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Domtar Corporation (NYSE:UFS)

Q4 2011 Earnings Conference Call

February 3, 2012 11:00 AM EST

Executives

Pascal Bossé – VP, Corporate Communications and IR

John Williams – President and CEO

Daniel Buron – CFO

Mike Edwards – SVP, Pulp and Paper Manufacturing

Analysts

Anthony Pettinari – Citi

George Staphos – Bank of America Merrill Lynch

Chip Dillon – Vertical Research Partners

Phil Gresh – JP Morgan

Marks Connelly – CLSA

Bill Hoffman – RBC Capital Markets

Mark Wilde – Deutsche Bank

Steve Chercover – D.A. Davidson

Ali Kabili – Credit Suisse

Robert Howard – Prospector Partners

Sean Steuart – TD

Paul Quinn – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Domtar Corporation fourth quarter 2011 financial results conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded. Today is Friday, Friday 3rd, 2012.

I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, Mr. Bossé.

Pascal Bossé

Great, thank you very much, Valerie. Good morning, everyone, and welcome to our fourth quarter 2011 earnings call.

So our speakers for today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. So John and Daniel as usual 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 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-US 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 earnings release, as well as on our website.

So with that, we'll turn the call over to John.

John Williams

Thank you, Pascal, and good morning, everyone. Our results in the fourth quarter rounded off a very successful 2011. Looking back, we delivered a strong performance with record EBITDA and solid free cash flow generation. Our teams were able to deliver and kept the focus on the 3Cs, customers, costs, and cash, while moving forward on our strategic growth plan.

Pulp markets softened in the second half, but demand remained steady, and we maintained our volumes in most of the geographies in which we sell. In paper, we delivered strong returns, and it continues to be an important platform to support our growth. We operated our facilities at levels consistent with our customer orders and announced a closure of a 125,000-ton paper machine at our Ashdown Mill.

Let me take a moment to discuss the fourth quarter results. We delivered a strong finish to a great year. In papers, we recorded another quarter of strong EBITDA margins above the 20% mark, despite the seasonal slowdown. The current price pressure in global pulp markets led to further down the price adjustments, but we do believe that a bottom is in sight. Finally, the Personal Care segment benefited from a full quarter of earnings from the recently acquired Attends North America business. The integration process has been very successful and its performance in the quarter was well up to expectations. On the cash front, despite a planned increase in CapEx during the quarter, we still generated healthy free cash flow and announced the increase of our buyback program to $1 billion. Since the program’s inception, we’ve repurchased approximately $539 million of our common stock. In summary, our businesses are continuing to execute well and all delivering strong results.

With these brief remarks, I’ll turn the call over to Daniel to 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 year on slide five. We reported net earnings of $9.08 per share in 2011, compared to net earnings of $14 per share in 2010. Adjusting for items, our earnings were $11.24 per share in 2011, compared to earnings of $10.90 per share in 2010. EBITDA before items amounted to $1.1 billion compared to $1.083 billion in 2010. Cash flow provided from operating activities amounted to $883 million. Capital expenditures were $144 million. Therefore, free cash flow totaled $739 million.

Let’s now turn to the financial highlights of the quarter on slide six. Domtar reported today net earnings of $1.63 per share for the fourth quarter, compared to net earnings of $2.95 per share in the third quarter. Adjusting for items, our earnings were $2.49 per share in the fourth quarter compared to earnings of $3.10 per share in the third quarter. EBITDA before items amounted to $243 million in the quarter. Cash flow provided from operating activities amounted to $172 million. Capital expenditures were $80 million. Therefore, free cash flow in the quarter totaled $92 million.

Turning to the earnings reconciliation on slide seven. Our fourth quarter earnings includes the following after-tax items, closure and restructuring cost of $23 million; and charge of $9 million related to the impairment and write-down of property, plant and equipment.

Let me take a moment to provide further detail on the restructure cost and the impairment charge of the quarter. This past December, we signed a four-year master agreement with the United Steelworkers that covers approximately 3,000, or all the employees at nine different locations in the United States. As part of the agreement, we will restructure the pension plans covering these negotiated employees. This will result in the withdrawal from a multi-employer plan at our Ashdown Mill and the transition of all covered employees not grandfathered under the existing defined-benefit pension plans to a defined-contribution pension plan for future service. As a result of this restructuring, we incur the charge recorded as a component of closure and restructuring cost. Finally, the impairment and write-down charge was the result of the write-up of the remaining assets of our former pulp mills in Lebel-sur-Quévillon, Quebec.

Turning to the sequential variation in earnings on slide eight. Sales were $48 million lower than the third quarter, mostly due to lower pulp prices and seasonally lower paper shipments, partially offset by a full quarter of sales in our Personal Care segment. SG&A was $12 million higher than Q4, mostly due to the impact of market-to-market of some stock-based compensation in the third quarter. Interest expense was $20 million, $5 million lower than last quarter, due to the premium paid on debt repurchase in Q3. In the fourth quarter, we recorded a tax expense of $11million or 14% compared to tax expense of $45 million or 28% in the previous quarter. This lower tax rate in Q4 is a result of the restructuring charges accounted for in the fourth quarter and other typical year-end adjustments.

