Domtar's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Domtar Corporation (UFS)

Domtar (NYSE:UFS)

Q3 2011 Earnings Call

October 27, 2011 10:00 am ET

Executives

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

Nicholas Estrela -

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

Unknown Executive -

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

Analysts

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

Bill Hoffman - RBC Capital Markets, LLC, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Stephen Atkinson - BMO Capital Markets Canada

Chip A. Dillon - Vertical Research Partners Inc.

Unknown Analyst -

Robert Howard - Prospector Partners

Mark Wilde - Deutsche Bank AG, Research Division

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

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Third Quarter 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is Thursday, October 27, 2011. I would now like to turn the meeting over to Nicolas Estrela, Manager of Investor Relations. Please go ahead.

Nicholas Estrela

Thank you. Good morning, and welcome to our third quarter 2011 earnings call. Our speakers today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. John and Daniel will begin with prepared remarks, after which we will take questions. During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of 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 of our control. I invite you to review Domtar's filings with the Securities Commissions for a listing of those.

Finally, certain non-U.S. GAAP financial measures will be presented and discussed, and you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release, as well as on our website. So with that, I'll turn it over to John.

John D. Williams

Thank you, Nick. Good morning, everyone. This morning, Domtar once again reported good results, driven by lower maintenance-related costs and higher paper prices. EBITDA before items was $286 million, an increase of 10% versus quarter 2. Year-to-date, EBITDA before items is closing in on $900 million, and we're tracking well versus our record 2010 results. EBITDA margins in the Pulp and Paper segment was solid and remained above the 20% range despite high commodity prices that put some pressure on our input costs.

North American uncoated freesheet market have been softer when compared to 2010. As our domestic commodity uncoated paper shipments trend in line with the market, we continue to offset these declines with an enhanced product mix and exports.

In Specialty Papers, our sales are growing, reflecting our strong customer relationships and collaborative efforts to bring new products to market. Year-to-date, sales in specialty products grew 2% versus last year, led by strong growth in food packaging and other grades.

In Pulp, the current down cycle in global markets led to further downward price adjustments. Our prices into quarter $30 per metric ton below the second quarter average, and further declines are expected throughout the fourth quarter.

On liquidity and capital, our solid financial performance continued to translate into strong cash flow, generating $226 million in the quarter. And we've put this cash to work, notably with our share repurchase program, buying back over 2.5 million shares.

Finally, our integration of Attends is progressing well and on target. The Attends acquisition is a small but important step in developing revenue in growing markets. Before turning to Daniel, let me summarize by saying that we're pleased by our continuing progress and have confidence that we can successfully execute on our strategic roadmap. Our capital structure's in good shape, and we're well-positioned to pursue opportunities that make good financial and strategic sense. 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. This morning, we reported net earnings of $2.95 per share for the third quarter, compared to net earnings of $1.30 per share in the second quarter. Adjusting for items, we had earnings of $3.10 per share for the third quarter compared to $2.37 per share in the second quarter. EBITDA before items amounted $286 million compared to $260 million in the previous quarter. Cash flows provided from operating activities amounted to $257 million. Capital expenditure were $31 million, therefore, free cash flow totaled $226 million.

Turning to the earning reconciliation on Slide 5. Our third quarter earnings include the following after-tax items: it started with $4 million related to the impairment and write-down of property, plant and equipment; premium paid on debt repurchase of $3 million; closure and restructuring costs of $1 million; the negative impact of purchase accounting related to the Attends transaction of $1 million; and gain on sales of assets of $3 million. Therefore, excluding these items, we had earnings of $123 million or $2.10 per share.

Turning to the sequential variation in earning on Slide 6. Sales were $14 million higher than the second quarter, mostly due to the inclusion of one month of our new Personal Care segment. SG&A decreased by $13 million, mostly due to the impact of the reduction of our stock in the quarter on the mark-to-market of some stock-based compensation. Interest expense was up $25 million or $4 million higher than the last quarter, due to premium paid on debt repurchase in the quarter. We recorded a tax provision of $45 million or 28% in the quarter. This compare to the tax rate of 29% on a year-to-date basis.

Now turning to the cash flow statement on Slide 7. Cash flow provided from operating activities amounted to $257 million. Capital expenditures amounted to $31 million or 33% of depreciation and amortization. Including CapEx funded by the Canadian Pulp and Paper Green Transformation Program, our capital expenditures in the quarter amounted to $51 million or 55% of D&A. Free cash flow amounted to $226 million in the quarter. Under our stock repurchase program, we repurchased 2.5 million share of stock during the quarter at an average price of $76.13. Since the inception of our program in May 2010, we repurchased 5.7 million share at an average price of $81.75. At the end of the quarter, we had 37.8 million share outstanding, including our exchangeable shares.

As a final note on our cash flow, I want to mention that since the beginning of the year, both our dividend and share repurchase program yield a free cash flow payout of 70%.

Turning to the quarterly sequential waterfall on Slide 8. When compared to the second quarter, EBITDA increased due to lower costs of $10 million, lower scheduled maintenance outage costs of $7 million, lower raw material costs for $6 million, higher-selling prices for $2 million, foreign exchange benefits of $2 million, and the inclusion of 1 month of our new Personal Care segment for $2 million. Few were mitigated by lower volume and mix for $3 million.

