Domtar Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: Domtar Corporation (UFS)

Domtar (NYSE:UFS)

Q3 2013 Earnings Call

October 24, 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

George L. Staphos - BofA Merrill Lynch, Research Division

Alex Ovshey - Goldman Sachs Group Inc., Research Division

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

James Armstrong - Vertical Research Partners, LLC

Mark W. Connelly - CLSA Limited, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Benoit Laprade - Scotiabank Global Banking and Markets, Research Division

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Stephen Atkinson - BMO Capital Markets Canada

Sean Steuart - TD Securities Equity Research

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

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is October 24. I would now like to turn the meeting over to Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Naomi. Good morning. Welcome to our third 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 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 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 third quarter earnings before items of $1.25 per share and EBITDA before items of $163 million. Our improved results compared to the second quarter came from better profitability in pulp and paper and continued growth in Personal Care earnings. Specifically in pulp, we had a lower level of maintenance downtime, resulting in better productivity and lower unit costs. We also benefited from higher shipments and higher average selling prices, and we are witnessing continued momentum in global softwood pulp markets.

In paper, we had slightly lower pricing, but a better mix. This resulted from the incremental Xerox volume and fact that export volume was down from quarter 2. We announced price increases covering a number of paper grades. And finally, we closed the acquisition of the baby diaper manufacturer Associated Hygienic Products earlier in the quarter. This acquisition not only adds a key product range to our portfolio, but also provides a wider geographic coverage and meaningful market expansion opportunities for our AI business. We are fast redeploying our new adult incontinence line to our Waco, Texas facility, and this will bring us closer to our West Coast customers. I'm pleased with the progress we're making on integrating AHP into our Personal Care Personal business.

Finally, before turning over to Daniel, I'd like to say a few words on capital allocation. We repurchased over 0.5 million shares of common stock for $36 million in the third quarter. Combined with our dividend, total capital return to shareholders amounted to $55 million. At the end of the quarter, we had $121 million left on the $1 billion authorization, and we will be engaging with our board in the coming months. We remain committed to returning the majority of free cash flow to shareholders and to use our financial flexibility to further expand our business.

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 on the quarter on Slide 4. We reported this morning net earnings of $0.82 per share for the third quarter compared to a net loss of $1.38 per share for the second quarter of 2013. Adjusting for items, our earnings were $1.25 per share in the third quarter compared to earnings of $0.48 per share for the second quarter. EBITDA before items amounted to $163 million compared to $135 million in the second quarter. Free cash flow totaled $42 million compared to $58 million in the second quarter.

Turning to the sequential valuation in earnings on Slide 5. Consolidated sales were $63 million higher than the second quarter, primarily driven by the addition of the sales of AHP acquired on July 1. SG&A was 5 million -- $95 million, in line with the second quarter. During the quarter, we recorded a charge of $19 million on the sales of our U.S. Distribution business. This charge was presented under other operating loss in our consolidated statement of earnings.

In the third quarter, we recorded a tax expense of $1 million. This low effective tax rate for the quarter is due to $3 million positive impact of newly reduced enacted tax rate in some jurisdictions, the reporting of $2 million from the reevaluation of certain tax benefit and a slightly favorable geographical mix of taxable income in the quarter. Excluding those items, our tax rate would have been approximately 28%.

Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $104 million for the quarter. Capital expenditures amounted to $62 million. This resulted in free cash flow of $42 million. During the quarter, we completed the sales of the Ariva U.S. business for a net proceed of $45 million, and we completed the acquisition of AHP for $276 million. In the third quarter, we returned a total of $55 million to our shareholders through a combination of dividends and stock buybacks. At the end of the quarter, we had 32.4 million shares outstanding, including the exchangeable shares.

Turning to the quarterly waterfall on Slide 7. When compared to the second quarter, EBITDA increased by $28 million due to $13 million of lower planned maintenance cost in our pulp business and $2 million IR planned maintenance cost in our paper business for a net positive impact of $11 million. $9 million benefit from volume, $6 million from the addition of earnings of AHP, $5 million for lower raw material costs, $3 million of higher pulp selling prices and $3 million due to favorable foreign exchange rates. These were partially offset by $5 million of higher fixed cost and $4 million of lower paper selling prices.

