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Executives

Pascal Bossé - Vice-President, Communications and Investor Relations

John D. Williams - President and Chief Executive Officer

Daniel Buron - Senior Vice-President and Chief Financial Officer

Richard L. Thomas - Senior Vice-President, Sales and Marketing

Analysts

Mark Connelly - Sterne, Agee & Leach

Joe Stivaletti - Goldman Sachs

Chip Dillon - Credit Suisse

Michael Rosen - Bank of America/Merrill Lynch

Richard Skidmore - Goldman Sachs

Claudia Shank Hueston - JP Morgan

Christopher Chan - Deutsche Bank

Mark Wilde - Deutsche Bank

Stephen Atkinson - Bank of Montreal

Tarek Hamid - J.P. Morgan

Paul Quinn - RBC capital market

Robert Howard - Prospector Partners

Frank Duplak - Prudential

Domtar Corporation (UFS) Q3 2009 Earnings Call October 30, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen, welcome to the Q3 2009 Domtar Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, today is Friday, October 30, 2009. I would now like to turn the meeting over to Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Marcus and good morning. Welcome to our third quarter 2009 earnings call. The speakers today will be John Williams, President and CEO and Daniel Buron, Chief Financial Officer. John and Daniel will begin their prepared remarks, after which will take questions. During the call references will be made to supporting slides in this time in this presentation in 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 that are subject to number of risks and uncertainties. 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 no further adieu, I'll turn the call over to John.

John D. Williams

Thank you, Pascal and good morning to everyone. Despite of challenging first half in 2009, we've made solid progress in quarter three. Much stronger results compared to quarter two, coming from our better performance in our pulp and our paper businesses. In pulp, we have lower unit costs due to the restart of two of our market pulp mills as well as higher shipments on higher selling prices to paper grade pulps. We also had a solid performance on our core paper business, despite the continued lack-of-order downtime taking the balance of production to customer demand.

Speaking of demand, paper volumes increased slightly from the second quarter, while prices for business papers were flat overall. On commercial printing paper grades, selling prices were modestly lower compared to the second quarter average. The price increases announced at the end of the summer on offset and opaque grades have been successfully implemented. Also we announced price increases on other grades, including some of our converting products that we are in the process of implementing. We expect to benefit from these increases in quarter four and into 2010. Our production within balance with customer demand in the third quarter with inventory levels decreasing across all of our businesses. For paper downtime and machines slowdown amounted to 101,000 tons or about 10% of our quarterly capacity.

And this strategy allowed us to further reduce working capital exposure and generate cash. All this is quite an achievement in the context of the weak economy and the headwinds we faced in the past quarters from depressed pulp markets early in the year; weak paper demand and high to low lumber prices. As we work to improve our operating and performance and focus on debt reduction, our employees are executing well on the three Cs with continued efforts to enhance the value we offer our customers to improve our cost base and generate strong cash flow. Free cash flow was very strong in the quarter at $220 million, allowing us to further reduce our net debt level to approximately $1.6 billion.

The net debt to total cap ratio is now below 40%, standing at 38%. To summarize the third quarter before I turn the floor over to Daniel, for the in depth financial review, our operating and financial performance improved in all of our business this quarter. Losses in pulp have been dramatically reduced, sales volumes in paper improved 5% due to a combination of better demand and slightly higher export volumes. We have lower costs due to better operating performance and our efforts from procurement costs and discretionary spending. And finally, free cash flow was very strong.

With that I'll turn the call over to Daniel, and I'll come back to share our priorities and outlook. Daniel?

Daniel Buron

Thank you, John and good morning everyone. Let's start with the highlights on slide four. Domtar reported today net earnings of $4.24 per share of the third quarter compared to net earnings of $1.12 per share in the second quarter and net earnings of $1 per share in the third quarter of last year.

Our earnings were $1.32 per share in the third quarter compared to a loss of $0.76 per share in the second quarter. Cash flow provided from operating activity amounted $244 million and capital expenditures amounted to $24 million. Therefore, free cash flow amounted $220 million this quarter. Turning to the sequential variation in the earning on slide five; sales were $121 million higher than the second quarter, mostly due to higher volumes in paper and pulp as well as higher pulp prices. Other operating income amounted to $159 million in the quarter, mostly due to the $159 million refundable despite tax credit for the production and use of our alternative bio-fuel earned in the quarter.

Interest expense were $24 million, $11 million higher than last quarter, mostly due to a gain on debt repurchase recorded in the second quarter. Turning to earnings reconciliation, slide six; we reported net earnings of $183 million or $4.24 per share. This includes the following after-tax item; a refundable excise tax credit for the production and use of alternative bio-fuel of $116 million, gain a $12 million on the sale of property plan and equipment and closure and distributing costs of $2 million. Therefore, excluding these items, we add earnings of $57 million or $1.32 per share.

Now let's turn to the cash flow statement on slide seven. Cash flows provided from operating activities amounted to $244 million in the second quarter. The amount drawn on our off balance sheet securitization program was $40 million in the quarter, unchanged from the last quarter.

