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Domtar (NYSE:UFS)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET

Executives

Pascal Bossé - Vice President of Corporate Communications and Investor Relations

John D. Williams - Chief Executive Officer, President and Director

Daniel Buron - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Richard L. Thomas - Senior Vice President of Sales & Marketing

Michael Edwards - Senior Vice-President of Pulp & Paper Manufacturing

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Mark W. Connelly - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Sean Steuart - TD Securities Equity Research

Phil M. Gresh - JP Morgan Chase & Co, Research Division

James Armstrong - Vertical Research Partners, LLC

Mark Wilde - Deutsche Bank AG, Research Division

Steven Chercover - D.A. Davidson & Co., Research Division

Albert T. Kabili - Crédit Suisse AG, Research Division

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Daryl Swetlishoff - Raymond James Ltd., Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Domtar Corporation First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Today is Thursday, April 25, 2013. I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, Mr. Bosse.

Pascal Bossé

Thank you, Valerie, and good morning. Welcome to our First Quarter 2013 Earnings Call. Our speakers for today will be John Williams, President and CEO; and 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 the website. As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside 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'll turn the call over to John.

John D. Williams

Thank you, Pascal. This morning, we reported first quarter net earnings of $45 million or $1.29 per diluted share on sales of $1.3 billion. Our financial performance in our core Paper business was weaker than in the fourth quarter, and this is due to lower productivity, which resulted in higher cost per ton.

The reconfiguration of our Marlboro, South Carolina operations lead to multiple paper-grade transfers at several of our mills and negatively impacted our productivity.

We estimate lost paper production at about 16,000 tons, and Daniel will talk to the detail of that in a minute, but we anticipate a return to a normal output in the quarters to come.

From a sales standpoint, we performed well, with better paper volumes shipping from inventory, and we benefited from better paper pricing than we had anticipated. We also exited the quarter with paper inventories below where we'd like them to be. For the months ahead, we'll be focused on 3 things: Settling the product mix in our mills; bringing productivity back up to normal levels; and replenishing our inventories.

On Pulp, results were better than fourth quarter with a $26 million EBITDA improvement. That's due to lower maintenance costs and higher selling prices.

Turning to Personal Care, performance was on target, with volumes up 7% compared to first quarter 2012 and an EBITDA of $19 million.

I'm pleased with the progress we're making on integration in the division and with our execution on our growth plans.

The addition of new production lines is progressing as planned, and I look forward to introducing the business and discussing our growth plans for Personal Care at our Investor Day we'll be holding in the coming months.

On capital allocation, we remain aggressive on our buyback and have repurchased over 600,000 shares of common stock for $47 million in the first quarter. And in total, capital return to shareholders amounted to $63 million, including dividends.

With these brief remarks, I'll turn the call over to Daniel for the financial review, and I'll come back with our priorities and our 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 4. We reported this morning net earnings of $1.29 per share for the first quarter, compared to net earnings of $0.54 per share for the first -- fourth quarter of 2012. Net earnings before items, our earnings were $0.95 per share in the first quarter compared to earnings of $1.31 per share for the fourth quarter.

EBITDA before items amounted to $170 million, compared to $180 million in the fourth quarter. Free cash flow totaled $7 million compared to $75 million in the fourth quarter and $1 million in the first quarter last year.

Turning to sequential variation in earnings on Slide 5. Consolidated sales were $18 million higher than the fourth quarter, primarily driven by higher paper shipments and higher pulp prices, mitigated by lower paper prices.

SG&A was $91 million, in line with the fourth quarter. We recorded a charge of $10 million to finalize the accelerated depreciation related to the closure of a pulp line at our Kamloops facility.

The $18 million you see under other operating loss is largely the combination of the 2 following elements: A gain of $10 million related to the sale of the land and buildings located at our former pulp and paper site in Port Edwards, Wisconsin; and a charge of $26 million related to the conversion of alternative fuel tax into cellulosic biofuel credits.

Let me give you more background on this subject, to eliminate potential confusion, as it has an impact not only at the EBITDA level, but also at the income tax level.

In 2012, the IRS announced that they will have allow taxpayers to convert alternative fuel tax credits into cellulosic biofuel until March 15, 2013. After consideration, we made the decision to convert $26 million of alternative fuel tax, recording a tax benefit of $41 million. All in all, this conversion resulted in a net profit of $15 million.

Interest expense was $25 million, $3 million higher than last quarter, related to the early redemption of the 5 3/8% notes due later this year.

In the first quarter, we recorded a tax benefit of $22 million, compared to a tax expense of $1 million in the previous quarter. Excluding items, notably the $41 million tax benefit related to the conversion of the alternative fuel tax credit, our income tax expense was $19 million or 36% in the quarter.

This higher-than-expected tax rate is mostly the result of a tax audit adjustment recorded in the quarter.

Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $63 million for the quarter. Capital expenditures amounted to $56 million. This resulted in free cash flow of $7 million. In the quarter, we also received proceeds of $9 million from the sale of assets related to our former Port Edwards pulp and paper mill.

