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Executives

Pascal Bossé – VP, Investor Relations

John Williams – President, Chief Executive Officer

Daniel Buron – SVP, Chief Financial Officer

Analysts

George Staphos – Bank of America Merrill Lynch

Phil Gresh – JP Morgan

Chip Dillon – Vertical Research

Alex Ovshey – Goldman Sachs

Paul Quinn – RBC Capital Markets

Mark Wilde – Deutsche Bank

Jeff Gates – Gates Capital

John Tumazos – Vary Independent Research

Robert Howard – Prospector Partners

Matt Teplitz – Guyasuta Investment Advisors

Domtar Corporation (UFS) Q4 2012 Earnings Call February 1, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen. Welcome to Domtar Corporation’s Fourth Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded today, Friday, February 1, 2013.

I would now like to turn the meeting over to Pascal Bossé. Please go ahead sir.

Pascal Bossé

Great, thank you, Mitchell. Good morning and welcome to our fourth quarter 2012 earnings call. So, our speakers for today will be John Williams, President and CEO, as well as Daniel Buron, Chief Financial Officer. John and Daniel will begin with prepared remarks, after which we will take questions.

During the call, references will be made to supporting slides, and you can find this presentation in the Investors Section of our 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, and many of which are outside of our control. I invite you to review Domtar’s filings with the Securities Commissions for a listing of those. And finally, certain non-U.S. GAAP financial measures will be presented and discussed and you can find the reconciliation to the closest GAAP measures in the appendix of this morning’s release, as well as on our website.

So, with that, I will turn the call over to John. John?

John Williams

Thank you, Pascal. Good morning, everyone. Let’s begin by taking a look at our fourth quarter results. Our paper and pulp businesses performed largely in line with expectations on both pricing and volumes. Demand for uncoated free sheet reflected the usual year-end seasonality, but December was weak mostly due to bad season impacting days of operations for our customers.

Higher cost for fiber energy an unexpected cost incurred on pulp mill following a planned maintenance outage also affected results. Daniel will further discuss these impacts in his prepared remarks. On non-core asset divestments, we closed the sale of the Ottawa-Gatineau hydro assets of $46 million. This brings total proceeds of non-core asset sales of $295 million since 2009.

Finally, despite higher cost and the issues I just discussed, we generated $75 million of free cash flow and we continue to buy back stock in the quarter. With these brief remarks, I’ll turn the call over to Daniel for the financial review and I’ll come back with a recap of the year and the 2013 outlook. Daniel?

Daniel Buron

Thank you, John, and good morning, everyone. Let’s start by going over the financial highlights of the quarter on slide four and I will cover the full year results in a few minutes. We reported this morning net earnings of $0.55 per share for the fourth quarter compared to net earnings of $1.84 per share for the third quarter of 2012. Adjusting for items, our earnings were $1.31 per share in the fourth quarter compared to earnings of $1.87 per share for the third quarter. EBITDA before items amounted to $180 million, compared to $207 million in the prior quarter. Free cash flow totaled $75 million compared to $140 million in the third quarter.

Turning to the sequential variation in earnings on slide five, consolidated sales were $62 million lower than the third quarter, primarily driven by lower shipments and lower selling prices for both pulp and paper. SG&A was $10 million higher than Q3, mostly due to the amortization of certain post retirement benefit plans that have a favorable impact in Q3.

Our fourth quarter earnings include total and restructuring cost of $27 million impart related to the announced closure of the top line and boiler at our Kamloops market both facility. Also in the quarter we incurred an impairment charge of $12 million lead mostly by the accelerated depreciation of the Kamloops top line and related assets. In addition, impairment charge of $12 million will be recorded in the first quarter of 2013 to complete the depreciation of those assets before the actual permanent shutdowns expect at the end of March.

This closure will result in the permanent reduction of our annual softwood production capacity by approximately 120,000 tons and will also affect 125 employees. We expect no incremental negative impact on unit costs from the closure of the top line, however the full optimization of the remaining assets, which should be finalized in the third quarter will record a full earnings potential of the mill.

Interest expense was $22 million, $2 million higher than last quarter due to the full impact of the 30 year senior notes issued during the third quarter. In the fourth quarter we reported a tax expense of $1 million or 5% compared to a tax expense of $22 million of 25% in the previous quarter. The low tax expense was from the impact of inactive tax rate changes mostly in Sweden and some other tax benefit recorded in Q4.

Now turning to the cash flow statement on slide six. Cash flow provided from operating activities amounted to $140 million for the fourth quarter. Capital expenditure amounted to $65 million, this resulted in free cash flow of $75 million. In the fourth quarter we also received $49 million from the disposition of assets.

Under our stock repurchase program, we repurchased 526,000 shares of common stock for a total cash consideration of $41 million. Since the inception of the program, we have repurchased close to 8.7 million shares of common stock at an average price of $80.04. At the end of the quarter, we had $304 million remaining under our program, and 34.8 million shares, including our exchangeable shares, were outstanding.

Turning to the quarterly waterfall on slide seven; when compared to the third quarter, EBITDA decreased by $27 million due to $12 million for lower selling prices, $6 million for higher raw material usage and $5 million for higher raw material unit cost for a total increase in raw material cost of $11 million, $10 million for higher SG&A cost, $3 million for higher freight cost and $2 million for higher total maintenance cost, subdivided into $5 million higher maintenance cost in our pulp business and $3 million for lower maintenance cost in our paper business. These were partially offset by $9 million of lower fixed and other costs and $2 million for higher productivity net of reduced volume in our pulp and paper segment.

