.
We do anticipate some volatility in softwood and fluff pulp markets, while personal care is expected to benefit from improved margins and increased sales driven by stronger order book.
Thank you for your time and support and I'll now turn the call back to Nick for questions.
Thank you John So both John and the yell will be available for questions as usual I ask our participants to ask a few questions at a time and return to the queue for follow ups as we want to get as many as many people as possible.
Got you can open up the lines for questions.
Thank you.
Good luck.
So.
Thanks.
Yeah.
If you're using a speakerphone. Please make sure you mute function.
Signal.
Right.
We'll now take.
From Anthony.
From Citi.
Yeah.
Hi, good morning.
As an ongoing.
John you talked about supply demand fundamentals potentially improving and Paul and maybe a four on pricing I was wondering if you could get a little more detail on what you're saying and then just looking at a preliminary a price for October it looks like you know soft with great tell despite a price hike. That's out there just wondering if you could provide a little more color on the kind.
Current north American market conditions.
Ah, Yes, certainly so I mean as we see it.
A little bit of softness, but nothing dramatic so kind of bumping along the bottom I think one would say probably in North America I think more importantly, you know, we obviously have a large business in Asia, and we're seeing their strong demand and a sense, there's a little bit of a beginning of the lower part of.
The market moving slightly upwards so.
So our mind this looks like we're bumping along the bottom it doesn't look as if that sort of more to come obviously quarter to quarter on comparison isn't helpful. Just because it could have lead the quarter end pricing versus the average go to pricing I'm.
So I think that's how I would categorize it as a report I think out this morning from PPI Asia, which I think gives you a pretty good.
Sense of what's happening there and we pretty much agree with that analysis.
Okay. That's helpful.
And then I'm I'm wondering if you could provide an update on the current thinking around potential milk conversions into containerboard and or Paul and specifically you know how does the color at ash down and core care on impact that thinking I think Ashdown was one of the for metals you've identified as a candidate.
Yeah sure. So obviously, we're still running a paper machine Ashdown. So it's it's a ways away and as we've said before in that particular facility. We have the sort of optionality of pulp all containerboard. So thinking stays very much. The same we know we have some very strong assets that are capable.
Manufacturing that grade.
And you know we have that Optionality, we believe as all cool paper business declines to make those choices that hasn't really changed and I was thinking.
Okay. That's helpful I'll turn it over.
Thanks.
If you find your question.
You mean.
From the Q.
Sorry.
We will now take questions from Brian Maguire from Goldman Sachs.
Hi, good morning, everyone.
Just a question.
On the on the share repurchase in the quarter, obviously is a lot bigger than you've done in quite a long time.
I guess, just how much of that would you say is opportunistic just trying to take advantage of the depressed stock price versus might say Dol little bit of a period and the capital reallocation strategy. I know you you have some targets out there for returning.
Certain percentage of net income across the cycle and that can be lumpy and maybe this is an example of the lumpiness there but.
I think you look at where the stock prices, even I'd like today, you know lower than what worth in the past.
I think that that is still at a better use of cash that it's been in the past considering your balance sheet still in pretty good shape.
Well, that's a great questions I mean, you won't milestones in terms of the way we see it. So yes. It's opportunistic yes, we felt it was great value so and of course we.
We have the choice to buyback and took it.
We haven't done that over the last few years I'm felt here was a great opportunity. So to do so I don't think it represents a kind of pivot in our thinking it's really more continuation of our thinking and we also.
I guess, if you look at the way the money comes into the business in terms of our cash flow.
Because pulp is such a driver sometimes of up chap rise.
We can still have a strong cash flow from a paper business when the share price is low and we felt we should take opportunity you know, we should take that opportunity, which we did.
Okay. That's just a question on the conversion obviously when you initially kind of announced that little over two years ago.
You know Virgin Virgin capacity for linerboard with look at attractive relative to recycle. It now yeah. The tables have turned and inherence in Virgin based guys investing LTC capacity, they try and push the feedstock more towards recycled do you think you know in the current environment that it makes sense to really be pursuing conversion.