On the financing activities side, as mentioned earlier, we redeemed notes due later this year and also bought back a lease for a total debt repayment of $95 million.

Under our stock repurchase program, we repurchased 606,000 shares of common stock for a total cash consideration of $47 million. Since the inception of the program, we have repurchased approximately 9.3 million shares of common stock. At the end of the quarter, we had $258 million remaining under the program and 34.2 million shares, including exchangeable shares, were outstanding.

In the first quarter, we returned a total of $63 million to our shareholders through a combination of dividend and stock buyback.

Over the last 12 months, we returned a total of $261 million or 81% of our free cash flow.

Turning to the quarterly waterfall, Slide 8, 7. When compared to the fourth quarter, EBITDA decreased by $10 million due to the following: $8 million of higher raw material usage and $4 million of higher raw material unit costs, for a total increase in raw material of $12 million; $8 million of lower paper prices; $4 million of higher costs; and $4 million of higher SG&A costs and other expenses. These were partially offset by $6 billion of higher selling prices for pulp, $4 million for higher volume, net of lower productivity; $4 million for lower maintenance costs; and a foreign exchange benefit of $4 million.

Now Slide 8. In the Pulp and Paper segment, sales were up 2% when compared to the fourth quarter and down by 6% when compared to last year. Operating income before items was $65 million on a depreciation and amortization charge of $88 million.

EBITDA before items was $153 million compared to 150 -- $165 million in the fourth quarter.

Now on our Paper business on Slide 9. We had an estimated decrease in EBITDA before items of $38 million. Paper shipment were sequentially higher by 23,000 tons, and down 42,000 tons when compared to the same period last year.

Our average transaction prices for all paper grades were $10 per ton lower than last quarter. As mentioned by John, our paper production decreased by 36,000 tons versus last quarter. Approximately 20,000 ton of that decrease is explained by 2 fewer days in this quarter versus last. The remaining 16,000 tons is due to productivity issues, mostly related to the reconfiguration of our Marlboro operation and the multiple paper-grade transfer it created in our system. This, coupled with the reduction of our inventories, impacted total costs in the quarter.

Our Pulp business on Slide 10. EBITDA before items increased by an estimated $26 million when compared to the fourth quarter. Pulp shipment were sequentially lower by 3% versus the fourth quarter, and average pulp prices increased by $19 per metric ton versus the fourth quarter.

Paper inventories decreased by 34,000 tons, while Pulp inventories increased by 16,000 metric tons. In Personal Care, EBITDA before item increased by $1 million when compared to the fourth quarter.

Before ending my remarks, I'd like to remind you that our second quarter is our more -- most active pulp and paper maintenance quarter, and that we plan to spend approximately $26 million more than what we spent in the first quarter.

So this conclude my remark, and with that, I will turn the call back to John.

John D. Williams

Thank you, Daniel. The recent demand statistics in white paper have shown weakness. Three percentage points of which is due to the 2 less shipment days in the first quarter when compared to prior year. This brings demand at the lower end of our long-term 3% to 4% demand decline assumption, and we believe that this assumption holds for 2013.

On pricing, we witnessed lower average selling prices compared to prior quarter, due to adjustments we made in December. But our price realizations were nonetheless slightly better than we had anticipated. Looking out towards the rest of the year, we expect price stability in paper and continued upward momentum on pulp prices.

Pulp markets continue to firm up with price increases announced in all grades in most of the markets. And last week, we announced the pulp price increase. Despite some capacity additions, we are optimistic about the remainder of the year and long-term fundamentals.

In Personal Care, progress continues with new capacity being installed to support the momentum building in both sales and EBITDA, with expected benefits later in the year. Best practices are being implemented in manufacturing, and our values on health and safety shared throughout the division. I am pleased to report that we recently passed the 500-day injury-free milestone in our Greenville, North Carolina operations.

While on health and safety, I'd also like to mention that our pulp and paper mills had their best safety instant rate on record, in the first quarter. And finally, profitability and distribution improved from last quarter, as the work to improve the business model and the value proposition with customers continues.

We continue to explore opportunities to invest in innovative fiber-based technologies, and our positioning in the market continues to evolve.

We started our production of our new commercial scale lignin separation plant at our Plymouth, North Carolina mill, the first of its kind in the world. With this investment, we make immediate gains with an improved efficiency of our pulp-making process. While the market gets a reliable, high-quality source of this alternative, ecological material. We branded the product BioChoice lignin and have a targeted production rate of 75 tons a day.

We see a wide range of potential industrial applications, as a bio-based alternative to the use of petroleum, other fossil fuels, resins and thermoplastics. On the strategic front, we announced the acquisition of Xerox's paper and print media business, with exclusive rights to North America. The deal allows us to add a strong brand name in our existing portfolio of paper products, and also includes wide format, carbonless and coded digital papers, not manufactured by Domtar.

