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Domtar (NYSE:UFS)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Pascal Bossé - Vice President of Corporate Communications and Investor Relations

Richard Thomas - Senior Vice President of Sales & Marketing

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

John Williams - Chief Executive Officer, President and Director

Analysts

Chip Dillon - Citigroup

Phil Gresh - JP Morgan Chase & Co

Sean Steuart - TD Newcrest Capital Inc.

Benoit Laprade - Scotia Capital Inc.

Bill Hoffman - RBC Capital Markets, LLC

Mark Connelly - Credit Agricole Securities (NYSE:USA) Inc.

Paul Quinn - RBC Capital Markets, LLC

Stephen Atkinson - BMO Capital Markets Canada

Mark Wilde - Deutsche Bank AG

George Staphos

Unknown Analyst -

Leon Cooperman - Omega Advisors, Inc.

Anthony Pettinari - Citigroup Inc

Operator

Good day, ladies and gentlemen, and welcome to Domtar Corporation's Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is July 28, 2011. I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Shelley, and good morning. And welcome to our second quarter 2011 earnings calls. Our speakers today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. As usual, John and Daniel will begin with prepared remarks, after which we will take questions. During the call, references will be made to supporting slides. And you can find this presentation in the Investors section of the website.

As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside 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 press release, as well as on our website.

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

John Williams

Thank you, Pascal. Good morning, everyone. This morning, Domtar reported another solid quarter with a sales performance that showed both good volumes and prices, and we also had our strongest-ever free cash flow. EBITDA before items was $260 million in the second quarter for an EBITDA margin of 19%. This is a 2 percentage point margin improvement over last year's second quarter EBITDA margin of 17%. So a very solid performance.

We had higher selling prices in both Pulp and Paper but the benefits were offset by costs stemming from a seasonally high level of scheduled maintenance in our mills. Daniel will talk to that in a moment, but maintenance costs are expected to come down in the third quarter with fewer scheduled outages in our mills. We did incur higher input costs, as we indicated in our last quarter outlook, and this was the result of higher commodity prices affecting freight, fiber and chemicals.

Specifically on our volumes, we're seeing good demand for some packaging paper grades and also healthy demand for our papers on the export market. Worth noting is that we continue to be successful in servicing our customers while keeping paper inventories fairly tight in our manufacturing system.

The focus on the three Cs, customers, costs and cash remains. And as a result, working capital was a source of cash at $77 million in quarter 2. Speaking of cash flow, as I mentioned early on, free cash flow was a record $286 million. We made a commitment at this year's annual shareholders meeting to return a majority of this free cash flow to shareholders, and we executed on our commitment. In quarter 2, we repurchased close to 1.7 million shares. That, coupled with our dividend, yielded a free cash flow payout of over 61% to Domtar shareholders. Since its inception some 15 months ago, we've repurchased more than 3.2 million shares of common stock under our $600 million share repurchase program. Altogether, these buybacks represent 7.4% of the share count that we had outstanding at the end of March last year. We're firmly committed to returning a majority of future free cash flow to shareholders. And as indicated before, share repurchases remain our preferred means to do this.

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 first start by going over the financial highlights of the quarter on Slide 4.

This morning, we reported net earnings of $1.30 per share for the second quarter compared to net earnings of $3.14 per share in the first quarter. Adjusting for items, we had earnings of $2.37 per share for the second quarter compared to $3.25 per share in the first quarter. EBITDA before items amounted to $260 million compared to $311 million in the first quarter. Cash flow provided from operating activities amounted to $306 million. Capital expenditures were $20 million, therefore free cash flow totaled $286 million.

Turning to earnings reconciliation on Slide 5. Our second quarter earnings included the following after-tax items: charge of $38 million for impairment and write-downs related to the announced closure of the Ashdown paper machine #61; losses on the sales of property, plant and equipment and businesses of $5 million; and closure and restructuring costs of $1 million. Therefore, excluding these items, we had earnings of $98 million or $2.37 per share.

Turning to the sequential variation in earnings on Slide 6. Sales were down $20 million lower than in the first quarter, due to lower paper shipment, mostly in our Paper Merchants business and lower pulp shipments. We wrote down $62 million of fixed assets due to the closure of the Ashdown paper machine 61 and incurred closure and restructuring costs of $2 million in the quarter. We expect to record a further $9 million of write-down related to our Ashdown paper machine closure in the third quarter. Interest expense was $21 million, the same amount as in the last quarter. We recorded a tax provision of $20 million or 27% in the quarter. This compares to a tax rate of 30% in the previous quarter.