I know you haven't announced you're going forward there right now, but given the current and kind of cost curve that's out there between recycled and version.
I think that this is something that's still a good idea.
Well I think we have to continue to weigh all thinking as I think I've said before you know there's not a short term decision you're going to make I think if we felt.
That differential was structural forever on a day that might change your thinking I think if we think it's temporary all thinking remains pretty much where it is I know it goes one of all mills actually we will probably take to recycle because that just makes sense.
So I don't think that's dramatically alter <unk> Oh thinking at this moment in time.
Okay, I'll turn it over thanks.
Thanks.
Our next question.
Okay.
Okay.
Good morning, John Good morning, Danielle well good morning, good morning.
And I do want to complement you on the timing of the share repurchase.
Executed.
I want to.
We're also turned to the closures at both Ashdown import here on and see if you can give us a little more color nodes decision support here on.
As I recall is not really a commodity uncoated freesheet more like specialty packaging papers business. So it it sounds to me a little bit different than some of the others that you've been doing and I wondered if you can help us understand that.
Sure. So I mean, if you look at that particular machine. So we had full machines and pull here I mean I have three post the closure.
The tail end of that business had some grades and quite frankly, Mount we fell over time, we were not going to be able to build the EBITDA to any level was attractive to us. So we felt we should just kind of.
I would I'd put it rationalize the product mix and that led to that machine being closed a ashdown is a is it sort of simplest story in a way, though you know very much commodity grades.
Some of those are attractive when we're going to make them in.
The rest of the network, so you're quite right two different reasons for push shutting.
And also from a productivity standpoint, we felt there were opportunities in <unk> you are and if we kind of downsized and then drove all volume through the freedom remaining machines.
Okay, and just kind of following on that John you've got a couple of mills.
Chains.
And you've got a couple of things up and ethanol or just give us something how those all stack up right now.
So if you look at the Espanola, we make about 70000 tons of paper and Espanola and actually we've got a very attractive mix and espanola. So the if you try and separately the paper business and that's been other from the pulp business and that's been Iowa and you look at the the margins and there's espanola grades I mean, we're very happy with.
That the grades out of Nekoosa nekoosa actually is almost.
Acting as a pipeline for moving some of those grades into a commodity type mills way, we can be more competitive a classic example of that would be the out vian grades where they would develop really when the coos or in mind and then if you remember we we we took that conversion enrolled wrote to move those grades into <unk>.
<unk> they've turned out to be very nicely profitable grades. So nekoosa has its place in the network I would say and of course Rothschild you know that we're really doing Ohio heavier weight grades. So that's kind of how the network fits together in terms of the appropriateness of these mills and on network.
Okay last one I had is just going over to personal care can you give us some sense for kind of margin targets for personal care over time, and what that trajectory might look like I mean, I think we go back.
When you first bought in that business, you bought about 150 or $160 million EBITDA, you, probably put you know another four or $500 million, a capital and trying to get some sense of where that business may be able to go in the future.
So I see no reason why we can't get back over a reasonable period of time to the mid double digit margins. So I take hope from 11, but 11 is far from enough or you know so I want to see that growing and I'd want to see the topline growing we have.
Some.
New wins coming in in the fourth quarter and into 2000, and a 20, which I think should lead us to high single digit sales growth in that business and then I'm expecting to get some margin momentous or the momentums over the time I'm coming out of 2020 into 21, I'm getting closer to those kinda numbers.
Okay. That's helpful I'll turn it over.
Many thanks.
As a reminder.
Ask a question.
We will now take next question from George Staphos from.
Hi, everyone. Good morning, Thanks, Sean Thanks, Daniel I just wanted to my first question to me a a different swagger on Mark's question.
So if I understood you correctly or any had volume momentum on the new win and you get high single digit growth.
<unk> I realize you're not going to put a very fine point on what your margin expectation on those wins would be certainly on a form like this but [noise].
We did take that starting up over those wins and the costs inherent means that you're really running more or less at current rates and then exiting at a higher margin in 2020.
The fourth quarter or should we see.
Some ratable increase from what you can see right now yeah and margin over the course of 2020 within personal care.
