Domtar Corp (USA) (UFS) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Domtar Corporation (UFS)

Domtar Corp (NYSE:USA) (NYSE:UFS)

Q2 2013 Earnings Call

July 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

Analysts

Mark W. Connelly - CLSA Limited, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

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

Sean Steuart - TD Securities Equity Research

Stephen Atkinson - BMO Capital Markets Canada

Albert T. Kabili - Macquarie Research

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

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation's Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is July 25, 2013. I would now like to turn the meeting over to Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Samantha. And good morning, everyone, and welcome to our second quarter 2013 earnings call. Our speakers for the day will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. So 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, many of which are outside of our control. I invite you to review Domtar's filings to 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 Mr. John Williams.

John D. Williams

Thank you, Pascal. This morning, we reported second quarter EBITDA before items of $135 million on sales of $1.3 billion, consistent with our business update that we issued on July 12. Our results in the Pulp and Paper business fell meaningfully short of our expectations in a quarter that had the busiest maintenance on record, with 10 out of our 12 pulp mills taking shutdowns.

We didn't operate up to our usual standards, particularly around the start-up phase following the planned outages at several of our facilities, resulting in lower pulp productivity. Nonetheless, we made very good progress on addressing and fixing the production issues towards quarter end. Our pulp mills were back to the normal operating levels, and we are confident that the issues are behind us. Temporary operational issues aside, the fundamentals of this business are strong, and we look forward to a much better second half in pulp profitability.

In paper, our operations improved with higher paper production quarter-over-quarter. In fact, some of our mills exceeded planned production, and, overall, we're able to build some much needed inventory.

In Personal Care, higher raw material costs had a slightly negative impact on our earnings, but we performed according to plan and continue to build out the segment with the acquisition of Associated Hygienic Products. I'm pleased with the progress we're making on integrating the new business, and we're also on track with our Attends growth plans, which we expect to bear fruit early in 2014.

Free cash flow in the quarter, even after a $49 million litigation settlement, was $58 million. And we continue to aggressively execute on the share repurchase program, buying back over $100 million worth of our equity in the quarter.

To summarize, productivity in the second quarter was clearly not to our normalized levels in pulp, but we're very focused on improving results and continuing to execute on our growth strategies. With these brief remarks, I'll turn the call over to Daniel for the financial review, and I'll come back with 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 a net loss of $1.38 per share for the second quarter compared to net earnings of $1.29 per share for the first quarter of 2013. Adjusting for items, our earnings were $0.48 per share in the second quarter compared to earnings of $0.95 per share for the first quarter. EBITDA before items amounted to $135 million compared to $170 million in the first quarter. Free cash flow totaled $58 million compared to $7 million in the first quarter.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $33 million, lower than the first quarter, primarily driven by lower pulp and paper shipments and partially offset by higher pulp prices. SG&A was $95 million, $4 million higher than the first quarter, partially due to higher sales and marketing activities and some additional costs related to the integration of the Xerox paper business.

During the quarter, we recorded a charge of $5 million related to the impairment of fixed assets of Ariva U.S. operations. The $18 million you see under the closure and restructuring charges is the combination of the following elements. First, we incurred a noncash charge of $13 million related to the windup of 2 pension plans linked to previously announced closures. Additionally, we've decided to withdraw from one multiemployer pension plan and recorded a charge of $3 million. And finally, the remaining $2 million is due to the organization costs related to the integration of businesses in our Personal Care group.

We also incurred a $49 million charge related to the George Weston litigation settlement, which was reported in an 8-K filed on June 27. A large portion of this settlement payment is non-tax deductible, explaining the low tax benefit and low tax rate recorded in the quarter.