Our working capital initiatives are paying off, and were a source of funds of $88 million in the quarter. Capital expenditures amounted to $24 million or 24% of D&A. We also repaid $150 million drawn on our $750 million revolving credit facility and repurchased $41 million of unsecured debt during the quarter.

Turning into the sequential waterfall on slide eight; when compared to the second quarter, EBITDA increased due to volume and mix impact of $53 million, favorable chemical fiber and energy cross of $24 million, favorable other costs of $20 million and partly to a lower maintenance and fixed costs, higher prices totaling $12 million and lower chemical and energy usage of $10 million. These factors were partially offset by an unfavorable foreign exchange impact of $8 million including AJ.

Turning to the paper segment review on slide nine. Sales increased by 7% from the second quarter to reach $1.2 billion.

Operating income deployed in was $138 million on the D&A charge of $95 million. EBITDA before items was $233 million compared to $121 million in Q2. The sequential increase in EBITDA was due to higher paper and pulp shipments, higher average selling prices for pulp and lower input costs.

These were mitigated by slightly lower average selling prices for paper and unfavorable foreign exchange rate including hedging. On slide 10, for your benefit we've split the profitability between our paper and pulp businesses. Our paper business recorded a sequential interim in EBITDA of $48 million, mostly due to higher shipments and lower input costs. The $243 million EBITDA represents a margin of 25%.

On the pulp side, the EBITDA loss was reduced significantly by $64 million from the second quarter, thanks to better volumes, higher pulp prices and time. Shipments for both paper and pulp were higher sequentially; 43,000 ton or 5% higher for paper and 53,000 metric tons or 13% higher for pulp.

We continue to pursue our strategy with regard to balancing our production and customer domain by taking 101,000 ton of downtime and slowdown in paper and 38,000 metric tons in pulp.

Inventory levels in both paper and pulp were reduced in the quarter. Paper inventory level declined 57,000 tons, the fourth consecutive quarter of inventory decreases while pulp inventory levels fell 29,000 metric ton. On average, transaction prices for all of our papergrades were $11 per ton lower than the last quarter. Average pulp prices rose significantly during the quarter, increasing sequentially by $59 per metric ton.

Moving to our Merchants group on side 15; sales increased 17% from the second quarter mostly due to higher delivery. The segment and an operating income items of $2 million, unchanged from the second quarter on a D&A charge of $1 million.

The wood business on slide 16; sales increased 28% from the second quarter, while profitability improved by $2 million due to higher average selling prices and higher shipments, this was partially offset by an unfavorable foreign exchange rate, hedging.

A few words on the alternative fuel tax credit before handing the call back to John. We recorded $159 million in the third quarter with regards to excise tax credit related to the production and use of alternative bio fuels at our mills.

We also received cash of $3 million during the quarter. As a reminder, Domtar's stopped claiming fuel tax credit on May 25, 2009. The credit refund after this date and until the end of the program will be claimed on Domtar's annual tax returns.

We accept to receive the fund raised in the second quarter or early in the third quarter of 2010. This decision was made to potentially improve the tax treatment of this credit.

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

John D. Williams

Thank you, Daniel. Market conditions improved in the third quarter and demand in many channels we served was better than the second quarter. And we continued to execute on our strategy to balance our production with customer demands. We explore opportunities to optimize the use of our assets. The recently announced strategic initiative to repurpose the Plymouth, North Carolina mill, converting the form of paper machine number five closed in February, will make the mill world class.

This reconfiguration will also remove 200,000 tons of paper from our system, further balancing our supply with customer demands, while cost effectively increasing our established presence in a growing business. A positive step towards our commitment to environmental chip, the pulp and paper green transformation program, announced by the government of Canada allocated Domtar a Canadian $143 million or investments aimed at improving environmental performance. The investments must be made before the expiration of the program on March 31, 2012, and our subject to the approval of the Government of Canada. We have developed a list of projects that we're currently evaluating, based on their environment benefit and potential pay back and we already started testing some of them with natural resources, Canada, for program approval.

Due to required federal environmental assessments, the projects may well be publicized. However, they will go through the same internal approval process as any other capital projects and they will be announced by Domtar once approved and the contribution agreement is in place.

I believe Domtar is heading in the right direction to deliver quality environmentally sound products, that are low regarded by our customers. Our efforts to reduce costs and the continued support of customer is a key to improving operating performance and generating strong cash flow as we emerge in the recession.

Our EBITDA margins in our core paper segment increase to well over 20%, which includes losses in pulp. Excluding pulp, the EBITDA margin reached 25% of $250 per ton in the third quarter.

SG&A is another area where we're tracking well versus our goals; currently trending below 6% of sales, which is very competitive. Finally, our open site is a sign of whether our business is being run effectively, and we continue to focus on that very closely.

