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Domtar (NYSE:UFS)

Q4 2013 Earnings Call

February 07, 2014 10:00 am ET

Executives

Pascal Bossé - Vice President of Corporate Communications and Investor Relations

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

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

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

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

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

Mark W. Connelly - CLSA Limited, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Daniel Moran - Macquarie Research

Sean Steuart - TD Securities Equity Research

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is February 7, 2014. I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Tracy, and good morning, and welcome to our fourth quarter and fiscal 2013 earnings call. So our speakers for today will be John Williams, President and CEO; and Daniel Buron, our 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 a reconciliation to the closest GAAP measures in the appendix of this morning's release, as well as on our website.

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

John D. Williams

Thank you, Pascal, and good morning, everyone. This morning, we reported earnings before items of $2.09 per share for the fourth quarter of 2013 and an EBITDA before items of $190 million. Our solid results in a seasonally slower period of the year, were generally in line with our expectations, and much improved when compared to both prior quarter and prior year. These strong results versus quarter 3 were largely due to lower planned maintenance costs and a continued upward momentum in softwood market pulp, resulting in a higher average selling prices and higher shipments. In a moment, Daniel will provide you with an in-depth financial review. But before he does so, I'd like to say a few words on the quarter and fiscal 2013 results.

First of all, I want to lead off with health and safety, where I'm very proud to report that Domtar recorded our lowest incident rate on record of 0.95 for fiscal 2013. I consider a total frequency rate below 1 to be world class, and I want to recognize the collective efforts of our 10,000 employees looking after the safety of their colleagues, as well as their own safety. Congratulations to all.

In 2013, despite lower shipments for pulp and paper and lower realized prices for uncoated freesheet papers, our consolidated sales only declined 1.6% when compared to prior year. We experienced slightly higher prices in pulp that marginally benefited results, but the growth in our Personal Care business provided strong support to our revenues.

On that note, the recent acquisition on January 2 of Laboratorios Indas, Spain's largest manufacturer and marketer of branded adult incontinence products, marks a key milestone on our strategic journey to build a Personal Care business of critical mass. I can say with confidence that the Domtar story of becoming one of profit or growth is in sight. The foundation of which will be a high-performing Pulp and Paper business and a fast-growing Personal Care business. With a total of 5 acquisitions in a little over 2 years, I'm impressed with the assets, the market position and the talented management team we brought underneath the Domtar Personal Care umbrella.

The integration team is moving fast in the strategic deployment of our new machinery, and we're well advanced in the integration, so we can bring the business close to the lower end of our targeted $300 million to $500 million of EBITDA by 2017.

In summary, we had a milestone quarter for Domtar in our quest to become a stronger business that creates sustainable value for our customers and our shareholders.

With these brief remarks, I'll turn the call over to Daniel for the financial review, and I'll come back with the outlook. Daniel?

Daniel Buron

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on Slide 4. We reported this morning net earnings of $2 per share for the fourth quarter compared to net earnings of $0.82 per share in the third quarter. Adjusting for items, our earnings were $2.09 per share in the fourth quarter compared to earnings of $1.25 per share for the third quarter. EBITDA before items amounted to $190 million compared to $163 million in the third quarter. Free cash flow totaled $62 million compared to $42 million in the third quarter.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $16 million lower than the third quarter, primarily due to the sale of our U.S. distribution business in August. SG&A was $5 million higher than Q3, mostly due to higher M&A costs and higher variable compensation accrual. In the quarter, we incurred an impairment charge of $7 million. Our fourth quarter earnings includes other operating income of $17 million related to a net gain on sale of assets, foreign exchange gains and the reduction of an environmental provision. Interest expense was $22 million, $1 million higher than last quarter due to the new $250 million 3-year note issued late November.

In the fourth quarter, we recorded a tax expense of $6 million or 8%. This low effective tax rate is mostly due to the research credit of $11 million recorded in the quarter, following the completion of a multi-year research and experimentation study in the U.S. and audits resolutions in Canada.

Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $124 million for the quarter. Capital expenditure amounted to $62 million. This resulted in free cash flow of $62 million in the quarter. No stock repurchases were made in the quarter. In 2013, we bought back 2.5 million shares for a total cash consideration of $183 million, and we still have $121 million available under our stock buyback program. At the end of the quarter, we had 32.4 million shares outstanding, including our exchangeable shares.

Turning to the quarterly waterfall on Slide 7. When compared to the third quarter, EBITDA increased by $27 million due to lower maintenance costs of $20 million, higher other operating income of $13 million, favorable foreign exchange rates of $4 million, higher productivity of $4 million and lower freight and higher volume for a total of $2 million. These were partially offset by our fixed and other costs of $5 million; higher raw material costs, mostly fiber, for $6 million; and higher SG&A.

I'm now on Slide 8. In the Pulp and Paper segment, sales were down 1% when compared to the third quarter and down by 2% when compared to last quarter. This decline is solely the result of the sale of our U.S. distribution business in the third quarter. EBITDA before items was $166 million compared to $145 million in the third quarter.