Before starting my segmented review, I would like to mention that as a result of the sales of the Ariva Paper distribution business in the U.S., we are consolidating Ariva Canada back into our Pulp and Paper segment. All historical results for sale for stability in volume has been adjusted to reflect this new presentation. Therefore, the financial result of the Pulp and Paper segment for the current quarter include 1 month of Ariva U.S. and 3 months of Ariva Canada compared to 3 months for both businesses in the second quarter. On that note, both the addition of those sales of Ariva Canada and the sales of Xerox branded paper sourced from third-party are increasing the total paper shipments of this segment by approximately 8%. This will also have the impact of reducing the average paper EBITDA margin by an estimated 70 to 100 basis points going forward as those new sales carry a distribution business profit margin.

And still on Slide 8. In the Pulp and Paper segment, sales were down 1% when compared to the second quarter and down by 6% when compared to last year. Operating income before items was $61 million on a depreciation and amortization charge of $84 million. EBITDA before items was $145 million compared to $118 million in the second quarter.

In our Paper business, we had an estimated decrease in EBITDA before items of $9 million. Domtar manufactured paper shipments were sequentially higher by 13,000 tons, but were down 12,000 tons when compared to the same period last year. Prices for our paper grades were down on average by $5 per ton, just as last quarter, and they were down $30 per ton compared to the same period last year. Finally, paper production was down 10,000 tons this quarter as we took lack-of-order downtime totaling 18,000 tons.

Now turning to the pulp on Slide 10. EBITDA before items increased by an estimated $36 million when compared to the second quarter. Pulp shipments were sequentially higher by 8,000 metric tons, and average product pulp prices increased by $7 per metric ton compared to Q2.

Now moving to Slide 12. Personal Care EBITDA before items increased by $4 million when compared to the second quarter, mostly due to the contribution of AHP. On Slide 13, you will find the planned maintenance schedule for the fourth quarter, which we expect will be $20 million lower than the third quarter. I also want to draw your attention to the appendix on Slide 16, where sales and EBITDA for paper have been restated to reflect the new presentation adopted in the Pulp and Paper segment.

So this concludes my remarks. With that, I'll turn the call back to John. John?

John D. Williams

Thank you, Daniel. Pulp profitability improved in the third quarter following a busy second quarter of planned maintenance outages in our mills. At Kamloops, we completed the reconfiguration of the pulp mill following the closure of an older recovery boiler and our manufacturing line earlier in the year. In doing so, we optimize the larger and more cost competitive second manufacturing line and fully restores the mill's profitability despite a 120,000-ton drop in our production capacity. And in light of continued momentum in global pulp demand, we announced price increases for softwood grades in most of our markets.

In paper, we had stronger shipments compared to quarter 2, while inventories remained relatively stable. The Appvion deal and the incremental volume from the Xerox acquisition in May, combined with recently announced capacity closures in the industry, will keep our utilization rates high for the foreseeable future. We've announced price increases on most of our paper grades, including business papers, as well as commercial printing paper grades and some specialty papers.

In Personal Care, we continue to see earnings progression with the integration of the AHP business.

While third quarter results were affected by an inventory adjustment to a large retail customer, we're enthusiastic about the long-term prospects and remain well on track to deliver over $200 million of EBITDA by 2017. The Personal Care market is fast-growing, and with new and efficient manufacturing lines, top quartile product and research and development capabilities, we are positioning the business to be the leader in targeted sales channels. With the recent acquisition and organic growth projects, we're making meaningful progress towards our goal of having $300 million to $500 million of annualized EBITDA from new businesses by 2017.

So in summary, we had the better operating quarter, with improved production in our pulp mills. There were no material changes to our inventory position, and we had relatively stable pricing.

Now turning to our outlook. Our pulp business should benefit from accelerating momentum in global demand, notably in China. The announced price increases on coated paper are expected to positively impact results towards the end of the fourth quarter and onward into 2014. We expect higher input cost prices in pulp and paper in the coming months due to seasonally higher usage, and we anticipate lower paper sales volumes in the fourth quarter, again due to our usual seasonality.

Let me conclude by saying that we're making good progress on our journey. As we continue on our journey into higher growth opportunities, our Pulp and Paper business continues to play a vital role with a cash generation platform. We remain focused on running our business as efficiently as possible to extract maximum value from our assets.