So turning to our fourth quarter outlook; we expect the lower volumes overall, due to the seasonality of our business when compared to the quarter three. Also the stronger Canadian dollar on average will negatively impact our Canadian mills. On costs, we benefited from lower input cost in quarter three with little incremental benefit from raw material that's expected in the coming quarters. The wet weather conditions in the U.S south currently effecting wood fiber availability could have an impact on wood costs and operating performance at some our southern mills.

We will monitor the situation and adjust our downtime strategy accordingly. All set in the fourth quarter, we have more plan maintenance shutdown scheduled at several of our mills and this will negatively affect operating costs. Finally, both our paper and our pulp businesses are expected to benefit from the recently announced price increases. Let me conclude by saying; I'm pleased with the progress we've made in improving operating performance, adjusting to rapidly changing market conditions and strengthening our financial position over the last several months. Equally important is that our execution was and remains, a critical factor as we deliver additional cost savings. As we move forward I'm confident that the actions we've taken over the past couple of quarters and the initiatives underway will put us in the better position to maximize returns and make Domtar our premier investment in the sector.

Thank you for your time and support. And I'll now turn it over to Pascal.

Pascal Bossé

Thank you, John. Before we start we polling for questions, I'd ask our participants to limit themselves to two questions at the time and return to the queue for follow-up since we want to get as many people as possible. So with that, Marcus, we are now ready for the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will now take the first question. Our first question comes from Mark Connelly with Sterne, Agee. Please go ahead.

Mark Connelly - Sterne, Agee & Leach

Thank you. John, two things; first, you have a very helpful chart on inventories chart 13. I wonder if you could characterize those inventories in terms of your own comfort level, because it doesn't save any inventories, it just talks about the changes. So I wonder, across the different pulp businesses and paper, are these inventories where you want them to be? And the second question to your point about repurposing the pulp asset. Do you have a lot of those sort of opportunities that you are studying at this point? I mean, you've obviously -- you have had a lot of changes in the asset portfolio over the last six months and twelve months.

John Williams

Sure. I will answer the first one first.

Mark Connelly - Sterne, Agee & Leach

Sure.

John Williams

On the inventory side, I don't think there's was ever a right answer for us as we see it, we still see there are opportunities to reduce inventory. But of course we have to see that through our ability to also supply our customer and not lose our reputation for good service. But certainly, I still see some opportunities on inventory reduction overtime.

How that is squeezed out overtime I really couldn't forecast, but certainly that's our intent. So we don't see -- if the business starts to recover in volume that we're going to have a bump in inventory, that's absolutely not what we are intending to do.

Mark Connelly - Sterne, Agee & Leach

Okay. That's helpful.

John Williams

And on the repurposing, as we said at the Investor Day, we do have a trail if you like of some of our assets that aren't fully utilized. Now we are looking at any number of options there. Some of them are power related or technology related more than they might be paper or pulp related. So we're looking at everything.

Mark Connelly - Sterne, Agee & Leach

Okay. It's very helpful. Thank you.

Operator

Thank you. The next question comes from Joe Stivaletti with Goldman Sachs. Please go ahead.

Joe Stivaletti - Goldman Sachs

Good morning.

John Williams

Good morning.

Joe Stivaletti - Goldman Sachs

On the tax credits, I was wondering if you could tell us what your receivable was at the end of September; and also if you have any view on the ability to get additional credits in 2010 under some other programs that have been written about lately.

John Williams

Joe, can I just talk to the 2010 pieces, and then I'll have Daniel, talk through the receivables numbers of that. Is it all right?

What we see at the moment, I think we provided yesterday or today, that the Government has said; those products that we use do not look -- will not be in the B-cap (ph) program I believe it is. So we are not planning on any receipts from that type of program within the U.S. in 2010. The Canadian program is more capital driven, so we have to put those projects together, present those projects then to Canada, to the Canadian Government; and then we'll receive our money either as we spend it or just after we spend it.

Does that help you.

Joe Stivaletti - Goldman Sachs

Yes.

John Williams

Okay. Good. And Daniel, if you could talk to the receivables project.

Daniel Buron

Yeah Joe, if you relate to the balance sheet and the information and go to the press release; first, in the balance sheet we've re-class two tax credit related to -- under income tax in the short-term assets to get down because as of September, this accounted 233 million; about 200 is linked to the fuel factor and the rest is other type of taxes. And we also added the cash flow information in appendix, so that you can have also that information there.

Joe Stivaletti - Goldman Sachs

Okay, great. And my second question was about the -- just may be if you could give us sort of bit of an update on market conditions globally in the pulp business and what you're seeing there and what you're hearing about inventory levels in other -- in Asia and other parts of the world.

John Williams

Yeah. Joe, this is anecdotal, so don't take this as science. But we're also hearing from machine manufacturers who are putting in about one major machine a month into China. And none of them have a pulp capacity with them. They are very much just paper machine. So, it would appear that forward demand is going be fairly robust. And certainly, we do see a little bit more inventory in China than whatever normal is, but it doesn't appear to be a major bill. So, we think that this may carry on for perhaps longer than most of the store it was going to. What that is, I would hesitate to define. But certainly, the momentum in that business is still with us in October and looks like it will be for November as well.