Now turning to the cash flow statement on slide nine. Cash flows provided from operating activities amounted to $883 million in 2011. Capital expenditures amounted to $144 million or 38% of D&A. Including CapEx funded by the Canadian Pulp and Paper Green Transformation Program, we have invested $227million or 60% of D&A in our asset in 2011. Under our stock repurchase program, we repurchased 5.9 million share of common stock in 2011 at an average price of $83.52. Since the inception of our program in May 2010, we repurchased 6.7 million shares at an average price of $80.56, reducing the share count by close to 15%. At the end of the quarter, we had 36.8 million shares outstanding, including our exchangeable shares. In 2011, both our dividend and share repurchase program yield a free cash flow payout of 73%.

Turning to the quarterly sequential waterfall on slide 10. When compared to the third quarter, EBITDA decreased due to lower selling prices for $39 million; higher SG&A for $10 million; higher usage of raw material, mostly energy for $9 million; and lower volume and mix for $7 million. These were mitigated by a full quarter of our Personal Care business, representing an increase of $8 million, foreign exchange benefit of $7 million, lower maintenance costs for $6 million, and lower other costs for $1 million.

Now slide 11. In Pulp and Paper, sales were down 6% compared to the third quarter and 3% when compared to last year. Operating income before items was $140 million on depreciation and amortization charge of $91 million. EBITDA before item was $231 million compared to $285 million in the third quarter. In Personal Care, the results reported today includes results of Attends North America for full three months. The business continue to perform as expected with an operating income before items of $7 million on a depreciation and amortization charge of $3 million.

Slide 12. Our uncoated freesheet business had an estimated sequential decrease in EBITDA before items of $20 million. Paper shipments were sequentially lower by 58,000 ton and down 19,000 ton when compared to the same quarter last year. Our average transaction prices for all our paper grades were $3 per ton lower than the last quarter. In our paper business, December prices were $15 per ton less than the average of the quarter. On pulp, EBITDA before item decreased by an estimated $34 million when compared to the third quarter. Pulp shipments were sequentially higher by 13% versus the third quarter and average Pulp prices decreased by $97 per metric ton just as the third quarter. In our Pulp business, December prices were $38 per metric ton lower than the quarterly average.

Slide 14. Paper inventory level increased by 40,000 tons, while pulp inventory level decreased by 25,000 metric tons. In paper, we view the opportunity of the low-shipment season to rebuild our inventory to a more acceptable level.

Finally, as is usually our practice for this time of the year, you will find on slide 15 and 16, our assumptions for some key financial items for the coming year. With regard to capital spending, our best estimate at this time is to spend somewhere between $220 million and $240 million. The increase in CapEx is mostly due to projects as the pulp conversion in Ashdown, the LignoBoost project in Plymouth, and some other discretionary projects.

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

John Williams

Thank you, Daniel. We turned an important corner in 2011, we delivered $1.1 billion of EBITDA before items, and generated approximately $739 million of free cash flow. In Paper, demand for our communication and printing paper growths trended in line with the market. However, we continue to offset these declines with an enhanced product mix in specialty papers.

Turning to Pulp, inventory adjustments and tight credit conditions in China, all contributed to a second half Pulp price correction. Despite the volatility, our reduced exposure to hardwood pulp from high-cost mills and better end-used markets contributed to improve results versus 2010. This solid performance enabled us to pursue a more aggressive capital allocation policy and on our commitment of returning a majority of free cash to our shareholders.

In 2011, our share buyback totaled $494 million, or 14% of the share count, and we also increased the dividend by 40% earlier in the year. We saw continued success with our growth strategy, following the acquisition of Attends North America in September. We announced last week the signing of a definitive agreement for the acquisition of privately-held Attends Europe. This moves us further along the path we started down last summer and it consolidates our ownership of the Attends brand on both sides of the Atlantic. This is a well-established business, but has the critical mass to derive product development and branding with our current North American business. We will continue to pursue acquisition opportunities to fit our growth strategy. And our goal is $300 million to $500 million of EBITDA from new business streams over five years.

We’re also investing in innovative projects which could potentially take our business in new and exciting directions, far from traditional pulp and paper applications. In conjunction with FPInnovations, we’ve recently started producing our first runs of NanoCrystalline Cellulose at our new plant in Windsor, Quebec. And, in Plymouth, we approved the capital project that would see the world’s first commercial installation of LignoBoost technology. The project will allow us to debottleneck the pulp line and explore new revenue streams and new uses for the lignin we generate.

Finally, I’d like to list a number of notable achievements during the year that deserve recognition. A milestone within our labor negotiations; we concluded the four-year master agreement, covering 3,000 Domtar colleagues in nine Pulp and Paper locations in the US. As a result of this ratification, some of the mills will have labor agreements in place through 2018. We also expanded our range of earth choice papers to include unique specialty and book papers.