Thank you for your time and support, and I'll turn it back to Pascal for questions.

Pascal Bossé

Great. Thank you, John. So Naomi, we're now ready to open up for questions.

Question-and-Answer Session

Operator

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

George L. Staphos - BofA Merrill Lynch, Research Division

Just a couple questions to start. Volume in paper held up a little better than we had been forecasting both for you and the industry. That's not a here nor there and I'm sure you share that view. But if you do concur with that, do you think any of that was related to perhaps anticipatory buying by your customers ahead of pricing? Why or why not do you have that view? And then the other question I have to start, could you update us on how you view the pipeline both for opportunities to grow in Personal Care and for that matter, potential future conversion projects within your legacy operations?

John D. Williams

Okay. Thank you, George. That's a fair number of questions all at once. I think, quite frankly, on the buy side on Paper, we're really not seeing the effect of people buying in. If it is, it's minimal at this point in time. So we don't see large buyers coming in there. On the M&A pipeline, I think we feel reasonably good. There are some choices out there that we'd certainly be seriously considering over time. On the conversion side, patently, I think we have to see where the volume falls based on what's been happening in the market in terms of capacity closure. As that works its way through, we'll start to make our choices. As I've said before, we have a plan. We know what we want to do when it happens. So we will keep working that plan. But again, we want to see where some of this volume falls before we implement. Does that help?

George L. Staphos - BofA Merrill Lynch, Research Division

It does. I guess maybe as one follow-on and I'll turn it over, can you quantify or qualitatively discuss how the fluff conversions have gone, and whether you've been as pleased with them at this juncture as you thought you'd be when you first went into them?

John D. Williams

Okay. Yes, certainly. Let me talk to that. Absolutely. We've been very pleased with it. In terms of returns we were expecting, we've done pretty well. As you know now, we've added this lignin separation plant supplement, which, again, gives us a little more volume to be able to move into the marketplace. Obviously, in the last few years that there have been some other openings, pricing has softened a little bit. But overall, we're still pretty happy. And we also think it's important to be vertically integrated into our own Personal Care business. We think that gives us some choices, particularly with the EAM business added on. That really gives us a kind of an R&D engine into those absorber product categories.

Operator

Our next question comes from Alex Ovshey from Goldman Sachs.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

On the pulp side, there's a significant amount of hardwood capacity that's set to come online over the next 12 months, will probably have a fairly negative impact on hardwood pulp prices. How do you think -- how are you thinking about the potential impact on softwood pricing from more than your hardwood capacity coming online?

John D. Williams

Yes, I think you have to look back a little bit about what we've been doing. So patently, we sold our Woodland Mill to minimize our exposure, if you like, to hardwood. And really, all of our business outside the U.S. is now not into printing and writing manufacturers, but is actually into tissue manufacturers and Personal Care manufacturers on fluff pulp. So there's an element of substitution that can only drive so far. It would be remarkable if they haven't driven it as far as they can, given the cost pressures some of the people are under. So I don't really see a -- the fact that there's a lot of hardwood coming in necessarily has to relate to what happens on softwood. Because certainly, the uses are very different, and we're always looking to build a sort of a specialty portfolio where we're not under such pressure. So we will have to see. But I think, certainly, at the moment, that's our view. Now if that differential become enormous, would people be trying to substitute within tissue grades? Well, maybe, but they might then end up with product tissue. So I think it's a little bit more subtle and, oh well, that's just an umbrella price. And if that differential opens up, people will start to substitute because technically, that's a difficult thing to do. Does that give you a little bit more color?

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Yes, John. That's helpful. And then your term, a number of price increases for pulp around the world. Can you talk about what you think your pulp price realization may be up by in the fourth quarter out to the third, kind of range around that?

John D. Williams

Yes. I mean, we wouldn't normally do that, and it's not my intention to do that. But certainly, when you look at announced price increases, I think you can sort of see the momentum that's there.

Operator

Our next question comes from Phil Gresh from JPMorgan.

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

So first question, John. I don't want to be accused of only pointing things out at the bottom. So as things get a little bit better on the pulp side, I'm curious if -- how you're thinking about these assets and whether you might be able to monetize them over time and perhaps use any of that cash you might get to help expand in your -- on the Personal Care side.