Now Slide 9. In Pulp and Paper, sales were down 1% compared to the second quarter and by 4% when compared to last year. Operating income before items was $194 million and depreciation and amortization charge of $91 million. EBITDA before item was $285 million compared to $261 million in the second quarter.

Slide 10. Our Uncoated Freesheet business had an estimated sequential increase in EBITDA before items of $4 million. Paper shipment were sequentially lower by 12,000 tons and down 7,000 ton when compare it to the same quarter last year. Our average transaction prices for all our paper grades were $18 per ton higher than the last quarter, as we implemented price increases.

On Pulp, EBITDA before items increased by an estimated $20 million when compared to the second quarter. Pulp shipment were sequentially lower by 1% versus the second quarter, an average of prices decreased by $34 per metric ton versus the second quarter.

And now on Slide 12. In the quarter, paper inventory levels decreased by 16,000 tons, while pulp inventory level increased by 21,000 metric tons. Lower lack-of-order downtime before machine slowdown was taken in the quarter, and we finalized the closure of paper machine 61 at our Ashdown mill.

Turning to our maintenance schedule on Slide 13.

Just a reminder that our planned maintenance costs are expected to decrease sequentially by approximately $10 million. Now let me make a few comments on the Attends acquisition. The results reported for the third quarter include the financial results of Attends for the month of September only. These results also include some onetime items related versus accounting.

In the quarter, this business continued to perform as expected with an annual run-rate EBITDA of approximately $39 million. We're looking forward to Q4 earnings release to be able to disclose a full quarter of this new business and give you more information, so that you understand its earnings profile. My last comment would be on CapEx for the rest of the year. In 2001, we have many projects where the majority of spendings occurs towards the end of the year. We have -- we are, therefore, still forecasting our total CapEx for 2011 to be at the lower end of the financial assumption of between $140 million and $160 million that we gave you last quarter. So this concludes the financial review. And with that, I will turn the call back to John.

John D. Williams

Thank you Daniel. Our results cap off a solid third quarter, as we achieved growth in EBITDA against quarter 2, despite accelerating softness in pulp markets and headwinds stemming from the high-end pulp cost environment. Paper price increases moved through, supported by tight inventory management and high operating rates. Our paper inventories were down again this quarter, as we stay vigilant on balancing our production with our cost of demand and closely monitor order entries.

While market demand for North American uncoated freesheet paper was down about 4% versus last year, we are developing business in new markets and new geographies, which have allowed our volumes to remain relatively steady. Moving on to the front end of the business, we recently expanded our EarthChoice line of paper products to include specialty and trade book papers. As a result, we'll sell an additional 150,000 tons of FSC-certified paper over time.

In Pulp, prices for our grades declined in the quarter, notably in China, but our inventories are much lower than they were in the last down cycle of late '08, early '09. We've also significantly reduced our exposure to hardwood pulp in the summer of 2010 with the sale of our Woodland Pulp Mill.

As speculation about the direction of the global economies continues, our overall outlook for volumes in pulp remains cautious. Pulp is a volatile business, and we'll continue to face a few bumps in the road, but we're optimistic about the long-term supply-and-demand dynamics going forward, notably in softwood.

I'm also very proud to mention that some of our mills were the recipients of a number of awards during the quarter. The Kingsport Mill's wood ash soil additive program was recently recognized by the Tennessee Chamber of Commerce, and they were the winners of the Solid Waste Management award at the organization's annual environmental conference. In addition, our Marlboro Mill was named the 2011 Silver Crescent award winner in Midsized Companies category. The Silver Crescent Awards recognize manufacturers in South Carolina for their production and process advances, and their contribution to the local community and state economy, their employee engagement efforts and their environmental performance.

Last but by no means least, our Paper Because campaign was the recipient of the Positively Print award, a program that honors creative and effective print advocacy campaigns within the graphic communications industry. Another notable achievement was on our health and safety performance with our total frequency rate reached 1.24% compared to 1.3% in the second quarter.

Looking at our strategic roadmap, we're making good progress on integrating Attends, and we're committed to unleashing the great organic growth potential of the business. We're focused on increasing the value that this acquisition will bring to Domtar through a number of initiatives. As we have mentioned at the time of the acquisition, we see an opportunity to double the business within 5 years. The long-term outlook for the Personal Care market is very positive, and we believe we're positioned for excellent profitable growth going forward.

Finally, on capital allocation, we're executing on our share buyback program, and we remain committed to returning a majority of future free cash to shareholders. Before we open the call for questions, I'd like to say a few words on our outlook for the upcoming quarter. As it is typical, fourth quarter results will reflect some seasonal slowdown within our paper shipments. And in Pulp, the cyclical downturn in global pulp markets is expected to lead to further declines in our reselling prices.

In addition, the price premium that had existed for NBSK in China versus North America has eroded. China remains a volatile market, due not only to demand patterns, but also to the impact of public and monetary policies. But we remain focused on creating shareholder value through first-class execution in our core business, disciplined capital allocation and targeted M&A that will provide oxygen to top line. I want to thank you for your support. And with that, I'll turn it over to Nick for questions.

