Domtar (UFS) John David Williams on Q4 2015 Results - Earnings Call Transcript

| About: Domtar Corporation (UFS)

Domtar Corp. (NYSE:UFS)

Q4 2015 Earnings Call

February 05, 2016 11:00 am ET

Executives

Nicholas Estrela - Director-Investor Relations

John David Williams - President, Chief Executive Officer & Director

Daniel Buron - Chief Financial Officer & Senior Vice President

Analysts

George Leon Staphos - Bank of America Merrill Lynch

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Mark William Wilde - BMO Capital Markets (United States)

Mark Connelly - CLSA Americas LLC

Danny Moran - Macquarie Capital (NYSE:USA), Inc.

Chip A. Dillon - Vertical Research Partners LLC

Sean Steuart - TD Securities, Inc.

Gilles Alfred Marchand - Knights of Columbus

Paul Quinn - RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Domtar Corporation Fourth Quarter 2015 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. As a reminder, this call is being recorded today is Friday, February 05, 2016.

I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead, sir.

Nicholas Estrela - Director-Investor Relations

Thank you. Good morning and welcome to our fourth quarter and full year 2015 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer and Daniel Buron, Senior Vice President and Chief Financial Officer. They will be supported by Michael Garcia, President of Pulp and Paper Division and Michael Fagan, President, Personal Care Division. John and Daniel will begin with prepared remarks, after which they will take questions. During the call, references will be made to supporting slides. And you can find this presentation in the Investors section of the website.

As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings to 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 David Williams - President, Chief Executive Officer & Director

Thank you, Nick, and good morning, everyone. Our fourth quarter rounded off a successful 2015. Our businesses generated strong free cash flow. And we further advanced on our Personal Care growth plan with the relaunch of branded products and a number of important customer wins.

Our solid performance enabled us to return cash to shareholders, manage our balance sheet to preserve financial flexibility and better position Domtar for sustainable long-term growth. Our business transformation is underway. And our financial results are beginning to share the benefits of investments we're making in our facilities, in our people and in our future.

Let me now take a moment to discuss fourth quarter results. Our results improved when compared to the third quarter. And we achieved our best EBITDA performance of 2015. In our Pulp and Paper business, strong shipments in pulp and paper helped offset some softness in prices in both products.

In addition, our operations run exceptionally well with productivity gains across the mill system, resulting in lower costs following a heavy quarter of maintenance. In fact, our average production cost continue to trend lower, as the measures we're taking to optimize our assets and improve our manufacturing processes take hold.

On raw materials, we benefited from lower energy costs, while higher manufacturing uptime resulted in improved efficiency. We had a milestone within our labor negotiations and we concluded a four-year master agreement with a number of facilities. The ratification covers some 3,000 Domtar colleagues and nine pulp and paper locations in the United States.

Two of our mills were honored in the quarter by the American Forest & Paper Association for extraordinary initiatives that advance sustainability as part of their Better Practices, Better Planet 2020 Campaign. The Plymouth Mill received the Innovation in Sustainability Award, which recognizes a process or product for its multi-faceted benefits.

For several years, our team has worked with North Carolina State University to develop a byproduct from Plymouth's production for a value-added use. This product branded K-Lime is sold to local farmers as a fertilizer substitute and helps them eliminate a waste stream historically destined for landfill. The Marlboro Mill received a Leadership in Sustainability Award in the forest certification category for their work on bringing FSC certification to forests in the Pee Dee region.

Because most of our fiber in the Southeast comes from small land owners, we recognize the importance of working together to help achieve more forest certification. In relation to these awards, I feel good about saying that innovation and carrying (4:42) are two of our core values and it's especially rewarding when our actions are recognized by others.

Turning to Personal Care, momentum continues to build and we delivered a strong quarter. On a same currency basis, fourth quarter sales performance was the best to-date, while EBITDA increased 23% when compared to the same quarter last year. Our European business delivered strong sales with a 3% year-over-year increase, driven by strong shipments of briefs of light incontinence products.

In North America, the business delivered its best EBITDA quarter to-date, mainly due to a solid top-line and sustained cost reduction efforts. We are generating savings from capital projects in manufacturing efficiency and through procurement initiatives. We also continue to deploy new innovations across our business portfolio.