Joe Stivaletti - Goldman Sachs

Great. Thank you.

John Williams

Thanks.

Operator

Thank you. The next question comes from Chip Dillon Credit Suisse. Please go ahead.

Chip Dillon - Credit Suisse

Yes, Good morning.

John Williams

Good morning, Chip.

Daniel Buron

Good morning.

Chip Dillon - Credit Suisse

First question is on your ability to produce, your inventories went down the quarter but you mentioned lack order down time that seem to be bigger than the decline in inventory. So, there is no reason that we should believe that the rate of shipments you show in the third quarter could not continue in definitely, correct?

John Williams

You mean, if there is a market shipment shift.

Chip Dillon - Credit Suisse

Yeah like you could be shipping 900 if the market is there, 975 at quarter-end in paper and 450 a quarter in pulp.

John Williams

I'd be a little bit cautious on paper, because we think we've got a bit of buying in on the price increase on some of the paper grades in quarter three. And we sold a little bit more, but not dramatically more into export.

If you look at the running rate on Paul, I think is a reasonable expectation. But I'm not so concern we're going to see that running rates on paper, and also just because of seasonal factors that happened in the industry.

Chip Dillon - Credit Suisse

Right. And of course you are taking some capacity out next year, is that right.

John Williams

Exactly. Yes. But that capacity would come out probably September, October of next year.

Chip Dillon - Credit Suisse

Right. Okay. And then the second question would be, going back to chart 17, if you sort of took the 196 that I think is the receivable that the part that you haven't received and you took the mid point to the fourth quarter, that would give you another say 236 million on top of whatever your free cash flow was in the fourth quarter and so, it's certainly reasonable if you even had zero other free cash flow but your net debt would be down to 1.35 and so all of sudden it looks like I think you could be in that 1 to 1.2 range sometime during next year, which is your target so, I would suppose if that is at all reasonable which I think it is, are you willing to share some thoughts about what you might be thinking about once you gain that flexibility that once you get to that goal

John Williams

Well, just to be honest, I think once we get closer, I'll be willing to share some thought, I think I'm not trying to ... anybody, but I think the really issue as I see it is, the world is still a pretty fragile place. So the potential for unknown events to happen, we still think, who knows, really I think it's still quiet considerable. So our attitude at the moment is to keep working till that end. And when we get closer to it, I think then we'll probably think again and say something. But at this point, we just stay focused on getting to that number.

Chip Dillon - Credit Suisse

Got you. Thank you.

Operator

Thank you, the next question comes from Michael Rosen with Bank of America/Merrill Lynch. Please go ahead.

Michael Rosen - Bank of America/Merrill Lynch

I am Mike, in for George Staphos.

John Williams

Hi Mike. Good morning.

Michael Rosen - Bank of America/Merrill Lynch

Good morning. Two quick questions, how much of input cost helped year-over-year and quarter-to-quarter with respect to three Q. And what are your expectations for input cost over the next several quarters.

John Williams

If I could talk to them, the micro ones,, and I will Daniel talk to some of the other issues. We think the running rate we're now seeing is the running rate -- we're not expecting quarter four to see acquisition cost reduction if you take my point. And therefore we see that working through; a little bit further out there are straws and the winds that I said some of the supplier bases are going to knock on our door to try to get what they may see as some of their money back. But at this moment in time, in the short term, we don't see it stepping down, we see it remaining stable at this kind of level.

Like in terms of the detail of what the benefit of Q2 versus Q3, it's in the slides, so we have the significant benefit -- you may recall that we said in our last call that the end of Q1, beginning Q2 was kind of a ... in terms of input cost for us in the closing -- in wood fiber. So what we've seen that the benefit in Q3. In terms of year-to-year, we'll come back to you with some numbers off line if you don't mind. That's ... but we'll gather information and give it to you.

Michael Rosen - Bank of America/Merrill Lynch

Got you. Just second question is real quicker on tax rate. In the 2Q call I believe you mentioned that for modeling purposes, we should be assuming a tax rate of zero from your Canadian operations and the tax rate of around 37 to 38% from the U.S. operations. How should we think about your tax rate going forward? Is that so prior predict given the improvement in pulp in our business?

John Williams

No I think it still applies. We have ample tax attributes in Canada, so there should be an end, and because of the GAAP, which we have not recorded any tax assets, so we're making in profits in Canada, that profit would be at zero taxing in Canada. For the Zero taxing, 37, 38% In the U.S. So, depending were the interest is coming from, we'll see some volatility in the tax rate. But for modeling purposes, I still believe that something around 40 makes sense, knowing that there will be some volatility in the short-term.

Michael Rosen - Bank of America/Merrill Lynch

Got you. Thank you.