John D. Williams

So I think that's a firepower question over time. So right now, we believe we have the firepower to do what we need to do on the M&A side. I think if there came a point where we either felt we have a lot of EBITDA coming out of Personal Care in order to reduce the volatility we might do something, we'd certainly be open to that. But at the minute, we're an owner of those assets for the moment.

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

Okay. And then second question is on the paper side. I'm wondering if you can maybe parse out a little bit some of the dynamics on cut size versus the other grades. There's definitely been some commentary out there recently that things like cut size might be a little bit more challenging with respect to imports. I was hoping maybe you could give us a little bit of color there.

John D. Williams

Yes. I mean, certainly, imports always turn up. Cut size is the obvious choice. I think 2 things has to happen. The customer has to feel that they want to give their supply chain to somebody where, to be frank, if the domestic market for that importer improves, they'll probably go home to their domestic market. We've seen that happen a number of times over the years. And if you look at the sort of cost implications to importers, particularly from Asia, particularly, say, from China, they are paying now higher pulp prices, then they're paying the freight, then they have to land it. It's relatively marginal business. So if prices were to improve in their domestic markets, they'll definitely do better selling in the domestic market. So I think the job for us is quite simply. We have to keep convincing the customer of the value of the domestic supply chain and the value of what we provide in terms of shipment and response to demand. And that's, I think, the -- how would I put it? The competitive environment in which we operate, Phil. Does that help?

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

It does, it does. Last question just on the M&A front. The deals you've been doing historically on Personal Care have been in that $200 million to $300 million range. And so I'm wondering if you still feel that, that's kind of the sweet spot for you or if there are opportunities out there you would be willing to look at something bigger? And if you were looking at bigger things with a kind of have the necessity of being more synergistic at this point given the footprint that you already have?

John D. Williams

I think that's a good question. So I mean, certainly, yes, things are sort of slightly bigger. I don't -- as again, to use the vernacular, we've said pretty clearly, we're not going to blow our brains out. But clearly, something that's slightly larger to scale. To be honest, I think the synergy question relies on the geographic question. So if it was a piece of geography where we're not currently present, you might well see less synergies. If it's a piece of geography where we're very solid, then I think you'd see higher synergies, Phil. Does that help?

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

It does. So you would still be willing to go out of the geographies you are currently in for Personal Care?

John D. Williams

We would. But again, let's be clear. We're focus on the Americas and Europe. So probably not outside of geography at this point.

Operator

Our next question comes from James Armstrong from Vertical Research Partners.

James Armstrong - Vertical Research Partners, LLC

First question on the Personal Care segment again. It was a bit lower than we expected, and I know you had an inventory adjustment on a large customer. First, how much do you think that adjustment hit you in the quarter? And second, do you expect that to reverse in the fourth quarter and start seeing the ramp-up?

John D. Williams

Well, let me give you a little bit of color, James, because I think it's an important question. So we think that cost us about $2 million in the quarter. Now certainly, in terms of the ramp up, when -- just to remind you that the machinery really will come in first, second quarter next year. So we're really now seeing that potential ramp up in earnings, probably around quarter 2, quarter 3. But I still feel that we're very much on track for that $200 million by 2017 on the businesses we own today. So this is a kind of a one-off inventory adjustment. Basically where it came from is a major diaper manufacturer announced they were taking their countdown, which is essentially a price increase. And obviously, they have that old inventory in the stores, and that was then sold through that inventory of sort of reduced pricing, which meant the price differential between private label and the brand reduced somewhat so the consumer went to the brand. So that is kind of a one-off event, as we see it. Does that help?

James Armstrong - Vertical Research Partners, LLC

It helps a whole lot. And then second question is on the price increases. As they do go through, do you expect the full impact in November and December, or do you expect the pricing to phase in over time? And how long do you think that phase in period would be?

John D. Williams

Well, I think the only thing I could do there really is sort of, to some extent, refer you back to history. But also, to repeat, I think I've said before, it's a bit of a mantra for me, that pricing is obviously between us and our customers. But I think if you look back, you can see the way these price increases have come through, and they take a few months to come through. So really, we're implementing throughout the fourth quarter. We don't expect much in quarter 4. But we do think it brings this kind of momentum in '14, which is, quite frankly, why I feel pretty good about our outlook.