Now on slide eight, in the pulp and paper segments, sales were down 5% when compared to the third quarter and down by 7% when compared to the same quarter last year. Operating income before items was $75 million on a depreciation and amortization charge of $90 million. EBITDA before items was $165 million compared to $193 million in the third quarter.

Now, on our paper business on slide nine; we had an estimated decrease in EBITDA before items of $8 million. Paper shipments were sequentially lower by 21,000 tons and down 26,000 tons when compared to the same period last year. Our shipment of specialty and packaging grades grew by 3% when compared to Q3 and by 19% when compared to last year. This increase was driven by the expected ramp up of the volume sold to Appleton.

In Q4, we shipped at an annual rate, a run rate of 154,000 ton and we expect to reach our full run rate of approximately 210,000 tons in the third quarter of 2013. Our average transaction price for all our paper grades were $4 per ton lower than last quarter. In the fourth quarter, we took 23,000 tons of market related downtime.

Our pulp business on slide 10, EBITDA before items decreased by an estimated $20 million, when compared to the third quarter. Pulp shipments were sequentially lower by 7% versus the third quarter, and average pulp prices decreased by $6 per metric ton versus the third quarter. Paper inventories increased by 27,000 tons while the pulp inventory increased by 3,000 tons in the quarter. In Personal Care, results were in line with our expectation and with Q3 performance.

Let’s now go over the financial highlights of the year on slide 12. For the full 2012 fiscal year, we reported net earnings of $4.76 per share compared to net earnings of $9.08 per share in 2011. Adjusting for items, our earnings were $6.45 per share in 2012 compared to earnings of $11.24 per share in 2011. EBITDA before items amounted to $799 million, compared to $1.1 billion for the year before.

Free cash flow totaled $350 million compared to $739 million last year. When compared to 2011, EBITDA decreased by $301 million, due to $210 million for overselling prices, mostly in pulp, $104 million for lower volume and lower productivity, primarily from lack of order downtime and mentioned slow back, $41 million for higher raw material cost mainly in fiber and chemicals, $18 million for higher freight costs, and $3 million for the negative impact of foreign exchange.

These were partially offset by $55 million of increased profitability from our Personal Care business, $11 million for lower SG&A cost excluding our Personal Care business in SG&A, $5 million for lower freight costs and $4 million for lower maintenance costs. Finally, as usual, our practice for this time of the year, you’ll find on slide 14 and 15 our assumptions for some key financial items for the coming year.

With regard to capital spending, our estimates at this time is that we will invest between $260 million and $280 million in 2013. A small increase in capital spending as to 2012 it’s mostly related to our strategic growth project in our Personal Care segment.

Our growth plan in this segment are expected to yield incremental earnings by the fourth quarter of 2013. So this concludes the financial review, and with that I’ll turn the call back to John.

John Williams

Thank you, Daniel. The fourth quarter rounded off a strategically important year for Domtar. While demand for uncoated free sheet was softer than prior year. Our paper business performed well in 2012. We took 85,000 tons of market related downtime during the year, and we continued to align our export strategy by targeting volumes overseas. However, this good performance was overshadowed by pulp that contributed to the majority of the segment’s earnings decline compared to prior year.

Clearly, despite the downcycle in pulp and the secular decline in paper demand, our teams were very agile in adjusting to market changes and executed well on things under our control. We continue to drive a focused agenda with clear priorities in the core business, notably with the conversion of our Marlboro mill to produce specialty and packaging paper resulting in the curtailment of 270,000 tons of commodity paper.

Our priority remains on preserving and enhancing the value of our assets by seeking new markets and business opportunities and providing alternative usage for our hardwood fiber over time. With that backdrop, we generated a solid $800 million of EBITDA and $315 million of free cash flow.

Our shareholders were also rewarded as we delivered on our commitment of returning a majority of free cash to them. On our growth strategy, new milestones were reached with the addition of two businesses on our Personal Care segment, that brings our annual run rate sales towards the $450 million mark.

Our expansion in global markets continues and acquisitions like Attends Europe give us exposure to growing markets and the critical mass to drive product development synergies across our Personal Care business. In May, we purchased EAM, which provide long-term research capabilities to further differentiate our full line of Personal Care products. Both of these acquisitions position us to grow in new markets and allow us to further build on our Personal Care business.

We are resolutely focused on executing against our three key strategic priorities, to grow and find ways to offset the secular decline of paper, to reduce the volatility in our earnings profile by increasing the visibility and predictability of our cash flows, and to invest capital wisely to generate shareholder value over time. We’re also repurposing assets and making investments in fiber based technologies including the recent Lignin removal project at our Plymouth Mill.

Turning to health and safety, we had a much improved safety record in 2012. The company’s safety performance was excellent. We recorded our lowest full-year instant rate in our history including working 6 out of 12 months below a one total frequency grade, which is world class. Enough cannot be said for those slides for the words injury free, maintained excellence performance and have made significant improvements.

On capital allocation, we repurchased two million shares during the year and nearly nine million shares since the program began or 20% of our outstanding share count, and we delivered on our commitment to reward shareholders evidenced by our 68% free cash flow payout through dividends and stock buybacks.

Turning to our outlook, we expect market demand for uncoated free sheet paper to continue to decline at a 3% to 4% rate in North America while we expect pulp demand to continue to increase at the rate of GDP. Our paper shipments, however, were expect to trend slightly better than the markets due to our growing positions in specialty and packaging papers and particularly through the incremental volume from the supply agreement signed with Appleton. We will continue to monitor volume trends throughout the year and we’re committed to balance our production with changes in demand patterns as evidenced by the Marlboro repurposing.