And now turning to the cash flow statement on Slide 6. Cash flows provided for operating activities amounted to $120 million in the quarter. Capital expenditures amounted to $62 million. This resulted in free cash flow of $58 million. In the second quarter, we returned a total of $115 million to the shareholders through a combination of dividends and stock buyback. Under our program -- on our stock repurchase program, we repurchased in the quarter nearly 1.4 million share of common stock for a total consideration of $100 million. Since the inception of the program, we've repurchased approximately 10.6 million shares of common stock. At the end of the quarter, we had $158 million left under our program, and 32.9 million shares, including exchangeable shares, were outstanding. Over the last 12 months, we returned to our shareholders a total of $294 million or slightly more than 100% of free cash flow.

Turning to the quarterly waterfall on Slide 7. When compared to the first quarter, EBITDA decreased by $35 million due to $24 million of planned maintenance costs, $9 million of lower volume, $5 million of higher freight costs, $4 million of lower productivity and $4 million higher SG&A costs. These were partially offset by $8 million of higher selling prices and $3 million due to favorable foreign exchange rates.

Now Slide 8. In the Pulp and Paper segment, sales were down 2% when compared to the first quarter and down by 3% when compared to last year. Operating income before items was $34 million on a depreciation and amortization charge of $87 million. EBITDA before item was $121 million compared to $153 million in the first quarter.

Now our Paper business on Slide 9. We had an estimated decrease in EBITDA before items of $3 million. Paper shipments were sequentially lower by 27,000 ton and down 18,000 ton when compare to the same period last year. Our average transaction prices for all of our paper grades were essentially flat compared to the first quarter.

Our Pulp business on Slide 10. EBITDA before items decreased by an estimated $29 million when compared to the first quarter. Pulp shipments were sequentially lower by 8%, and average pulp prices increased by $27 per metric ton. Planned maintenance and related downtime reduced our dry pulp production by approximately 21,000 metric tons. Start-up and other issues at some mills, coupled with the impact of a closure -- the closure of a line in our Kamloops mill further reduced our pulp productivity. The total output reduction has a negative impact on our earnings of approximately $10 million in the quarter. Paper inventory increased by 37,000 tons while pulp inventory decreased by 26,000 metric tons.

In Personal Care, EBITDA before items increased -- decreased by $1 million when compared to the first quarter, mostly due to higher run at the old costs, in particular, the cost of nonwoven materials.

As usual, you will find on Slide 12 our forecasted maintenance for the next 2 quarters. You'll note that we expect to spend $17 million less in the third quarter when compared to the second.

Finally, Monday, we announced an agreement to sell our Ariva U.S. operation. Upon closure, this transaction will trigger a loss on disposal of approximately $18 million mostly related to meet the employer pension plan withdrawals and temporary healthcare benefit to our employees.

So this concludes the financial review. And with that, I will turn the call back to John.

John D. Williams

Thank you, Daniel. While paper demand has been on the weaker side of the overall trend this year, our prices in quarter 2 were stable when compared to the first quarter. In pulp, prices continued their upward momentum while global inventories remained at balanced levels. On the strategic front, we continued to expand our growing Personal Care segment through the acquisition of Associated Hygienic Products. The market penetration for store-brand infant diapers is growing in North America where they represent a strong value proposition.

The acquisition of AHP will provide meaningful geographic expansion opportunities, stronger access to the retail market for our adult incontinence products, as well as synergies to the bottom line. This is our fourth transaction in Personal Care in 2 years, and with it, this division will reach over $200 million in annualized EBITDA by 2017.

Earlier this week, we also announced an agreement to sell our Ariva operations in the U.S. to privately held Lindenmeyr Munroe. We are pleased that we reached an agreement with this long-term customer of Domtar, and we'll continue to integrate our volume through their sales channel going forward. Ariva operations in Canada will be integrated into our Pulp and Paper segment, and we'll report in to Dick Thomas. The transaction is expected to close by the end of July.

On capital allocation, we announced the 22% dividend increase at our annual general meeting in May. And the board's decision to increase the dividend recognizes the continued progress we're making on our strategic roadmap. Our commitment is to return the majority of free cash flow to shareholders as we execute on our strategic objectives of bringing growth and stability to our earnings and creating shareholder value. We were also very active with our share repurchases, buying back 1.37 million shares of common stock, and we will keep executing on that initiative.