Now turning to the cash flow statement on Slide 7. Cash flow provided from operating activities amounted to $306 million, including a source of cash resulting from the reduction in working capital of $77 million. Capital expenditures amounted to $20 million or 21% of depreciation and amortization. Including CapEx funded by the Pulp and Paper Green Transformation Program, our capital expenditures amounted to $48 million or 51% of depreciation and amortization. Free cash flow amounted to $286 million in the quarter.

Under our stock repurchase program, we repurchased close to 1.7 million shares of common stock during the quarter for a total cash consideration of $155 million. During the quarter, we also entered into a new unsecured $600 million credit agreement maturing in June 2015 to replace the existing secured revolving credit facility that was scheduled to mature in March 2012.

Turning to the quarterly sequential waterfall on Slide 8. When compared to the first quarter, EBITDA decreased due to higher scheduled maintenance costs for $25 million, lower volume and mix for $16 million, higher raw material costs for $14 million, higher other costs for $7 million and the impact of higher Canadian dollar for $4 million. These were mitigated by higher selling prices for paper and pulp of $13 million and lower usage of raw materials for $2 million.

Now more details on our paper segment starting on Slide 9. Sales were down by less than 1% when compared to the first quarter and by 4% when compared to last year. Operating income before items was $167 million on a depreciation and amortization charge of $94 million. EBITDA before items was $261 million compared to $311 million in the first quarter.

Slide 10. Our uncoated freesheet business experienced an estimated sequential decrease in EBITDA before items of $37 million. Paper shipments were sequentially lower by 12,000 tons and up 1.3% when compared to the same quarter last year. Our average transaction prices for all of our paper grades were $2 per ton higher than the last quarter, as we began to implement the recently announced price increases.

Slide 11 on pulp. EBITDA before items decreased by an estimated $13 million when compared to the first quarter. Pulp shipments were sequentially lower by 3.7% versus the first quarter, and average pulp prices increased by $36 per metric ton versus the first quarter. Paper inventory levels decreased by 11,000 tons, while pulp inventory levels decreased by 8,000 metric tons in the quarter. As we began to prepare for the Ashdown paper machine closure, we took in the quarter 21,000 tons of paper market and machine slowdown.

Turning to our maintenance schedule on Slide 13. Just a reminder that our plan maintenance costs are expected to decrease sequentially by approximately $7 million.

Finally, as is usually our practice for this time of the year, you will find on Slide 14 our revised financial assumptions. There have been no material changes except with regard to capital spending, where we have revised our original estimate downward to between $140 million and $160 million. This does not include the investment that will be made under our Canadian Pulp and Paper Green Transformation Program.

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

John Williams

Thank you, Daniel. Today's strong results demonstrate our continued success on our strategic journey. We announced in May the closing of the sale of our former Prince Albert mill, another key step in the consolidation of our portfolio.

On our NCC project with FPInnovations, the newly appointed management team is moving fast towards the successful startup of operations. The business has recently announced its branding, CelluForce, a name that reflects the origin of the nano material extracted from tree cellulose and one of the main properties of the product. The construction of the demonstration plant in Windsor is progressing as planned, and we recently hired the 30 people needed to operate the facility. Startup is scheduled for late 2011.

Our efforts to streamline our business, improve financial performance and good execution on our "Perform. Grow. Break Out" strategic road map continue to be recognized. Early in the quarter, our stock was added to the Standard & Poor's MidCap 400 Index, further increasing awareness of the Domtar story. More recently in June, we were upgraded by Moody's to Baa3 with a stable outlook. And we were named by Corporate Knights as one of the top 3 corporate citizens in Canada, recognizing Domtar's responsible business and corporate practices.

To summarize, we had strong results in the quarter and we're poised for another good year. EBITDA year-to-date is already 15% ahead of last year's. And importantly, our year-to-date health and safety incident rate of 1.09 is 20% better than the 1.37 recorded in the first half of 2010. Hats off to our teams for their great execution on the company's goals, and I look forward to continued success for the second half of 2011 and beyond.

Before we open the call for questions, I'd like to say a few words on our outlook for the second half of 2011. Our paper shipments year-to-date are flat from last year of 1.8 million tons, and our read of the markets suggests that 2011 promises to be nearly as good as 2010. The benefits from announced price increases in paper and fewer costs due to scheduled maintenance in the mills are expected to favorably impact our results. Average selling prices of pulp are expected to decline compared to the first half of the year, but global inventories remain relatively stable on softwood grades. And we expect to continue to benefit from our favorable sales mix focused on softwood and fluff at over 80% of our total pulp shipments.