Question-and-Answer Session

Nicholas Estrela

So to take questions, we have John and Daniel, a few others, Dick Thomas, Senior VP of Sales and Marketing; and Mike Edwards, Senior VP, Pulp and Paper Manufacturing. [Operator Instructions] Operator?

Operator

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

Unknown Analyst -

This [indiscernible] on for Mark this morning. I just have a couple of questions. First of all, why do you think the trade rags keep reporting weaker white paper prices when the big producers haven't shown a decline? We saw this a couple of quarters ago in our channel check said it wasn't an issue. Pulp and paper, we did it again, and once again we don 't see on the marker. So why do industry observers keep telling us that prices are going down when we can't see that they are?

John D. Williams

I think, one of the issues -- I think, we may have discussed this before. A lot of what they do is kind of anecdotal information that's been turned into statistics, which is always a little bit disturbing to me, which is why we don't participate in a number of these surveys. That's why I think, to be honest, I think it's a part of it. Typically, if you ask a buyer what is he going to tell you? So I think that probably skews it in one particular direction.

Unknown Analyst -

Just one on the acquisition front. After the Attends deal, are you still focused on acquisitions. And if so, how important to your acquisition strategy is integrating your net long pulp position.

John D. Williams

Well, I think, it gives us opportunities that, that sort of downstream integration, but I think the real issue more importantly is to buy good strong business where we like the dynamics of the business, which is why we did what we did at Attends. Because obviously even if we forward integrate, we're going to sort of forward integrate, if you like a market pricing, obviously. So if you look at incontinence, we like the look at that business. And as we said previously, we look at other grades if we think they make sense. So it's important because I think we need to build out to make sure that we have an earnings stream. We've said over the years, the issue really is to try and reduce volatility and that's exactly what we're trying to do.

Unknown Analyst -

And then just finally, would you be inclined to ask the Board for an increase in your buyback authorization, given the way cash flow in the business are going?

John D. Williams

Well, I mean, as you can tell, we made the promise and I'm proud that we kept to it, that we would return a majority of free cash to shareholders. So if we feel that, that would be important as part of that, we obviously would do.

Operator

The next question comes from Anthony Pettinari from Citi.

Anthony Pettinari - Citigroup Inc, Research Division

I had a question on uncoated freesheet exports. I think last quarter, you talked about exporting at a run rate of, I think, 190,000 tons, with most of that going to Europe, and I think historically you've done 100,000, 120,000 tons. Given the kind of deterioration -- or relative deterioration we've seen in export markets, maybe kind of a softer macro view for Europe, can you just talk about maybe where your exports are right now? And then, can you still see yourself operating at kind of a 200,000-ton export level next year?

John D. Williams

Well, I think you have to split it a little bit into 2. We do export cut size, and we export that mainly to our sort of key accounts that we also have relationships with in the U.S. That remains pretty constant business. And then sometimes on the roll side, we come in and out of it. Really, we're thinking about should we be there, how could we be there into long-term and to what level that's appropriate. And we think that 190,000, 200,000 ton level is reasonably appropriate. So I think we'll see it around those levels between 150,000 to 200,000 tons, pretty consistently over time. If that helps?

Anthony Pettinari - Citigroup Inc, Research Division

Yes. That's pretty helpful. And then just regarding the Attends acquisition you talked about potentially doubling that business within the next 5 years. Other than just the growth of that category in the consumer, what are kind of the levers that you can pull to really grow that business over the next 5 years and sort of what are the chance that you can take?

John D. Williams

I'm happy to answer the question. If you look at it, it's a business that providing it maintains market share. It's going to see high single-digit growth year-after-year-after-year, just based on the marketplace growth, 6%, 7% growth a year. In addition, I don't want to go through of the detail of the product range, but I mean, in addition, there are elements of the product range where we don't have the full range. So we see opportunities there. And we also see opportunities in a couple of channels, particularly the home care channel. We're very strong in the acute care channel, but we see opportunities in home care. There would be some capital involved. But obviously, it's not the sort of capital level that you might see in the paper industry. So put all that together, we see a very strong runway for that business.

Operator

The next question comes from Phil Gresh from JPMorgan.

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

Looking back to last quarter, you had talked about input costs as a headwind for this quarter, and in your bridge, you talked about it as a tailwind. So I guess maybe you could give us some color on what happened there?

John D. Williams

I mean, some of the sort of pricing increase we saw are perhaps better than we expected to. If you look forward, we see some increases in some of the chemical areas, the caustic soda [ph] areas. So it's not gigantic, Phil, but it's, I mean, quarter-to-quarter maybe $3 million, $5 million something around that, but it's not going to be enormous. So that's what happened.

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

And just -- on the fluff pulp markets, I'm hoping you might give a little bit more color what you're seeing there. I know there's some customers out there that have talked about weaker demand. So are you concerned at all with the demand side of the equation that you've got some supply coming on line here in the industry?

John D. Williams

I mean, if you look at -- you've been reading that thing that says people are using diapers for longer I guess in developing markets. I mean, if you look at where we are, we're about sort of a 400,000-ton seller into a well over $5 million-ton marketplace. I think, quite frankly, we can -- we should be able to find our way around to make sure that we find a home for those volumes. But certainly, it has got a little bit softer, but I don't think it's anything -- it's not sort of some sort of kind of tsunami in terms of reduction in demand. But certainly, it's got a bit softer. If that helps?