In addition, it provides strong expertise in our route to market within our existing business channels. The business will be integrated into our Pulp and Paper segments, and the deal is expected to close in the second quarter.

In closing, we entered 2013 confident of our ability to execute against our strategic objectives. As previously mentioned, our operational performance in the first quarter was not up to our usual standards. We knew that there were risks to our production as we completed the largest conversion of a commodity mill to specialty paper grades, while not halting production. The Marlboro reconfiguration's an excellent repurposing project, and as we move up the learning curve in the mills, receiving new grades, we pave the way for better uptime for the balance of the year.

Turning to our outlook, we expect continued momentum in pulp markets, with a moderate improvement in pricing and steady shipments. In Papers, our volumes are expected to be similar to the first quarter in the near term. The second quarter will be affected by the usual seasonal higher maintenance activity in Pulp, while input costs are expected to decline slightly, notably due to lower energy usage.

And finally, as mentioned, we expect productivity in our paper mills to return to normal in the quarters to come.

Meanwhile, we will continue to aggressively execute on our share buyback program, and have repurchased $50 million worth of stock or 658,000 shares in April to date. Thank you for your time and support, and I'll hand over to Pascal for questions.

Pascal Bossé

Thank you, John. So to take questions, we have John and Daniel. But we also have Dick Thomas, Senior Vice President of Sales and Marketing; and we have Mike Edwards, Senior Vice President, Pulp and Paper manufacturing. [Operator Instructions] So with that, Valerie, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from George Staphos of Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

First, a question just on manufacturing, to the extent that you can comment. What do you anticipate or expect the lost productivity cost you in the quarter, related to Marlboro, in dollar terms? And if I look also at the maintenance schedule coming up yes, seasonally, 2Q is normally ahead of 1Q. But this year's bump is a little bit more than last year's, and more in concert with what we saw in 2011. So what caused the variation from year-to-year here?

Daniel Buron

Okay, so it's Daniel. I'm going to take that question. The first question is the cost of the lower productivity, because of the Marlboro repurposing. The cost is not only at the Marlboro Mill, as we've mentioned, it's the ripple effect on the rest of the mill for grade transfer. But you have that into, actually 3 buckets. A portion of that is purely productivity, so it's more or less $6 million that it cost us. There's usage, that is also impacted by that, that we value at $2 million. And lastly, we had to draw inventory for -- serving our customers, and that's kind of using the same cost twice in the same quarter. So it's another $1 million. So we believe the impact is $9 million in total, in the quarter. As for your second question, there's a little bit more maintenance actually in Q2 this year than last year. There's 2 mills that will have -- longer shut, because we have more work to do. It's -- the total expense for the year is only $5 million or $6 million higher than the prior year, but the sequencing is a little bit different because of 2 longer shut in Q2.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Next question, maybe for Dick or Mike. What do you anticipate your current operating rates are within uncoated freesheet? And related question, if we had to peer into the integrated pulp lines, what do you think your mix of hardwood versus softwood pulp is, within your integrated operations?

Richard L. Thomas

Mike, do you want to take that?

Michael Edwards

Our operating rate is round about 89%, 90% level, and manufacturing -- from an efficiency perspective in manufacturing, I think that's what -- the question he's asking. The other question with regards to...

John D. Williams

15%. It's hardwood and softwood pulp, George, you're asking?

George L. Staphos - BofA Merrill Lynch, Research Division

Yes. Not on the market side, but within your integrated operations, what's the mix? I'm assuming it's mostly hardwood, but I…

John D. Williams

Right, sort of 80-20 -- 80-20 is the number. And if your previous question was a kind of, sort of production to shipment ratio question, obviously, we're at a 104% in the quarter, because essentially, we are having to sell out of inventory based on the fact that our lead times have pushed.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. I guess the last question I had, John, certainly, it's not the end of the world, but shipments have -- are trending, adjusted for shipping days towards the lower end of your targeted range. And the trade press has basically been reflecting as well that shipments have been a little bit weaker than expected, at least in the first quarter. If you agree with that premise, what do you think is behind it? I mean, employment's not rocketing, but certainly employment is gradually getting better, and uncoated freesheet, traditionally, has been a white-collar employment-driven grade. So what you think is behind, maybe the little bit greater than normal weakness thus far this year?

John D. Williams

Yes, I mean obviously, you've got a couple of days that weren't there. So if you look sort of like-for-like, that has a sort of 2%, 3% effect, which is where we come back to our sort, of kind of 4% decline thinking, George. If we look forward and we look sort of what's happening in April, that seems to be a reasonable assumption. I think for U.S. producers, exports are still bumping along with at a slight increase, but the kind of level -- excuse me, imports, exports are growing quite nicely, I think for most U.S. producers. So I still think it's a fair assumption. I don't see anything that says, the world's changed on us.