Finally, we expect inflation pressures to continue throughout the second half of the year due to the rising commodity prices. So pulp prices and input costs are likely to be headwinds in the back half of 2011. We continue to look for potential strategic investments in our mills and growth opportunities and remain firmly committed to return cash to shareholders. And I would like to take this opportunity to thank you all for your support.

And with that, I'll turn it over to Pascal for questions.

Pascal Bossé

Thank you, John. So to take questions, we have John and Daniel; as well as Dick Thomas, Senior Vice President of Sales and Marketing; and Mike Edwards, Senior Vice President, Pulp and Paper Manufacturing. [Operator Instructions] And if you'd like to follow up with me after this call, you can reach my office (514) 848-5938.

So with that, Shelley, we're ready to take questions.

Question-and-Answer Session

Operator

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

George Staphos

A couple of quick questions to start. John, would it be fair to say that even if you don't want to get into the details -- I know you normally don't like to on input costs, that input will likely exceed the positive sequential benefit you get from lower maintenance in the third quarter. Would that be fair?

John Williams

I think on the input side, yes, it probably will by a few million. But nothing substantial, George.

George Staphos

Okay. And at this juncture, obviously, it's hard to project input costs, but would that be your assumption for the back half of the year as well? The fourth quarter, the third quarter?

John Williams

It will be. Yes.

George Staphos

Okay. Now, on uncoated freesheet shipments, demand has been better than we would have expected. Your shipments are stable. Do you think that we found kind of a new level of stability in the business and that we've seen whatever cyclical reduction in demand we're going to see? And now at this juncture, we're just waiting for employment, whenever that will recover, to recover to see an uptick in demand. How should we think about that the next couple of years?

John Williams

Yes. I think you have to look at specific grades within grades, if you like. So the converting grades are very strong. Cut size, you've seen, has had its issues but it seems to have stabilized. We've done well in our paper packaging grades. And of course, we're exporting a little bit more than we were. So overall, I mean, if you look at -- we've told the world, as you know, kind of 4% secular demand decline. I mean, it looks at the minute that we're doing better than that, that it's relatively flat. That looks a pretty fair judge for the second half of this year. I mean, I can't really see much further than that, to be honest, George, at this point.

George Staphos

I understand. Well, you're ahead of us on that front. I guess the last question, bigger picture, as we consider your capital allocation the next few quarters, it seems like share repurchase is preferred to dividend. And one of the implications in that is that you believe that you can continue to maintain returns on your business above your cost of capital. Otherwise, you'd be paying out dividends instead of buying back stock. Do you agree with that premise? And what gives you comfort in being able to maintain your positive return versus your cost of capital the next couple of years?

John Williams

I mean, just to answer that question, the answer to the question simply is yes. But I think one should always remind ourselves that we do have the volatility of pulp pricing running through the business. So that's very difficult to say where that will take us in the short term, because obviously at the minute, we are going through an adjustment on pulp prices. I mean, if this looks like last year looked, you would imagine that they'll come back again in the tail end of the year, but who knows at this point.

George Staphos

If we strip out the volatility in pulp, then what gives you the confidence about being able to maintain your returns on the paper side?

John Williams

Okay, certainly, what we see is a sort of steady-as- she-goes situation in paper, providing we remain sensible in terms of giving our customers value and maintaining the supply-demand balance in our supply chain.

Operator

The next question comes from Anthony Pettinari from Citigroup.

Anthony Pettinari - Citigroup Inc

Your pulp shipments were down about 4% sequentially. And I'm wondering, is that purely the result of scheduled maintenance downtime? Or is there any kind of mix impact or any unscheduled downtime that was -- played a part in that sequential decline?

John Williams

No, it was mostly the maintenance effect. And I think also pulp shipments can be lumpy across months. One boat can be 25,000, 30,000 tons, so that's why that happens. So there's nothing underlying that in terms of customer mix or anything.

Anthony Pettinari - Citigroup Inc

And just sticking with pulp, I was wondering if you could maybe give us a little color on the kind of demand you're seeing in China. Clearly, they've kind of taken a little bit of a breather in July, and we've seen some inventories increase a couple of days. Can you just kind of provide a little color on what you're seeing in China now in terms of customer demand and inventories? And maybe what you would expect a normal demand trend to be as we head into the fall?

John Williams

Sure. Dick, can I ask you to take that question?