Operator

Our next question comes from Mark Connelly from CLSA.

Mark W. Connelly - CLSA Limited, Research Division

Two questions. First, can you give us a sense of the profitability of your Canadian paper versus your U.S. system and whether -- and what the outlook is for the opportunity to maybe improve the Canadian side? And a related question. You didn't have as much of the wood pressure, wood cost pressure in Q3 that some other people did given the geography. Should we assume that you're expecting a normal Q4 at this point?

John D. Williams

Let me answer that one first, Mark. Yes, on the wood cost issue. We are -- we actually do -- we are in fairly similar baskets, I must say, on the wood cost front. But I mean, as you know, wood is very local to all the mills. It's a 25-, 50-mile discussion. There are peripheral areas where we compete for wood in some places, particularly Franklin and Plymouth on the fluff pulp side. But again, we have a slightly different experience than some other people did in the marketplace in terms of wood costs. On the Canadian paper side, are you talking to the distribution business or you're talking to the manufacturing business?

Mark W. Connelly - CLSA Limited, Research Division

No, I'm thinking about your mills. And as you think about the changes that we're seeing in the overall system, how -- the overall system across North America, not just yours, how much opportunity is there with you to improve your Canadian assets versus the U.S.? Or should you be spending more in a U.S. at point on your system?

John D. Williams

Yes. I mean, I think if you see it as an integrated system -- I mean, my view is in Windsor, we've got a global the highly competitive mill. So yes, incremental improvement, but it's a very strong asset. It's been a strong asset for a number of years. Patently, our Espanola facility is a more challenged asset. It's a specialty paper mill at the front, which certainly, are selling some specialty pulps at the back end. The rest, of course, in Canada are really pulp mills. So we've got work to do in a Espanola because certainly, looking back on the quarter, we had some issues on Espanola on maintenance, which is part of the reason our maintenance is a little bit higher than I would have liked. So we've got work to do there. Windsor is a world-class asset. Does that help?

Mark W. Connelly - CLSA Limited, Research Division

That's helpful.

Operator

Our next question comes from Anthony Pettinari from CitiFinancial.

Anthony Pettinari - Citigroup Inc, Research Division

A question on Personal Care. You referenced the integration of AHP. And I'm wondering, as we think about normalized margins for Personal Care, I think, at least when you acquired it, AHP's margins were substantially lower than Attends and maybe Attends Europe was somewhere between AHP and Attends. How do we think about maybe normalized margins next year when integration activities have been completed, and maybe where is the most potential for margin improvement within the segment?

John D. Williams

Okay. That's a great question. So let me talk that one through because I think it's an important point. Certainly within the Attends U.S. business, we look to see margin improvement from the sort of reengineering of the product range that goes with the CapEx we're spending. So that, we should hope to see end of the quarter 2-ish. The same is true, to some extent, in Europe. Although Europe, more than a margin issue, is more about the volume we believe we can support. If you look at AHP, really, the margin improvement, I think, will not be that dramatic. It has to come from some cost improvement, some of those synergies we've talked about, and it also will come from as we integrate AI into that plant in Waco, Texas, we'll see margin improvement. So that's, if you like, the mechanics of how we'll see margin improvements. So some of it will definitely come from AHP. I don't expect too much from Europe, and some will come from the U.S. business as we improve the product portfolio. Does that help you?

Anthony Pettinari - Citigroup Inc, Research Division

That's very helpful. And then maybe just as a follow-up, you talked about the potential importance of being integrated with fluff. I mean, is it safe to say that the actual tonnage that you're using through your system is pretty low at this point? And when you think about that importance, would you expect that integration really to grow through 2017, or why is it important, I guess?

John D. Williams

Yes. Well, I think it's both important from a market standpoint. But it's actually important from a technical standpoint. It's probably -- if we put -- it's about 80,000 tons of fluff pulp we've used internally based on what we've got now roughly of the sort of 4 25 that we can get out of Plymouth. I think what's important, though, that EAM business that we owned really is all about sort of the absorbent technology for the core of baby diapers, feminine hygiene, products and adult incontinence products. So if you look at sort of fluff technology and you look at EAM technology and you start putting all that together, that's a key competitive advantage that, I think, we can build over time. And interestingly, if we look at where that EAM business has been building, we've got -- we've now integrated a lot of that into our own product range, and that's been pretty powerful for us. So I do believe there are market benefits to be got from the fact that we have that integrated model. Does that help you?