Operator

Thank you. The next question comes from Rick Skidmore with Goldman Sachs. Please go ahead.

Richard Skidmore - Goldman Sachs

Good morning John and Daniel.

John Williams

Good morning.

Richard Skidmore - Goldman Sachs

Can you just may be add a little bit more detail around the improvement in the paper business; specifically you're showing that EBITDA went out 48 million, but prices actually were down 15. So there is sort of a bridge of about 63 million of improvement in the exact pricing. Can you just talk to where that came from in the paper business?

John Williams

Daniel, so I'll let you talk to that one.

Daniel Buron

I think there is easily $10 million that is -- I mean, cost of pulp is transferring to paper in the model we are looking at. So we said that we had in pulp in terms of clinical, fiber usage, it's transferred to the paper business. So the fact that we run our pulp better with lower downtime is benefiting us. And the new just run better and there was less maintenance downtime and less -- in the sense in the mill in the quarters, up to Q3 versus Q2.

Richard Skidmore - Goldman Sachs

So it's primarily just operating better and less maintenance downtime in the papers side?

Daniel Buron

And input costs being lower.

Richard Skidmore - Goldman Sachs

Okay. So the input costs flow through I guess is that what you input cost flows through to the paper.

Daniel Buron

I think (inaudible) and we see the benefit of the pulp is coming from there.

Richard Skidmore - Goldman Sachs

Okay. And then --

John Williams

Don't forget there is already be the benefit of probably $25 million benefit of volume and mix in the paper business.

Richard Skidmore - Goldman Sachs

Okay, great. Thank you.

Operator

Next question comes from Claudia Shank Hueston with JP Morgan. Please go ahead.

Claudia Shank Hueston - JP Morgan

Hi. Thanks very much. Good morning

John Williams

Hi. Good morning, Claudia.

Claudia Shank Hueston - JP Morgan

I was hoping if you could just provide a little bit more color on the maintenance that you are taking in the fourth quarter?

John Williams

We're going to take a little bit more maintenance in the forth. I think we used to get that targets on, I'm going to give the number. I think it's 5 or $8 million more in terms of cost in the fourth quarter than what we spend in the third quarter.

Claudia Shank Hueston - JP Morgan

Okay, perfect. And then just on working capital side, you've done a really good job there, how are you thinking about working capital benefit going forward?

John Williams

Well, I think -- as we said earlier, we still think there is an opportunity on the inventory side. What that is, we haven't really quantified yet and of course a lot of it has to do with what happens with the sales volume. But we are certainly thinking in terms of improving our stock turns. We have done a very good job of reacting to where the sales line finds itself. But dollars-for-dollar, our inventory hasn't reduced that dramatically against the sales volume. So we're still thinking of other opportunities to tighten that up.

We also believe on payables, we've been very aggressive and in fact looking at the payables right through some of our competitors, we now find ourselves looking extremely aggressive. So, whether there are more opportunities, there I think we have to careful with our supplier base and the realities of the supply chain. But we always watch every penny Claudia, so we'll continue that focus. It fits very much into the three Cs, but this is of course its cash sitting in our business that we wanted to have elsewhere. So, we'll do everything we can to squeeze it out.

Claudia Shank Hueston - JP Morgan

Okay. Thank you.

Operator

The next question comes from Christopher Chan with Deutsche Bank. Please go ahead

Christopher Chan - Deutsche Bank

Yeah thanks. Good morning guys.

John Williams

Good morning.

Daniel Buron

Good morning.

Christopher Chan - Deutsche Bank

Hey, I just wanted to ask about first of all, on slide eight, where you give your bridge between 2Q and 3Q. $53 million has listed as volume slash mix. Can you break out for us, what the volume and the mix components were?

John Williams

It's a very good difficult calculation. And there is so many ways that calculation can be done. In fact, the way we do it internally, ... lower than copy (ph) in a quarter, that is shown as a negative mix in the business even if it's the positive event in the business. So we're not really making the distinction or analyzing that type of granular information. So the thing I can share with you is, out of the 53 million, $20 million is linked to the pulp business, and $25 million is linked -- more or less $25 million is linked to the paper business that is coming from wood and merchant business.

Christopher Chan - Deutsche Bank

Yeah. Okay. And ahead to 4Q, you mentioned that in paper, we might see a seasonal decline. Last year volumes declined in 4Q almost a 100,000 tons quarter-over-quarter, I'm wondering if that's an order of magnitude that we should be expecting or whether there was a big cyclical component to what happened last year.

John Williams

I think last year was -- I hope everybody will recall that last year was very special first quarter for everybody. There was a -- I think the entire world come to at the end of October. Let's hope that it won't happen this year again. But we do expect a normal seasonal correction or reduction in Q4, but we don't expect the same type of event that we have witness in Q4 last year.

Christopher Chan - Deutsche Bank

Yeah. Okay, thanks for your help.

Operator

Next question comes from Bill Hawk (ph) with RBC Capital Markets. Please go ahead.