We continue to have the largest, most comprehensive line of environmentally and socially responsible papers in the North American Uncoated business, selling nearly 1 million tons of FSC Certified Paper in the past year. We made great progress in growing earth choices of brand with our most important customers and look to continue this in 2012 and beyond. Our “Paper Because” campaign, one of the promotional campaign of the year award at a number of industry events, notably at the 2011 PPI Awards in Brussels last fall. On sustainability and corporate responsibility, we rank third amongst the 50 Best Corporate Citizens in Canada by Corporate Knights. Our noncore asset divestments, we sold the Prince Albert facility. And we recently announced agreement for the sale of the Lebel-sur-Quévillon assets, with the closing expected in the second quarter. We made progress with our growth strategy and towards our goal of becoming a business that would generate more predictable cash flows. And we’ve got a great balance sheet with plenty of capacity to make sensible investments.

Before we open the call for questions and outlook, I’d like to say a few words on our significant event that recently took place within our organization. The Fiber of Domtar, an initiative that was launched in September is a platform to help redefine Domtar’s identity. Building on our core competencies, we are moving to position ourselves as a fiber-based company and we want all of our 8,700 employees to be part of our vision to become a leader in innovative fiber-based product technologies and services. I am pleased with the enthusiasm coming from our work force since this rollout. And I hope to build on this initiative for a better and sustainable future for our company and its people and its customers.

Turning to the outlook, as Daniel mentioned, uncoated freesheet prices drifted during the month of December, trending below the quarter average. North American paper demand is expected to decline at a 2% to 4% rate in 2012, consistent with long-term trends. However – and the acceleration in employment growth may help mitigate the structural decline. Prices for pulp are expected to continue to come under pressure in certain geographies, while market dynamics in Asia are stabilizing. Inflation on input cost is expected to be moderate in 2012.

Thank you for your time and support, and I’ll turn it over to Pascal. Pascal.

Pascal Bossé

Yes, thank you, John. So before we start polling for questions, I’d ask our participants to ask only a few questions at a time and return to the queue for follow-ups as we would like to get as many people as possible. Valarie, I’ll just turn it over to you, we’re now ready to take our first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Anthony Pettinari of Citi. Please go ahead.

Anthony Pettinari – Citi

Good morning.

John Williams

Anthony, good morning.

Anthony Pettinari – Citi

You referenced the 2% to 4% decline in uncoated freesheet volumes, and when you think about your total company volumes in 2012, would you expect them to decline in kind of a similar range or do you think that you can kind of hold volumes flat and export the delta?

John Williams

Well, if you look at what happened in 2011, essentially we found some specialty grades to manufacture that left us relatively flat, I think about a 0.7% overall volume decline year-to-year. I think we’re going to do some of the same this year, but I’m not sure we’re going to fill the gap completely. So I think you might see a small decline in the total, but probably not to that level.

Anthony Pettinari – Citi

Okay. And I think last year you had talked about 190,000 tons going into the export market, a lot of that to Europe, so that would be down in 2012 presumably.

John Williams

A little bit, yes. Just based on the currency for now. Although, there are opportunities out there that we’ll also look forward.

Anthony Pettinari – Citi

Okay. And switching over to the Personal Care side, when you purchased Attends, you said there was an opportunity to double sales in five years, and I’m just wondering if that applies to the European business as well as the US.

John Williams

Yes. What we actually said was doubling EBITDA and earnings over five years, and we believe the same opportunity exists in Europe. Just to give you a bit of context, the global Inco business total market is about $8 billion worldwide; it’s growing at about 6% a year. So if you do the math, every year there is a business being built that’s bigger than the businesses we’ll own in a few weeks time. So we see plenty of opportunity there if that helps.

Anthony Pettinari – Citi

Yes, definitely. And then when you said the $300 million to $500 million EBITDA from new streams, would that be in addition to the Attends acquisition in growth or would you include the EBITDA from Attends within that?

John Williams

That would be included.

Anthony Pettinari – Citi

Okay, thank you very much.

John Williams

You’re very welcome. Thank you.

Operator

Thank you. And our next question comes from George Staphos of Bank of America Merrill Lynch. Please go ahead.

George Staphos – Bank of America Merrill Lynch

Hi, everyone. Good morning.

John Williams

Good morning.

George Staphos – Bank of America Merrill Lynch

Congratulations on a great year for you.

John Williams

Thank you.

George Staphos – Bank of America Merrill Lynch

I guess, the first question I had, the change in the pension plan that you’ve discussed, what benefits should we begin to see accrued to your earnings over time from that? And the second question I had is, if you could give us a bit more color in terms of how we should think about bridging first quarter versus fourth quarter, given some of the price deltas, I could come up with maybe $20 million sequential decline, however you said inputs are favorable, at least “moderate” I think was the term you used, what other elements should we consider as we look out to first quarter? Thank you.

Daniel Buron

All right. The first part of the question, the withdrawal from a multi-employer and the change of DB to DC; in terms of cost in our business, I don’t think you’re going to see any sizeable difference. The goal of that was not to reduce pension or reduce the benefit to our employees, but to in part de-risk the way we were managing our pension plan. So I think we’re going to be over time, because that the former DB will be in place for the grandfather employees for a long period of time. But over a time, we’re going to decrease the risk of the business by doing that.

Your second question, the bridge on Q1, I mean obviously this is a forward-looking statement, but the price gap that we saw between December pricing both Pulp and Paper and without the full quarter is a significant headwind. So I think we’re going to have better volume, we don’t see a lot of risk of inflation in Q1. But the price pressure is such that it’s difficult to believe that we’re going to have positive that will totally offset the negatives of the price.