Market paper prices are expected to trend at year-end levels while we expect a slow and steady recovery in pulp prices. Finally, in Personal Care, we expect demand for enconglarent products to continue to grow, further emphasizing the importance for smooth and successful ramp up of our new production lines. Our growth plans in Personal Care are well on track and we will see some benefits later in the year.

To conclude, we are well positioned to pursue additional opportunities that are a good strategic fit. We’re delivering attractive financial returns and creating shareholder value. Thank you for your time and support. And I’ll hand it over to Pascal for questions. Pascal?

Pascal Bossé

Great, thank you, John. So to take questions, we have both John and Daniel. We have Dick Thomas, Senior Vice President of Sales and Marketing and Mike Edwards, Senior Vice President of Pulp and Paper manufacturing. So before we start polling for questions, I’d ask our participants to ask only few questions at a time and return to the queue for follow-ups because we want to get as many as people as possible. So, with that the show, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructor) Our first question comes from George Staphos of Bank of America Merrill Lynch. Please go ahead.

George Staphos – Bank of America Merrill Lynch

Thanks everyone, good morning. Congratulations.

John Williams

Hi, George.

George Staphos – Bank of America Merrill Lynch

Cognations on the year. Could you comment a bit on the December weakness that you saw, if I heard you correctly, in shipment and has somewhat subsided in this business back trending where you had expected it? And the follow-on question I had, how do you view your inventory? Are comfortable with where they are or where they should be for this time of the year? And I had a follow-on.

John Williams

Sure. If you look at December George, my apologies for my voice, but I got a stinking cold. If you look at December, certainly the way Christmas fell, we felt really stopped the market in its tracks, actually the first few weeks of December were pretty robust. So, suddenly some shipments were not made that might have otherwise been made.

George Staphos – Bank of America Merrill Lynch

Right.

John Williams

January’s actually started – January has been pretty solid, sort of back to normal I guess I would say. Inventory, I think we build about 30,000 tons. We think about a third of that will be gone by the end of January. So, we’re pretty comfortable and I think we run a pretty high touch model in terms of service, so these level of inventories we need really to serve the customer effectively through our distribution. So, we’re pretty comfortable there if that helps.

George Staphos – Bank of America Merrill Lynch

No it does, I appreciate that. And then if possible to the extent you can comment on this on this kind of forum, can you comment where the CapEx is going relative to Personal Care in terms of the ramp up? Thank you.

John Williams

Yeah, certainly, well really a lot of that CapEx is going towards Personal Care. So, we’re putting machinery into our Greenville facility and we are putting machinery into those machines will arrive over the next year or 15 months. So, really most of what you see in that capital growth is really all about Personal Care.

George Staphos – Bank of America Merrill Lynch

I understood that, but aimed at doing what within those facilities, John, if you provide some kind of color?

John Williams

Okay, yeah, certainly just I’ll announce the question, George, if I may at a sort of a general level.

George Staphos – Bank of America Merrill Lynch

I understand.

John Williams

It’s really about new machinery for new growth as well as machinery to reduce the cost base on some of the products we manufacture. So, to help us – as we said before we have a business when we bought it with a run rate of about $75 million of EBITDA. We believe over five years we can move that to $150 million and you know what we’re doing in terms of this capital is to enable us to do that.

George Staphos – Bank of America Merrill Lynch

Okay. Thank you, very helpful, I’ll turn it over.

Pascal Bossé

All right. Thanks.

Operator

Thank you. The next question comes from Phil Gresh of JPMorgan. Please go ahead.

Phil Gresh – JP Morgan

Hi, couple of questions. First one is a follow-up on what George was asking on Personal Care. How much of this first slug of spend is around the save side and should we expect any kind of meaningful change in 2014 on the profitability there as a result of that, so is this kind of more evenly spread that $75 going to that $150 over time and similarly along on the CapEx, does it hold at these levels or come back down?

John Williams

It won’t hold at these levels, Phil, so, it will come back down because really the maintenance CapEx for those A machine is somewhere between $15 million to $20 million. One of the issues we have here is we need some infrastructure to actually site some of these machines. So, if you like this little bit of spend is a bit more intense to that, because we need extra spends in terms of warehousing in Greenville, because of sort of infrastructure if you like for air and power et cetera. So, it will reduce over time. And from a sort of step-up standpoint, I don’t really want to give you a -if you don’t mind a full cost, but certainly we’d like to see, we should see a strong step-up between 2014 and 2013 in terms of the earnings profile. Did that help?

Phil Gresh – JP Morgan

Okay. Fair enough.

John Williams

Okay.

Phil Gresh – JP Morgan

On pulp in the quarter, Daniel could you explain the delta from the $16 million EBITDA in the third quarter to the negative $4 million in the fourth quarter. You gave a couple of the items there in the bridge, but I just want to understand that a little better.

Daniel Buron

All right, Phil. The $20 million gap is explained by a series of small elements actually. There is a lower price and lower shipments that would explain close to 4 million of the $20 million, higher planned maintenance in the quarter of $5 million debt, one of the items that I have shared in the waterfall. The fact that we took maintenance on time also is reducing our ability to produce, so you have unabsorbed fixed cost that is probably around $5 million also in the quarter if you compared to the third.

Higher cost because of the winter in the Pulp business overall for more or less $2 million, and we have some particularly issue at our Kamloops mill actually that led to the decision to close the pulp line. We have some issues with the boiler, so we’ve run that mill, not at full capacity, for the biggest part of the quarter. So that’s probably a $4 million impact. If you are trying to bridge that to normal operation, I think there are probably $10 million to $12 million of that negative will appear in Q1, Q2 just by not making that downtime and having the time to absorb the fixed cost that I referred to, so $10 million to $12 million was specific to a higher quarter of maintenance in the Pulp business.