Well I think it's more the full more than the latter so oh.
Obviously, you know as we absorbed large chunks of business, there's a cost absorption as a cost of start up.
I think we should also remember you know we shut a facility and we've moved a number of machines on the the baby diaper side into our Delaware, Ohio facility from Waco, which we shot.
You know we're recruiting people that leads us to some operating inefficiencies I think would probably gonna have to live with them for three to six month. So you know I think the latter half of next year is when you start to really see you should see anyway that the beginnings of that momentum in margin I think the top line, you're gonna see sooner.
But I think we might have some operational challenges just by absorbing that business in the shoulder to [noise].
John early in Italy is the business invest to all at a 15% or mid mid double digit margin level.
So we've been waiting for that.
The market hasn't been as.
Positive for you as you would have expected yeah. There no guarantees in life, we understand that but at 15% or better. It had a business that's really a war domtar holding onto and one quick point on the margin improvement how much that was just pulp pricing being lower.
No not a lot of it a little bit of it but not a lot of it I mean as a little bit was we were you know we took.
A large chunks of cost out by closing so we had some benefit but it wasn't a dramatic benefit to my mind. The answer to your question is yes I think.
For adult into our own <unk> I think what I really want to focus on is getting that business to a performance level, where I'm comfortable we know how to run the business ourselves and then we'll make go choices.
Understood My last one quick one I'll turn it over and come back in Q.
And perhaps you've already mentioned the passing of so I apologize how much do you expect the fourth quarter outage at Espanola will cost.
How much of that is and the the maintenance expense budget for Fourq <unk>. Thank you.
If I mean, all these into maintenance, but says if you can see there's just the what's missing is the unabsorbed fixed costs that this probably five or 6 million a that's we'll have to absorb without a this the sale on the other side or the rest is actually on the maintenance.
Hi, this you having the deck.
Thank you yeah, absolutely I'll be back thank you.
Thanks.
We'll now take next question from <unk>.
Incorporation.
Thanks, John .
Obviously the strong dollar.
Ports, a bigger boost than they might have otherwise gotten but produce I also had to change their mix and their configurations have you.
We'd all of the grade changes.
Wanted to make in response to GP inclusive of what you're doing with Ashdown or is there still more to do.
I think we're pretty much there.
I think with that I think if you if you think about.
Our focus in terms of kind of R. and D. you know, we're thinking long and hard about how can we substitute plastic in all kinds of different.
Publications, Mark because we feel there's an opportunity for fiber based business to really take that by the scrap or the knick over the next few years and develop it but right now the grades.
All sitting across all network in the appropriate assets.
So that answers your question.
That's helpful.
Okay small second one weather impact across the south was extremely on even some states got really really hard how much did that impact you and our things back to normal more or less in your system right now.
Things are very much back to normal.
And interestingly if you look at some of the tailwind we go in quarter. Three some of that was really would cost, particularly the end of the cool to coming back to reasonable levels, having been pretty high for longer than we were expecting in the u.
Sure understood. That's just I was looking for thank you.
Welcome.
Next question from Ti.
Please go ahead.
Hi, Thank you that's my first name.
Sounds so much better it sounds very much better [laughter], Oh, I bet, especially today I'm sure [laughter] well listen thanks. Thanks for all the details and a buffer is your wife has to do with.
Capital spending for next year, and maybe it's still a bit early but it is getting to the ended the year would it be likely that you would not have a major bump in capex in 20, even assuming you make a plan to move forward with a a project. It would seem like you know there'd be a little bit a time before you actually started to spend the money.
Or am I, putting you in a box could we actually see a ramp in the second half.
We're still Oh, they're planning phase a chip.
You know.
Yeah, we I guess the question we need to answer internally is almost we've been investing our pulp plan and they fear vesta spreading that a little bit more so I expect for the time being something very similar to this year and it will update you went to the reflection will be done that our Q4 calls.
And I guess on that it's a serendipitous said I mean or should I say what are the silver linings of a tough pulp market as it makes it less costly or there's less opportunity cost would maybe pushing a little faster on some of these projects is that fair.