Richard Thomas

Sure, I'd be happy to. Your description "has taken a breather" is pretty apt and we saw a bit of this last year. I think the real question is, is this a repeat of last year? Or is there more going on with the government trying to control inflation and kind of manage economic output? At this point, I think it's early to say. Based on the facts as we see them right now, it looks very similar to last year. So the demand has fallen off, really, for NBSK and fluff. And again, you tend to see this fluff -- in particular, you see this in the summertime. I think the good news is that traders have started buying again. They've seen lower prices, and they started to buy. And so that would suggest that they at least believe that there is a bottom forming. And our expectation, based on talking to our customers, is that we'll see activity begin to pick up, tail end of August and into September again as we did, really, the last 2 years.

Operator

The next question comes from Chip Dillon from Vertical Research Partners.

Chip Dillon - Citigroup

Where do I start? $7 a share in free cash flow in one quarter. Now you can't reduce your working capital every quarter like that, but I guess we'll take it. The first question is, your average diluted share count went down about an even 1 million shares or 2.5%. But of course, it was during the second quarter when you bought back most of the shares that you've bought back this year so far. Can you give us either the end-of-the-quarter diluted share count or maybe what the estimate is -- what it will be for the third quarter?

Daniel Buron

Yes, the end of the second quarter was 40.2 million shares outstanding.

Chip Dillon

Got you, okay. And then just remind us what is left on the $600 million cumulative buyback that you've announced so far? How much have you not used up?

Daniel Buron

Yes, we bought back since the beginning close to $279 million out of a $600 million program. So we have left on that, the current program, $321 million.

Chip Dillon - Citigroup

Got you, got it. And then I guess, John, you had mentioned, I know a year ago, that -- I think acquisitions were more on the radar than they later became. And has anything changed in terms of your thinking there or in terms of the opportunity? Or as, I guess, you stated early in the call, that basically that they aren't really on the front burner anymore?

John Williams

Well, I mean, I think -- let's be clear. For the sake of clarity, Chip, we've always said if we could find the right thing to do, we'd do the right thing, but we'd never bet the store. So we're always, I guess I would put it, scanning the horizon. But as we've said very clearly, it has to make strategic sense and it has to make economic sense for the business. If we could find a mixture of those 2 things in a deal, we'd certainly be prepared to do a deal. But as I said very clearly, we're not going to bet the store. So it's going to be $1 billion or less. We've been pretty clear about that, and we remain clear and we remain committed to keep returning cash to shareholders.

Chip Dillon

And then lastly on that score, I noticed the net debt fell very close to 0, about $100 million. Do you -- is there any way you can use that cash that's building up to buy in some of the debt? Or is it just still kind of not a wise thing to do, given whatever the interest rates are?

Daniel Buron

If we do the math, I said the net present value is negative, if we were to do that. So we will continue to monitor and at the right timing, we might use a little bit of that cash to reduce the 2007, theme [ph] mostly, issue that we have outstanding, the high coupon one. But I mean, we're kind of keeping an eye on that, and we'll wait to when it's going to make sense for us to do it.

Operator

The next question comes from Mark Connelly from CLSA.

Mark Connelly - Credit Agricole Securities (USA) Inc.

Just following on Chip's question a bit, as you think about buybacks as part of your process, are you thinking about this as opportunistic buybacks or as part of an ongoing process? We've got companies that sort of fall into 2 categories there: some that do it most of the time; some that just do it when they think their stock is cheap. So that's my first question. Second question's a financial question. Obviously, you can't take all your restructuring charges in one quarter anymore. But can you give us some visibility on what kind of restructuring charges we should be expecting for the rest of the year?

John Williams

Daniel, would you like to talk to that?

Daniel Buron

I don't think you should expect a lot of restructuring charges for the remainder of the year. There's probably a little bit left, few million for the added on closure. That's probably it, obviously, for what's been decided. So if something else is happening, that may change. In terms of buyback, we kind of -- I guess we're a part of the 2 camps that you refer to. We won't buy back stock if we believe the stock is fairly valued. I mean, we're going to buy back that if we believe that it's a very good investment for our shareholders. But at the same time, we like the idea of doing it a little bit all the time. And we're not kind of betting that this quarter, the stock is good and being wrong. So we're going to keep that balance sheet flexibility to seize opportunities in market. As -- I mean, the stock is down in part, I guess, because of the uncertainty in the U.S. situation. But we're going to work with that, and play [ph] so that we create value for our shareholders.

Mark Connelly - Credit Agricole Securities (USA) Inc.

That's very helpful. Just one more question, if I could. Industry inventories are below normal when we think about them in terms of days of supply, which I suppose is good. Can you talk about how you're trying to manage your own inventories in terms of -- relative to where you might have been wanting to keep them 6 or 8 months ago?