Now our Paper business on Slide 9. We had an estimated increase in EBITDA before items of $13 million in our Paper business. Manufactured paper shipments were 3,000 tons higher when compared to the third quarter and up 12,000 tons when compared to the same period last year. Our average transaction prices for all our papergrade were $5 per ton lower than last quarter. The dollar per ton decline on average is a result of actual price increases of $7 per ton, offset by a weaker mix in the quarter of $12 per ton. In the fourth quarter, we took 20,000 tons of lack-of-order downtime.

On our Pulp business on Slide 10. EBITDA before items increased by an estimated $8 million when compared to the third quarter. Pulp shipments were sequentially higher by 7% versus the third quarter and average pulp prices increased by $12 per metric ton versus the third quarter. Paper inventory were flat compared to last quarter, while pulp inventory decreased by 10,000 metric tons.

In Personal Care, results were in line with our expectation and Q3 performance. In the fourth quarter, we successfully started our state-of-the-art fully automated high-bay warehouse in our Sweden facility. This is the first important delivery of a number of growth capital projects we are working on in this business.

Finally, as usually our practice at this time of the year, you'll find on Slide 13 through 15 our estimate of some key financial items for the coming year. Please note that our current estimates do not include the acquisition of Indas. We'll, therefore, provide updated assumption at our next call.

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

John D. Williams

Thank you, Daniel. Our strong fourth quarter capped off a year of achievements for Domtar. We announced several strategic initiatives and continued to execute on our commitment to transition our earnings profile. We also divested noncore legacy assets and sold our U.S. paper distribution business.

Demand for uncoated freesheet papers declined when compared to prior year, albeit at a slower pace than trends, and our volumes have formed largely in line with the market. Specialty paper shipments increased 4% over 2012, with additional tons coming from the Appvion sales agreement, and we secured incremental volume with the acquisition of Xerox's paper and print media products in June.

In softwood pulp, demand growth in China and stable global inventory levels supported further price increases and drove market momentum throughout the year. Also during the quarter, we began transitioning our Espanola mill out of market hardwood pulp to softwood, further improving our overall market pulp mix.

With our ongoing growth strategies, we're confident that we're headed in the right direction and we'll deliver continued earnings and cash flow growth in 2014.

Finally, on capital allocation, we more than delivered on our commitment of returning the majority of free cash flow to shareholders with over 100% of our free cash flow paid out through dividends and stock buybacks. As we begin 2014, our company is stronger than ever, and I'm confident that we have the right strategies and action plans in place.

Now turning to our outlook. We expect our paper shipments to be in line with 2013, while we expect market demand for uncoated freesheet to decline modestly but levels similar to the long-term secular trends. Our paper prices will benefit from the implementation of recently announced price increases, and we expect softwood pulp markets to maintain positive momentum, but newly scheduled industry hardwood pulp capacity makes the latter part of the year a little more uncertain.

Turning to Personal Care. We'll continue to see earnings growth with the recent acquisition of Indas and with the addition of the new production lines towards the end of the year.

Overall, I'm pleased with the financial performance we achieved in 2013 and we remain focused as we begin 2014 on growing the company and creating additional shareholder value.

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

Pascal Bossé

Great. Thank you, John. So Tracy, we are now ready to start polling for questions. [Operator Instructions] So with that, Tracy, we're ready to take questions.

Question-and-Answer Session

Operator

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

George L. Staphos - BofA Merrill Lynch, Research Division

My 2 questions to start will be on Personal Care. Number one, in the quarter, could you parse out if there are any operating inefficiencies or other factors that would have prevented you from achieving whatever margin you would have liked? You said the performance was in line with your expectations, but were there any other factors that would have brought the results up to a higher level of profitability in the quarter? And the second question, John, you were talking about ultimately getting to the $300 million to $500 million EBITDA goal over time. Is it possible to perhaps be more precise in terms of what you expect from the segment, say, by 2015?

John D. Williams

To the second one, I think the answer really, to be frank, George, is no. We stick to the idea that by 2017, we think we're going to get to that sort of the lower end of the $300 million to $500 million. So I'm not trying to be obstructive, but I think we'll stay with that. As far as the fourth quarter is concerned, if you think about all the capital projects we have, building machines, building warehouses, undoubtedly, there's noise in that business that when it settles down in terms of the machines being in and running at full rates. So for example, we're running trials, et cetera. There's no doubt that we incurred some costs but won't repeat. Very hard to quantify them, to be honest. But certainly, we would think going forward that as we settle these machines in and we're getting more of a run rate that we'll see movement in the earnings from that business, as we've said, in the second half of the year. I hope that gives you a little bit of color.

George L. Staphos - BofA Merrill Lynch, Research Division

It does. I mean, when I've seen other companies involved in such a project, normally, I've seen 2, 3 percentage points as a rough estimate for what the efficiency loss was. Do you think, without being terribly precise, do you think that would have captured where you might have been?