That's fair and that's what we've done by fixing if you will its done though in Q3 in Q4 and that's part of the thought process, we're going through for next year in terms of Capex.
Okay, and then lastly quickly as John I don't know if there's any progress report you can give us in terms of the I think it's called the circumvention you know a investigation on some of the tariffs that people have been shipping from third countries to try to get or what around it.
What does that stand and maybe what sort of your best guess as to when we think we'll get some some information in terms of where that might you know where we might actually see some action.
Yeah, So we think probably.
Midpoint of next year olds sort of late in the first off in terms of the timing.
I think what it does do chip is that sort of prepared to listen I don't have announced the you know that taking the case.
You know importers start to wonder about whether this is sustainable.
So that you know just makes them a little bit more careful around putting a lot of product through early certainly putting a lot of product into the distribution systems.
So it's good it's going to take probably six eight months I think before we really know.
Got you, but at the same time, we're seeing a maybe a little bit of marginal behavioral shift already well what is yeah well. That's interesting also what we are seeing you know with some of those customers who bought imports. When you know people were nervous about actually getting paper supply.
A number of them actually you have got pretty frustrated with the supply chain.
And in a couple of large customer cases of actually come back to us So and as you saw in quarter three somebody imposed reduced a little bit. So I think we'll just keep a walk to align see where that's headed.
Great very helpful. Thank you.
You're welcome.
We'll now take our next question from Steve Shak over from D.A. Davidson.
Thanks, Good morning, everyone.
Wanting first of all the nice work on the repo can you remind us what is outstanding on the authorization. Please.
It's a close to 150 million dollar left on the on the authorization.
And then expiring on that.
There's not I mean, the we we manage that I mean, that's that's the program that was put in place I mean, eight nine years ago increase that I think three times. So there's no firing date that when we're going to get closer to the a the consumption of the of the plan will sit down with all board and will decide if we increase that again a tool to give us the fixed.
He sees a fortune thing the markets when the stock.
Goals are worth was or a couple of weeks ago.
Great. Thanks, and then sorry, I just can't write fast enough can you repeat with the exit prices were for paper and pulp versus the Q3 average.
For paper 13 dollar for Sun, lower and for probably was $18 per ton lower.
Thanks, that's the September I've read addresses the average over the quarters, so that I mean, it's very clear.
Thanks for clarifying and then with respect to the capacity reductions I know that ultimately, it's based on matching supply and demand.
But is it safe to say that those machines in question were cash negative and therefore, the closure is accretive.
Well, we took a large amount of lack of orders on time just in Q3, a thing it was a $125 million. So it's not the wore me I mean that downtime with was kind of taken in many places. So it's not that we have paper that is not positive is that we had lack of although.
So, yes, it's going to be positive to the extent that the up the fixed cost that portion that.
That will that be or the fixed costs will disappear because of that.
But the end of the day, it's really about protecting the you know the 3 million tons of freesheet not the 200000 it goes away.
Little thing exactly okay.
Okay, and then last one.
With respect to ash down I mean, you're making but I assume that the freesheet, mainly hardwood and the fluff is mainly softwood Israel, Israel excess softwood in that particular wood basket.
Or is there absolutely is so we know where we've talked about conversion with you. We've already done the work in terms of wood basket to know they are all possible based on wood supply and we can be competitive on wood supply and those wood baskets.
Great Thanks and Blackstone.
[laughter] I'm following the rugby World Cup, so I'm I'm not interested but that's okay [noise].
Well.
Yes.
From Keybanc capital markets.
Thanks, Good morning, everyone.
Hi, good morning.
Good morning show that John just one on your import comment.
<unk> talking about the supply chain issues that some freesheet customers domestically are having yes. Some of those imports are starting to leave a then why make why they need to permanently shot two of your machine. It seems like that's the biggest problem in recent months was these lower.
Priced in part so if they're starting to leave I wouldn't think that to permanent machine closures would necessarily be necessary.
Well I think you'll have to think about you know the if you look at market decline over time, we believe yeah. This is a market that's declining a three and a half.