John Williams

Not in absolute terms, but I could talk in stock turns. I mean, I think, we've moved the stock turns up to around 10x, 10.5x this year. Maybe 2 years ago, stock turns were around 8-ish. So we're just learning how to run the place more efficiently. And I mean that's really making sure -- obviously the balance of this is to make sure that we can supply our customers effectively. So we think at the minute from a sort of "stock in the system to support the sales" line, this is close to as good as it gets. We think maybe there's another half turn in there, but probably no more than that. That helps?

Mark Connelly - Credit Agricole Securities (USA) Inc.

Yes, that's super.

Operator

Next question comes from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG

John, I just noticed this morning that activist shareholder group has taken a position in one of the specialty paper and tissue companies in the upper Midwest. I know you have a Packaging and Specialty Paper business in the upper Midwest. I wonder if you could just talk with us a little bit about how you're thinking about your business right now.

John Williams

Well, certainly. I mean, at the minute, what we see is actually we're getting a nice volume growth from that business. If you look at those mills specifically, margins are pretty good at the moment, because of course we're a largely-integrated specialty paper maker rather than an unintegrated one, so that helps us quite a lot in the world of high pulp. And even with the adjustments we've seen in the pulp pricing, pulp prices are still fairly high if you're a nonintegrated player in that marketplace. So we remain a pretty committed owner in those businesses. And actually, as we move some of the larger volumes of those grades into our commodity system, we see a very attractive margin opportunity.

Mark Wilde - Deutsche Bank AG

So as a business generally, you're interested in staying in at this point?

John Williams

We are at this point, yes.

Mark Wilde - Deutsche Bank AG

Okay. And can I also ask about the distribution business? It was not a very good quarter there, and I just wondered how you're thinking about sort of your position in distribution.

John Williams

Yes, certainly. I think not a very good quarter, but if we looked at where the trajectory had been heading, I think we've steadied the ship a bit. Obviously, it's only moved around a couple of million. We still like that business as a route to market. I mean, we all know those industry returns are challenged and that we've got to do a better job in that business. I think we've steadied the ship, but we still have to see that margin improve. So I think that's the way we see it at this point.

Mark Wilde - Deutsche Bank AG

Okay. And then finally, could Dick Thomas just give us a little bit of color perhaps on sort of how important the growth in export volumes and uncoated freesheet has been sort of the relatively stable volumes you've shown overall? Can you just kind of break out domestic versus export?

John Williams

Yes. I can take you through that, Mark. I mean, what we see is historically we've probably done 100,000 to 120,000 tons annually on export. If you take our running rate year-to-date, I think our running rate is up to about 185,000, 190,000 tons. I think year-to-date, it's about a 31,000 increase. I forget the exact number. So why are we doing that? Because as you know, it's mostly to Europe. It's mostly with customers we've had for some time. And we see an opportunity to build that business. I don't think we're going to build it out much further than that. But I could see us operating around the sort of 200,000-ton mark by next year and we'll take it from there.

Mark Wilde - Deutsche Bank AG

I mean, I'm just trying to figure out, what are you selling over there? Because it seems like we got Stora [ph] and Portucel and a lot of other Europeans shipping white paper over here, and then you're shipping white paper the other way. It's a little baffling.

John Williams

We wave as the boats pass each other on the Atlantic.

Mark Wilde - Deutsche Bank AG

It doesn't offer a carbon footprint, though.

John Williams

Gives us an opportunity to greet them on their way in. I would -- in all seriousness, I mean, I think we've got some customers over here, who are over there, who like what we do. They like our service. They like our quality. They like our positioning. And where we find those opportunities in that geography, we'll take them.

Operator

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

Stephen Atkinson - BMO Capital Markets Canada

In terms of the working capital reduction, where you have 77 in the first quarter, what is the plan for the year? Or is that 77 like a permanent reduction?

Daniel Buron

Well, there's always a little bit of variability. I think, typically you see in Q4 some cash coming from the receivables. The last couple of weeks are good collection weeks and shipment is a little bit less. So we should see more cash coming from the receivables towards the end of the year. I think inventory, John mentioned the fact that we still see a small improvement. Difficult to see if it's going to happen this year or early next year. So I would consider inventory more stable until the end of the year. So that's, I think, what you should look at for the rest of the year.

Stephen Atkinson - BMO Capital Markets Canada

Okay, so basically...

Daniel Buron

Flat inventory and a little bit of cash coming from the receivables.

John Williams

You got a trading effect in quarter 4, Steven.

Stephen Atkinson - BMO Capital Markets Canada

Okay, so then this is a source of cash? Like this is, shall we say, a permanent reduction?