Phil Gresh – JP Morgan

Very helpful. Last question for John, just on the Pulp business, I know we got the full year under our belts here, it’s down $200 million on the EBITDA and I am just kind of wondering again how you are thinking strategically about this business and I realized about the trough, so it’s kind of a hard time to discuss it to some degree, but one of your peers just announced yesterday that they’re planning to sell a NBSK mill that’s a geographically quite close to your Kamloops mills. So, it does seem like there is a market appetite for these mills. So any color if you could provide there would be helpful? Thank you.

John Williams

Sure. We’ll happy to. I mean, certainly I think your point about the trough is well made. So, I think it’s the same old story really, which is, if you feel you can generate value, you think about whether you should be the long-term owner. I mean, at this moment in time, as we look forward, the grades were in, and we look forward the grades we’re in and we look forward in terms of the pricing over the next few years. It looks pretty attractive as we see it right now, but quite frankly if there was a moment we felt it wasn’t, we’d make the right decision. So, I think that’s how we see things. Does that help at all?

Phil Gresh – JP Morgan

It does and I guess on the pricing outlook, your view is more optimistic just kind of post the production capacity coming online or just any color you can provide about why it is that?

Daniel Buron

I think if you look at – certainly – if you look at softwood, we like the grades we’re in. Obviously, in the short term, fluff pulp has its issues because there is capacity coming in, but if you look at the long term of the business, it’s a 5 million ton market. It’s growing at about 5% a year. It can absorb some of this capacity and we see pricing coming back to more normal levels, NBSK, look at the tissue capacity going into China and elsewhere and the tissue capacity going into the U.S. and some of it into Europe. We think the market dynamics are reasonably attractive. And it’s really about how can we maximize the value between the two choices that face us, running the business or exiting the business and we always look at in those terms.

Phil Gresh – JP Morgan

Okay, I’ll turn it over. Thanks a lot.

Pascal Bossé

Thank you.

Operator

Thank you. The next question comes from Chip Dillon of Vertical Research. Please go ahead.

Chip Dillon – Vertical Research

Yes. Good morning, Daniel and John. First question is on the Attends business here in North America where obviously the spending is – much of it is taking place. I thought you had a strategy and just want you to kind of update us on this of maybe building out this plant, it made a lot of sense to kind of build for growth all at once as opposed to spacing it out, I guess it’s cost effective, but I was under the impression most of that was actually going to be done in 2012. And can you just give us an idea of how – why that is spread over two years, maybe I was misinformed? And then, sort of will that build out at least to get to that run rate in five years 150? Will that be completed – when will that be completed?

John Williams

Well, the machinery to do that would all be in place by June 2014. The lead time on machineries is about 18 months. So, I think that gives you some idea. First machines are going to come in, that being built as we speak will probably come to us end of quarter 2013. So, that’s how it’s going to roll if you like in terms of the timing because that 18 months lead time on machinery. So, by middle of 2014, everything we need as we can say at this point in time to get that run rate to happen is in place.

Chip Dillon – Vertical Research

Okay.

John Williams

Both in the U.S. and in Europe actually and in Sweden.

Chip Dillon – Vertical Research

Got you.

John Williams

Does that help – does that give you the color you need?

Chip Dillon – Vertical Research

Oh, yeah. That’s very helpful. And then one other quick question just shifting gears a little bit.

John Williams

Sure.

Chip Dillon – Vertical Research

You mentioned the very high shipments to capacity ratio that you have in your paper business and some of the data – I know October was good, but November and December seemed to be quite softened and rather lower, I think we’re in the 80s in the operating rate for the industry. And I guess my question is maybe you could touch on differences in your system maybe that – from those industry numbers. And then secondly, more importantly wood prices kind of having been under a little pressure at least as reported by the trade press, do you think maybe the industry needs to see another round of capacity reduction in 2013 to achieve that level pricing with year-end levels as you pointed out?

Daniel Buron

So, I just talk to the pricing first, will that help. We did see some pricing pressures relating to quarter four on same grades, I mean not all, but some. We felt that was really the spot mark, getting a little bit more active, maybe a little bit of year end softness, it often happens, and really moving into January leather market has been better, but we’re not really certain that it’s strong enough right now to sort of grab that little bit back that maybe – but at the same time we don’t really expect it to deteriorate much further. And in fact, as we said earlier, January bookings have been fairly strong. So, I think that gives me confidence, pricing is going to be pretty stable going forward.

I think on our system versus the market, I can only really comment on our system that Appleton ramp up. When you think about the tons of coming out, full tilt, 270,000 tons of commodity roll up come out and we will be doing probably about 210,000 tons of Appleton, right now our run rate is about 160-165. In addition, we’ve done a little bit more exports. If you put all that together, our system remains pretty busy. In fact, I mean – I think there were some orders we would’ve liked to have shift in December but in the end we were unable to shift. In fact, again gives you little bit more color.

Chip Dillon – Vertical Research

Okay. Thank you.

John Williams

You’re very welcome.

Operator

Thank you. The next question comes from Mark Connelly of COSA. Please go ahead.

Unidentified Analyst

This is Steve (inaudible) filling in for Mark Connelly.

John Williams

Steve, good morning.

Unidentified Analyst

Good morning guys.

John Williams

Good morning.

Unidentified Analyst

So, my first question is when I look at your return of capital to shareholders over the last two years, I think in 2011 you did about 68% and then this year around 50% – actually that is reversed.

John Williams

Other way round, yeah.

Unidentified Analyst

Yeah, so where in that range do you see things going forward?