John D. Williams

I couldn't really say. I mean, I think it's a reasonable assumption but it's very hard to chase all this down because it goes to your running machines at low efficiencies, you're training teams, you're holding stock you wouldn't normally hold because you're about to open a new house. Well, I think that's a fair rule of thumb.

Operator

Our next question comes from Anthony Pettinari with Citi.

Anthony Pettinari - Citigroup Inc, Research Division

In uncoated freesheet, I was wondering if you could provide any thoughts or any color on expectations for when the most recently announced price increases should be realized. And then I was wondering if you could talk about your mix in uncoated freesheet in 2014. You have a very helpful slide where you break out your price sensitivity to the various grades of paper. And I'm wondering, you have a large competitor that's taken down capacity and indicated that they're really exiting some commodity grades. But at the same time, we have, it seems like, the increase in imports and some of the cut-size grades. I'm just wondering if you could talk about the price increase announcements and then your mix changes for '14.

John D. Williams

We don't expect the mix to change very dramatically. So we think pretty much, as is, that we hold our share in the key markets. So we don't expect major swings on the mix side. On the pricing, as you know, we've just announced -- if you look back, you'll sort of see the time frame, the 3 to 4 months it may take to really settle. So our best guess is you're going to see that full run rate towards the latter half of the first half of the year, just as you're beginning to really see in January the beginnings of the run rate from the price increases we announced earlier. So I think as a rule of thumb, you could use that timing. Does that help you a bit, Anthony?

Anthony Pettinari - Citigroup Inc, Research Division

No, that is helpful. And then maybe just following up on the cut-size imports. Obviously, year-over-year, there's been a big increase in imports. Is that something that you see have run its course? Or obviously, the price increases potentially make that market more attractive to Asian producers, how do you think about the cut-size import pressure?

John D. Williams

Yes. I think what you have to believe is that you can leverage your supply chain effectively from a customer service standpoint and a response standpoint. But imports find their place. We managed to do that over a number of years through currency highs and currency lows. And if you look at imports, they're inclined to sort of appear from one place, and then they suddenly appear from another place. So there's obviously a currency question to some extent at work. I also think our major accounts are going to be a bit leery of allowing their supply chain to be at the behest of businesses who appear to sometimes be in and sometimes be out. So we just continue to competitively make certain that we have a strong enough offering for our customers that they feel that we're the logical place for them to buy from.

Operator

And our next question comes from Stephen Atkinson with Dundee.

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

In terms of the -- how do call it, the Personal Care, where on one side, in Europe, you've added Indas and you've got Attends. And of course, North America have Attends. You've also added another product line and, I believe, doing an expansion. Can you walk through the strategy for both regions?

John D. Williams

Absolutely. Thanks for asking, Stephen. So when you think of Personal Care, it's about a 62% institutional business, a business-to-business through hospitals, home care, sold through distributors. It's even more so in Europe, of course, where it's prescription-driven. And so the Attends brand and the Indas brands are very much around institutional sales. Some of the growth we're looking for is going to come from probably a co-branded and a private label strategy in retail. So our thinking has been let's own the AHP business so that we can actually build a strong enough platform to really front up to major retailers with both baby diaper and with incontinence. The EAM strategy was really about understanding the key technologies in the core of these products, where we think there's competitive advantage to be built. So we're building a global product platform that we're going to drive across the whole geography to make absolutely certain we've got the most competitive and functional products that are in there. Interestingly, we've just actually tested the first of our new products in Canada and have had rave reviews. So that's really how we're going to drive that business going forward, Stephen. Does that help?

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

Yes. No, no, that's great. Second thing on Espanola, where you're switching from hardwood to softwood, which, of course, is good. Are you able to give me some color on timing or anything like that?

John D. Williams

Not really. It's kind of a work in progress at this point. But we've started and we have to make sure we're sort of going to get the efficiencies we're looking for. So we're in sort of start-up mode. But so far, it looks pretty good.

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

But you have the softwood available?

John D. Williams

Absolutely. Yes, absolutely.

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

Great. Last question, on Slide 7, we're talking about the nonrecurring where you've got higher fiber costs, $6 million; SG&A at $5 million, and I assume that's for year end; and then other is $5 million. Could I kind of get some color on that?

John D. Williams

On the other?

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

Yes. Well, on the 3 -- well, the fiber costs.

John D. Williams

On the buckets? I'll let Daniel talk to that a bit.

Daniel Buron

Fiber costs is often weather related. So Q4 is always tough. Actually Q1 this year, I think, will prove to be even tougher than what we've witnessed in Q4 because of freezing weather. But I mean, Q4 is normally usage and cost is increased because of the difficulties to harvest the wood. SG&A is more year end. There's a little bit of M&A costs, as I said in my prepared remarks. That's linked to Indas, obviously. And other cost is a mixed bag of a lot of small variances here and there. So it's very difficult to dissect that one.