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

Okay. And then just a last question. Your pulp inventories are up in the quarter. I know that some of the stuff can be, like you said last quarter, one shipload at the end of the quarter. I don't know if that was a factor, or maybe you're trying to be a bit more opportunistic around the pricing environment right now. Just maybe some color around that?

John D. Williams

Yes, certainly. I think if you look back, you could criticize us in '09, but we went into that downturn with a pretty high stocks, and one of the reasons behind that, quite frankly, was our hardwood position in Woodland. That's not going to happen this time, and we're very determined to make sure we keep those inventories as tight as we can, while still supplying the customer. And that's the way we're going to progress as we go through it. Just to give you a little bit of internal color, we run a meeting every Tuesday morning based on a scorecard that we have. The key to that scorecard is always our inventory levels. So we're watching it very closely.

Operator

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

Chip A. Dillon - Vertical Research Partners Inc.

I know last year and I guess this is kind of normal -- and you mentioned this in your comments about volumes, that there is a normal drop-off in the fourth quarter across the board, and I guess as we look at our numbers, should we assume anything other than that change plus the increase in CapEx that you're sort of suggesting as we kind try to get to a free cash flow number for the fourth quarter?

Daniel Buron

I think we should see a more likely the same cyclical impact in the fourth quarter after Thanksgiving, the business is definitely slower than it is for the rest of the year. And you're right, I mean, we're pointing to more CapEx in Q4 than the rest of the year. Obviously, there's always a question mark to how much will actually being done. But right now if you look at our plans, we should be at the lower end of the $140 million or close to $140 million for the full year, which means a significant CapEx in Q4.

Chip A. Dillon - Vertical Research Partners Inc.

And then, back to the buyback issue. Could you remind us what you have left on your authorization? I don't know if you care to comment about what you might have been so far in October. So just sort of where that stands? And I guess another question is -- I'll just let you answer that.

John D. Williams

What we have left in our program is $130 million, Chip, and we've done some. We have signed a [indiscernible] agreement before we're going to turn to the blackout in September. That will be reported in our Q4 earnings conference.

Chip A. Dillon - Vertical Research Partners Inc.

To get that out, should we assume that you would not buyback more than $130 million in the fourth quarter? Or is it possible that you could get that authorization extended before the end of the year?

Daniel Buron

As we're consuming the $130 million left. We're getting closer to a point where we're going to sit down with our Board and discuss what's next. And as John mentioned earlier, our commitment remain to return the necessary to our [ph] -- future free cash flow to our shareholders.

Chip A. Dillon - Vertical Research Partners Inc.

And last question, when you look at 2012 and I know it's early days, any early guidance as to how you see capital spending shaping up that year compared to this year? In particular, you mentioned it's going to be at the low end of your earlier range. Does that mean that you might be pushing some of that CapEx into 2012?

Daniel Buron

It's very early to share that, we're in the budget process right now. There's an initial question mark for 2012 will be the Attends business's capital needs to do their -- end or doubling their earnings over 5 years. We'll be able to give you more in Q4, but the core business or the business, excluding attention [ph], what we've guided in the past.

John D. Williams

The only other difference, Chip, would obviously, be the green transformation program ends March in Canada. So consequently, what we're investing if you like in our Canadian mills come 2012 would actually sort be our money, if you understand my point. That might make a bit of a difference, but we're in the process now, and we'll obviously let you know as we do when we know.

Operator

Next question comes from Bill Hoffman from RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

John, I was just wondering if you could address sort of M&A opportunities. As you guys sort of look forward, the Attends obviously is an interesting acquisition. I just wondered, one, whether there's other bolt-ons that would help you build out that end of the business and sort of further downstream integrate in that same mode? And the second thing is, when you talk about some of these additional sales of specialty products, packaging grades and also other geographic regions, I'm just wondering whether -- can challenging [ph] some of those other competitive markets that make sense for you, obviously, on a bolt-on basis as opposed to anything major?

John D. Williams

Yes, let me take the first one and then the second one, if I may. I think the idea of moving downstream, I mean, we continue -- our antennae are always out there, looking at opportunities. I think we've been pretty clear. We're not going to do something that kind of bets the store. So you're going to see things if you do see anything, of the size of the transaction we have made, maybe slightly bigger. We said sort of up to a $1 billion, $1.5 billion, but we certainly don't see ourselves erupting into anything major. I think on consolidating our own market in other geography. Again, I think I've been pretty clear and probably worth restating, I mean Europe looks nigh on impossible in terms of the transactions you have to put in place to do it. South America, well, we're just another guy with money. Do we really bring anything to the party? China, you've seen what we've done. We're building a distribution, converting business more than putting down hard metal on paper manufacturing. Quite frankly, that's I think the way we're going to behave. If that helps you.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

That's helpful. But I guess the other question I was just -- would really just not -- freesheet [ph] grades, some of these other sort of complimentary grades.