Between three and 5% year after year less last year, but of course, you know what we consider demand to some extent is also shipments. It's got a must either I think in terms of what's really going on in the market. So two things I mean pool here on is not really a reaction to overall uncoated freesheet, it's really a reaction to mix.
On a productivity opportunity in the machine part we have left in the mill.
So really the Ashdown machine closure is about putting we took down as Daniel said earlier, we took a lot of downtime.
That comes a point, where you have to consider some of that is temporary if you take on network and you look at you know you say to yourself.
In any year in a 3 million ton network 90000 tons. If you take that 3% decline. All you know 150000 tons. If you believe and 5% has to come out. So I don't think this is.
I don't think we closed stupidly ahead of potentially increase demand as exports come as imports come away also I think one has to remember we kind of alluded to it and our remarks, but maybe we haven't been clear enough I'll productivity when were running machines or has been.
Prove considerably so actually we can cope with a slightly smaller machine cog and still generate good volume. So I think those two things combined make complete sense rushed down there that gives you a little bit more color.
I appreciate that John just I know, Brian asked earlier about <unk> recycled versus Virgin in terms of a potential containerboard conversion I want to take a look at the export angle so to the extent.
That exports would be a part of your strategy and event you word to convert a machine or or more obviously the export markets of change pretty dramatically over the past couple of years for the worse and I know you keep talking about this is a long term decision, but I mean look when you look at all the capacity coming on globally, it could well be that export market.
Could be week for for quite some time to calm so how does that.
Enter into your thought process about whether or whether or not to do this.
Well I I mean, the answer is of course. It does we have to wait we really didn't have export is kind of a major chunk of what we were proposing to do we think there are plenty of domestic opportunities, particularly for the volumes, we may or may not bring on in the very short term. Obviously you know we have the choices on pulp fluff pulp to make.
I think if you kind of back off tool as you say to yourself.
Over the medium to long term, we're attracted by self would we like softwood, we like softwood pulp and oversee containerboard is largely a self would play.
So somehow we're going to make that play, especially given how competitive our assets off so we obviously way. It I mean I think if we felt you know X what was going to be horrible for a very long time, we'd put that into our thinking and decide what to do about it.
Sure and just one more on on leverage and how you're thinking about cap allocation see he went up to 1.2 times to do the repurchase what are you comfortable levering up to in the event you choose to go ahead with one or more of these conversion projects and do whatever else, you're you're thinking of doing.
I mean, our belief is weekend, we can't do what conversion project with just the normal cash flow of the business I mean, it's a year, where I mean, we won't pay down debt or have the cash sitting on the balance sheet, but I mean do the just the agenda cash engine of the business I mean that those projects are kind of a two year project. So it's adding to our.
Our normal Capex Capex Capex, we don't believe we will need to leverage significantly to do a conversion.
Thank you much and now.
So.
We will not.
Sophos from Bank of America.
Thanks couple of questions on on pulp and paper markets. So John you said earlier, you know your girding for some volatility in the pulp markets, which.
Kind of the nature of the markets I recognize it's a little bit more different period, perhaps than what we see in the past, but what are you, saying on the ground, particularly in China in terms of inventory level. You know recognizing you know fluff pulp is different than you know hardwood pulp where it which is where you had a bigger increasing inventory, which will have to be.
You know coming down as well so what are you, saying on the margin and how much more vol. Should we expect the pulp markets have you given they didn't pretty darn volatile for the last few decades.
Well of course people, who focus this market I think normally ended up in a pad itself, but I I think what I would say is you have to think about end use so think about the markets that this is serving so think about the tissue grades in Asia, and China think about baby diapers think about.
Adult diapers all those are growth markets and continue to be growth markets, you know probably faster than GDP, so to my mind.
They'll be inventory leverage in place every so often in terms of how especially when people are selling through agents, but to my mind the underlying demand curve in this business is still very attractive so.
You know we've seen a very false decline in the pricing.
So it may be the future is a world of sort of choppy a fast a up and down cycles right. Now. We believe this thing has largely bottomed out a across most of the geography.
I'm not quite so much I think in the U.S. as we feel in China and Asia.