Operator

We'll move to our next question from Mark Connelly of CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Ariva volumes were up very nicely. Can you give us a sense, I mean, obviously, we had the bumpiness towards South Carolina, but is there a big offset on the other side of Ariva? Or I'm just trying to get a sense of how much of that was net new? And then the second piece is, with Personal Care, is it correct or fair for me to say this was a pretty normal and solid operating quarter for you?

John D. Williams

Yes, let me answer those 2 questions. So if you take Ariva, Mark, I think there's a seasonal effect. It's a big financial printing season. So that, I think it gives you the bump from the fourth quarter. But certainly, we are, I think, quite successfully building out business in the digital space and the packaging space, so that helps us, but that takes a while to build. So that's growing, albeit off a low base, pretty nicely. As you know, my attitude on Ariva has always been that it's sort of subsidized SG&A, if you like, for the White Paper business. And it still sort of performs that function, particularly in the Canadian market, actually. Your second question?

Sean Steuart - TD Securities Equity Research

It looks like this was a good -- it's obviously a solid quarter, I'm wondering if you consider this a pretty normal quarter?

John D. Williams

Yes, I mean, let me talk about Personal Care. Right now, really, across that network, we are largely sold out. We are really shipping everything we can make. Our new assets will start firing up in the fourth quarter. So I think that's a reasonable run rate until we see that settling down fourth quarter, first quarter and second quarter 2014. That's when you should see that journey, if you like, towards the numbers we've shared with you.

Operator

We'll move to our next question from Phil Gresh of JPMorgan.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

The first question, I wanted to follow up on George's question about the productivity. You said there's a $9 million delta. And I think last quarter, you had some challenges in the pulp mills, it sounds like those got better. And Daniel, at the time, you were talking about like a $5 million to $6 million productivity improvement on that side of the business. So my first question is, is that $9 million delta, the total company delta, or is that just the paper delta? And there's an offsetting improvement that occurred on the Pulp side?

Daniel Buron

It's the paper delta. Actually, if you look at the waterfall slide, that Page 7 that we have on our deck there, that the first bucket is volume and productivity. So let me give you a little bit more detail there. Pulp productivity was actually up $4 million in the quarter. The paper productivity was down $6 million, and volume was up for the rest. So that's a combination of the 4. You see that? So we have the portion of the return to positivity at our Kamloops mill that we are expecting. As we said last call, it's going to take, to come back to full productivity -- actually, the mill closed at the end of the quarter. We let go people as we speak, so the full positivity to be back around the third, or beginning of the fourth quarter.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. And is that the pulp productivity, you expect that to get there in the third or fourth quarter? Or is that the total company, because you made a comment about quarters to come in terms of the paper productivity?

Daniel Buron

My comment was on Kamloops, but I think the answer will be the same for the rest of the positivity because of the great reshuffling we've done in Q1. So I think it's going to be back sometime in Q2, we'll be -- we'll see some improvement, but it's going to be Q3, Q4 before we master the new rates.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

John, can you just elaborate on when these challenges started on the paper side, I'm just kind of wondering, philosophically, the magnitude is reasonably significant, so.

John D. Williams

Let me talk about it, I mean it's obviously critical to the whole piece. When we started to engage in the Appleton relationship, and we decided to rebuild Marlboro, we're obviously making far lighter grades on that machine that's ever been used to making. So that meant we had to run that up very carefully. It was also slightly compounded by the fact that on the antidumping issue with Koloss [ph] they needed every piece of volume they could get out, so that they could code it and move it into the marketplace to grasp that opportunity. So that meant we had to move grades somewhat faster perhaps than planned, into other mills such as, Hawesville, et cetera. So the whole system, if you like, creaked a bit, based on those issues. So what we now have to do, we have to learn how to do that better, settle that down. I don't think it's impossible, or beyond the wit of man. We're a pretty strong manufacturing organization. So over the next few months, we'll settle that down, get the productivity back up and sort ourselves out. Does that give you a bit more color? Is that -- is that helpful?

Phil M. Gresh - JP Morgan Chase & Co, Research Division

It does, I guess, the follow-on to that is, perhaps preannouncing something like this, given the magnitude relative to kind of what the expectations are out there, I know you don't manage to consensus or anything like that. But just philosophically, any thoughts on that?

John D. Williams

Well, I mean it hasn't been our practice. To be honest, Phil, I don't think it will become our practice because it's kind of a sort of one-off event that we'll move through. But I agree, I mean, it was substantial and disappointing in quarter 1.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. Last question, just on the fiber side. You guys expect a kind of flattish inflation there. But how much was fiber usage in terms of that inflation? Now where is -- is some of that supposed to come back?

Daniel Buron

Yes, out of the $5 million were showing, $1 million essentially usage, the rest is actually unit costs. We have higher fiber costs, mostly now in our Plymouth location. There's more demand than fiber available, or more demand now than in the past for the fiber. So we have to get the fiber a little bit farther than we used to. Our belief is, over time, our capacity will increase in the, in that region, and fiber will get back in terms of pricing. But as we speak right now, this is the region where we're paying a little bit more.