George Staphos – Bank of America Merrill Lynch

That’s a good start. Thanks very much. I’ll turn it over.

Daniel Buron

Okay.

Operator

Thank you. And our next question comes from Chip Dillon of Vertical Research Partners. Please go ahead.

Chip Dillon – Vertical Research Partners

Yes, thank you, and good morning, everyone.

John Williams

Good morning.

Chip Dillon – Vertical Research Partners

As we calculate adding back the one-time items, the sort of tax rate on the normalized earnings were around 20 – was around 20%, which is terrific, and obviously means you’re doing well in Canada. And with all the changes in Canada, I always think of you guys as being more pulpish than paperish there, but that probably isn’t true. And as we go into 2012, do you see if pulp does stabilize here soon and the mix of earnings staying about the same such that your tax rate may stay sort of this low level for a while?

Daniel Buron

I think we expect tax rate to be between 30% and 32% next year, so a bit higher than the average of this year. In Q4, obviously there is a little – I mean there is always those year-end adjustments, so the explanation for the low tax rate in Q4 is, I would say, 50% of the decrease versus the average of the year is the restructuring cost we took in Q4, the other 50% is just normal, a year-end adjustment. It’s a different between the forecasted rate and the actual full-year review that you were doing on the year-end.

Chip Dillon – Vertical Research Partners

And Daniel, when you say 30% to 32%, obviously you’ve got to make some guess as to your earnings mix. Is – and maybe to help us, what is sort of the proportion of the tons now that you sell in the market roughly that are produced in Canada that go into the paper market versus into the pulp market.

Daniel Buron

The lion share of the earnings are still in the US, and Canada is more – as we mentioned in our pulp business we have the Espanola, it is both pulp and paper, Kamloops and Dryden that are pure pulp mill, and Windsor that is a pure paper mill. The weight is still heavily in the US.

Chip Dillon – Vertical Research Partners

Got you. Thank you very much.

Operator

Thank you. And our next question comes from Phil Gresh of JP Morgan. Please go ahead.

Phil Gresh – JP Morgan

Hi, good morning.

Daniel Buron

Good morning.

John Williams

Good morning, Phil.

Phil Gresh – JP Morgan

So on the uncoated freesheet, your price degradation despite the December decline that was actually pretty impressive only down $3 a ton, I was wondering if you could talk maybe about what kind of drove that, because some of your peers actually had much greater price declines in the quarter.

John Williams

I mean we think some of it’s product mix. We withdrew a bit from some of the export business that obviously drives some the realization price down. Sometimes it shifts a little bit between rolls and cut size. Of course, you know in cut size, we’re a very large player. So we think that’s large. And some of it may just be timing between our customers and somebody else’s customers. Phil, that’s the way I interpret it to be honest.

Phil Gresh – JP Morgan

Okay. And I don’t know if you can comment on this, but obviously with respect to December, did you see stabilization on the uncoated freesheet side in January on the pricing?

John Williams

Yes, I think what happened in the fourth quarter happened in the fourth quarter, and now we see that running through, but we don’t see more than that running through in terms of the exit price not the average price through the quarter, but in terms of the exit price for the quarter.

Phil Gresh – JP Morgan

Sure, understood. Did you happen to take any market related downtime in a quarter, or are you currently as you’ve progressed in this so far, have you taken any asset particularly on the paper side, given the inventory build in the quarter?

John Williams

No, we haven’t, Phil. And just to be clear on that inventory build, the majority of that is work in progress, and we do have some shuts coming our way. So I think we’ve been pretty consistent by saying – really last year, we felt we were bit tight on inventory, so I think we’re now back to more normalized levels. So we’re not concerned by that build to your point.

Phil Gresh – JP Morgan

Okay. And then my last question is just on the cash usage side. You talked about the percentage that you’re paying out to shareholders via dividend and repurchase. Would you expect a similar mix this year or should we think of it slightly differently given you’ve already – you have the Attends Europe here that you’re about to close that’s reasonably sizeable relative to 2011?

John Williams

We would see a similar mix.

Phil Gresh – JP Morgan

Okay, all right, thank you.

John Williams

All right, Phil. Thanks.

Operator

Thank you. (Operator Instructions). And our next question comes from Marks Connelly of CLSA. Please go ahead.

Marks Connelly – CLSA

Thanks. Just one question. Some big players are telling us that generics are taking share in the adult paper market, because there is much more price sensitivity there. Are you seeing that and do you see that as a significant trend?

John Williams

I think it depends on where the business is. Mark, if you look in that business globally, it’s about 62% is institutional and the rest is retail. In the retail space, retailers are certainly looking to launch private label, it’s already there, but they’re looking to launch it. In the institutional space, some of the distributors will have private label, some will not. And the regional guys often won’t, the nationals often will. So actually, there is some private labels certainly building in retail, but it is where it is I think in these institutional market, which is largely where we are focused. If that helps you, Mark.

Marks Connelly – CLSA

Okay. That is helpful. Thank you.

John Williams

You’re welcome.

Operator

Thank you. And our next question comes from Bill Hoffman of RBC Capital Markets. Please go ahead.