Our job as I see it you know we've got a very disciplined pulp capital strategy to make ourselves ever more competitive and actually as we said in our publish remark. If we took sort of esplanade or out of this actually we're still seeing positive EBIT dollar Uno cool pulp mill. So I think we've done a good job on cost I like the demand.
Owned in the end use for these products so I.
I think it's a commodity marketplace I accept that but I still feel over time, but it remains attractive and <unk> as you know when it's you know when prices a strong it's a it's a highly profitable enterprise.
Right.
No I appreciate the thoughts on that John have you seen here you coming earlier in terms of import restrictions.
Restrictions, perhaps causing customers to maybe rethink their supply chains are you, saying can extend that you can parse this and talking about it life. Mike are you seeing any change and purchasing behavior and domestically related to you know what has been discussed announced commented on in terms of.
Pasadena over the next year or so are you seeing any kind of lift in customers willingness to.
Purchase it may be inventory a little bit.
Well, so I can only two anecdotally, but there's there's no doubt we've had a couple of customers who.
Going for imports thinking you know that was going to be a place where they could.
You know they could get regular supply that supply chain has turned out to be painful for them.
They've they've come to us because you know we have this fantastic network, where you know we can give you really strong delivery strong service and strong quality. So.
I think that.
I think you know if you if you think about it I think we're probably going to see more of that over time, because this inventory bubble kind of works its way out.
Understood and then lastly, Oh I'm, assuming with Espanola most of the the maintenance both sequentially and then in the year on year isn't pulp first this paper, but could you provide more color on that thank you and good luck in the quarter guys.
That's true George you're exactly right.
All right.
Thank you very much.
Thank you.
We'll now take.
From clean from RBC.
Yeah, Thanks, very much morning, guys.
Oh money.
And just want to get some color on the the closures I know these decisions or an easy but a you've you've taken are taking 200000 tons roughly at permanently but you know if I annualize the market related downtime in Q3, that's kind of 500000 tons you know your John 3% to 5% owed.
The in the overall uncoated freesheet is another you know, it's kind of 250 to 300000 tons a year.
We got the IP shut next year and then we've got the imports whether they go away maybe could just help me understand how you came up with you know shutting those two facilities why not more why not less.
Well I mean, because I think we view.
If you go back to 2018, we think.
I'm going to inventory bubble got built of about 300000 tons in various places in the market either in merchant so just across the piece.
That kind of if you think about that versus an 8 million ton market that is beginning to slowly work its way out. So we don't think that's a loss of 300000 tones overall, so I would take that out of the calculation when we take that out of the calculation and we think of on network.
You know and we think about kind of a 3% decline year on year and you look at the downtime we've had to take we think what we've done is appropriate versus of you going forward.
All right that's all I had that select thanks. Thank thank you.
Next question from climb from.
Please go ahead.
Yeah, John I, just wanted to come back on the conversion is one more time I just I.
I seem to me one of the key.
Issues for you when you think about this particularly in containerboard isn't channels to market you're not on the business right. Now you don't have any down right. Converting you know if you look at people who have built merchant machines overtime. The risk as always you bring that merchant machine up into a crappy market and then you're like how.
Going to sell at the worst possible price and so just update us on your thoughts about how you mitigate that kind of risk.
Well, if you don't mind <unk> I don't really want to talk about it kind of well just broad.
And open play, but I I think.
We're aware.
Pretty clearly that we have to thing very carefully about a route to market, whether that's a partnership or whether that's going to integrating in some way whether that's a partnership in terms of integration. So those are all discussions we continue to have.
All right that's fair.
Thanks.
Our next question from Brian Maguire from Goldman Sachs. Please go ahead.
Thanks, Thanks for taking my follow up in any color on Fourq you any outlook. John you talked about in paper mix will be a little bit of a headwind, but you didn't I guess, specifically talk about pricing. There obviously the color on where September prices where versus the three to average gives us some insight there, though just wondering you.
Within that yeah. The price declines is on paper both in Threeq, you and September were less than some of the indices published and I know that those aren't always 100% accurate for your own business.
Just wondering if if this is.