Operator

We'll move to our next question, from James Armstrong of Vertical Research Partners.

James Armstrong - Vertical Research Partners, LLC

As we go into the second quarter, some of the trade publication continues to show unquoted freesheet pricing slipping a little. Are you seeing any of this, or are you seeing your prices more or less stable as we go into the second quarter?

Daniel Buron

Well, James, to be honest, again, I think, I've said before, sort of discussing pricing on an open mic, I'm never very comfortable. Quite frankly, we see stable pricing, and that continues, and that's what we're planning on. So we don't see that, to be frank at this point.

James Armstrong - Vertical Research Partners, LLC

Fair enough. And then a second -- about a year or so ago, you talked about having a plan in place, to shut capacity if pricing and volumes really started to slip. Do you think we're getting close to the time to implement that plan?

John D. Williams

Well, I think you have to think about what we've already done. If you take the Appleton volume, that's the equivalent of about 320,000, 350,000 tons of commodity that's no longer available in the market, I mean that's equivalent of probably the largest shot that's ever been taken. So yes, to your point, I think if we see it eroding further, we'll take the action we plan to take. But not at the minute, in fact, quite frankly at the moment, we have the opposite issue, is that we can't get the stuff out the door.

James Armstrong - Vertical Research Partners, LLC

Completely fair. And then lastly, if you strip out black liquor and the other items, what was your effective tax rate for the year? And what should we expect going forward?

Daniel Buron

The tax for the quarter was 36% and there's -- the expected, or the normal tax rate should be between 28% and 30%. So the high tax rate in the quarter were due to an audit adjustment or a tax audit adjustment that we have to record in the first quarter.

Operator

We'll move to our next question, from Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

First, just a last shot on these productivity issues in the first quarter. It sounded like you were suggesting maybe there's a little tail on this, into the second quarter? Can you confirm that?

John D. Williams

That's a good question. It's really about, can we get the tons per day out that we're planning to get out, based on our operating and forecasting, Mark. And certainly, April to date, we're pretty much there. So we're not showing the variances we showed at February and January. So I'm much more confident that we're not going to use see it at that level, but we might see a little. I don't think they're same number, but you never know.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. So if we penciled in $1 million or $2 million versus that $9 million in the first quarter, that seem like a reasonable number?

John D. Williams

It seems reasonable, but you couldn't take me to the woodshed on it.

Daniel Buron

And we'll try to do better than that, but...

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. Second question I had was, Daniel, could you just give us a little bit more detail on the ramp-up of these new Personal Care machines? It sounds like you're going to have some additional overhead before we're going to actually start to see the benefit from incremental sales?

Daniel Buron

Actually, the overhead that the business needs to run is already there. So when you look at quarterly results, I don't think we're going to see overhead increasing. The first machine will be up and running in Q4, probably the second half of Q4. So we should start to produce a sellable ton in Q4. The real benefit, I think, we'll see in Q1. And there is a couple of other machines that are sequenced for the first quarter. So I think we'll see the ramp-up starting Q1, and you're going to see that. I mean, we'll have enough capacity to double our earnings as we have mentioned. So the ramp-up will be over 2 years, but the start will be early 2014.

John D. Williams

And Mark, to be honest, when we do the Investor Day, I mean, we're really going to focus on that, so we give you a bit more granularity on how we get from here to there, because I can understand at the minute, people are wondering, well, how are they going to get from here to there, because at the minute, those earnings look stable as opposed to growing. So that's going to be the major discussion.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Then I -- if I could just turn to the distribution business. I mean, it just looks to me like you're more and more the last of the Mohicans here, because we've had this transaction with IP and Unisource announced this week, so effectively, IP is exiting. GP exited a while back, if we go back even further, MEDA exited, and then I think, most of the Europeans have exited distribution. So I'm just -- A, curious about what you see about this business that other people have not seen? And then, whether, not moving sooner kind of reduces sort of your options in the -- will leave you with fewer options in the future?

John D. Williams

You mean I won't have a dance partner when the dance is over. And I guess I see it in 2 ways, really. One, if I look at the intensity of the uncoated freesheet share through Ariva, it's still very attractive. So we have to think about how do we protect that, if we make a strategic move, Mark. That's not immediately obvious, to be frank. So I think that's one of the reasons behind it. I think to your consolidation point, I actually see it as the opposite, that actually when the industry has consolidated quite a lot, maybe the last couple of players there, if they were choosing to do something, might get quite good value given, there isn't much left. So we continue to try and operate that business as effectively as we can, but we'll always weighing the strategic options.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then the last question I had, John, just the Xerox deal was quite interesting, and I just wondered if you could give us some sense about sort of, what that might do for you in terms of uncoated freesheet volumes over the next few years, because I think Xerox is sourcing from some other people right now. And I assume that, that's going to shift over to Domtar over time.