Bill Hoffman – RBC Capital Markets

Yes, thanks, and good morning.

John Williams

Good morning.

Daniel Buron

Good morning.

Bill Hoffman – RBC Capital Markets

John, just a little bit more on the Attends. You talked a little bit about your growth outlook there. Could you just talk a little bit more about what percentage of growth are you thinking you can achieve where your capacity utilization, et cetera are right now with the business?

John Williams

Yes, certainly. As I said, we see an opportunity over five years to double the EBITDA, both from the business we’re about own and the business we own. What does that really mean? It certainly means in our Greenville, North Carolina facility, we think we have an opportunity both on – if you like where we have some capacity already and where we may build capacity. I think in Europe we’re largely following the market plus filling out the product range. So I think that’s where we see it in terms of building that business out. Again if that gives you bit more context.

Bill Hoffman – RBC Capital Markets

And just with regards to the capital, is that something effective this year, or next year from timing standpoint?

John Williams

I think you’ll see some this year and you will see some over next year. That’s got a long lead time for some of these machines, so it’s going to be over the next couple of years.

Bill Hoffman – RBC Capital Markets

Okay, thanks. And then just in the paper side, just wondering what your thoughts are with the volume declines, potentially a couple percentages. Where are you operating rate-wise, and when do you think you have to shut the next machine?

John Williams

Sure. I mean we’re operating full to be honest. We operated very full last year. January looks pretty solid. So we’re always watchful, we always look at the supply-demand balance in our own system, and if we feel we need to take action we will. We took some action as we said last year. And if we need, we will again.

Bill Hoffman – RBC Capital Markets

Okay, thank you.

John Williams

You’re welcome.

Operator

Thank you. And our next question comes from Mark Wilde of Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

First question I have, yesterday IP talked about restructuring in Xpedx and starting to deal with the structural decline in some of the printing papers business. I noticed that your sales and your distribution business were down quite a bit year-over-year. Can you just talk about sort of what your plan is going forward there in distribution?

John Williams

Certainly Mark. I mean, as you see, we’ve kind of brought it back a little bit from the dead at least we’re covering our cost a bit and of course it was actually cash positive in 2011. I think the way we see this is run brilliantly these businesses the 1% to 2% return on sales businesses; I really don’t have an expectation to get them much further than that, that’s kind of where the market is. So we’re looking at the digital space to build some more business. We have I think a high-cost base. We’ve taken a lot of costs out on the various distribution warehouses we have. I mean I think the other thing just to remember is that we took out – we sold actually a contract – our contract paper group business. That accentuated the sales decline. So overall – I mean that’s our plan for that business. I think we have to keep our cost tight. We’ve replaced the leadership in North America – well, sorry, in the US. And I think we’ll just move forward and see better returns over time.

Mark Wilde – Deutsche Bank

Okay. I mean a lot of the other merchants, not just Xpedx, but the other paper merchants are doing things like packaging and jan-san. I’m not sure whether there is any of that inside risks or whether those are the businesses you want to be in.

John Williams

Well, jan-san, I think not, but certainly packaging. We’re looking at the packaging business and deciding where we can really add some value. We do a little, but it’s very small market right now. So we’re looking at that. But I think as importantly we’re really looking at that digital printing space. If we can get the right offer there, which I think we now have already, we see sales growth and profit growth opportunity from there.

Mark Wilde – Deutsche Bank

Okay. The other question I have John is a little longer-term question that is just managing sort of a business that’s in structural decline. I’m just – I’m so struck by how your situation seems to be, you’re shaping up different way than what we’ve seen with the guys in the newsprint industry where pretty much every big producer has gone bankrupt and in the coated paper business where the biggest producer has gone bankrupt and others are struggling. Any thoughts on what the difference is between your business and these other businesses?

John Williams

Other than charismatic leadership.

Mark Wilde – Deutsche Bank

Well, other than that.

John Williams

Well, I – to be honest, I think we just recognized if we within our own system make sensible choices and the demand decline is manageable, I think we show that we have profitable business. I think I’d also remind you all, this thing still churns out 4.3 million tons of pulp, so it’s not as if it’s going to disappear, it still has a business engine behind it. And really now strategically, we’re looking at how we can build that business engine and get the most value from it. I think that’s the difference.

Mark Wilde – Deutsche Bank

Okay. One other thing, are you just – in the past you’ve hinted in other products other than just fluff pulp that you might be interested in going into as you repurpose some of these mills. Is that still very much on the table?

John Williams

Well, I mean certainly the idea of looking to repurpose if we have to rather than taking closure is still very much with us. Yes, I mean we scan that all the time looking at other choices. Right now to be honest, we’re relatively full, but we have plans in place that if we need to we can react.

Mark Wilde – Deutsche Bank

Okay, fair enough. Listen, good luck in 2012.

John Williams

Thank you very much.

Operator

Thank you. And our next question comes from Gene Pavlenko of D.A. Davidson. Please go ahead.

Steve Chercover – D.A. Davidson

Yes, good morning. It’s actually Steve Chercover. And I think this is a good segue from Mark Wilde’s question. If you’re going to be a fiber company, why didn’t you take the Quebec Government’s money to convert Lebel-sur-Quévillon to dissolving as opposed to letting fortress to it, because presumably the returns would be compelling to you as well, are they not?