Anthony Pettinari - Citigroup Inc, Research Division

Yes, that's very helpful.

Operator

Your next question comes from Benoit Laprade from Scotiabank.

Benoit Laprade - Scotiabank Global Banking and Markets, Research Division

Switching gears a little, 2 questions somewhat related on the capital allocation side. Just wanted to -- actually, one, it's more a comment. It wouldn't be question. But I was surprised that you actually repurchased so few shares in the quarter when we look back at how weak the stock price was. And secondly, just wanted to clarify when you reiterate your commitment to give back the majority of free cash flow to shareholders going forward, are we talking consolidated free cash flows or the legacy business on the pulp and paper side?

Daniel Buron

Benoit, Daniel speaking here. I mean, we're buying quarterly, and I think we're not trying to target a specific number every quarter. I think we're -- it's a long-term program. I mean, we've been into that program for a couple -- almost 3 years now. So we're more looking on how can we build and respect our commitment to take the majority. So we're actually not really looking at how much we're buying quarter per quarter. We're trying to be aggressive when the stock is relatively low, and we've been very aggressive this year so far. Your second question, we're talking about the cash flow of the business overall. So it's the consolidated cash flow. So our commitment is the majority of the future cash flow of the entire business will be returned to shareholders in the form of dividends and stock buybacks.

Operator

Our next question comes from Bill Hoffman from RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

John, can you talk a little bit about just the general customer response to the IP closure and how they might sort of reallocate their businesses around it? I mean, I know you wanted to see how it sort of falls out. But I'm just sort of curious what the tone is from the customers.

John D. Williams

Well, I mean, Bill, obviously, it's very early days because, of course, at the moment, those machines are still manufacturing. So certainly, customers are looking as to where the place those volumes that they're walking away from. And that -- I mean, if you do the math, that's probably, I don't know, 400,000, 450,000 tons if you take the export out of it, but they'd be thinking about where would they get it from going forward. And that's across a lot of different grades and a lot of different customers. And patently, I'm sure our competitor is hoping to keep as much of that as much as they possibly can in their own system. So it's a bit early to tell. I think the sort of psychology is, well, there is a business or maybe a couple of businesses look who look really committed to this marketplace. I mean, obviously, that's us. And that, I think, helps the dynamic going forward. That's about the most sort of color I can give you on it, Bill, right now.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

All right. And just a quick question for Daniel. In the third quarter here, could you just help us -- how much distribution sales you had that are actually in the third quarter numbers and going forward? Maybe just some -- help to quantify a little bit what the Canadian distribution pieces so we know what that impact margin impact drag is.

Daniel Buron

If you look at the sale of the food distribution in Q2, I think it was around $150 million. The Canadian operation represents 1/3 of that, so -- 1/3 to 40% of that. So going forward within the pulp and Paper business, we'd have something around 40% of that $150 million that you saw in our Q2 earnings call.

Operator

Our next question comes from Stephen Atkinson from BMO Capital Markets.

Stephen Atkinson - BMO Capital Markets Canada

In terms of the Personal Care where you're talking about the ramp-up in the U.S., can you quantify like number of lines or what exactly?

John D. Williams

You mean how many lines are we buying?

Stephen Atkinson - BMO Capital Markets Canada

Oh, yes, like referring to the previous comment about the ramp-up in Q2 and Q3.

John D. Williams

Yes. Well, I mean, it's a number of lines. It's probably 4 lines, to be frank, Stephen. I mean, we're doing things across the whole range of products and a couple of lines into Europe and a new bay warehouse in Europe, which is actually being built and is operating. But remember, that's not all net extra business, one should be clear. I mean, some of that is actually substitution for some products where we buy the -- not got the products in the range, or we're moving to a more modern product type?

Stephen Atkinson - BMO Capital Markets Canada

Okay. And so then -- that refers back then to when we'll see the benefits, starting Q2 next year?

John D. Williams

Yes, exactly.

Stephen Atkinson - BMO Capital Markets Canada

The other thing about Europe from what I remember was that the marketing was mainly in the North, as it were, and they weren't doing too much in the Mediterranean. Have you been able to grow that business, or does it even interest you?