In closing, 4 weeks into the quarter, we can say that the operational issues are behind us. We're running well after a couple of inconsistent months. Pulp productivity is much improved, and we have our mix of paper inventory back to where we'd like it to be without any impact on our service to our customers. We continue to scan the horizon for value-creating M&A opportunities as we target $300 million to $500 million in annualized EBITDA from growing businesses over the next 4 years.

Turning to our outlook, we're looking at a stronger third quarter. Earnings from pulp are expected to benefit from lower planned maintenance costs, higher productivity and higher sales volumes. In paper, we can reaffirm our forecast of the market demand decline of 2% to 4%, with volumes likely trending close to 4% for the remainder of the year. Earnings in paper is expected to benefit from higher productivity, but we stay vigilant on balancing our production with our customer demand, and we continue to size the business appropriately. The completion of the AHP acquisition on July 1 will be accretive to the Personal Care segment's earnings in the third quarter.

Finally, input costs are expected to stay relatively stable for the second half of 2013, with some relief on freight costs. We're looking forward to step up in earnings in the third quarter, and we remain committed to our Perform, Grow and Break Out strategy, notably, the Perform piece after a few difficult operating quarters.

Thank you for your time and support, and I'll hand it over to Pascal. Pascal?

Pascal Bossé

Great. Thank you, John. So, Samantha, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Mark Connelly from CLSA.

Mark W. Connelly - CLSA Limited, Research Division

2 things, John. It's pretty unusual for white paper pricing to follow import price pressure, and yet over the last couple of quarters, that is what we seem to have been seeing. Can you give us just a little bit more color of what you're seeing going on in the market? I mean, stability in your prices is good, but we're still seeing weakness in the general market. And I'm curious, we're just not getting a very clear read of why that's happening and whether imports are driving the price as they appear to be.

John D. Williams

I don't think I would agree with you they're driving the price, Mark. I mean, they have increased slightly but I don't think enough to really dramatically affect pricing overall. As we've discussed before, I think, on these calls, they're inclined to find their place, particularly in some of the bit business here and there. So we don't see that that's a massive creator of price pressure, quite frankly.

Mark W. Connelly - CLSA Limited, Research Division

So what is the driver then? I mean, for 3 quarters, we've seen weakness.

John D. Williams

Well, I mean, I think the overall volume pressure in the marketplace creates some issues on pricing. I think the customer wants to feel they're buying competitively. If they feel they don't, they're going to ask us for adjustments. So -- but I think overall, you see reasonable price stability, quite frankly, at the minute.

Mark W. Connelly - CLSA Limited, Research Division

Okay, fair enough. Now the Ariva decision, presumably, given your comments, there's a pretty good supply agreement with that. How long does that supply agreement last?

John D. Williams

It'd last for a number of years, but to be honest, it's a pretty standard supply agreement. So my view is we've always been competitive selling to Ariva when we have to be competitive selling to the people who purchased the business. So we're going to keep maintaining that business and maintaining competitiveness.

Operator

And our next question comes in from Chip Dillon from Vertical Research Partners.

Chip A. Dillon - Vertical Research Partners, LLC

John, Daniel, I know of couple of years ago, you guys had -- I think had expressed the view, at least on the dividend, of kind of walking it up, and a $3 number was thrown out. And you certainly have been moving in that direction. And as you just sort of think about what you were saying maybe back in 2011, returning asset to free cash flow through dividend buybacks, which you've been doing, do you see the dividend is being still tilted more upwards in that direction if conditions warrant like in the next year or so? Or should we see it not move up as fast and instead see more of an emphasis on the buyback?