John Williams

Well, I don’t think it’s for me to comment really.

Operator

Mr. Pavlenko your line is still open. Please continue.

John Williams

I mean I think it’s really not for us to comment. They had a particular business plan, I respect their business plan and I wish them well. I just don’t think it was for us.

Steve Chercover – D.A. Davidson

So did they approach the Quebec Government and then collectively they came to you.

John Williams

Really, I don’t think that’s a subject for this call if you don’t mind.

Steve Chercover – D.A. Davidson

Okay, thanks so much.

Pascal Bossé

Valerie.

John Williams

We’ve lost Valerie.

Operator

No, I’m sorry. How can I help you?

Pascal Bossé

We’re ready to take the next question, please.

Operator

Okay, sir. Well, just one moment. Our next question comes from Ali Kabili and he is with Credit Suisse. Please go ahead.

Ali Kabili – Credit Suisse

All right, thanks.

John Williams

Good morning.

Ali Kabili – Credit Suisse

Good morning. And just a quick question, Daniel, on the increase in the CapEx for 2012. Is that all Attends related? And to clarify, I assume that includes Attends Europe in that number as well.

Daniel Buron

Let’s answer the second part of the question. No it does not; we're not the owner yet. I don't think there would be a lot of CapEx that will end up in 2012. So it shouldn't change that number significantly after the acquisition. Yes, it does though include Attends in the US, but we're not forecasting a big investment there just yet. It's more as I mentioned in my speech, the LignoBoost project, the conversion of Ashdown from the hardwood line to a softwood line this year. A bit more on maintenance. We have also to take into account that we've almost spent the entire Green Transformation Program money that was allocated to us, so there is little bit of those CapEx that were financed by the government that will now be on our own account. So it's a combination of all that that explains that increase in CapEx.

Ali Kabili – Credit Suisse

Okay. And is there a way that help us think about on a normalized basis, without these special items what we should be thinking for CapEx?

Daniel Buron

If you look at the average of the last two, three years, it's a good proxy in the $180 million, $190 million a year is what we should think of in the future for our business.

Ali Kabili – Credit Suisse

Okay. And that includes Attends.

Daniel Buron

That includes Attends, yes.

Ali Kabili – Credit Suisse

Okay. Great, all right. And then, I guess the other question I had along the lines of Attends is, now that you’ve – you will be hopefully bringing this Attends Europe when the deal closes, any thoughts on any synergies that you might see near-term on bringing these two geographies together, and kind of what’s the vision for the brand going forward now that you’ve got the two geographies that will be put together again?

John Williams

And let me talk to that. I think that’s a good and an important question. I think from an operating standpoint sort of cost wise, the synergies will be minimal. But from a brand platform and product development standpoint that will be large, but they’ll develop here over time.

On the brand strategy, really the brands sit very much as a well trusted brand in the institutional space, and I think we have to build on that, there is still plenty, plenty of growth in that story. So that’s where we’re going to continue to position and grow the brand. It’s very much in Northern Europe right now, so there's a question about can we spread it around geography. And there's always question certainly in the US about should we at some point look at the West Coast and what we might do there, because we’re still very much a Southeastern brand or Eastern I guess I should say to be precise. So I mean that’s where our thinking is in terms of the growth opportunities.

Ali Kabili – Credit Suisse

Okay. And along those lines with the goal of doubling EBITDA over the next five years, I imagine the ramp in that is not exactly linear, there maybe some investment that you need to do and in marketing, et cetera as you’re looking to grow. But can you kind of just help us figure how we should think about that ramp?

John Williams

Yes, I think that’s a – that’s again a very interesting question. I mean if you look at – let me take it first of all from the machine standpoint, it’s probably on the whole about a 12-month sort of order to get in producing cycle, we then take about eight to 12 weeks to move it up to largely full production. So it’s a fairly quick cycle once we’ve actually got the machine in-house. A machine is roughly $12 million to $15 million a time, plus a bit of infrastructure on packing lines. On the A&P side, because we’re really in the institutional space, we’re not spending big advertising dollars, so you’re not going to see of sudden sort of large jump in A&P, so it’s more of a capital issue than it is an operating issue. If that gives you a bit more color.

Ali Kabili – Credit Suisse

No, that helps. That helps a lot, John. Thanks. And final one, just the – what you're thinking in terms of M&A pipeline versus continuing to return cash via buybacks. Thank you very much.

John Williams

Okay. Certainly, and let me talk to – I mean we made that commitment to return the majority of free cash to shareholders, we hold to that commitment. And certainly as you’ve seen us behave so far, we continue to behave into the future.

Ali Kabili – Credit Suisse

Thank you.

John Williams

You’re welcome.

Operator

Thank you. And our next question comes from Robert Howard of Prospector Partners. Please go ahead.

Robert Howard – Prospector Partners

Good morning.

John Williams

Good morning.

Daniel Buron

Good morning.

Robert Howard – Prospector Partners

Just a couple of things. With the Attends, were there any integration costs – or I guess with the North American operations, were there any kind of integration or kind of ramping up type of costs that might have held down that fourth quarter number that we should maybe think something a little bit higher to – as a starting point or?