John Williams

Yes.

Stephen Atkinson - BMO Capital Markets Canada

Great. The second thing, you've got a lot of projects ongoing. And wondered if you could make a couple of comments like China, Kamloops -- I assume it's finished, whether there's anything under the GDP other than the nano. And then finally, of course, if you could give me an update on Ashdown, that would be great.

John Williams

Right. Gosh, that's a lot of questions in one. Let me rattle across the geography. China, we're not up and running, but we're certainly -- we have our building and we're on time. We said, I think, first quarter 2012, and the timing still holds. So that's in pretty good shape. Kamloops is up and running and giving us what we expected it to do. On the Green Transformation monies, I think we have about $31 million left to spend of the $143.5 million that we were allocated, which we have to spend by end of March 2012. And we will spend it. And that's on a variety of projects, as you know, mostly environmentally and energy driven. On Ashdown, we actually did extend the machine for a month, but it shuts in 3 days, on the 61. And of course, we're doing the work, as you know, on that softwood line. But we think that's probably an 18-month bit of work before we have that additional softwood to sell. If that gives you enough color?

Stephen Atkinson - BMO Capital Markets Canada

That's great. Last question, if I may. When I look at the second versus the first -- talking on Slide 8, where you've got $25 million for maintenance and $16 million for volume, meaning $41 million, your maintenance obviously is going down. Is there any planned shutdowns? Or it's really just focusing on the $16 million penalty. Is there any more planned shutdowns for the third quarter relating to maintenance?

Daniel Buron

Yes, there will be a little bit less maintenance shut in the third than in the second. And Ashdown 61, as John mentioned, will close in the next couple of days. So we should reduce the penalty of -- I mean, we took 26,000 tons of lack-of-order downtime in Q1. That should not happen in Q2 and Q3 because of that permanent closure.

Operator

Bill Hoffman from RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC

Just a quick question, John, I just wondered if you could talk a little bit about the pulp, the fluff markets and your thoughts there, whether you have any sort of future plans for additional conversions, et cetera.

John Williams

Well, let me, if I can, just sort of repeat the history. I mean, why did we do what we did? Because of course, we liked the market and we had a unique position in Plymouth where we thought we could supply that market effectively. We were already in the market. We had a good brand. We had a deepwater port, and we liked the market dynamics. We still, obviously, very much like the market dynamics, but what we have to do is really look at our current mills and decide if we can be as competitive in another facility as we are in Plymouth. And we look at that all the time quite frankly, in terms of potential repurposing opportunities. So that's always sort of on the radar. But we certainly have not made a decision at this point and probably won't make one for some time.

Bill Hoffman - RBC Capital Markets, LLC

How much of that pulp is going offshore at this point?

John Williams

Well, the vast majority. Dick will probably know a number better than I do. But I would think certainly 85%. Dick, would that be fair?

Richard Thomas

Yes, that's right on.

Bill Hoffman - RBC Capital Markets, LLC

Right. And are you seeing any pressure on those offshore sales as NBSK comes down on pricing?

John Williams

Well, I think it's not quite the relation to NBSK that is the issue on fluff. The issue is there's quite a lot of new capacity around. And with the sort of general slight Chinese slowdown, there is a little bit more pressure than there used to be. But it certainly isn't enormous pressure.

Operator

The next question comes from Sean Stewart from TD Securities.

Sean Steuart - TD Newcrest Capital Inc.

A question on the CapEx guidance. Daniel, maybe you can just go into a bit of detail on the rationale for lowering that by $40 million or so. And is it specific projects that are being cut out? Or is this more just a general number where you don't see the returns on the projects justifying it?

Daniel Buron

It's more projects that we thought we would be able to do within the year that are taking longer to be finalized and approved and the spending will just be postponed for a few months. And so that's project that we should see in 2012.

Sean Steuart - TD Newcrest Capital Inc.

Okay. And then just following on that, the money you're getting for the Green Energy Transformation, can you remind us of the returns you're expecting on that money you're getting -- i.e., if you can put an EBITDA contribution number around that or return on capital targets you're expecting from that money?

Daniel Buron

It's a little bit all over the place, to be honest. There are some that has very good return and others that were more kind of environmental -- pure, no return, but investment that are improving our environmental situation. So it's all over the map, Sean.

Operator

Next question comes from Lee Cooperman from Omega Advisors.

Leon Cooperman - Omega Advisors, Inc.