John D. Williams

Well, I think you want to ask to be careful. The specialty business historically has been selling from smaller machines that used to be world-class stuff for which you need more money. You have to be very confident that actually consolidating a market like that. Because really, it's a series of micromarkets. It's not about owning lots of specialty mills in my personal opinion. And if you look at the business we've got, I mean it's typically been where the front end of the specialty businesses negotiated, and we've moved some of those grades under commodity machines, and therefore, can be competitive. So that's the way we see it today. If that helps. I hope I've answered your question.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And just one last question on the Attends business, as we look into Q4, we assumed that you're going to be generating somewhere in the $10 million should be the EBITDA in that business.

John D. Williams

Of course, I mean, I never want to fall into a trap of giving you forward guidance, but I mean, you can certainly make the assumption it's trading at the kind of levels we expected it to trade at, that kind of $39 million run rate looks a pretty good rule of thumb at the moment.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Is there any seasonality to that?

John D. Williams

A little bit but not a lot, to be frank, not a lot. It's a pretty constant business.

Daniel Buron

Quarter-over-quarter, it's like that.

John D. Williams

It's pretty steady.

Operator

The next question comes from George Staphos from Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

First question on Attends, do you think there are other opportunities to take the brand into related areas that would obviously be beneficial for volume and for profitability?

John D. Williams

Well, the answer is maybe, which is probably a useless answer. I think where we're focused at the moment is really making sure we deliver the promise we've made. If you wanted, I mean, sort of a blue skies a bit where that brand is really strong is in that home care, acute care. Now you could absolutely see a world where that brand in terms of a home care delivery of a number of products and services could actually be quite powerful, but I think what we've got to do first is to grow the business as we promised we would grow it.

George L. Staphos - BofA Merrill Lynch, Research Division

Meantime on pricing and uncoated freesheet, back to an earlier question, are there opportunities, you think, John, are there opportunities, John, either through channel or different products like post-consumer where you can actually margin up the business. Obviously, in spite of what will be a slow decline from a demand standpoint long-term?

John D. Williams

I, to be honest, my expectation, George, I mean it's probably not. I think there are going to be opportunities, but they're not step-change opportunities in my view.

George L. Staphos - BofA Merrill Lynch, Research Division

I guess 2 last ones, and I'll turn it over. Could you update us on where you think in softwood you are on a cost curve relative to average? Are any things that you can do to move further to left on the cost curve within your pulp?

John D. Williams

We've done a lot. I'd don't think one should underestimate what we've done. If you take our Canadian mills, you take particularly Kamloops, you take Dryden. We've done a lot on the cost side, on the power side to give ourselves opportunities to lower our cost base, and we're doing that pretty actively right now. And of course, I mean all the major mill is Plymouth, that is right there in terms of below-cost curve. But I think we made progress, to be frank. So if you look at where our breakeven might have been in sort of very low pulp pricing and where it is today, it's considerably improved. Because of what we've done in the asset base, and of course, what we've done in terms of product mix.

George L. Staphos - BofA Merrill Lynch, Research Division

In realizing, it's a little bit confidential, a lot of it is confidential, John. But could you size it at all in terms of what is the progress has been, either versus where you've been or where you think versus the industry average might have been maybe index it however you'd like?

John D. Williams

I'm afraid, I can't do that George.

George L. Staphos - BofA Merrill Lynch, Research Division

Again, softwood seems to be very tight right now. That's a positive for you. What do you folks suggest the ability for buyers to shift and users to shift between hardwood and softwood is on a global basis?

John D. Williams

I think that's a kind of world hunger question. I mean, obviously -- you always ask one every quarter. I would say, if you look at it right now, the differential means people will work hard to substitute as much as they possibly can. There is a limited that, and it's really why not only have we moved our grades, but we've also, if you like, the customer base into kind of tissue grades where we know that substitute in opportunities are not so great. So in my view, it is somewhere around the margin that always do their best, but they are limited by it.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

A few percent is not like 10%?

John D. Williams

No.

Operator

Next question comes from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

I got a few questions, one, can you just talk about the specialty paper strategy. I've think you said you're at about 150,000 tons a year now? Is that right?

John D. Williams

No, let me be clear. That was the FSC where -- and those aren't new tons, those are tons that are becoming FSC-certified. Based on what we call -- we always have a debate about what really the technical and specialty is. Daniel wants a precise definition. I never do. It's about 400,000 tons of our business. And it runs with a different sales and marketing organization. But what it does seem to do is that it finds us some opportunity that when we took them on some of our commodity machines, for example, in colors that we moved into Hallsville [ph] a couple of years ago. We find ourselves improving EBITDA.

Mark Wilde - Deutsche Bank AG, Research Division

And what kind of growth do you think you can put in a 400,000 ton base? Because obviously, you're in a great position to be very low-cost in these specialties, if you've got the ability to market and sell them right.

John D. Williams

Exactly, I agree. I mean it's a GDP growth business. And what quickly happens and I this is where everyone has to be careful is that growth, as well as you know as anybody, those grades great typically, the move the 10,000 to 20,000 tons. People them move them onto the machine. Kind of over time they get some price resolutions. So it's not like every time you move it, you fill your boot. Sometimes you do, sometimes you don't. So I mean, we're not trying to grow that business too much faster than the mat, to be frank.