John Williams

Well, I think if you recall what we’ve always said was that we would give them a majority of free cash back to shareholders and we remain committed to do that. So, we don’t really sort of target a specific percentage, I mean the only percentage that we target is, that it’s going to be more than 50.

Unidentified Analyst

Okay. And then also, you – I think everyone is talking about the incremental earnings in your Personal Care segment. How much of that is more market growth related than operational?

John Williams

Well, let me give you the top-line of the industry, maybe that would help. So, it’s rough and ready, now by Personal Care, we’re defining very much as adult incontinence at this point. So, just let me be clear that the investments we’re making are focused absolutely on adult incontinence. That’s an $8 billion market globally growing at 5% to 6% a year depending on who you talk to. So, that growth is relatively consistent EBIT in developed markets, either U.S. or if you look at the demographics in Europe. So, most of our growth is coming from us maintaining market share and getting market growth. A few points of that growth are us actually filling out our range to make sure we have the appropriate products for the key markets that we serve, particularly the home care market where we’re very strong, and looking at the retail marketplace as well. Does that help?

Unidentified Analyst

Yeah, that helps a lot. Thanks a lot, guys.

John Williams

You’re very welcome.

Operator

Thank you. The next question comes from Alex Ovshey of Goldman Sachs. Please go ahead.

Alex Ovshey – Goldman Sachs

Thanks. Good morning.

John Williams

Alex, Good morning.

Alex Ovshey – Goldman Sachs

John, so looking at your cost performance in the paper business actually pretty solid sequentially. Can you guys comment on what the benefit may have been from producing more to build inventory decks and were there any other positive deltas that drove pretty soft cost performance in the paper business in the quarter.

John Williams

I’m going to let Daniel talk to that, if I may.

Daniel Buron

Actually, the big portion of the improvement in the cost structure comes from the fact that we had less lack of – less maintenance downtime in Q3 versus Q4. If you recall, we took more or less the same amount of lack of order downtime. So, comparing quarter-to-quarter that’s very minimal impact, so a big portion of the improvement we’re seeing is coming from just less maintenance. And as I mentioned earlier, when you take maintenance there is a chance that you can let produce their afforded fixed cost that are unabsorbed or resolved to their P&L in the quarter.

Alex Ovshey – Goldman Sachs

Okay. And on the paper business, what was the – can you breakout how much of your tonnage movement to the export market in 2012. Was that up year-over-year and how do you see your export business developing in 2013 versus 2012?

John Williams

It was I think about 150,000 tons, but was flat year-on-year, and we see sort of 30 to 50 more in 2013.

Alex Ovshey – Goldman Sachs

Thanks, John.

John Williams

You’re welcome.

Operator

Thank you. The next question comes from Paul Quinn of RBC Capital Markets. Please go ahead.

Paul Quinn – RBC Capital Markets

Yeah, thanks. Good morning.

John Williams

Good morning Paul.

Paul Quinn – RBC Capital Markets

Just and thanks for the additional color on Personal Care, that’s really helpful. Just a question on M&A overall. Is there any change the way you look at it in terms of size or scope that you’re looking on opportunity going forward?

John Williams

No, not really. We’ve said pretty clearly, we’re not going to blow our brains out on some things. I think if the right opportunity arose, we would look at that sort of $1.5 billion if it was very compelling and – but no Paul, there is nothing that says we’re going to and blow our brains out on something got to happen.

Paul Quinn – RBC Capital Markets

And then just lastly on Ariva – I guess you’ve repositioned that. It seems to be getting a little bit better. Are we going to see a material change in that business going forward at some point?

John Williams

Well. I mean let’s be frank, it’s a struggle. I’ll give you a little bit more detail in the business, our Canadian business is actually a very solid, nicely profitable business, that kind of the sort of amounts the 1% to 2% return on sales you expect to see. Midwest business is okay. Our real challenge is in the northeast of the U.S. So, we’ve done a couple of things. We’ve cut our costs. I think we got about 15% of the head count out in the last few years, and we also have to build out into the packaging business and into the digital space where we got I think some pretty good plans and we’re getting some growth, but it’s not going to be widely compelling.

I think it’s a breakeven to very small profit to a small loss type of business, Paul. It’s never going to be a real driver of overall earnings, but I would still say that as a route to market, some pretty solid tons of Domtar tons it’s still important to us. In a way, I think you almost have to look at it as a kind of subsidized SG&A. I think that’s how we see that business.

Paul Quinn – RBC Capital Markets

Interesting. Thanks very much. Good luck.

Pascal Bossé

All right. Thank you.

Operator

Thank you. The next question comes from Mark Wilde of Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

Hey John,

John Williams

Hey Mark.

Mark Wilde – Deutsche Bank

Is there an alternative to subsidized SG&A. I mean look, you’ve done a very interesting thing down at Marlboro, are the other ways to skin this cat on the distribution side?

John Williams

Well, that’s an interesting question. I think one way of looking at it is can you find it more things to do that covers its overhead. If you think of it – our challenges with the top line has been under such pressure that it’s a bit like the Maldives, eventually you get swamped because you just don’t have enough to do with your asset base. So, we’ve to find other things to do with an asset base, and we’re looking at sort of more imaginative opportunities, but it’s going to take us a while, Mark.

Mark Wilde – Deutsche Bank

Okay. On that alternatives for the asset base, you talked a lot about repurposing you’ve done some repurposing with the pulp business. I’m just curious. Are there other things you could do, let’s say packaging board or other things?