Unidentified Analyst

Hi. Good morning.

John Williams

Good morning.

Daniel Buron

Good morning.

Unidentified Analyst

Just a follow-on to that question; thinking about the fourth quarter, you mentioned you have some incremental maintenance downtime in the quarter, I just wondered if you could give us a little guidance on what amount of downturn we take and bottom pulp and paper.

John Williams

I don't think we actually give you those numbers in advance, because it's really all about what's happening in terms of the marketplace. If demand softens a little bit, we'll take more downtime. We do have this issue in the Southern US on wood supplies. So, obviously that causes us difficulty; we'll take some downtime that we are not currently anticipating. I think Daniel; I gave you the number pretty much on maintenance.

Daniel Buron

Basically more than the last quarter.

John Williams

That's normally the way we would go in the sense of any discussion on that.

Unidentified Analyst

Okay then, thanks. And then one other thing you did mentioned too is, in the paper side, seeing some strength in the quarter in the third quarter around the export market. I'm just wondering if you could just help us a little bit more about how much more you're exploring in a third quarter and whether you see those market opportunities as sustainable at the moment.

John Williams

So, let me have Dick, to talk to you about that, because he'd closer to that than I am.

Richard Thomas

Good morning. It's Dick Thomas. Couple of -- two fact sheets to that. As we've discussed before, kind of in general terms, we've been an active ongoing participant in export markets on cut size for couple of years now. And that volume has been pretty stable in the third quarter and we don't anticipate it changing. The customer base is pretty established and the supply chains are well established, so we really consider that part of our core business.

It does vary a bit, it's the low business. And over the last couple of years, we have shipped more of roll business in the third quarter due to demand, cycles in the areas where we tend to ship, they tend to have busy third quarters. And that was the case here when we shipped about 10,000 more tons of rolls. Interestingly though, we also sold them at a higher net back than our rolls sales in the second quarter. So we didn't just work for volume, we worked for net back as well. So, we tried to balance that mix as well.

Unidentified Analyst

Okay. Thanks. That's helpful. And then just a question on the cash on the balance sheet, obviously the market conditions here have improved in the credit markets; Dan, if you could just talk a little bit about what you're expecting to do with your cash. You expect to start paying down the debt more aggressively there or do you want to continue to sit on the at this point?

Daniel Buron

Well, we'll definitely to continue to carry more question on our balance sheet than we used to look forward the going profession and as affective lead through as again look for year. Its not so return were we spend exactly the in terms of recovery so I think we continue to apply-- isn't there, but we've use our a portion of give in the third quarter to buyback $41 million secure, unsecured until we repay our $450 million of our securities although. So, we have pay down debt in the and we continue to that in the.

Unidentified Analyst

Thanks may be just a quite technical question that 38,000 tons of maintenance downturn in the third quarter. Do, you expect to have that same level of downtime in the fourth or is there something structural that keeps you from running your pulp flat out here in the fourth?

John Williams

That was just maintenance some time there the number that have of course in my was lack of order downtime.

Unidentified Analyst

Okay.

John Williams

Yet we intent to meet you -- manage our pulp so that's we are maximized profitability. A portion of that is linked to the paper that we also restrict if I intent there is a some mills that we've reduced the pulp output to perfectly match the paper output reducing direct EBS, our pulp division.

Unidentified Analyst

Okay. Thank you.

Operator

Next question comes from Mark Wilde with Deutsche Bank. Please go ahead.

Mark Wilde - Deutsche Bank

Congratulations on a good third quarter.

John Williams

Thanks, Mark.

Mark Wilde - Deutsche Bank

John, I wanted to just come back to the market, pulp business, it's still running a little bit of an EBITDA was there in the third quarter. But, if we think about it, the prices in the third quarter probably above what most analysts forecast this kind of trend prices. So, what to be done kind of going forward in the pulp and we have to just as soon that we are going to have some EBITDA losses there on a trend basis, because if you were to close some of those pulp operations, you'd screw up the economics in your integrated mill or are there certain facility, should might want to come back and look at.

John Williams

Yeah, if you ask the sort of portfolio question Mark, and than you ask also the operating question. If I could talk the operating question first, if you look at the running rate now, they are obviously doing better than they did in quarter three in terms of their earnings potential. But prices have moved and continue to move positively.

Mark Wilde - Deutsche Bank

And if any drive them was slow full months and the third output of the deciding cost?

John Williams

Right. So we don't see that bumping along where it's bumping along Mark.

Mark Wilde - Deutsche Bank

Okay.

John Williams

I think the question going forward for is how long can live last and at the moment it looks more positive I think for any of us who are expecting it to -- in terms of Chinese demand. And the other thing we've done, which can be underestimated. Well, I think it's quiet proper, we have migrated our portfolio to selling to different types of customers for example like our tissue customers. We are going to do more of that as we go forward. So I think we'll have a better business. Now whether or not that's a business for us as we look at the portfolio more carefully I think we are going to have to decide.