John Williams

No, no, because if you remember, we said we were buying on the sort of last 12 months we were about $39 million, so that’s absolutely in line. So there's nothing odd in that number. That's a pure trading number.

Robert Howard – Prospector Partners

Okay, great. And the higher Q4 CapEx, is that all kind of related to the same reasons that you were saying the 2012 CapEx is going to be higher or were there any other things that bumped that up?

Daniel Buron

It's not totally linked. Obviously, with the project, [inaudible] because that’s our year-end so it's a planning process. We had just more project in 2011 that were planned with late implementations, so we had as expected. In fact, we ended up the year at the lower event of the guidance we gave. So it was expected with big fourth quarter and there is a little bit of both projects that we're going to continue into Q1.

Robert Howard – Prospector Partners

Okay, great. And then, lastly with the Green Transformation CapEx, is there any type of cost savings that you guys are estimating from that right now that we could kind of say, “Okay, this is going to knockout $20 million of cost a year, whatever.”

Daniel Buron

We’ve seen in our operations some benefit. A lot of that was linked to environment and energy. So we’ve seen a lot of benefit on the energy side, mostly at our Kamloops Mill, and we’re going to see some benefit also at our Dryden Mill, a little bit in our Windsor Mill. A big portion of that or – I mean the lion share – the Kamloops Mill project is over and the benefits are already in our P&L.

Robert Howard – Prospector Partners

But – so – but we should I guess expect more of that coming through in ’12, because –

Daniel Buron

We’re expecting energy cost next year to be a little bit lower than this year, and in large part because of those investments.

Robert Howard – Prospector Partners

Okay, great. Thanks guys.

John Williams

Thank you.

Daniel Buron

Thank you.

Operator

Thank you. (Operator Instructions). And our next question comes from Sean Steuart of TD. Please go ahead.

Sean Steuart – TD

Thanks. Good morning, everyone.

John Williams

Sean, good morning.

Sean Steuart – TD

A couple of questions. John when you talk about the $300 million to $500 million in EBITDA from new income streams over the next five years, how should we think about that, I guess first of all in terms of product breadths, adult incontinence versus other streams, and then also in terms of geographic breadths, anything beyond North America and Europe?

John Williams

Yes, that’s a good question. In the way I see this really, we like we had all incontinence business if we could build that out all that way, we’ll be happy so to do, both from a mix of organic and M&A work. We scan for other opportunities. But to be honest, I don’t want to become a kind of mini conglomerate with the paper business. So we’ll stay focused I think in that Personal Care area. We look at tissue as we’ve discussed before, but really I think that Personal Care space right now given where we’re building the business is the more compelling for us. In terms of the geography, we can find plenty of growth in the Americas and Europe. If there was a way over time to begin in Asia, we might, but we’re not going to go to Asia and bet the store, because I think that would be inappropriate.

Sean Steuart – TD

Okay, understood. And then, Daniel, just one I guess a clarification question. The $7 million in equity losses this quarter, can you tell us what that was?

Daniel Buron

That’s the – our equity portion of the loss of CelluForce, let me give you a little bit of background of what it is in more detail. CelluForce is viewed as a R&D venture, so any amount of money that is spent in CapEx or in advertising is considered from an accounting point of view as an expense, because of R&D venture classification. So the first money that was spent in that business to build the demonstration plant was the money that was provided by the government.

In Q4, the construction was finalized with a little bit of money from us and FPInnovations plus the normal spending of the business, and what you see is the result of all that. So in the coming quarters, because construction is finished, you're going to see just our fair share of the commercialization cost of that business.

Sean Steuart – TD

Okay, understood. That’s all I had. Thanks guys.

John Williams

Thank you.

Daniel Buron

Thank you.

Operator

Thank you. And our next question comes from Paul Quinn of RBC Capital Markets. Please go ahead.

Paul Quinn – RBC Capital Markets

Yes, thanks. Good morning.

John Williams

Good morning.

Paul Quinn – RBC Capital Markets

Just a question on – and congratulations on Attends Europe. I’m just wondering how you intend to globalize this brand, what’s left in Asia specifically that you haven’t got wrapped up, and how would you take advantage of the growth in adult incontinence consumption in Asia?

John Williams

Yes. I mean I think – I guess the first thing to do is really stay close to the home and drive what we’ve got, and that’s the way I see it anyways. Europe – and basically Europe, Middle East, Africa and the Americas is where we own the brand largely, and a few countries in Asia. So I think we’re going to do that first. If we find an opportunity in Asia, we may take it. But again there is always this choice for organic growth. So I think that’s the way we’re going to view it, Paul, over time.

Paul Quinn – RBC Capital Markets

Okay. And then just secondly, just on the Plymouth LignoBoost project, maybe you can give us some background on what that project is and what do you hope to realize over time.

John Williams

Mike, can I let you talk to that?

Mike Edwards

What that project does is it debottlenecks the mill, the mill's recovery boiler are limited. So we're going to not bond the lignin and the recovery boiler and this process takes take lignin out. We are looking for users for lignin and that also what we do enable us to produce about another 80 tons a day of pulp.

John Williams

Is that helpful?