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

And the other, is that included -- okay, that was the other?

Daniel Buron

Yes, that's the other. The other, $5 million, I mean, is kind of a bucket of various small variances.

Stephen Atkinson - Dundee Capital Markets Inc., Research Division

Okay. So basically nonrecurring items?

Daniel Buron

In nature, yes.

Operator

And our next question comes from Paul Quinn with RBC Capital Markets.

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

Just a question, just on the build-out of Personal Care business, if you could just outline what additional machines you've got going in, at which facilities? And what's the incremental EBITDA that you see in the back half of the year that you're expecting?

John D. Williams

I could talk to the machines. I mean, not the incremental EBITDA. But we have -- I'm just trying to get this right for you, Paul, from memory. So we're investing 2 machines, I think it is, in our Swedish facility, plus the new warehouse, 3 in Greenville. What we've actually chosen to do, a couple of those -- a couple of machines are actually going to go into our Waco, Texas facility for adult incontinence. So we're going to manufacture them alongside the baby diaper business because we get a freight saving and then we can build out the Southwest and the West, which is a bit difficult to do from Greenville. So by sort of mid-year -- well, midyear, third quarter, everything should largely be in place. And plainly, I wouldn't give you the specific uptick for quarter 4. But certainly, it's key to the runway going forward. Now just be clear on what we're doing here, so this is about some new business where we're building out our light inco offering, so that we have a strong offering for private label retail. And it's also about generating some quite dramatic cost per case savings on some of our heavier inco product. So it's not all new extra business, some of it is also making certain that we have a cost competitive offering. Now what's interesting is because we own EAM, if we put all that together, it looks as if we're going to have sort of the product offering in incontinence across the key geographies of Europe and North America. So it's pretty exciting stuff, I have to say. Does that help you?

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

It's as exciting as adult incontinence can be. Yes, I'm not...

John D. Williams

No, no, no don't be cynical, Paul. It doesn't become -- don't be cynical.

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

No, that's helpful. And just looking back through my notes, it seems like this sort of build-out has been delayed. Is that fair to say?

John D. Williams

Yes. Let's explain why because I think it's largely the decisions we've made. So when we bought Attends U.S., we had a particular plan in terms of product platform and had ordered machinery accordingly. When we then bought Europe, we felt it was important to think more carefully about sort of a global product platform rather than just sort of bang machines in for the local market. And that delayed us by about 6 to 9 months. So it's decisions we've made that I think are the right decisions in terms of CapEx intensity and in terms of kind of product line that have made this happen.

Operator

And our next question comes from Mark Connelly with CLSA.

Mark W. Connelly - CLSA Limited, Research Division

Two things. Can you help us understand a little bit more what's behind your $300 million to $500 million EBITDA target? You talk about achieving critical mass, you talk about a global platform, are you further behind in terms of getting to that global platform overseas or here? Do we need more acquisitions? Or is there another piece that has to fit in to get that critical mass? And then my second question is just for Daniel on the tax rate, whether you could help us with the quarter end and next year.

John D. Williams

Certainly, Mark. Let me answer the first question. One, I think it's an important question and I'm happy to answer it. So undoubtedly, we feel pretty strongly that there's more M&A to be done. We feel that what we own today can get us pretty close, if not there. But again, we want to make certain that we make that target. Why did we do it? So were those numbers plucked out of the air? Absolutely not. The issue for us really is to run a business in that place that is globally competitive, we think we need a certain critical mass. That's the critical mass we need, I think, to be competitive. Does that help?

Mark W. Connelly - CLSA Limited, Research Division

Sure. And when you say you need more acquisitions, do you need it more there or here?

John D. Williams

I think it would be either. I don't think necessarily -- if you think of Europe now, we've got a pretty good framework, but we could probably fill it out. If you think of the U.S., we've got 3 plants. Again, is there a way we could fill that out, maybe there is. So I'm relatively agnostic on the geography. But certainly, not the wilderness. It will be Europe, U.S.

Mark W. Connelly - CLSA Limited, Research Division

Sure that's helpful. And on the tax rate?

Daniel Buron

Mark, the tax rate this quarter is low because of an $11 million research and development tax credit that was booked in the quarter that was following a multiyear study and some minor R&D also that's coming from resolution of audits with the Canadian side of our business. I think the best forecast going forward is the rate of between 28% to 30%, which is the normal rate -- number of normal rate if there's no kind of distorting events like we had in the quarter.

Operator

Our next question comes from Chip Dillon with Vertical Research Partners.

Chip A. Dillon - Vertical Research Partners, LLC

Looking at the forward guidance metrics on Slide 15, is it more or less fair to say that the interest expense, when you do fold in Indas would not change? I would assume that kind of captures all the interest from the debt you will have and have borrowed to buy that. And then, I guess, the second question is would you expect at least directionally the CapEx to go up as fast as the depreciation and amortization? Or maybe more slowly because of the step-up in how you value the Indas assets?