Mark Wilde - Deutsche Bank

Okay, fair enough. And John, just a one other question; any kind of thoughts on further moves around either the merchanting or the wood products business; you've talked about both of those in past.

John Williams

Yeah, absolutely. I mean, with the wood businesses we've said, we're a seller. That's no change. And if we could find a willing buyer who would pay a sensible price would be a keen seller. On the merchant business I think our thinking is developed there we do see it as a good route to market if you look at the we're getting from that business versus the -- we're getting on our grades from the merchants so, going forward we have to work out how we make that more competitive the reason we've got new leadership is starting in January it's a really work that one through in terms of how that business should serve us better.

Mark Wilde - Deutsche Bank

Good enough. That you.

Operator

Next question comes from Stephen Atkinson with Bank of Montreal. Please go ahead.

Stephen Atkinson - Bank of Montreal

Thank you. And great call by the way, in terms of the green transmission program funds I know it has been approve to anything, but following the long run what Mark was asking and looking at the pulp business, from what I read is about roughly 47 million going for Kamloops projects to -- energy cost and improved environment, can something be done at Dryden and Espanola to -- or should we say, world them more world class.

John Williams

Well, I mean that's the part of the list of projects Stephan. Obviously they are looking at and that will put forward, I don't want to go into the detail what they are in this call, but obviously we're focused on even if it is environmental its power generation based how can we use it to both achieve that and do something about our world class base from use it that and that's the way Mike has got it focused, so its gone stay focused in that fashion what we're not going to do is put gold leaf on our with obviously deluded for us.

Stephen Atkinson - Bank of Montreal

Okay, and so that in terms of Plymouth, where you have I believe $72 million project. Are there going to be any cost; number one. And number two, would there be -- by cost I mean, rent and so on. And then the second question being, can you give me some idea of the timing?

John Williams

Certainly, I think I don't want to pump to number out there. But if would recall the number, I think Daniel it's 10 million of cash.

Daniel Buron

Yeah. $12 million of severance and other costs; that will mostly is expensed in Q3, Q4 next year severance. And we'll see a write-off also in Q4 this year for the paper machine that we are closing, write-off to be around $55, $56 million.

Stephen Atkinson - Bank of Montreal

A question for -- on the delay of the tax treatment of the credits, the alternative fuel credits, are you able to tell me what type of tax, I'd have to say, tax rate we should use on it or could you I just use the ratio that you've presented in this last quarterly.

John Williams

Given the uncertainty, Stephen, we're going to continue to book the tax provision. And I guess we won't know the real answer on the flexibility of that credit until -- our tax returns are going to take time so from the pure financial statement point of view was going to continue to book as if was taxable.

Stephen Atkinson - Bank of Montreal

Okay. And then finally can you tell me, or give me a on your CapEx next year?

John Williams

talked about we think around sort of 40% of depreciation is a good working premise we happen, we haven't got our budget sort it out, yeah that would be a net number because I think the Canadian fuel tax CapEx may well be above that number. But that would be a good working premise, but we could come either side that slightly but we'll see where it takes us.

Stephen Atkinson - Bank of Montreal

And includes premise?

John Williams

Absolutely.

Stephen Atkinson - Bank of Montreal

Okay. Great. Thanks a lot.

Operator

Next question comes from Tarek Hamid with J.P. Morgan. Please go ahead.

Tarek Hamid - J.P. Morgan

Good morning.

John Williams

Good morning.

Tarek Hamid - J.P. Morgan

You talked a little bit about market discipline with conditions, while the better pricing generally trending up, any changes in the behavior in the industry?

John Williams

I mean I would never use the term that you preferred to, one can really look at it from one zone customers and funds zone demand profile, but at the moment in time, I think what we see is there are number of customers out there who actually appreciate the fact that prices are not moving all over the place and like that consistency and pricing so we don't see major volatility coming into the business on pricing. Obviously have started there machine that is the 500,000 tone machine so, you know there is some risk around where that products fines a home. But certainly of this moment of time we see at remaining stable particularly in cut size and of course on some of the other grades we've actually take on the opportunity to move price. So, that's how we see going forward. Hope that answer your question.

Tarek Hamid - J.P. Morgan

A very helpful and, second one with the terms of the your are paying down debt on any cover how much comes the flexibility you have to continue to pay on secured debt versus having to pay down some of your term loans?

John Williams

The only debt that we allow under our banking agreements you are to pay other then the term loan that is part of at the secured bank deals -- 2011 and to be frank here the idea of this long term be in, as any one we've done the deal with -- have that ability to pay down their total will. So most use that flexibility that we've created them for that reason debt.

Tarek Hamid - J.P. Morgan

Understood, thank you very much.

John Williams

Thank you.

Operator

Thank you. The next question comes from Paul Quinn with RBC capital markets. Please go ahead.

Paul Quinn - RBC capital market

Yeah thanks very much. Couple of easy questions, one on non core assets sales just, give us an update on how that program is doing.