John D. Williams

Well, I mean, that's not necessarily our plan, Mark. There's a lot of paper in there, and a lot of grades that we couldn't make. So I see no reason why we'd bring that in-house. We're really more interested in the fact that it gives us a brand that we can really do things with. So we manufacture some of that paper today, but we're quite happy to keep buying that paper. We still make money when we do the license agreement. So my view is, if it makes sense over time, we may make those choices. But right now, we're quite happy to continue to buy from the suppliers that we currently buy from.

Operator

We'll move to our next question, from Steuart, sorry, Sean Steuart of TD Securities.

Sean Steuart - TD Securities Equity Research

A couple of questions. I guess, Daniel, first. Can you update us on what's left, if anything, really in terms of non-core assets you might have for sale?

Daniel Buron

There's less and less, fewer and fewer assets. The one that comes to my mind is the land in Ottawa, I guess north Ottawa, that is there, that is available, if someone is interested to buy. As you know, it's a fine piece of real estate. Apart from that, I don't think there's much left, so you should not expect anything big in the foreseeable future from that.

Sean Steuart - TD Securities Equity Research

Okay, and then John, just beyond the line installations in the Personal Care business, can you just give us any updates on, I guess, bigger expansion initiatives you might be considering? And I know you're not going to speak to specifics, but how much of your time are you spending on considering these sorts of options? Are you seeing more deal flow, just any context from a high level?

John D. Williams

Yes, I mean, it's interesting, isn't it, how in the last few days, a lot has erupted, if you like, in the core market in terms of the offer. I mean, we, to be honest, we like that Personal Care space. I think you have to be focused, not thinking should we do this, should we do that. So really, most of my focus is about building out into that space. And if you look at ownership in that space, there's a lot of private equity ownership. So we think there are opportunities there for M&A going forward. I think we have to be clear is, to make sure that we do at a value that's sensible and meaningful, that we don't get so overexcited that we overpay. So really, focusing in that area. I don't think we want to become kind of yet another paper conglomerate. We're more interested in focusing on that consumer space. Does that help?

Sean Steuart - TD Securities Equity Research

That does. Thanks for the context.

Operator

We'll move to our next question from Steve Chercover of D.A. Davidson.

Steven Chercover - D.A. Davidson & Co., Research Division

My question was also with respect to Personal Care. And it focuses on the EAM acquisition from last May. Was that the deal -- should we look at that more as an insourcing deal for absorbent cores or did it actually grow revenues and earnings?

John D. Williams

You should look at it more as an internal deal. So really, there, the attraction was, you had a bit of a sales line, but not an enormous sales line. But the access to that technology for us, in terms of absorbent core, really makes us feel over time, we can build a very competitive product, both from a cost base and as importantly, from a consumer experience in terms of how the product is used. So really, you should see it like that.

Steven Chercover - D.A. Davidson & Co., Research Division

And was Domtar, or I guess, Attends the biggest customer of EAM? Does it diminish your access to external customers?

John D. Williams

Actually, not. I mean, we had a number of major customers, but also Attends was a major customer, so a pretty fair balance, actually across, the 4 or 5 key accounts. It's a key account-type business, Steve.

Steven Chercover - D.A. Davidson & Co., Research Division

And so the fact that you now own it doesn't mean that they can't...

John D. Williams

No, I mean, customers haven't, no, locked off, saying "Well, we're not going to buy from you because," if that was your question.

Operator

And we'll move to our next question from Albert Kabili from Macquarie.

Albert T. Kabili - Crédit Suisse AG, Research Division

I guess a question on the operational issues with Marlboro. I know you are targeting kind of a 210,000 run rate, second quarter. Can you kind of comment on where you are today versus that?

John D. Williams

Sure, be happy to. If you take March, we'd be at 180,000-ton run rate right now. So we've got about 20,000 left to build. Now that was very much sort of a contracted number, given what happened with this antidumping on COLA, there may be another 20,000 to 30,000 tons in there. And we're doing some R&D at the moment on some other grades. So that might build a little bit more over time than our expectations, originally.

Albert T. Kabili - Crédit Suisse AG, Research Division

And I guess that's a positive, longer term, but I guess what I'm getting at too on the other risk shorter-term, with some of the production issues that you've kind of highlighted here in the first quarter, as demand kind of ramps up, maybe near term, even more than originally expected, given the production issues you've had in the first quarter, do you see risk that actually the...

John D. Williams

We're going to keep shooting ourselves in the foot?

Albert T. Kabili - Crédit Suisse AG, Research Division

Yes. Was that a risk, that the cost could actually get a little worse first before they get a little bit better?

John D. Williams

That's a very good question. I mean, I think if you think about we did, we did a major capital expenditure in Marlboro to enable us to make these lighter grades, and to handle these lighter grades at faster speeds that we were capable of previously. So that ramp-up has cost us money. If I look at output today, we've learned a lot of those lessons, and we're actually making a much higher quality product than we were making, maybe 8 to 12 weeks ago. So I think we're in a much better position now. We have one issue left, which is we need to spend some time at the winder and a bit of money at the winders so we handle them better, which we're going to do over the next few weeks. I think when we've done that, I don't think we run the risk that you talked to, but there may be bumps in the road. You what these large assets can be like, but I feel pretty confident that we're far better lined up than we were maybe 10 to 12 weeks ago.