John D. Williams

Well, I think what we've said, Chip, is that essentially, you -- the dividend will sort of move into the median of the peers in the area, but we don't expect to go roaring past that. So every year, we sit and think about calibrating it, and you see what we've done recently. So I think -- I still think that sort of remains our focus over time. And on the buyback, we've got a ways to go yet before we think about what we do next. So -- but we continue to calibrate it, so I couldn't really if we're headed in one direction or the other. It's really a balance, and it's a balance of where we see the sort of M&A pipeline going forward as well, as we said to you before.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And speaking of M&A, I mean, you mentioned the target by 2017, are you pretty much -- obviously, you're focused on the path there, which I think [indiscernible] more incremental acquisitions. But if something larger that would get you there faster emerges, is that something that you would -- if the risk or work made sense that you would you do? Or instead, do you sense -- do you feel you would rather keep the acquisitions more bite-size?

John D. Williams

Well, I think we've said before, if we saw something compelling that was considerably bigger and we felt it would work, we would do it. Patently, we're not going to take on a ton of leverage to do it, but if we feel that was reasonable, we would. But certainly, when you look down the pike of what's available, I think there's the string of pearls piece and then maybe along the way, something slightly larger. And if we saw that, we would -- and we -- again, we felt it was good value, we would do it.

Chip A. Dillon - Vertical Research Partners, LLC

And then last quick question. When you look at the -- beyond current appreciating business, it's interesting. Over the last year, you've seen prices, at least reported by the trade association, edge down while pulp prices have gone up. And of course, most of the North American industry is backward-integrated, but there still are a number of smaller players out there that really aren't. And based, I guess, on your experience with your mills, do you sense that some of these competitors -- do you kind of wonder how they are making money or surviving given the pulp is up and paper prices appear to be down.

John D. Williams

I think the short answer is yes. But I mean, that's really their business in terms of how they choose to manage their business and what kind of earnings they're expecting from this marketplace. But I would imagine non-integrated players definitely are going to be under more pressure than they have been.

Operator

And our next question comes in from Phil Gresh from JPMorgan.

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

First question on the Personal Care side. The growth in the quarter of 1% year-over-year, and I think it did still have some acquisition contribution there a little bit year-over-year. So I'm just wondering kind of what you're seeing from a growth perspective. I think typically, you see this as kind of a more mid-single-digit growth business longer term.

John D. Williams

We had 2 particular customer issues, Phil, where we came out of a big contract in Scotland with the National Health Service that was actually at negative margins. And in addition, we have one customer in the United States who, couple of years ago now, started self-manufacturing one of the big distributors and has exited or largely exited. Again, lower -- our lowest-margin customer. If you extract that from the U.S. numbers, it's growing at about 7% a year, so our mix has improved pretty dramatically, and the rest of Europe is growing. So those are, in a way, 2 events, but underlying, the growth is where we expected it to be.

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

So were those events in this quarter, and we just kind of layer through over the next year?

John D. Williams

I mean, on the U.S. customer, it was very much this quarter. And on the NHS, it sort of wound out end of last quarter, beginning of this.

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

Got it, okay. Second question, kind of aligned to what Chip was asking around buybacks. You obviously were very aggressive here in the second quarter and kind of approaching the higher end of your free cash flow relative to typical. Would you say that if you look at the stock price today, I'm assuming you view it as kind of well below what normalized valuation would be. Would you get more aggressive here and use that -- use your balance sheet a little bit timing-wise if you look -- kind of look at it over a 2-, 3-year basis relative to how you think about the value of the company?

John D. Williams

Yes. I mean, patently, we think the business represents very strong value right now, so that's why we bought the buyback. If it sort of remains there, I think we'll still be aggressive on buyback as we work our way through to complete the buyback we promised, Phil.

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

Okay. And then just on the operational side of things, and I guess my question here is that there's been a couple of quarters of challenges. There are different pieces of the business, obviously, understand the complexity of some of these things. I guess I'm just wondering how you think about kind of managing these types of processes bigger picture moving forward. Do you feel like it's just -- it is what it is because it's challenging? Or do you feel like maybe there's some process improvements across the organization that could help things be a bit more streamlined? How do you think about that, John?