John Williams

Well, I think you have to – again, not to give you too long winded and long answer, but the way we look today is, do you like the dynamics of the end used market and can you bring something to that market that makes you competitive. So, that’s really been the driver on Plymouth and you really do have to think as repurposing, because by the time, we’re finished that is really a specialty mill. So, the way we look at it is always that way. So, if you take for example the line of board example, we have to feel, we can do something that’s extremely competitive and/or a packaging board whatever it might be and we would have to make be very certain we would be on the top quartile in terms of the competitiveness in this – of the asset. So, again we always scan, based on those criteria, and continue so to do, to be honest.

Mark Wilde – Deutsche Bank

Okay. And then just finally John, we don’t really talk about this much, but you got a number of smaller specialty mills.

John Williams

Yeah.

Mark Wilde – Deutsche Bank

Kind of around the Great Lakes, and I just – it seems like there are many questions around those operations in the past. Can you just give us an idea of how that business is performing right now and how do you think about that business going forward?

John Williams

Well, it’s interesting. Because we have those mills, we have a technical and specialty sales organization. Because we have that technical and specialty sales organization. We actually got the Appleton business. So, I think it’s an interesting frontend to bring some of those grades into the commodity system, and then take that advantage we have in terms of competitiveness to allow us to be more competitive in that space mark. But on a mill-by-mill basis, those are all profitable mills. Okay.

Mark Wilde – Deutsche Bank

Would you ever expand in that specially paper business by buying another assets?

John Williams

It would have to be very compelling and we have to feel the synergies were enormous, and it would have to be very good value for money.

Mark Wilde – Deutsche Bank

Yeah, okay fair enough. I could buy off on those. Good luck in the coming quarter.

John Williams

Thank you very much.

Operator

Thank you. The next question comes from Mark Friedman of Gates Capital. Please go ahead.

Jeff Gates – Gates Capital

Hi, it’s actually Jeff Gates.

John Williams

Jeff, we’re having a bit of trouble hearing you. Can you...

Jeff Gates – Gates Capital

It’s actually Jeff. I have three questions.

John Williams

Okay.

Jeff Gates – Gates Capital

How do you view – I know you gave us the units for -for your outlook for units on paper. What would your long-term outlook be for pricing? And then secondly, it looks like your SG&A tick up this year, even though your sales were down and I’m kind of wondering if there are opportunities to further rationalize the cost structure on – on each side? And then on the Personal Care side, you did great job explaining that, but it looks like you’re going to grow better than twice the market, and I’m just kind of wondering this additional capacity and machines that you’re adding sold to any specific customers or you’re just assuming that you’ll be able to tell?

John Williams

And sort of build and enable comes strategy?

Jeff Gates – Gates Capital

Yes.

John Williams

Okay. Can you just remind me what was the first one?

Jeff Gates – Gates Capital

First one is long-term pricing and paper.

John Williams

Obviously, we would – to be honest we wouldn’t discuss long-term pricing. I mean, certainly in terms of demand, we see kind of 3% to 4% demand decline year to year to year. So, that’s how we’re operating.

On the Personal Care side, it is either product specific. So, it’s either the fill out a range and in some cases, its customer specific. So, it’s to your point. It’s not a kind of build and label cum strategy. We’re very confident that we – that this volume will move into the market pretty smoothly.

Daniel Buron

I think your last question was around SG&A. Actually, SG&A is to determine the acquisition we’ve made in the Personal Care business was down a year-over-year, so the growth that you’ve seen there is acquisition related.

Jeff Gates – Gates Capital

Okay, great. Thank you.

Pascal Bossé

You’re welcome.

Operator

Thank you. The next question comes from John Tumazos of John Tumazos Vary Independent Research. Please go ahead.

John Tumazos – Vary Independent Research

As you invest to grow the Personal Care segment, what sort of expenses will there be in 2013 that might affect the growth rate in operating income, promotion, new plan expansion, different developmental cost?

John Williams

That’s an interesting question. Let me try and answer that meaningfully. On the R&D side, the EAM business that we bought is really the R&D engine for that business. It also sells the sort of third parties. So, although we’ve expanded it slightly, as we expanded it also gets a revenue line. So, it’s sort of net bout. So, it doesn’t really show expense because it’s getting some income for that expense, and as well the machines go in. There is a little bit of additional cost in engineering and of course the capital cost. But in this business, each of the machines is a dedicated line, so those machines where you already have in today we’ll be able to just keep running as productively as we’ve always run them, so we wouldn’t see if you like an increased cost per unit of that machine base.

Now, there’s a startup phase, the startup phase is normally two to three months. Well, that’s really about the items coming off those new machines. We’re able to see initially they are not going to come off at either a full rate or necessarily with the speeds and the lack of breakdowns we’re looking for. So, there is a little bit of noise in there, but it’s not really substantial. Does that capture your question?

John Tumazos – Vary Independent Research

So, we shouldn’t worry too much in 2013 that your good performance will be hidden by growing investments.

John Williams

No. It’s a very good question, but absolutely not. I mean the way we put our plans together is actually to make certainly the people who are accountable for putting in that new machinery and getting it up and running separate from those people who are out there day-to-day churn out demand we already have.

John Tumazos – Vary Independent Research

So today, I turn 57.

John Williams

Many happy returns.

John Tumazos – Vary Independent Research

Should I look forward to 75 or 85 as when I might become your customer?

John Williams

Well, who knows. We get a new customer every 30 seconds, so it shouldn’t be on your birthday today anyway.

John Tumazos – Vary Independent Research

Thank you.

John Williams

All right.

Operator

Thank you. (Operator instructions) The next question comes from Phil Gresh of JPMorgan. Please go ahead.

Phil Gresh – JP Morgan

Hi, just a couple of follow-ups here.

John Williams

Sure.

Phil Gresh – JP Morgan

In the quarter, the fiber costs were up $6 million quarter-over-quarter and you’ve generally done a pretty good job managing the fiber cost. So I was just wondering is that seasonal or are there any other elements there that are, that might be more than seasonal?