Albert T. Kabili - Crédit Suisse AG, Research Division

And then, just a final question for me, switching over to Personal Care. And you mentioned the volumes increasing 7%. The earnings there, can you talk about how EBITDA growth, how you see EBITDA progressing, relative to the volume growth there?

John D. Williams

Well, I think right now, I mean, it can be very affected by mix. One of the things that's happening in the market at the minute is that there's a lighter weight product, which is a slightly down engineered product that been placed out there by some of our competitors. We have to respond to that. So that means we're not quite seeing the whole margin benefit I'd like to see from all that volume. I think that's a temporary issue, and it's only in one particular segment. But certainly, over time, as we build those new machines and build that new volume, we believe very strongly, we have a business in 5 years' time, can certainly double what it's doing today. Now, will there will be bumps along that road? Life being what it is, there may well be. But certainly, we see that route from today's 80 to tomorrow's 160. And again, in the Investor Day, we'll give you more granularity on that, so we're just not saying trust us. You can actually see what we're about.

Daniel Buron

But Al, just to clarify something, the 7% is pro forma sales, first quarter 2012, the full year growth but the EBITDA grew at -- on the pro forma basis also. But the answer of John is I think you've...

Albert T. Kabili - Crédit Suisse AG, Research Division

Yes, I guess it's what I was getting at, it just seems that on -- correct me if I'm wrong but it just seems that on a pro forma basis that the EBITDA isn't quite growing in line with what the volume growth. And I just wanted to understand if I was thinking about that right, and how you kind of see -- how we should be modeling that on a go-forward basis? So it sounds like...

John D. Williams

Sure. Let me talk to that. I mean I have some -- certainly, I don't see a big bump quarter 2, quarter 3. But I see steady. We get our new machinery in quarter 4. And I think Daniel point was well made earlier, again in quarter 1, 2014, we'd look to see the beginnings of those earnings moving pretty strongly.

Operator

And we'll move to our next question from Alex Ovshey of Goldman Sachs.

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

This is Usha in behalf of Alex. Quick question. Are you seeing more opportunities in the markets similar to the Appleton supply payment?

John D. Williams

Not many. Really, for that to work, you have to find somebody who both, if you like, owns a paper mill and uses that output to do other things with, probably coating. There aren't many around. I mean, one recently is in a transaction, as you may have seen, which is Thilmany, putting together with the Wausau mill. So you now have a new 600,000 ton specialty paper producer. So there aren't many about, to be frank.

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

Got it. And then what in your view is the current industry operating rate, I know earlier you talked about your operating rate. But what in your view is the current industry operating rate? And if the current demand trends were to continue, at what point would you expect more industry capacity closures?

John D. Williams

I honestly -- I mean, in the industry operating rate is probably around the 90% -s right now, I think 92%, something around that. Don't quote me on that. It's in the publications. Quite frankly, I really look at ours more than I look at the industry, as you know, you make decisions based on your own supply chain. Again, mid-80s, something might happen.

Operator

[Operator Instructions] And we'll move to our next question, from Paul Quinn of RBC Capital Markets.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Just a question on the pulp side. We've seen inventory build 16,000 tons in the quarter, and almost 50,000 tons over the last 12 months. What's the issue there? And then following up, on the price side, we saw NBSK and NBHK move up. Seen a competitor point out that their flat pulp price moved down significantly in the quarter. Maybe you could give us some direction on the overall individual segments within your Pulp segment?

John D. Williams

Yes, certainly. I think we're comfortable on the inventory side. As you know, pulp shipments can be lumpy, just based on the time of the month or the quarter. So we're not uncomfortable and remember, we've got some fairly sizable pulp shots coming our way. So I think that makes us feel perfectly happy with those 16,000 tons, Paul. On the pricing, yes, I mean, hardwood, as you know, has moved and may continue to move. We do about 200,000 tons, about 220,000 tons of hardwood. We'll follow, if we get the opportunity. Softwood, we think has pretty decent runway, and got the recent price increase relatively comfortably, so let's see where that goes. Fluff, we really didn't see a decline, sort of bumped along, probably for nearly 1 year to 18 months. And as you know, we recently announced a price increase. And the differential between fluff and southern softwood, typically would be 60. That's now close to the between 20 and 30. So we see an opportunity to open that differential up again. Does that help?

Daryl Swetlishoff - Raymond James Ltd., Research Division

Very much so. And additionally, thanks for the color on the onetime productivity issues on the paper side.

John D. Williams

You're very welcome. Thank you very much.

Operator

And we'll move to our next question, from Phil Gresh, a follow-up, from JPMorgan.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

A couple of quick follow-ups. One is just, with the significant maintenance increase this quarter over the last quarter. I mean, do you think that the usage benefits and the improved productivity can more than offset that maintenance? Or is it going to be difficult to get there?