John D. Williams

I think that's a very good question. My personal view is I think we could do more in terms of reliability and continuous improvement. So in fact, what we've done, since Mike Edwards retired, I've taken the 2 senior players of the manufacturing side as direct reports, Jack Bray and Mark Dan Loreal [ph], who are both terrific individuals. And the 3 of us, actually, our major focus is reliability and also continuous improvement, to put more process in across the mill system than we perhaps had before. So my view is yes, it's complicated, but the excuse that my dog ate my homework simply isn't good enough. So we have to make absolutely certain we get reliability, process, improvement. What really cost us this time was actually not the maintenance money we spent while we were down -- we pretty much hit that number actually -- but the start-up. So we've gone into 10 shutdowns, and, really, most of those start-ups, we came out poorly. So it took us 2 days, 3 days, 4 days to really get the output we wanted, and of course, that loses us overhead recovery. So that's one of the areas, I think, where we have to drive continuous improvement and reliability, and we're taking some steps to make sure that we drive that going forward.

Operator

And our next question comes in from Sean Steuart from TD Securities.

Sean Steuart - TD Securities Equity Research

Couple questions, I guess, for Daniel. Just trying to reconcile the Pulp and Paper unit cost inflation. And you'd cited $24 million in sequential pressure on EBITDA from the maintenance program, which was, I think, pretty consistent with the guidance you gave after the last call. And I guess, what I'm wondering is, the issues you had related to start-ups after this extensive downtime you took, where does that show up really in how you're looking at the waterfall chart, I guess?

Daniel Buron

I think, Sean, the -- if you look at maintenance, $20 million out of the $24 million maintenance is actually in -- assigned to market pulp mills or market pulp tonnage. I bet resulted there is $4 million is actually assigned to the Paper business. As for the productivity, I would say it's probably 60% to -- obviously, this is -- we're giving kind of a ballpark figure because we don't have a true segment for Pulp and Paper. So it's about 60% is Pulp and 40% is actually assigned to the Paper business. So in other words, we had more issue in our market pulp mills than in integrated mills.

Sean Steuart - TD Securities Equity Research

Got it. And the issues you had with respect to, I guess, the Marlboro conversion last quarter and grade-shifting across your paper mill portfolio, I think there was an indication last call that some of that would have carried into this quarter. Can you quantify that?

Daniel Buron

I think we've mentioned that the -- we've estimated the cost of build issue in Q1 to close to $9 million. We're back $6 million of the $9 million in the second quarter, so there's still $3 million positive improvement that we should see in the third quarter.

Sean Steuart - TD Securities Equity Research

Okay. And the last question I had is just some pulp markets in general. I'm wondering if you can differentiate what you're seeing right now in NBSK markets versus fluff and, I guess, relative momentum differences you're seeing between those 2 grades.

Daniel Buron

We're seeing more positive momentum in the NBSK. Actually, if you look at the pricing, a big portion of the increase we've seen on average this quarter is coming from NBSK and the HK. Even if we don't have a large portion, 15% of our shipment, I think, this quarter were on the hardwood side. At fluff, we see good demand but stable pricing.

Sean Steuart - TD Securities Equity Research

And as you look at it to Q3, Daniel, I mean, it feels like there's cracks certainly in NBSK, prices are off in China?

Daniel Buron

Yes. It's always tough to -- we all know that pulp is probably the more difficult commodity to forecast. But I think stable pricing this is what we had at the end of the quarter is probably a good bet as we speak right now. You're right that on the -- for us, I mean, HK, again, is not a big portion. So HK is a little bit down. Softwood should be on average a little bit up. So I mean, for us, we view a small positive in the third quarter in terms of pulp pricing.

Operator

And our next question comes from Stephen Atkinson from BMO.

Stephen Atkinson - BMO Capital Markets Canada

In terms of the share buyback, how much money is left, meaning authorized?

Daniel Buron

$158 million.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And if I'm reading your maintenance table, right, on Page 12, then basically, you're saying that there's a $17 million drop in maintenance?

John D. Williams

That's correct, Stephen. Total liquidity, yes.