Mark Wilde - Deutsche Bank AG, Research Division

I got a couple of questions for Dick Thomas, if I could. Dick, I'm just curious about what your sense is on 2 issues, one is the impact of these coated paper producers maybe running more uncoated these days. It's always hard for us to tell this on the outside. One of those guys are private. And then also, what do you think the impact is going to be as these whole costs come down in non-integrated uncoated freesheet producers outside of North America? And how that's going to affect the global market?

Richard L. Thomas

We're watching both of those very carefully. On the coated side, John talked earlier about kind of the anecdotal nature of this. We think we've a decent handle on it, and we think we dimensioned it. There's probably a bit of upside potential, but we feel like the coated players, domestically, have been active in kind of at the margin and [ph] on the margin in uncoated for a while. So again, there might be some upside potential but a think it's kind of limited. On the question of non-integrateds, globally, probably Asia's where you would look at that. I think that globally, we've felt pretty strongly for the past few years that you don't have much of a connection any more in pulp prices and uncoated paper production. I think you'd agree that's been pretty well-validated. Globally, there's probably some -- certainly some risk there, I think, and we're watching that carefully. And obviously, we get the imported numbers a bit after the fact. And so far, they're pretty steady.

John D. Williams

Mark, I think also, the other question -- I'm sorry to cut you, but I think the other point is whether or not major accounts in the U.S. are going to risk their supply chain to somebody who may come in and out, because a lot of these guys now, they're very focused and just-in-time. They're very -- they can't forecast their own business. It's all based on consumer demand or printed [ph] demand. It is, right now, I guess sometimes you see more noise than tons, if that makes sense. Because I think, when the purchaser really thinks about -- they're going to have to hold inventory. It's a fairly long supply chain. I mean, it makes a noise. But then again, given the fact that Europeans have gotten vaguely organized, there's also the currency issue and the people aren't really going to put their business to somebody where it's a currency play. So I think all that put together says, if they were going to do it, they might have done it already.

Mark Wilde - Deutsche Bank AG, Research Division

Yes, I agree. From what I can see, it's the reason you the only guys that are really consistent on this have been the Portuguese. The last question I have is just on the Pulp side. And I have 2 questions here. One is, do you have any sense for like the high-cost softwood producers in either Canada or Europe, how much more room they have before we start to run up against cash costs for a high-cost producer, and also just related to that, with the markets still coming down and the weather getting cold across Northern Europe and in Canada, is there a point here where these guys don't make a decision soon, to kind of pull capacity, they wind up just forcing themselves to run through the winter because they can't shut down the mill in the middle of the winter?

John D. Williams

Well, I can't talk for the rest of them, Mark. I can only joke for us, really. I mean certainly, we're watching this very closely. And certainly, we have a view this time around, if it gets to that point. And it's a long way from that point right now. Winter, summer, spring or fall, these people are going to have to -- we're have going to have to do something. So we're not really prepared this time around to -- you can't shut in the winter issue. But I think if you look at it, even if you look at the forward forecast right now, we don't appear to be reaching that point even by January, February of next year.

Mark Wilde - Deutsche Bank AG, Research Division

And you would say that, John, even kind if you based on what you know about the sort of industry cost curves for other players up there?

John D. Williams

To be honest, Mark, it's not for me to comment on other players but my guess would be that they're going to have to make their own decisions.

Daniel Buron

If history repeats itself. It takes a lot to fill the mill.

Mark Wilde - Deutsche Bank AG, Research Division

But you feel like you could do that during mid-winter, if you had to.

John D. Williams

Well if we have to, we have to. It's as simple as that.

Mark Wilde - Deutsche Bank AG, Research Division

All right, very good. Well, we hope you don't have to.

Operator

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

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

Just following up on Mark's question on the pulp markets. There's a number of people out there that are pretty pessimistic on the markets expecting pricing on NBSK down to the low 800 level, I just wanted to get some more color on your thinking going forward. I'm not there but where are you guys at?

John D. Williams

Well, I mean, I think one has -- I don't like to talk about forward pricing, if you don't mind, Paul. Just because it's kind of between ourselves and our customers, and it's been a bit of a lagging -- I guess the way we see this is we all know this is a cyclical marketplace. And right now, the cycle is sliding a bit, we're very careful with our inventory. We like what we've done in terms of product mix. I think we're far better prepared than we were the last time this happened us. And we'll manage. And I think what we can give you is only the assurance that we will manage our way through it. We're a small player in the global pulp market. And that's how we have to behave in terms of making the right decisions.

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

Okay, nicely done. And just on -- just a follow-up on Green Transformation, if you can give it an update on where you're at on the spending there?

John D. Williams

I can tell you the total. I'll let Daniel give you the detail of where we got to. We were allocated $143.5 million. And by end of March 2012, we will have pretty much -- we spent it all. And Daniel, if you could just update us on where we are?

Daniel Buron

We're doing very well there. There's $20 million left of CapEx to be done, for the program to be completed. So we have an ample time for us to complete that before the deadline end of March next year. Is that helpful?

Operator

The next question comes from Robert Howard from Prospector Partners.

[Technical Difficulty]

Robert Howard - Prospector Partners

Most of my stuff's been answered, just finishing up on that last bit on the Green Transformation Program, I guess have you been seeing much results or have the benefits from that kind of rolling in the way that you would have expected?