Daniel Buron

You're absolute right on the interest expense that it was on our balance sheet at the end of the year. That's why the show of [ph] interest includes the cash that we had to raise for Indas. So you're right there. CapEx, it's early to tell. My guess right now is we will not spend in Indas in the first year more than the depreciation. I think it's going to be lower than their depreciation, but you understand this is very early to tell. And we'll update that the next call. But for trying to help you here, I think it's going to be lower than depreciation.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And then on the tax rate, obviously, the tax rate is lower than many companies, certainly, operating in the U.S., and I believe that's because you still have the reserve issue in Canada. And therefore, you have to, I think, earn a certain amount of money before the tax rate there goes to a full level. That's my guess. Is that true? And when do you think you would see that tax rate start to creep up?

Daniel Buron

Actually, the normal tax rate for our business is between 28% and 30%. And that 28% and 30% is actually the average of the tax rate in Canada that is in the 26%. And the tax rate in the U.S. that is in the 36%, 37%. The point you're referring to is more the cash tax rate. Yes, it's true that we still have tax attributes in Canada, so we're actually not paying cash taxes in Canada. I don't have -- and the -- and actually it's going to be available in the K. What's the tax attribute left in Canada? Well, I'm convinced that 2014 will be another year where it's going to be very low in terms of cash taxes in Canada. And in the U.S., to the contrary, we have a higher tax -- cash tax rate.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. The last quick question is on the CapEx, and let's leave Indas out, and this is more for John, would you see the need to stay at this $260 million to $280 million level to continue to grow organically as you see the natural course there for Personal Care? Or does this sort of represent a little bit of a hump because you're building all these facilities to deal with the near-term growth that you see?

John D. Williams

That's an interesting question, Chip. I -- if we were steady state, depending obviously on the size of the business, I wouldn't be expecting a spend at these levels. It's really about the machine park. And of course part of that is us really understanding more about the Indas machine park; and of course, the machine park of anything we may choose or not choose to acquire. But if you think about the assets we have today and what we've done with those assets, this has been a very aggressive capital program to build a new product platform. Having built that, you're really then into growth mode. So if you think about this marketplace, this is a market growing 5%, 6%, 7% a year, depending on whose numbers you believe. So you say to yourself, "Well, if I have sales of x and I want to have that growth, I may need a machine, 2 machines a year." That's a $15 million to $20 million commitment. So I wouldn't be expecting to spend at this high level. But again, it really depends on the size of the business. But if the business stayed this size, I think you could see this as a peak. Does that help?

Chip A. Dillon - Vertical Research Partners, LLC

Very much so.

Operator

And our next question comes from Alex Ovshey with Goldman Sachs.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

John, so as I look at your slide deck, where guys are nice enough to give us the breakout of the uncoated freesheet subgrades. So looking at the 4 subgrades, business papers, converting and publishing, commercial printing and other, as we think about the 2 announced price increases in uncoated freesheet, $60 and $70 per ton, respectively, can you help us understand how those apply to these subgrades?

John D. Williams

Well, again, I mean, I always get sort of a bit leery of discussing price over telephones. But if you look at price increase letters -- typically, we will send price increase letters to the specific channels where these operates, yes? And roughly, we've moved all these prices pretty much at the same level in terms of our objectives from a price increase standpoint. So I hope that -- I'm not sure that helps you. But I mean, basically, we've -- the original price increase in October, this price increase was about $70.

Daniel Buron

I think -- John, if I may add. The only paper that is not moving with the current price increase as well as the one that we've done in the fall is the specialty side of the business where it's more -- actually a portion is more linked to pulp. And as you know, Appvion, which is a sizeable volume, is also a contracted price.

John D. Williams

Does that help?

Alex Ovshey - Goldman Sachs Group Inc., Research Division

No, that does. I guess just a quick follow-up on that, so it's most specialty essentially in that other bucket, is that fair?

Daniel Buron

Yes.

John D. Williams

Yes, absolutely.

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Now that's fantastic. So the other question I have is on your volume outlook for uncoated freesheet staying flattish for '14 versus normal decline of 3% to 4%, is that based on firm customer commitment at this point or more your expectation of customers having to come to you given the significant capacity shuts by other players?

John D. Williams

I would say it's a little bit of both. So you're pretty much can decide sort of where you're going to be on export. You obviously by this time of the year, you know where you are with your major accounts. And obviously, we have a pipeline of some of that business that has come our way. We put all that together and we look at our budget, that's where we are.

Operator

And the next question comes from Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

I've got a near-term one and then a little longer-term one. Just the near-term one, Daniel, at this point, is there any way for you to kind of size what impact the whole of this January weather may have had on your business?