Stephen Atkinson - BMO Capital Markets Canada

But I assume then it would be mainly in paper if you've done maintenance in most of the pulp mills?

John D. Williams

Can it be -- lower in maintenance and a little bit higher in paper in the third quarter.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And I don't know if I can ask you this one, John, but -- meaning, I know you can, but I don't know when you're able to. I'm trying to get the question right. The plan to get the $200 million in tissue, I should say, on Personal Care, are you able to give us some color on that?

John D. Williams

Yes, absolutely. I mean, you can tell the run rate of the businesses we've purchased. We are investing in those businesses, I think, as we've said before, Stephen. So if you look at the plan and then you look at AHP on top of that plan, we have line of sight from here to there. So it's not a hope. It's a plan. And the capital is going in, and the sales effort is going in to realize that plan.

Stephen Atkinson - BMO Capital Markets Canada

So where it is -- obviously, plan on the -- well, maybe it's too early to talk about AHP. But obviously, there's a plan then for growth in that business, too.

John D. Williams

Yes. So the thinking in AHP has been that we believe there's about $10 million of internal synergies that we can generate from purchasing and SG&A. We think we can get probably half of that in the first year run rate of ownership. And then what we're assessing is as we now have, in a way, a national factory network, with Waco and Columbus, Ohio, or Delaware, Ohio, to be precise. Can we put our AI business into that and get both the freight saving and then more market penetration, the geography through retail. So that's the work we're doing right now: to give, if you like, upside to that plan.

Stephen Atkinson - BMO Capital Markets Canada

Yes, so longer term them, the synergies could be a lot more than timing?

John D. Williams

That, obviously, would be our plan. But I mean, it may be mid rather than long, Stephen.

Stephen Atkinson - BMO Capital Markets Canada

Okay, okay. And I may have missed it, but the $18 million withdrawal cost from distribution, is -- that's noncash; is that correct?

John D. Williams

$18 million or $80 million?

Stephen Atkinson - BMO Capital Markets Canada

I thought it's $18 million, 1-8.

John D. Williams

$18 million. Yes, that's right. Sorry, I thought I misheard you.

Daniel Buron

$7 million of that, Stephen, is noncash but will be cash in the next 20 years. $7 million of that is actually healthcare benefits, so it's going to be cash within the next 18 months.

Stephen Atkinson - BMO Capital Markets Canada

Oh, okay. Okay. And finally, obviously, you're doing cost reduction as we go along such as the -- well, should we say restructuring it. Kamloops, any -- the cost reduction projects you have going?

John D. Williams

Well, I mean, I think until we declare them -- I mean, obviously, we're always looking, Stephen, at, how can we reduce costs? How can we refine the network? So I mean, that work is always ongoing, and as that work comes to pass, we'd obviously announce accordingly.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And how much was involved at Kamloops?

John D. Williams

What do you mean how much...

Daniel Buron

You mean CapEx, I assume?

Stephen Atkinson - BMO Capital Markets Canada

Yes, the shutdown and everything.

Daniel Buron

If you recall, Kamloops was actually, a 2-line with 2-boiler pulp mill. In Q4, we shut -- after a maintenance shut, actually, we never restarted one boiler. And we announced in Q1 that we would actually totally close, permanently close that boiler plus 1 of the pulp line. So the plan was to get back to normal productivity, so back to the productivity before all that happened by the end of the third quarter this year. So we're in good shape to get there. And the longer-term plan was to actually become more focused in the mill, and a better product mix was actually to increase profitability in Kamloops long term. So we're all in line with delivering all that.

Stephen Atkinson - BMO Capital Markets Canada

Oh, but there has been any announcement, I guess, that's the point?

Daniel Buron

Yes, the announcement was done in Q1, booked in Q1. So the only thing -- the only impact we have this quarter is actually that -- the actual stop-shop took place this quarter, so we've lost a little bit of positivity. Obviously, there's people leaving. There's bumping. So you have kind of that type of issues when you close a portion of a mill, and that's a couple of million impacting the current quarter as expected. That should get back to us in the third and fourth quarter this year.