John D. Williams

Absolutely. I think what you do see is where we have spent that money because really our Canadian asset other than Windsor are very much pulp-driven assets. We've been, and again, I'm not happy to give you the number but I think you should know that we have driven our cost base down in both our Dryden mill and also in our Kamloops Mill. So I mean that's really where that money has been focused mostly on energy generation and power deals that give us a net income from the arbitrage of the power price

Robert Howard - Prospector Partners

And then I guess one other thing, just with the way pulp prices has been moving here. Have you been seeing much of a reaction from your customer, like you just talked a little bit earlier about maybe they're trying to change their hard, soft pulp mix or other -- is there anything else, are they being more tricky when they're buying stuff from you or anything like that?

John D. Williams

I mean, no, not really. I mean we're focused -- if they have demand we're their supplier, if they have less demand, obviously they're feeling a little less confident. But no, we haven't really seen very much of that, to be honest with you.

Operator

The next question comes from Stephen Atkinson from Bank of Montréal.

Stephen Atkinson - BMO Capital Markets Canada

Can you give me an update on where you are with China in terms of your converting project?

John D. Williams

Certainly, we are a proud owner of 2 warehouses. And we'll be sort of firing in anger, if you like, by the end of quarter 1, 2012, Stephen. So we have a general manager for management infrastructure. We're recruiting people, and we have our license to operate, actually, which we got I think last week. So we're working our way through.

Stephen Atkinson - BMO Capital Markets Canada

And in terms of the pension, can you give me some -- an update in terms of status of any contributions in Q4?

John D. Williams

I'll let Daniel do that.

Daniel Buron

We are a little bit too early to keep it up in Q4. We normally do a full review in the fourth quarter. It's not done right now. So we've made, so far, the scheduled payment that are as scheduled. You'll see a little bit more of this in Q3 because in the U.S., there's a deadline under the U.S. laws that you have to fund [ph] by at September 15, whatever was needed to be fund for the year. Other than that time, for the time being, this should be a busy or a normal quarter. But again, we're going to look at it, and we reserve the right to fund more if we feel this is the right decision for us.

Stephen Atkinson - BMO Capital Markets Canada

In terms of Attends, are you running the business full ship like -- I'm trying to get a handle as to whether -- when you talk about filling up the product line, whether you can do that without spending money, or are you going to have to put in hardware?

John D. Williams

Let's be clear. We're going to have to put in hardware, Stephen. I mean, it depends on the specific product they have -- we have, I should say. Some upside of the machines we already have, but really, we think the best way to approach that business is to have it running full tilt from that facility. They have a strategic plan that requires capital, and we absolutely support that plan. So you will see us spending money there.

Stephen Atkinson - BMO Capital Markets Canada

In terms of the Green Transformation Program, sorry to come back to it. I'm trying to get a handle like you spent a $123.5 million, some of it, of course, is Windsor and the balance is Kamloops and -- and where I assume very little in Espanola. So in terms of the project, of $123 million, have they been completed and we're seeing the full benefit or is there more to come? Or are some of the projects still being done?

John D. Williams

There are still of the projects that's still being done. The Dryden, I think, biggest project is Dryden, is still in process, and we should see benefits early next year. A lot of money was spent, I think the lion's share was spent in Kamloops not all of that is behind us, but a significant portion of it. And we do have the benefit, as we speak, as to the remark that John mentioned earlier, our costs -- average cost of pulp has improved significantly since last -- since 2009. So it's a mixed bag, Stephen.

Stephen Atkinson - BMO Capital Markets Canada

Yes. Just to get a handle that there's still some more to come in terms of benefits?

Daniel Buron

Yes, there's still some more to come.

Stephen Atkinson - BMO Capital Markets Canada

And I don't know if you could tell me this one, are you able to tell me how much pulp at Attends buys?

John D. Williams

Absolutely, about 30,000 tons, and they're signed up with a competitor for year 1, for the majority of it. And so the rough rule of thumb, Stephen, if it's any help is about any $100 million of sales is roughly 15,000 tons of fluff pulp.

Stephen Atkinson - BMO Capital Markets Canada

So that possibly, obviously, you negotiated a very good contract, if it's a competitor, but I guess I was looking at it from the point of view of...

John D. Williams

They were already committed. So it is what it is.

Stephen Atkinson - BMO Capital Markets Canada

So 2013 then Plymouth could benefit from a freight savings.

John D. Williams

Well, it would be Attends benefiting, yes. I wouldn't -- please don't overestimate that. I mean, in my view, that's a pretty small number.

Daniel Buron

Because the current supplier is not that far also. There's a saving but it's not a huge one.

Operator

The next question comes from Mark Friedman [ph] from that Gabes Capital [ph].

Unknown Analyst -

It's Dax [ph]. I have a question. If you look at the Pulp business a year ago, I guess you had Woodland in the quarter, and if you look at the sequential business, I mean, you had flattish sort of volumes and pricing down and yet the EBITDA went from $55 million last quarter to $75 million. Is that all seasonal maintenance? Or can you break that down that $20 million. I'm just trying to understand how you made so much money in that with the pricing and volume terms.