You've been asked this question several times, and by me about 2 years ago, and I hear your answer. But I want to make sure that we've really focused on this. And this is on whole stock repurchase deal. I find it interesting. In 2010, the stock traded between, I think, roughly $45 and $85. And this year, I think, somewhere between $75 and $105. Yet we have an average repurchase price of $87, which is almost twice the low of 2010 and pretty much at the high of 2010. And sometimes companies get themselves into a mode where they buy when they have the cash, as opposed to buy when it's undervalued. And I would just kind of admonish you to be more opportunistic and to make sure that we're doing the right thing, because those of us that are not selling back to the company, as you shrink the capital base, are enlarging our ownership. And if you're doing so at inappropriate prices, in the end, you as a stockholder and I as a stockholder are being disadvantaged. So I'm kind of surprised at the very high average price we paid, given where the stock has been for the last couple of years. And so that I hope we don't fall into this mode of buying it when we have the money, rather than buying it when we think it's undervalued. So it's really not a question, it's a statement.

John Williams

I was about to say it's hard to come back with a response. I mean, I think you make a perfectly valid point. But at the minute, I think we still believe that it's a good investment. I mean, I think if you look at the overall valuation of the business, we still think at these prices, it's a good way to use the money. But patently, we try to be as opportunistic as we can to make sure that, to your point, we're not buying at the top.

Leon Cooperman - Omega Advisors, Inc.

Well, at least now, when the call ends, you can go back and buy because it's now trading below what your average price is over the period of almost a year.

John Williams

Exactly.

Leon Cooperman - Omega Advisors, Inc.

All right, thank you. But not to be a wise guy...

John Williams

No, no, no, it's a point well made.

Leon Cooperman - Omega Advisors, Inc.

We have a large interest, and we're not selling. So we're enlarging our ownership. And it looks cheap, and we're glad that you agree. But we want to make sure that -- since you know more than I know, that we're on the right track.

John Williams

I appreciate the support.

Operator

The next question comes from Paul Quinn from RBC Capital Markets.

Paul Quinn - RBC Capital Markets, LLC

You guys have described sort of Domtar's exports in the paper side. Maybe could give us an update on what you're seeing in the North American markets from the import pressure?

John Williams

Well, imports are down about 8.5%, I think, year-to-date if you believe the statistics. So you've got pretty clearly, the Portuguese who have built a position announcing, pretty happy with it. So they're maintaining their volumes. The South Americans have gone quiet for obvious reasons, because currencies roared against them in the opposite direction. So they'd rather sell domestically. The Asians are there a bit, but they are not there that dramatically. So, so far, and if you look over history, what you see is imports largely bump along at around about a 6% market share and stay pretty constant. And that's where they are close to at this point, but at the lower end of it. If that helps, Paul.

Paul Quinn - RBC Capital Markets, LLC

Yes. That's helpful. And just to beat this horse again, just on the allocation between share repurchases and dividend, your stock has done well over the last 2 years -- very well. But it seems to have sort of plateaued here. From the conversations I had with investors, it seems more weighted to higher dividends than share repurchases. Is that something that you'd look at going forward?

John Williams

Well, as you know, we continually review capital allocation. And when we do, we take all those issues into consideration. I mean you've seen what we've done. We did increase by 40% at the Annual General Meeting. And ourselves and our finance committee and the board always look at this. And it's always in our sights; it's something we think about. But I have to say right now, we're very focused on that share repurchase program. So we want to complete that $600 million buyback within an appropriate time, and that's where we're focused for now. And the dividend will stay as is.

Paul Quinn - RBC Capital Markets, LLC

Okay, and just last question on potential acquisitions sort of on a high level. It seems that a number again of shareholders, what keeps your stock at a relatively low valuation is that secular decline that a number of people feel. What is happening on the acquisition front? Just from a high level, do you feel the market is getting more expensive, less expensive? Are the opportunities better than you've seen?

John Williams

Sure. Let me, if I may, talk to the first point, which is this issue of the secular demand decline. I mean, you haven't seen it in the last 2 years. And of course, I think a lot of people feel that if we're not selling uncoated freesheet, the earnings profile disappears. But of course, we still have other things to sell even if we're not selling uncoated freesheet -- most notably pulp. And if we maintain the right portfolio in pulp, we still see opportunities. So if earnings go to nothing, they may reduce slightly, but we don't see them disappearing. So I think that's a key message that perhaps we haven't got across as strongly as we might. On the acquisition front, I think we've said it has to make economic sense and it has to make forward integration sense, and it has to not be betting the store. And we're always scanning the horizon. We've said very clearly, at this point, we believe that we should stay in our own geography. So we're not going to go off on wild adventures into South America or wherever. And that remains our approach. So we scan the horizon and we look for things that make sense. And we haven't done anything. Why haven't we done anything? Because we haven't found something that makes sense. If we do, we'd do it.