Paul Quinn – RBC Capital Markets

Yes, no, that’s very helpful. Thanks very much. Best of luck going forward.

John Williams

Thank you.

Daniel Buron

Thank you.

Mike Edwards

Thank you.

Operator

Thank you. Ladies and gentlemen, we do have a follow-up question from Chip Dillon of Vertical Research Partners. Please go ahead.

Chip Dillon – Vertical Research Partners

Yes, thank you very much. Could you, Daniel, just review for us if there is any potential benefit from some of the interpretations on the black liquor credits? I know that it is a very complicated topic. So I guess the simple question is, did you all actually pay tax on it in a way that if you get the same treatment that the Capstone got down here in the States there is going to be a potential that you could get some money back.

Daniel Buron

In our case, Chip, we from the get-go our review of the credit was, it was not taxable. But because of the risk of our review, we took a provision. So we haven't paid the tax but we booked the liability. So if ever or if and when the treatment is more certain that's it's not taxable for us, it's going to be paper and trees, it's going to be just river full of the provision no cash for us.

Chip Dillon – Vertical Research Partners

Got you. Thanks for that. Absolutely. And then one question, I guess, for John. When you think about the – your plan in terms of returning cash to shareholders majority, does that more or less keep the size of acquisitions that we’ve been seeing this year, sort of a ballpark range that we should expect in the future. I know you can never say never, but I guess asked differently, it seems like you really are gravitating more toward Personal Care as opposed to say tissue, is that a distinction we should go away with?

John Williams

To be honest, Chip, I think it probably is, I think things of a similar size. If it was compelling enough, obviously we’d look very carefully, but we really like that business. And right now, I think particularly tissue North America given what’s happening with capacity build and private label aggression, the time is not right for us.

Chip Dillon – Vertical Research Partners

Got you, thank you.

John Williams

Thank you.

Operator

Thank you. And we do have a follow-up question from George Staphos of Bank of America Merrill Lynch. Please go ahead.

George Staphos – Bank of America Merrill Lynch

Thanks very much. Two last ones, guys. First of all, with capital spending this year, the $220 million that you’ve cited, what risk do you see specific to the projects that you won’t be able to get all the CapEx done in 2012 and what type of return should we think about you achieving off this spending in these projects for 2012?

Daniel Buron

The risk of not spending the entire amount is a good one, because I guess we have a history of calling for big number and that it helps spending less. I think the risk is there. Those projects are fringes projects that needs go through the gate of our approval and we realize sometimes the return is just not meeting our expectation, and we say “no” or we are asking for further study and it's delaying to the next year. So there’s definitely a risk. I would say that compared to prior years, I believe that we probably have more projects that are in advanced stage of planning to prior years, but we're going to update that forecast of CapEx as the year is evolving but your question is right. I mean, that's probably the max amount we're going to spend and we may spend a bit less.

In terms of returns, the lion share of those projects – I don't have the exact figure for next year – is the maintenance where returns are just – you can continue to run the business and produce the high-quality paper and high-quality pulp. And in $220 million next year, there's probably $60 million to $70 million of our project that are there because it can reduce our cost and improve a little bit our operation, and we're typically aiming at more or less 20% rate of return on those projects.

George Staphos – Bank of America Merrill Lynch

Okay, appreciate that, Daniel. And the other question I had to Attends, I mean having owned the business now at least the US piece for a little while, is there anything that you’ve seen from a manufacturing standpoint or process standpoint that you think you’ll be able to given your expertise bring to bear within that business and within Europe as well. Thanks guys. Good luck in the quarter.

John Williams

An interesting question. I mean it’s a converting business, so I think we have got some converting skills, but I don’t have to say, this is a ex-Procter & Gamble business, who aren’t famous of leaving much on the table when it comes to operation. So it’s a very well run business. I think there are things we can help with maybe on the purchasing side, but on the whole I think operationally they know what they’re doing, probably health and safety, we could help on a little bit I think, because we’re very focused there.

George Staphos – Bank of America Merrill Lynch

Thank you, John. Thank you, Daniel.

John Williams

Thank you.

Operator

Thank you. And we have a follow-up question from Mark Wilde of Deutsche Bank. Please go ahead.

Mark Wilde – Deutsche Bank

Just one, John. Seemed like a couple of quarters ago, you talked about a little trial balloon over in China, I think maybe it was a sheeting facility or something. Can you just update us on that?

John Williams

Yes, absolutely, be happy to. Yes, we now have a facility – a physical facility, we’re beginning to populate it with people of machines, we’ve got our management team that we hired probably three months ago. I should think we’ll be up and running by June. It’s really a sort of distribution sheeting business, little bit of converting. I don’t think it’s going to move the dial much on the earnings side, but at least it gives us, if you like, a way of finding ourselves a way around that geography so that we know what we’re doing before we deploy anything else if we were to.

Mark Wilde – Deutsche Bank

Okay. All right, sounds good. Thanks.

John Williams

Alrighty, thanks.

Operator

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

Pascal Bossé

Great. Thank you very much, Valerie. And I want to thank all of our participants for today’s call, and we look forward to being back towards the end of April, for our first quarter earnings results. Thank you very much and you all have a great day.

Operator

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

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