Daniel Buron

It's very early stage, so I don't want to be accused of anything at Q1 earnings call. But I think it's going to be at least a $10 million -- $10 million to $12 million is probably -- I mean, the last production, the issue we had with the slowdown, we had to take increased costs, energy. I mean, we all know that the price of natural gas went up significantly in the first few weeks of January. So I'm guessing $10 million to $12 million, but we'll come with more precise number after Q1 earnings call.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then a little longer-term, John, just I saw a story a month or 2 ago that the Canadian Post changing kind of delivery strategy. It sounds like in kind of urban, suburban areas, they may be going to kind of clustered mailboxes rather than individual home delivery. I just like to get your thoughts on what that could mean to kind of uncoated freesheet demand because it just seems like it might make direct mail a little less attractive to an advertiser?

John D. Williams

I don't think I could quantify it, Mark, if I'm being honest. Interestingly, on my house in Canada, they already have that clustered mailbox and it got pretty full. But you have to trudge out to it in the freezing cold. I've actually got a meeting with the Head of Canada Post in a few weeks’ time, so I should be able to tell you more. I would agree with you, though, just in terms of an atmosphere around direct mail that says if there are fewer deliveries or if it's more difficult to get at it, it may soften. One sort of feels that way. But then when I think about how effective it is, and it's now seen a sort of one of the least intrusive methods of advertising, I still think it has a pretty good future, actually. I think it’s interaction with digital media over time could be quite powerful. So I don't think we're going to see a major shortfall, to be honest with you.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Actually if I could ask one other thing. Just your thoughts on kind of changes in the paper distribution industry. I mean, we've got sort of xpedx and UniSource. We've had you guys selling a portion of your business to the CNG guys but they've bought a lot of other distributors. What's the upshot of all of these do you think for Domtar?

John D. Williams

Well, I mean, I think, certainly, with UniSource and xpedx, we've got a very good relationship with both of them and, of course, have known all the senior players for many a moon. So I think they're going to make competitive decision. We feel pretty confident that we'll hold our position. And interestingly, as we very much are with CNG, so in fact, the Domtar volumes that used to go through Ariva are now happily going through CNG, and we've maintained a very strong position. So I think, there, I feel it's going to be more of deciding who your partners are and making certain that with those partners, you build a competitive environment. And in fairness to us, I think we've done that very well over the last few years. So I think it's more of the same, Mark.

Operator

And our next question comes from Al Kabili with Macquarie Group.

Daniel Moran - Macquarie Research

This is Danny Moran on for Al. How are you guys thinking about pension expenses here? Will there be a tailwind? And what do you expect pension -- or cash pension contributions will be?

Daniel Buron

I think we're going to end up with a pension expense being very, very close to pension contribution. We had actually a great run-up, I think, over the last few years. So I can think this has end up to be very close to 0. With the higher discount rates and great return on our portfolio, I think we're in good shape. So I don't expect to make more payment than our expense.

Daniel Moran - Macquarie Research

Okay, that's helpful. And then just a follow-up on the hardwood pulp swing. What do you expect your pulp mix will be for 2014?

John D. Williams

I think hardwood is around 18% to 20%. Then the balance is softwood and fluff pulp. Just to give you precision, I mean, fluff pulp is about 440,000 tons. And then so the balance between the 2 is obviously going to be softwood, both northern and southern, but obviously mostly northern. Does that help?

Daniel Moran - Macquarie Research

Great. That's helpful.

Operator

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

Sean Steuart - TD Securities Equity Research

A couple of questions on markets, John. I guess, when we think about maybe potential risk to the uncoated freesheet story and appreciating it's a tightening market right now, but one is imports, which you addressed. And I guess, the other could be the spread between uncoated freesheet and coated freesheet on the rolls and it looks like that price gap is effectively closed. Are you concerned or maybe could speak to, I guess, your view of potential coated guys shutting off their coaters and selling offset rolls into the market and maybe limiting some of the upside?

John D. Williams

One's always concerned. I think I come back to a similar answer in a way that one talks about from an importer standpoint is you just got to leverage your supply chain as well as you can to convince the customer that you're making -- you're offering them a competitive long-term offering. And you're the expert in the market, you're the market leader, you're doing the things they need. And I think also, the other issue, pricing is pretty transparent. So even if someone knocks on your door with a knockdown drag-out offer, if you use that for competitive advantage, it lasts about a minute. So my view on all this is pretty clear that we continue to leverage our supply chain. We have touch points in the industry that nobody else has. That's, I think, the way people do choose to do this, but we will make certain we compete effectively with them.

Sean Steuart - TD Securities Equity Research

Okay, that's helpful. And on the pulp side, your views on softwood markets, I mean, it sounds like you're expecting positive momentum, and certainly that's the case early in the year. I mean, how do you weigh your outlook for softwood vis-à-vis the amount of hardwood capacity to starting up your expectations of substitution at the margin and how that hardwood growth might feed into softwood markets later in the year, if you can give any context there?