John Williams

Yeah certainly we have lists of the assets for sale. Yeah, I mean I want go through the assets for sale - if you don't mind. But, I'll certainly tell you where we are. We have so like think about 12 to $13 million worth at this point. I mean, some of that you see in the gain and the sale in the numbers. And we continue to focus on a number of other project as I said, obviously I am not gone to bad deals to meet a timing but based on the deals we have it to look is at that timing going work was around in the quarter one next year.

Paul Quinn - RBC capital market

Okay, and just a little bit more color on sort of the I guess the financial look your getting give some of these Canadian environmental projects given that a, there is a vast majority the money will be Canadian dollars and it looks like the ROV is pretty high and just everything you can look at.

John Williams

I mean it has the way we're looking at it would have to meet the sort of threshold would be comfortable with but it makes a sensible investment and so in certain cases for example if it's something like an element of a recovery boil where we need the repair, the real return on the investment is the fact that you are still running a mill so, from a ROE standpoint if you just look at it as a single investment in doesn't have a particularly attractive return but of courses it's still generating the income from that mill. So, we're going to be disciplined in that approach.

Paul Quinn - RBC capital market

Alright, thanks very much great quarter guys.

John Williams

Thank you.

Operator

The last question comes from Robert Howard with Prospector Partners. Please go ahead.

Robert Howard - Prospector Partners

Good morning.

John Williams

Good morning.

Robert Howard - Prospector Partners

I just wanted to go back a little bit to a quick thing what -- was talking about with your $1.2 billion target that you guys have discussed, when you are kind of looking at that number the tax credits that you have a receivable on, are year going to count those towards that 1.2 billion or are you going to wait for the government to pay the money.

John Williams

I mean, cash is cash and there is there is still a always not cash so we are going to we may considered the debt being pay down when we going to have as a question or bank account

Robert Howard - Prospector Partners

Okay. And the government the payments from the government would be it is tempered we've like September?

John Williams

I think if things unfold how we expected, it should be late Q2 or early Q3. Obviously, this is net function at this time and let's commit our government will analyze and treat our tax is you look at normal delay. The time that we're planning to follow that's returning good gets its end of Q2 beginning of Q3 2010.

Robert Howard - Prospector Partners

Okay, because its just seem like I guess there is still some uncertainties about that But there is a good chance are going to get it but sort of how you choose -- the balance sheet will look good but a kind of change is when you restart you $1.2 billion number by couple of months. And just one to make sure I no one we should be expressing you to come out with new - or where your going. All right thanks it from me.

John Williams

Thank you.

Operator

Next question comes from Doug Laces with Keith Capital Management (ph). Please go ahead.

Unidentified Analyst

Yes, I have a question regarding your inner wells. I am just curious the taxes that you have, show me your taxes that your occurring for that the I guessed from the year-to-date numbers you had 336 pre tax of alternative - packs credit and yet to, it was the 223 of after tax so that assumes basically 113 million to tax, would if those taxes if you did have to pay those taxes or the net amount was only 223 year-to-date, what would happen to your, where are your currently and when would you expect to actually pay cash taxes in the United States would that be in 2010 events and can you just talk about are ability to shield to actually not pay cash taxes in the near-term?

John Williams

We've -- a year with around $420 million of -- as a label in the U.S. so that's the extent of the shield that we have, and descending on the tax treatment the final tax treatment of the shield -- price with consume if -- we're going to consume a significant portion of those on the well in 2009. Therefore, there would be less at the level for 2010 and in the future. This is not flexible we are gone use a small portion in 2009 and we have available for the future.

Unidentified Analyst

And the tax rate on the pre tax I mean what is the depreciation based of your tax of you, I mean the assets you have in the United States. I assume that depreciation of was fact for tax and book purposes is that correct.

John Williams

That, that's absolutely you right, the way U.S. tax law working you using a double and all you using a double-digit lining in the third quarter for appreciating fact as there and transfer 6-7 years end of with a very tax basis for assets. if you reinvested the renergy we haven't spend a lot on CapEx for last several years to our tax is therefore a lot in the U.S.

Unidentified Analyst

Okay. And then the 159 of assets sales with those cash generating that is that you're accountably we those cash generating assets from the quarter?

John Williams

Sorry

Unidentified Analyst

With the EBITDA generating assets in the quarter its

John Williams

No

Unidentified Analyst

Okay, thank you.

Operator

Thank you Next question comes from Frank Duplak with Prudential. Please go ahead.

Frank Duplak - Prudential

My question has been answered. Thank you.

John Williams

Okay, thank you.

Daniel Buron

Thank you, Frank.

Operator

There are no further questions please continue sir.

Pascal Bossé

Great. Thank you Marcus. I would like thank all of our participants and I guess we'll see you back in early February for our fourth quarter results. Thank you all a very good day.

Operator

Ladies and gentlemen this thus concludes conference call for today we thank you for your participation. You may now disconnect your lines and have a great rest of the day.

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