Daniel Buron

It's more of costs in the quarter. $8 million of that is maintenance. The biggest place we're spending our dollar to maintain is the Pulp business. So we have a quarter-over-quarter $7 million or $8 million benefit from maintenance. So you cannot assign all of that to the Pulp business or almost all that to the Pulp business. And in general, our costs were lower also in the quarter. And a significant proportion of that is assigned to the Pulp business.

John D. Williams

Did that help?

Unknown Analyst -

Yes. Is any of that, is any of that -- is there some sort of seasonal aspect to the maintenance there? Would you expect given -- if you had another quarter of the similar pricing and similar volumes, would you expect to make that much money in the Pulp business?

Daniel Buron

To give you an idea in Q4, we expect $10 million less spending and maintenance that we had in Q3. So definitely, there is a seasonal aspect. Q2 is typically our biggest month, our biggest quarter of maintenance.

Unknown Analyst -

Okay. And then, if I look in the Uncoated Freesheet business, and you look over like, let's say, the near term, the next 12 months or so, and you look out at demand trends, would you expect that, that supply and demand would be relatively balanced industry-wide for the coming like 12 months or so?

John D. Williams

Well, I mean, it's not for me to talk about the industry, it's really only for me to talk about us. And I think you've seen how we behaved over time, and we see no reason that we wouldn't behave in the same way. We've said pretty clearly that we think this is a business with a kind of 3% to 4% demand decline. And the way we're managing that is obviously if we feel that we're getting too far ahead, we'll take a shot. We take a permanent shot, as we've done this year. And of course, some of those other grades that we'll move in to make sure we're running our mills. So I think that's all I can comment on that, Mark, really.

Unknown Executive

Before, pulps were actually higher.

Operator

[Operator Instructions] We have a follow-up question from Chip Dillon.

Chip A. Dillon - Vertical Research Partners Inc.

Could you remind us, Daniel, where the share count ended, either on a diluted or a basic basis at the end of the quarter?

Daniel Buron

It's at 37.8 million shares outstanding this is on an absolute basis. Dilution is I think more or less 300,000 share, if you look at the GAAP normally. You can add 300 if you want for your diluted number.

Chip A. Dillon - Vertical Research Partners Inc.

So in other words, if you had 39.5 million on average. Let's say at the diluted level, you had 39.7 million and now if you have 38.1 million, you're already 4% sort of ahead of the game in the fourth quarter in terms of having lower share count.

John D. Williams

You’re right.

Chip A. Dillon - Vertical Research Partners Inc.

And then on the tax credits that -- I guess you know we're hearing different things, as people still deal with the legacy of alternative energy tax credits from '09, I see on your balance sheet there's a 151 current deferred tax assets. Could you sort of weave that all together and tell us how we could maybe see any incremental benefit from that program?

Daniel Buron

You shouldn't see any. Let's divide the different contents you see in our balance sheet is the short-term provision that are in the balance sheet that are replacing themselves year-after-year. So you should not see a big swing there, and there's no link between and fuel tax credit that you're referring to. In terms of fuel tax credit, I don't believe are going to see -- I've don't see any further benefit. The big question mark is still -- is a taxable credit or not? And every company made their own decision, and their only assumption and IRS at some point will decide or will assess the companies. So for us we treated it as a taxable. If ever it's not taxable, we're going to have a big benefit in our P&L at that time. And if it's taxable, we're going to have a big cash out, because our position, our tax return, it's not taxable. But for [indiscernible] reason, we took a provision in our P&L for that.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. The 151 on the current asset side that says deferred taxes, has that turned to cash in the next year?

Daniel Buron

Not really, because it's a rolling amount -- it's all the provision you have and then bad debt provision and the accrual that you have in your books that are kind -- if there's a change in the amount of provision, a portion of that will turn into cash. But if there's no change in the amount of the provision, they are kind of renew themselves.

Chip A. Dillon - Vertical Research Partners Inc.

And just a little tongue-in-cheek, John, who mentioned the decline in uncoated, I'm not sure that's really, totally accurate. If my data is right from your press release, it looks like your shipments in uncoated are actually better the last 2 quarters, second, third of '11 versus the second and third quarter of '10. Is there something I'm missing here? If you added the tons, it's a little higher.

John D. Williams

Let me explain, because I want to be clear. I mean, we obviously caught all the business, if you like, uncoated freesheet. If you look at how we're performing in the key marketplaces versus the declines you see in market data, Chip. You look at cut size or you look at rolls, you look at -- I mean, we're right on what's going on in those market places. So our cut size business is down about to market. Our roll business is very much where the marketplace is. Our total tons, however, based on the fact we're exporting a little bit more and we've done some more work in some specialty grades are showing what they're showing. But just to be clear because they don't want you to think that we're set up doing something different. But so, in those key markets we behave exactly as we have been in terms of the way we deal with our customers. But we are doing some other business in some of those mills.

Chip A. Dillon - Vertical Research Partners Inc.

Right and I guess, also, just to make sure I'm right on this, it seems like if you go back all the way to the beginning of 2010. You really haven't -- even if -- I think you've shut down 2 or maybe 3 paper machines, I guess Plymouth and Ashdown, but you haven't really shut down any Pulp, if I'm not mistaken. Obviously, you sold Woodland, but you have haven't shut down any Pulp that was behind those machines, is that correct?

John D. Williams

It is.

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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