John D. Williams

I could move on to world hunger, I think, if I could answer that with detail. One, can we look at the differential between the 2 grades and have a sense that if that opens up too far, the incentive to substitute is powerful? Whether or not that happens remains to be seen. But there does come a point actually in terms of product content. Just to remind you, our softwood now is much more focused on tissue than it is on printing and writing. So our view is we've got more runway based on our insights into end use and those customers to whom we're selling. But as we say and as I said in my published remarks, when a lot of capacity comes in, there's always a bit of nervousness that, that might sort of spill over into behavior in our grade. I don't think I can really give you much more color on that, Sean. But...

Sean Steuart - TD Securities Equity Research

No, that's helpful. Maybe, John, just how much of your pulp volume right now do you think is going directly to tissue?

John D. Williams

I probably have to ask Dick to give us sort of a more informed answer than mine. Dick, what would you think?

Richard L. Thomas

So it depends a bit by market.

John D. Williams

You'll have to yell. It's a rather poor line.

Richard L. Thomas

Okay, yes. In both China and North America, we've moved from probably 40% tissue to more like 65%. We do have a little bit of printing and writing in the mills that are in the Central North America, just because the freight rates are so attractive. But primarily what we sell in North America, as well as Asia goes into tissue. And that's been a conscious effort, as John indicated.

Operator

And our next question comes from George Staphos with Bank of America.

George L. Staphos - BofA Merrill Lynch, Research Division

John, I want to switch to paper for a little bit in terms of these questions. Over the last, whatever, 15 years, the ability for imports to hit this country have been -- and the region have been lessened obviously because of the needs for certification, Chain of Custody. Where do you find that being more important? Do you see it's more important with your retail customers per se? Or do you see distributor customers equally as focused on Chain of Custody? And for that matter, too, the business buyer, do you think they worry as much about that on whether the paper came from a sustainably grown forest as, say, your retail branded of customers?

John D. Williams

So interesting question. Let me try and give you a bit of color. So certainly, major financial institutions care deeply about Chain of Custody. So when we talk to major banks as a potential customer, the story on EarthChoice and sustainability and our behavior in that area is very important to them. Obviously, from a public reputation standpoint, George, people do not wish to have aggressive NGOs picketing them. If you look at retail, retail is interesting because retail isn't just retail, of course. In fact, for most of our major accounts, although they have a retail front end, they have a very large and very often bigger, actually, business-to-business stream. I mean, if you take Staples, Depot -- Office Depot/OfficeMax. So in that case, they are still very concerned. They're very concerned at retail because, of course, it's visible but they're equally concerned of the sort of business-to-business level. So I think it's still there and certainly still is something we talk about a lot. And certainly, at the senior level in those businesses, people want to know what they're purchasing and the suppliers for whom they're doing business have a good reputation and are behaving in a responsible way.

George L. Staphos - BofA Merrill Lynch, Research Division

So if you had to estimate across your business, how much does -- how much of a moat does Chain of Custody provide you? Is it -- if I add up the large financial institutions, the large retailers with obviously their distribution business, is that 80% of your market cares about Chain of Custody, 50%? Help us understand that so that we can size the import threat?

John D. Williams

No, I mean, you asked a good question. I'm not sure I could see it in those terms. I mean, obviously, from our standpoint, it's a part of our marketing every day. I think you've got 2 issues: You've got the Chain of Custody issue, you've got the FSC issue, of course, and you have a branding issue. So there are people who wish to buy Xerox papers. We now own that brand in North America. There are people who wish to buy EarthChoice. If you take EarthChoice as a proxy for Chain of Custody, we're -- that business is growing double-digit year after year after year. So I still think it has a lot of resonance in the marketplace. I can't speak down into the percentages but it certainly has a lot of resonance.

George L. Staphos - BofA Merrill Lynch, Research Division

Understand. That's fair. John, last question, and I'll turn over. The maintenance schedule over the last couple of years had become second quarter weighted. Now for the year, you're guiding relatively consistently. Can you remind us why has the schedule become more Q2 weighted? Is that a sort of a redo from the former change that had been done to the maintenance schedule back a few years ago and this is just normalizing back to a heavier than -- heavier weighting to 2Q?

John D. Williams

I mean, really, you're not going to do maintenance when it's cold in major mills. So that's why it's sort of quarter 1, quarter 4. Third quarter, you are typically building ahead of a busy selling period at the end of the third quarter, beginning of the fourth, so you end up with quarter 2 as the logical place, George. It's not much more complicated than that.

George L. Staphos - BofA Merrill Lynch, Research Division

No, I understand. It's just '12 was more or less even across the quarters, and I'm remembering that being a different maintenance schedule, is that -- maintenance program, is that the reason for the difference? Or is there something else driving that?

John D. Williams

Yes, that's interesting. I mean, there were also places when life was very difficult. We were taking 18 months, now we're really more back to that year-to-year. So this is, I think, a pattern you're going to see.

Operator

And our next question comes from Mark Teplitz with Guyasuta.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

It's Matt Teplitz. But just a couple of quick questions, more just clarification. So just to be really clear, the pricing that was evident in the Paper division in the fourth quarter reflected little, if any, of the $60 increase, is that correct?