Bad or are they more of a lag impact that we would expect to see fourq you pricing, even worse than where it wasn't September or maybe some other recent published price declines impact one Qs 20 more than they do the second half of the here.
I think that's one I don't think we'd like to speculate on what the future pricing will look like a I mean, we've told all along I think that we we deal death with a with our own customer. We have is a very strong customer base.
So the best we can do is a share the September prices or be a the quarter out of the average knowing that add to that a little bit of makes typical typically in Q4, and we'll just see where it's going to lead us that's our Q4 and solved.
Okay. Thank you.
Already.
We'll now.
Hi.
From Keybanc capital markets.
Okay. Thanks again, everyone. John just one on on pulp end market sales talking about short term, maybe there's a bottom who knows but.
Longer term pulp demand growth over the past yeah really since 2009 has been 2% to 3% a year last year at when it was basically flat this year at negative.
Partly because of what's happening with printing and writing grades around the world I think tissue growth has slowed as well what do you think long term pulp demand growth is just particularly given that printing and writing grades perhaps the declines who knows but perhaps the declines are accelerating I don't know, but if it gets long.
From demand growth isn't 2% to 3%, perhaps recall what do you think it is and how does that kind of influence your thinking about the long term attractiveness for that business.
Well I can anything in a way about all grades right. So you know we are really a soft would produce oh and were largely you know obviously fluff pulp. We think has a lower runway we were in a pretty good place on fluff pulp from a cost position and we're in a pretty good place on gold and northern softwood on southern Softwood My view.
Is there for what I think at the end use markets that those those products are playing in.
We have some specialty grades of cools <unk>.
I I still think twothree presented as a reasonable proxy overtime I think it gets lumpy largely because of inventory play where you know the marketplace, obviously, China that is driving a lot of this.
Agents will arbitrage their image repositioned for price negotiation, which you know fair enough. That's the game. There written so I think you'll have to really look over a two year period to really well, maybe even a three appeared to get a sense of underlying growth but.
It's kind of interesting you know we sit in the personal care business. Okay. We're a small player.
But you know adult incontinence products and you know baby products, even in developed markets I mean diapers that the softer than they used to be in terms of demand just because of birthrights, but that still strong businesses. So I I don't feel nervousness around the sort of underlying demand profile of and news products and in the.
Grades that we were operating it and to be Frank we made the decision to be in those grades you know we came out at all would a long time ago, because we felt we couldn't be competitive so.
I mean, I feel good about the pulp business, especially.
So I'm, giving you a long winded answer, but I think especially allied to the work we're doing a to make sure you know with very competitive in the facilities and you know we got a three to five year plan to make sure we own.
John just one last one on that point, how do you flop is supposed to be a premium grade obviously the software, but it hasn't really acted like that for the better part of a year if not longer Uh huh.
What do you how do you how would you compare the profitability of of does grades and do you think of that falafel ever really de link from software because we've heard in the past that that was going to happen any day now and it rarely if ever seems to actually happen.
Well I think one of the issues. There of course is the swing capacity question because a lot of the capacity that can do flow and also do softwood.
So I could see people, making choices that if softwood is looking very unattractive theyre going to try and do pulp to maybe do a little better than they do on softwood I think as softwood kind of comes up you will see fluff move up but you'll points, while made I'm I'm not sure there's a true decoupling.
Thanks, so much John back to last.
Thanks.
We'll now take on next question.
Yeah. John This is Sean when can you just.
Update us on the fiber supply situation for you guys noted Kamloops I mean, you're in an area that's been pretty hard hit by the by the beetle we're seeing a lot of downsizing and sawmill capacity right around Kamloops, So what does that mean.
Well, we've obviously those are pretty carefully Ah, yes, we've been impacted by some of those somo closes when we look at it it was a pretty small suspense percentage of all supply. So you know maybe a dollar or to hear on their own would supply more but nothing structural that we have to be wildly concerned about.
Okay very good good luck in the fourth quarter.
Thank you very much.
He'd like to ask a question.
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No other questions.
Yeah.
I think using if we will release, our fourth quarter in full year 2019 results on Friday February seven 2020, Thank you for listening and every day.
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