Stephen Atkinson - BMO Capital Markets Canada

Okay. So I guess -- I was thinking that there would be quite a bit of savings with Kamloops down the road -- well, starting in the fourth quarter, the -- when it, should we say, achieves optimum?

Daniel Buron

Savings, obviously, you let go people, but you also have less pulp that you're going to sell. We have 100,000 and 120,000 tons of pulp that was profitable. So the goal of the mill was to -- again, by the end of Q3, to get back to prior profitability and from there, try to optimize and be more profitable. So there's -- actually on the net OP level, it should be a wash by the end of the third quarter, and we should start to see some benefit as we increase productivity.

Operator

And our next question comes in from Al Kabili from Macquarie.

Albert T. Kabili - Macquarie Research

John, just wanted to circle back on the Personal Care business and the ramp to getting the $200 million EBITDA. How does that -- how do you -- and I see this -- you saw a line of sight to that. And I was wondering how you see that ramping over the next 3 years, is that linearly? Or is it sort of weighted more to the later years? How does that kind of ramp up over time?

John D. Williams

That's a good question, Al. I mean, obviously, we need the machinery in order to be able to supply it because at the minute, we're pretty much full. So we said to you, I think, before, sort of first half 2014, we should see a bit of a step change versus where we are today, and then it sort of ramps up from there as we fill that machine base and more machines come in. So it's not linear. So when I look at this quarter and I look at maybe quarter 3, quarter 4, I'm not expecting a jump, but I'm certainly expecting a step change in the first half of 2014. And then I think from thereon in, we're going to see that rolling forward to those kind of levels.

Albert T. Kabili - Macquarie Research

Okay. And any sense for the size of the step change we're looking for?

John D. Williams

I think not, but it -- if you think about the businesses we bought and you add the kind of run rate number on which we bought them and you think about doubling that number by sort of 2017 full run rate, come '14 onwards, it's not quite linear. There'll be some lumps along the way because that's the way life is. But that's a reasonable way to look at it in my view, if that helps you, Al?

Albert T. Kabili - Macquarie Research

Yes. No. When we had a [indiscernible], I just wanted to make sure we're calibrated right because I would say, I guess -- and the reason I'm asking it as well is I know you mentioned like the EBITDA this quarter was according to your plan. Now it looks flat year-on-year, and I know you mentioned some business changes on some low-margin items. But you were still kind of growing mid, high single digits outside of that. So is there anything that's happening that's offsetting that growth?

Daniel Buron

A little bit of raw material increase. And we've built the -- a global group to be able to absorb new acquisitions. So we're -- actually build up a central group that is probably adding -- if you look at a full year, probably adding $5 million or $6 million per year more than $10 million last year. So I think if you peel the onion, the businesses' EBITDA is actually growing, but we're set for acquisition. And by the way, the $10 million synergy that we were claiming with the AHP acquisition is in part due to our ability to integrate and consolidate businesses.

John D. Williams

Does that help, Al? I mean, essentially, what we've done, we've built a global team based in Raleigh-Durham, which is capable of rolling in these acquisitions and getting the synergies out. We built that, if you like, ahead of the process of some of the M&A, which has meant we got a bit more cost in that business in the short term. The good news is that as we roll more businesses in there and we see the synergy opportunity, we have a way of getting them as opposed to kind of running a sort of diaspora of small independent businesses where we don't leverage any of the benefit. The negative to that has been that we have to put cost into that business earlier. And if you think about the projects we're doing -- we've got CapEx going in, we've got customer acquisition at work. I mean, we need that team. In addition -- sorry to give you such a long answer. But in addition, on the sort of research and development side, we built a small, very effective, very professional R&D group because this is a business that's driven by innovation and, actually, interestingly, IP protection. So we've done work there to make sure that's appropriate.