Daniel Buron

Yes, that's correct.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Okay. And obviously, then we would expect to see the bulk of that in the first quarter then?

Daniel Buron

That's correct, too.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Okay. And Daniel, are you comfortable putting what you think would be a cash tax number for '14 blending your, I guess...

Daniel Buron

Actually, this is almost impossible because I -- depending on the exchange rate, depending on prices of pulp and paper, I mean, that at Canada, U.S., it's very, very difficult.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Let's put it a different way. If we sort of use your 28-ish number, is cash tax in aggregate likely to be significantly different than 28%?

Daniel Buron

I'll have to give you the same answer. I mean, it's almost impossible to forecast. And I mean, we -- and we see we're doing everything we can to minimize cash taxes.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Okay, yes, I would assume. John, on SG&A, are we looking at a material build in SG&A in '14 associated with the Personal Care business? Obviously, some comes with the Indas acquisition.

John D. Williams

Yes. Not, particularly. I think we should explain what we've done there. So we've built a global team to drive that on a global basis. So we've added to SG&A in those businesses. So in the short term, that's been a bit of a drag on earnings versus the timing. But I don't expect to see a major step-up '14 to '13 other than Indas and a little bit of inflation.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Okay. And then lastly, I guess, once again, probing the Personal Care numbers. But -- so as we look at Indas, we know the acquisition price. I don't recall -- did you disclose an EBITDA number for the business?

John D. Williams

Yes, we did.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Okay. And could you remind me what that was?

Daniel Buron

I think the equivalent in U.S. dollars were $60 million, $61 million.

John D. Williams

$60 million to $61 million of EBITDA, Matt. About EUR 49 million, if I recall.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Okay. So if we take that number in the fourth quarter run rate, we come out somewhere around $145 million, $150 million pro forma for that deal. And I guess, the question -- I understand certain -- I hate to use the word caginess, but evasiveness about putting hard numbers out there. But in that, we spent nearly $1 billion in acquisitions. We've significantly ramped CapEx. I mean, is that -- couldn't we at least put some sort of range or even what sort of EBITDA number you would expect or hope to exit '14 at as a run rate or anything?

John D. Williams

We don't give guidance.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Understood...

John D. Williams

So I mean I think you have -- I mean, with all due respect, I think you have to see this as a move to build out a business. The promise we've made for 2017 holds. And of course, quite rightly, we will make as dramatic as progress towards that as we possibly can. So to be honest, Matt, that's where we find ourselves.

Matthew J. Teplitz - Guyasuta Investment Advisors, Inc.

Well, I obviously don't have a lot choice. But '17 is rather far -- and as you see fit, I guess. But I can't say I like it.

Operator

And our next question comes from Mark Connelly with CLSA.

Mark W. Connelly - CLSA Limited, Research Division

Just one more question. With all of the changes in capacity that we're seeing elsewhere, do you expect to undertake a substantial re-optimization of your system to take advantage of the opportunities that are being created there with other systems?

John D. Williams

Well, I think, Mark, there's always the question of the appropriateness of the asset base and what's competitive and what isn't competitive. We always keep that in mind. So we'll -- I think we have to let it shake out a bit because, obviously, we do not have complete visibility if the grades that are sort of, how would I put it, now available that weren't prior to. Do you take my point? I think we have to let that shake out for a few months before we could make those kind of choices if we were going to make them.

Operator

And our next question comes from Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Yes. Just one other question, John, while we got Dick Thomas on the line. There were some talk a month or 2 ago about some real pressure in the fluff pulp market. I think partly because of what was going on in the dissolving market, some of the dissolving producers opting to start producing more fluff. Can you get Dick just to kind of update us on what's going on in that market at the moment as you see it?

John D. Williams

Sure. Dick, do you want to take that?

Richard L. Thomas

Sure, happy to. So we're actually a bit encouraged, concerned, as you noted, when Rayonier -- ran into the tariff and began making some more fluff. But on balance, the market looks like it's really starting to absorb the capacity that came on the last couple of years. So we're actually probably, despite that, more optimistic right now than we were a year ago.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Is there any chance, Dick, you can -- the other thing I kind of hear in this market is that the sort of the spread between kind of the list pulp price and kind of what big buyers are actually paying is pretty much at all-time highs. Can you talk about that at all?

Richard L. Thomas

It's not just in fluff...

Mark Wilde - Deutsche Bank AG, Research Division

Yes, it's kind of across the pulp spectrum, right?

Richard L. Thomas

Well, certainly, NBSK and fluff. You see North America, there's been discount creep, less so in Asia. So it's unfortunately a fact of life. We -- as you can imagine, we look our net prices and netbacks at the mill.

Operator

And there are no additional questions at this time. Please go ahead, Mr. Bossé.

Pascal Bossé

Great. Thank you very much, Tracy, and happy that we could take all questions. So I think I want to thank all of our participants in today's call, and I wish you all 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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