Operator

[Operator Instructions] The next question comes from Benoit Laprade from Scotia Capital.

Benoit Laprade - Scotia Capital Inc.

Actually most of my questions have been answered. But just curious on the share repurchase program. The $321 million or so that you have left, is there a specific date by which you would want to be completed? Or...

John Williams

No, Benoit. There isn't.

Operator

And the follow-up question is from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG

John, one of the other things you have talked about as a potential use of some capital going forward is some more repurposing of existing assets into other markets. You've obviously done this down in Plymouth. Can you give us any more kind of a brief update on that or a little color about what types of businesses you might be looking at?

John Williams

Certainly, I'd be happy to. I mean, I think one is always bad at the things one didn't do. So I think I'm quite pleased we didn't go chasing after dissolving pulp, because that was a huge temptation.

Mark Wilde - Deutsche Bank AG

We haven't seen the bottom yet.

John Williams

I think that's going to be interesting. So again, I think the way we look at it -- I'm trying to give you a sort of a general and a specific answer. I mean, really the way we look at it, if we like the market dynamic and our asset base can be repurposed to be in the top quartile of competitiveness, we'd always consider something. So that's the way we look at things. And of course, we look at it based on the fact that we're no longer making paper in that facility. Now the urgency of that particular issue is slightly reduced at the minute, because we find ourselves relatively full. But we're always looking 18 months out to say, "Well, if volume did X, what would our opportunities be?" And yes, can we find higher value pulp grades? Can we find other grades generally? So we're always looking at it in those terms across the asset base.

Mark Wilde - Deutsche Bank AG

All right. Are you looking at proposals actively right now?

John Williams

Well, I mean we're always looking. I mean -- but I wouldn't expect anything to happen in the short or whatever one might call the short- or medium-term mark at this point. We'll take the 61 closure. We'll move that paper into the rest of the network and that keeps us pretty busy and pretty full right now. So that's where we’re going to stay for the moment.

[Technical Difficulty]

John Williams

We had a little bit of radio silence there.

Unknown Analyst -

As a follow-up to that prior question, and actually a couple that have come up. I think it's important to revisit this whole secular decline discussion. I mean, when you look at your asset base, if I'm not mistaken, pretty much over the last 1.5 years, maybe 2 years, you really haven't taken assets out of the business on a net basis, from what I can tell. And can you just, as we look ahead, let's say, for example, in the next 2 to 3 years, you do have say 1 or 2 machines in uncoated you take out. Would it be possible or likely that you would take those machines down in mills that have integrated pulp facilities that you could continue to run, and maybe as you did with Plymouth, make special and high-end products on?

John Williams

Absolutely, absolutely. That's exactly what we look at all the time. So the idea is, if you look at the system, the system is say -- I'll pick a number: 5 million, 5.5 million, 5.4 million tons of pulp. I mean, the real issue is, if you're not making paper, how do make absolutely certain that you're making the maximum earnings from that pulp? So that's the way we look at it.

Unknown Analyst -

Got you. And is it still fair to say that when you look at investment in a paper enterprise or mill that, what, 75%, 80% of the investment if it's integrated is actually the pulp? So your shutting the machine really is a very small relatively small part of the whole picture?

John Williams

It is. You've seen where we've done it. So that's exactly the case from a cash standpoint. Certainly, of course, you're taking a write-down in other ways. But from a cash standpoint, it's not enormous. And again, I'll remind you of Plymouth. We spent close to $80 million on the CapEx to do the job.

Operator

Next question comes from Phil Gresh from JPMorgan.

Phil Gresh - JP Morgan Chase & Co

Just one very quick question. There was a question earlier about the pulp volumes in the second quarter. So I just want to follow up in terms of what actually the kind of capacity run rate is for the second half, kind of taking into account the Ashdown paper machine closure. I know you're also investing to convert some of that from hardwood to softwood. So I didn't know if you actually would be able to run that at the same time. So I'm just trying to get a sense of what your appropriate run rate is.

John Williams

I mean that's going to take a year or so, so that changeover. So a good sort of run rate is about 375,000 tons a quarter on our pulp sales. That's a reasonable balance, if you're looking for a number.

Operator

There are no further questions at this time. Please continue.

Pascal Bossé

Great. Thank you very much, Shelly, and I want to thank all the participants in today's call. And I invite you to join us for the release of our third quarter financial results, which is set for October 27. So thank you very much. You all have a very good day.

Operator

Thank you. 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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