Daniel Buron

If you look at the, kind of the bridge between Q1 and Q2, obviously, the largest variance will be the $26 million that we -- more maintenance in the second quarter. On the positive side, I think we're going to see higher pulp price on average, is going to help us absorb that $26 million. We should have lower cost -- difficult to quantify, but we should have lower cost because of usage. Just the fact that it's going to be summer versus winter would bring something. It's just that the winter is always a period where usage is a little bit higher. And improved productivity, as John mentioned, a portion of that will be -- will happen in the second quarter and likely, another portion in the third quarter. So volume, we believe, will be, more or less flat. But there's probably a little bit of upside on the pulp -- and both, actually, pulp and paper side of the business. But obviously, this is difficult to forecast.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay, no, the color is helpful. And then, just -- the second question is, on the buybacks here. I mean, you've always talked about being opportunistic and aggressive. With where the stock is today, can we see you guys actually start buying back more than what you've normally done in the past couple of years? And take advantage of the stock price, then actually, maybe increase the leverage a little bit, at a level like this?

John D. Williams

Well, I mean, let me be clear, Phil. I think we would only ever spend money on buybacks on cash we have. So if sort of there was a question behind there about -- we'll be sort of borrow a bit to buy. I mean, typically, we haven't done that, because we want to keep our powder dry for the strategic plan that we're implementing, if you like. I mean, certainly, as we get to the end of the buyback, you've seen us being far more aggressive than we were in quarter 1 last year. And quarter 2, we continue to be pretty aggressive. So we've got about $208 million left to go on the current buyback. I mean, if we're knocking up against that, we're going to engage with our boards, really, to discuss what we should do next. And as you know, buybacks have been our preference. So and again, to give you the context, we've said very clearly that we would give the majority of free cash back to shareholders. Buybacks are our preferred way of doing so, so we'll continue so to do.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Yes, no, that's fair, and you definitely have returned a lot of cash to shareholders. I was thinking you have talked about how much dry powder you have, it's pretty significant. I just wondered if you might view the investment in your own company as equally or more of an opportunity than in another company at this type of price level.

John D. Williams

Well I think, Phil, to be honest, what we've said is pretty clearly I think, as the cash builds, if we can't find the opportunities we're looking for, that's something we'd think about. But I don't think we'd lever, we've been pretty clear about that so far.

Daniel Buron

So just to give you the addition actually of the buybacks in Q1, and as John mentioned in his prepared remarks, we -- what we've done so far in Q4, we're at $100 million, so which is more than our free cash flow. So I think we're -- we are more aggressive and opportunistic as we said we'd be. But to John's point, we'll use our cash, but we have plenty of cash on balance sheet. So we have the, also the ability to be more aggressive, and our intent is to be more aggressive when the stock is lower and be a little less aggressive when we view the stock higher.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

And okay. Last question. Cash tax rate, Daniel, relative to book tax rate with these new tax credits?

Daniel Buron

That's a good one. I think it should be more or less the same percentage than prior year. But I'll have to re-look at it, to be honest, I have no reason to believe it's going to be different, but I haven't looked at it in that -- with that angle.

Operator

And we'll move to our next question, from Anthony Pettinari of Citigroup.

Anthony Pettinari - Citigroup Inc, Research Division

I apologize if this question was asked earlier. I'm jumping on a little bit late. I was wondering if you could talk a little bit about uncoated freesheet import-export dynamics? Specifically on imports, are you seeing increased imports, maybe from Asia, versus this time last year? And is that meaningfully contributing to maybe some of the erosion we've seen in list prices for uncoated freesheet? And then on the export side, I mean, I think historically, you've exported some to Europe. Is the very weak macro situation there making that less attractive or impacting your volumes on the export side?

John D. Williams

Sure, I mean, exports -- we have grown exports quite dramatically, actually in the first quarter versus prior year. And probably they'll come down a little bit in quarter 2. But I would think we would expect to end the year with sort of growth in our exports into Europe, and we've actually set up a supply chain that I think is a little bit more robust than our historical supply chain. So we now have a relationship with a converter over there, which will sort of allow us to serve the market, if you like, rather than just turn up when we choose to. On the import side, I mean, undoubtedly, the Asians are importing a little bit more, but it's not a flood. And it's choppy, there are tons looking for a home one day, and not looking for home another. So I don't see it as a step change, if you like, in the way that they're seeing the U.S. market.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. So the kind of year-over-year price declines we've seen in freesheet had been more a function of just sort of North American supply demand really, rather than more aggressive pricing by...

John D. Williams

Importers? Yes, absolutely.

Operator

There no further questions from the phone lines at this time, gentlemen, please continue.

Pascal Bossé

Great. Thank you very much, Valerie. So this concludes today's call, and I want to thank all of our participants. And I wish you all a very good day. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great day.

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