Albert T. Kabili - Macquarie Research

Okay. Yes, that does help. I really appreciate all that color, John. And I assume then that also, you're -- you'll see most of that investment in that infrastructure and organization. Is that largely now done at this point? Or is there still more to go as you look at it?

John D. Williams

Al, that's such a very good question. It's largely done. We -- it has also allowed us to make some management changes within the operating businesses to make sure that we've got people who understand what it's like to work for a larger business and how to use a network. And I'm obsessed by the fact that it doesn't become a bureaucratic monster. So we're making certain that it's appropriate for the size of the business.

Albert T. Kabili - Macquarie Research

Okay, great. I appreciate that. And final, just housekeeping question for Daniel. On the corporate costs, are there any -- how should we be thinking about how much of corporate costs would have been allocated to Ariva that stays with you even though you're selling the business? Is that a meaningful number? Or is there not much impact there?

Daniel Buron

Most of the costs that were assigned to Ariva, U.S. should disappear. They were a very limited allocation to that business because, actually, they were requiring very, very few services. So it should not have an impact overall. It's going to disappear, so whatever you see disappearing from the Ariva segment will disappear from our costs.

Operator

[Operator Instructions] And our next question comes in from Paul Quinn from RBC Capital Markets.

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

Just a couple of questions on Personal Care. If you could remind us of the CapEx growth plans you've got in store over the next little while to be able to get that step change in H1 '14.

John D. Williams

Yes. I don't think we've declared that number, Paul. And to be frank, for competitive reasons, I'd rather not declare it. But it -- if you take sort of the underlying capital you see in the core business and what's the difference -- I mean, the difference is largely Personal Care, and as we kind of deliver those segment numbers, you'll see that CapEx. So it will be visible. But certainly, we're buying a number of machines, both in the -- for the U.S. business and for the European business. In Europe, we built a new warehouse in our Aneby facility, which is not up and running yet, but everything is on time. So really, by early '14, end of first quarter, end of second quarter, that machine park will largely be in place. And that is the moment when going you're going to start to see that volume ramp and that earnings ramp.

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

Okay. And then if I just add in AHP and sort of take a run rate on sort of just north of $100 million in EBITDA, and it'll -- it looks like you've got a plan to grow that or double that over the next number of years. To be able to hit your $300 million to $500 million obviously requires more acquisitions. Could you -- I don't need specifics on the acquisitions. I just wonder what that pipeline is looking like, whether there's been any change in the number of businesses you're looking at.

John D. Williams

Yes, sure. No. I'm happy to give you a bit of color. So certainly, there are still businesses that are available, and there are -- and really, in a way that -- there are 2 categories, if you like. There are businesses that are in private equity -- we have actually 3 categories, to be precise. There are that are in private equity hands. There are privately owned businesses, as in AHP, which is, obviously, owned by Brandon Wang, an Asian entrepreneur. And there are divisions of -- and brands of multinationals where they're wondering, do they really want to be in certain parts of the Personal Care category? If I put all of that together, certainly, I see a runway that is -- that can get us there by the time that we consider that we should get there. Now if, for whatever reason, things change, obviously, then we'll say different things. But at the moment, the runway looks pretty good. Does that help?

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

Yes. And just last question on Personal Care. You mentioned costs being up mostly on the nonmoving side. What is the mechanism or pushback on those costs that keep your margins high? Is there a price increase? How does that work through...

John D. Williams

Well, I mean, some of them are indexed on various indices, and where you have branding, you can get some back. I have to say historically, there's typically been a lag between increase on raw material side and, actually the price mechanism moving through to the customer. So it can take 9 months sometimes to get it back. And obviously, if you're in the private label business, normally, a lot of these contracts don't have a mechanism like that in unless it's very dramatic. So in private label, very often you have a selling price, and then whatever happens behind that happens. So I think one of the issues for us here now is because we're a much bigger buyer and we're vertically integrated in some ways, we're in a better position perhaps than we were historically. Does that help?

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

Yes.

Operator

And there are no further questions at this time. Please continue.

Pascal Bossé

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

Operator

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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