John Williams

I think the, let me pull back to a page here. I have to make sure I am quoting. Usage was higher by $4 million, so that’s purely a yield related because of the winter and price is actually just up 2%. So, I think we’ve – sorry, $2 million, so I think we’re still viewing fiber cost in 2013 as being more or less flat to our total spending in 2012. So, we still have the same strategy, very diversifying supplier group and we see some pocket of increase, but some pocket we’re decreasing a little bit. So overall I think flat is the way we see 2013.

Phil Gresh – JP Morgan

Okay. And I guess, the broader question with respect to input cost John. You made a comment paper pricing being kind of flattish, are you assuming input costs are flat when you say that? Just trying to get a sense of how you are thinking about your margins because again you lost some margins this year.

John Williams

I think input costs we see them as relatively flat. There is a bump here and there. I mean, corns are little a bit high where is that going to go. I mean, fiber is really the big buys, as you know, and that’s so localized, sometimes it’s hard to see where it’s headed. But my view would be relatively flat to pretty good judgment at this moment in time on the input side.

Phil Gresh – JP Morgan

Okay. And then, Daniel, the cash tax rate for next year, is it similar to book or is it lower?

Daniel Buron

Well, that’s a very good question. We have a fewer and fewer tax attributes that was favorable to us. We’ve been happy to use – we’ve been fortunate to use a lot of tax attribute in the U.S. We still have tax attribute in Canada, so the cash tax in Canada should be relatively limited. In the U.S., it’s going to be bit higher. So, I guess, it’s probably fair to say that more or less the same thing as book tax was, again it’s moving, depending on are we going to – the tax return will be done later, so, I’ll be able to give you more on that a little bit better probably in Q1.

Phil Gresh – JP Morgan

Okay. That’s all I had. Thank you.

Operator

Thank you. The next question comes from Robert Howard of Prospector Partners. Please go ahead.

Robert Howard – Prospector Partners

Hi. I just wondered, do you guys have the asset sales completed in the quarter and I was wondering sort of where you stand going forward with doing other non-core ones. Do you think you kind of got that mostly done or do you sort of see few more assets that you might see?

John Williams

There are few more opportunities, but it’s mostly done. So, there might be – I don’t know, 10 to 50 over the next few years, but nothing – not to the levels you’ve been seeing.

Robert Howard – Prospector Partners

$10 million to $50 million worth of is all that.....

John Williams

Yeah.

Robert Howard – Prospector Partners

Okay. All right, great. Thank you.

Pascal Bossé

Thank you.

Operator

Thank you. The next question comes from Mark Wilde of Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

Yeah. Just wanted to follow up on those comments around fiber because as we listen to some of that timber REITS over the last week and week-and-a-half, some of them are talking about increases in pulpwood prices and probably in the 10% or 15% range. You’ve got a pretty good REIT across the South and over Northern being down in the Southeast. You are not seeing any of that?

John Williams

A little bit, but not very much, Mark, we’re not saying that. I think you also have to think about who we’re buying from. We are buying from a very disparate mostly independent group. So I’ll let Mike give you more color, but we haven’t seen that so far certainly. Mike would that be fair?

Daniel Buron

I think the point making there is with the housing market recovery, we’re seeing those mills that benefit from residual chips. They are obviously benefiting from a cost side and those mills complete with them slightly negative, we’re competing with this whole mills that are buying for the housing market is a bit of mix, but overall we’re seeing as a system a flat in fiber costs.

John Williams

Did that help, Mark?

Mark Wilde – Deutsche Bank

Yeah, Mike any kind of weather issues just as we think about the first quarter which might be kind of hitting you in terms of pulpwood availability, pulpwood cost.

John Williams

I think they always write a book for those people that are buying wood around weather conditions, I hope it works out one way or the other. But now we’re not seeing any impact so far.

Mark Wilde – Deutsche Bank

Okay. All right. Thanks a lot.

Pascal Bossé

Thank you.

Operator

Thank you. The next question comes from (inaudible) Capital. Please go ahead.

Unidentified Analyst

Yeah, just wanted a follow up on pricing for the year. I think you made a comment that you expect it to be in line with year end. Was that the December or is that the fourth quarter? And given what happened at the end of December and the weakness, wouldn’t you expect some sort of increase of that going forward, particularly in light of what’s going in January?

John Williams

Actually as I said in my prepared remarks our average price in paper went down 14 bucks a ton in the quarter and the comment we’ve made was with yearend pricing. So everything being equal, you should expect a little bit of average price down in the first quarter to complete that.

Unidentified Analyst

Okay. Thanks.

Operator

Thank you. The next question comes from Matt Teplitz of Guyasuta Investment Advisors. Please go ahead.

Matt Teplitz – Guyasuta Investment Advisors

Hello, it’s Guyasuta, just not that it gives you more clarity to see you now.

John Williams

Good morning.

Matt Teplitz – Guyasuta Investment Advisors

Good morning. Long-term holder and just a couple of questions obviously, we have, I guess 2012 was a more ordinary year compared to what we got used to the last few years. But one question, you obviously did a fairly significant debt raise this year. The cash is sitting on the balance sheet. I know you’re not going to tell me what you’re looking to buy if anything specifically, but it obviously is pretty inefficient to have that level of cash sitting there, and for that matter that level of debt. So I’m sort of wondering what’s your patience, is there a point when that cash gets, I guess more turned inward if there is not something worth buying?

John Williams

Yeah.

Matt Teplitz – Guyasuta Investment Advisors

Or walk me through why you did debt issuance in the first place.