John D. Williams

You mean the South versus the North, apart from European earnings house is there? Well, we have really looked at building more of a kind of pan-European retail business as opposed to an institutional business. So certainly, we are knocking on the doors of major retailers who have a pan-European footprint, Stephen. I think that's kind of where we've been looking at this point.

Stephen Atkinson - BMO Capital Markets Canada

I don't know whether you can help me on this one, but are you able to tell me the growth in the -- or historical, if it be, for North American and for Europe, the growth in the Personal Care or the adult incontinence business?

John D. Williams

So let me give you the global numbers, if that would be help. I mean, globally, it's a business growing between 5% and 7% a year of about an $8.5 billion to $9 billion base. So if you look at the demographics, particularly in certain pockets in the U.S., for example, the southeast, the population over 80 and what's happening to the population over 65, that runway of growth, there's no reason to expect that runway of growth is going to continue.

Stephen Atkinson - BMO Capital Markets Canada

Okay. So that you would be able to, just how do you call it, to grow where the market is, I guess, the game plan?

John D. Williams

Exactly.

Stephen Atkinson - BMO Capital Markets Canada

Okay. On the fluff pulp, like where there's an increase in the softwood, is there an increase in fluff pulp?

John D. Williams

We have announced a price increase, yes.

Operator

[Operator Instructions] We do have a question from Sean Steuart from TD.

Sean Steuart - TD Securities Equity Research

A couple of questions. The run rate of $200 million in EBITDA Personal Care by 2017, can you give us the incremental CapEx associated with the extra lines you're going to be adding? And I guess a lot of it will be spent over the next couple of quarters, but can you clarify that number?

Daniel Buron

Sean, Daniel speaking here. We're trying to -- not to share that for a competitive reason. But if you look at our financial statement last year, I think there was $43 million, $45 million spent last year. And as you see, as we file our full financial statement for 2013, you're going to see how much we've invested in 2013, and it's going to be the lion's share because we're actually receiving those machines as we speak, and into the second and third quarter this year. So a big portion of our spending will be behind us in 2014.

Sean Steuart - TD Securities Equity Research

Okay. And then Daniel, are you at a point yet where you can give us guidance for total CapEx next year? I take it 2013 would be intact with the...

Daniel Buron

About 2013, I think we've guided you to $260 million to $280 million. I believe we'll be on the low side of that range. I think this is still a good number to work with. As for 2014, we're currently working on our budget. So as we usually do, we'll share those assumption on our next earnings call.

Sean Steuart - TD Securities Equity Research

Okay. And then just lastly, as you look at maybe larger acquisitions in the Personal Care space, can you give us an update on your thinking around comfort on leverage levels, whether it's debt to cap or trailing debt-to-EBITDA? What sort of metrics you might think about being comfortable with as you grow?

Daniel Buron

I mean, we -- I mean, the way we look at it is we need to be in a position -- I mean, we want to have access to capital in all types of market environments and without -- I mean, some may think to investment grade because we're actually not controlling the view of the industry, the credit agencies. I mean, if you look at what is required to be, investment-grade is something that we have as a benchmark internally. So this 2.5x EBITDA at trend is something that makes sense for us. Obviously, for a very good acquisition and with a solid deleveraging plan, we may go over that for a period of time. But we'll be very sensible the way we manage our balance sheet.

Operator

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

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

Just a quick question on your growth initiatives. Are you looking outside Personal Care to some other businesses as well?

John D. Williams

Paul, we're focused on Personal Care. I mean, if there were other choices that made some sense, I think we'd certainly look at those choices, but trying to stay as focused as we can.

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

Okay. And is it fair to assume that you would branch out of the AI and baby diapers market?

John D. Williams

Well, if you take the Personal Care space, I mean, really, you've got 3 product areas. So you got baby diaper, you've got AI and you've got fem hy. Fem Hy is -- the feminine hygiene is the smallest player in all that. And let's just keep thinking about the growth platform for all 3 of those businesses. However, yes, we'd look around it under things made sense that were kind of downstream opportunities.

Operator

[Operator Instructions] There are no further questions at this time. Please continue.

Pascal Bossé

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

Operator

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

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