Daniel Buron

Certainly Matt. I think it’s an excellent question, so let me just try and focus on it. If you look at Personal Care, we’ve said pretty clearly we’re going to build out $300 million to $500 million of EBITDA from that business. Right now the businesses we own will probably give us a $150 million in five years’ time. So there is the gap. So, I think there is no doubt we’re out looking to find compelling value-added acquisitions in that Personal Care space.

If for whatever reason those are not forthcoming and we feel what we should be doing here is either accelerating the share buyback program or finding other ways to get money back to shareholders we will do because we are very, very focused on keeping that commitment on the majority of free cash flow will go back to shareholders. Does that help?

Matt Teplitz – Guyasuta Investment Advisors

I think it does. And I mean, because the other two questions, they were sort of somewhat related to that. So one, as it relates somewhat to the debt into the buyback in general, if we take your current net debt it’s what about $450 million and so again, little over half of multiple of this year’s EBITDA and those who has been here remember the near debt experience, it was 2008 and 2009, so it’s clearly sobering. But at the same time by almost any measure your current leverage is extraordinarily low as our interest rates.

Is there anything that props you to say let’s get crazy and go full multiple of EBITDA and buy back another 10%, 20% of the company here, I mean, because, I mean, as you are well aware the stock is sort of stock, I’m not sure what’s going to finally move it, maybe eventually Personal Care business, it’s hard to say. Does the board wrestle with that? Is there just an absolute view that level of debt, I mean – obviously EBITDA can fall, one becomes two times, but it’s hard to envision a scenario where one multiple, say $700 million or $800 million of EBITDA is becoming life threatening to this company?

Daniel Buron

I think that we’re seeing that as a debt leverage in the life of the company. It’s very rarely on exactly where you are going to have lots of capital. You have ample time where leverages are early – you have this thing where leverage is lower and we’re in one of those – we are right now. And we need that flexibility to be able to build the $300 million and $500 million EBITDA of new business that John just referred to.

In addition to that, one of the reason why we have net cash on the balance sheet, flexibility that we like, but also we have the opportunity, a very rare opportunity in our segment to issue 30-year debt earlier this year. So, it’s quite unique as we see at a 4% after tax rate. We felt it was the right strategy to do – to apply. And the shareholder will see the benefit of that as we use that cash to grow our business.

Matt Teplitz – Guyasuta Investment Advisors

Again, I’m not quelling with that and I don’t disagree – I – with all due respect for the company and not entirely sure why I would buy 30-year debt at these rates. But it’s not my job to talk them out of it. But it seems to me that if you’re able to sell debt at what are – by all historical measures extraordinary levels, it seems like an awfully good time to be buying end stock where the market is at best indifference here right now.

And then just, and enough said, I think you get the point. One other question and then just, I’m sort of kind of trying to do my kind of idiot’s math here. So, if the current EBITDA of the Personal Care business is roughly $75 million, we expect to double it by 15 with the current assets we have and the capital expenses we’re making. Help me understand what incremental capital expenditures are we making overall to get from 75 to 150? Or what’s envisioned between what’s spread this year and the coming 2013 and 2014?

Daniel Buron

We spent a little bit in 2012. So, numbers will be in our 10-K.

Matt Teplitz – Guyasuta Investment Advisors

Right.

John Williams

I have that here right now and for competitive reason, we prefer to not to disclose our segments at CapEx before it’s actually required by the SEC. So, you’ll see the financial sense – final answer on that actually in the year 2014, but it’s – the goal of the business is to have a return on asset that is beating a set of capital and I can assure you that all those investments will deliver that.

Matt Teplitz – Guyasuta Investment Advisors

All right, well, let me try to back in, it’s sort of better, what would you consider the overall cost of capital that is the hurdle here to be met?

John Williams

I mean, again that’s a little bit like the leverage question, there’s no perfect answer to that depending on market condition, and obviously the world but we believe that return on invested capital of between 8% and 10% of our business is great.

Matt Teplitz – Guyasuta Investment Advisors

Okay. And just double that we could obviously, your stock is pretty cheap on that basis as well, no doubt. Thank you.

Pascal Bossé

Thank you very much.

John Williams

I just want to come back to a prior question where I think that was here in terms of pricing, the average price of paper for the last quarter was actually 14 bucks lower than Q3. So, everything being equal, it should be down 14 bucks also on average in Q1, but that doesn’t mean further price erosion, that just means running at December prices.

Pascal Bossé

Michelle, we’re ready to take maybe the last question.

Operator

Okay, thank you. The last question comes from Chip Dillon of Vertical Research. Please go ahead.

Chip Dillon – Vertical Research

Yes, thanks for letting me come back in. Just a quick one, John, obviously if the end quarter demand holds up better than you expect and I think you probably will find a way to supply the market, but let’s say that you get into a couple of months where maybe the decline rate is greater than you expect. Do you sort of have plans already set where you could sort of making adjustments to your footprint, your capacity in a relatively short period. And would that move involve a situation where you would continue to – you wouldn’t in other words keep the pulp. Would it be at an integrated facility or would it likely be a non-integrated facility?

John Williams

Good question, Chip. Essentially, the answer is yes. So, we know what we do next – what we would next would mean that we still be making the pulp. Does that help?

Chip Dillon – Vertical Research

That does help. Thank you.

John Williams

Okay. Thank you.

Pascal Bossé

All right. I want to thank everyone for their participation in today’s call. We’re set to report first quarter earnings on April 25.

John Williams

My birthday.

Pascal Bossé

And until then I wish you all a very good day. Thank you. And so long. Bye-bye.

Operator

Ladies and gentlemen, this concludes the conference call for today. You may disconnect your line and have a great day.

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