During the quarter, we relaunched our line of light incontinence products in Spain. The (05:49) discreet bladder control pad incorporates new innovation from our absorbent core materials business and is being very well received by consumers. We conducted consumer testing for innovations that will be launched in the first quarter within our infant line and a new adult incontinence brief design.

Finally, our Personal Care Group delivered all of these business improvements, while continuing to progress towards industry leadership in safety. The year ended with a total frequency rate of 0.88, which is a 28% improvement from 2014. Five of the seven facilities were injury-free in the third and fourth quarters, while two were injury-free for the entire year.

To sum up, we had a strong finish to a good year and improved our long-term positioning, while remaining focused on value creation for our shareholders.

With that, let me turn the call over to Daniel for the financial review before making some additional comments on our performance and our outlook for 2016. Daniel?

Daniel Buron - Chief Financial Officer & Senior Vice President

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on slide four. We reported this morning net earnings of $0.91 per share for the fourth quarter compared to net earnings of $0.17 per share for the third quarter of 2015. Adjusted for items, our earnings were $1.11 per share in the fourth quarter compared to earnings of $0.86 per share for the prior quarter.

EBITDA before items amounted to $204 million compared to $171 million in the third quarter. Free cash flow totaled $50 million compared to $1 million in the third quarter, which included a premium paid for the partial redemption of certain notes.

Turning to the sequential variation in earnings on slide five. Consolidated sales were $22 million higher than the third quarter, mostly due to higher volume in all our businesses, partially offset by lower prices in our Pulp and Paper business. Depreciation, amortization was in line with the third quarter, while SG&A was $5 million higher due to additional incentive accrual and more sales and marketing activities in the quarter.

Our fourth quarter's earnings include an impairment charge of $20 million and closure and restructuring cost of $1 million related to the planned conversion of a paper machine into a fluff pulp line at our Ashdown facility in 2016. I would like to remind you that a similar impairment charge will be recorded in the first quarter of 2016.

Interest expense was $17 million, $47 million lower than last quarter, due to refinancing related costs in Q3. In the fourth quarter, we recorded an income tax expense of $20 million, resulting in an effective tax rate of 26%, in line with our expected tax rates.

Now, turning to the cash flow statement on slide six. Cash flows provided from operating activities amounted to $137 million, while capital expenditures amounted to $87 million. This resulted in a free cash flow of $50 million for the quarter. For the full year 2015, cash flow provided from operating activities amounted to $453 million and capital expenditures amounted to $289 million. This resulted in a free cash flow of $164 million for the full year.

In 2015, we returned $150 million to shareholders through dividend and share buybacks, representing 91% of our free cash flow. From January 2011 to December 2015, we've returned a total of $1.3 billion to our shareholders, representing 72% of our free cash flow. At the end of the quarter, we had 52.8 million common shares outstanding.

Turning to the quarterly waterfall on slide seven. When compared to the third quarter, EBITDA before items increased by $33 million due to lower maintenance cost of $24 million, higher volume and mix for $17 million, higher productivity for $13 million, lower raw material and other cost for $10 million, a favorable foreign exchange rate of $5 million, and lower freight cost of $3 million. These were partially offset by lower selling prices of $33 million and higher SG&A cost of $6 million.

Now the review of our business segments, starting on slide eight. In the Pulp and Paper segment, sales were 2% higher when compared to the third quarter and down 4% when compared to last year. EBITDA before item was $180 million compared to $150 million in the third quarter of 2015.

Our Paper business on slide nine. Sales decreased 1%, while estimated EBITDA before items was $32 million higher when compared to the third quarter. Manufactured paper shipment increased 2% when compared to the third quarter and also increased 2% when compared to the same period last year. Our average transaction prices for all our paper grades were $24 per ton lower than the last quarter.

Our Pulp business on slide 10. Estimated EBITDA before items decreased $2 million when compared to the third quarter. Pulp shipments were sequentially higher by 16% versus the third quarter and up 4% when compared to the same period last year. Average pulp prices decreased by $35 per metric ton versus the third quarter. Our paper inventory increased by 41,000 tons compared to the last quarter in preparation to the closure of one paper machine at our Ashdown facility in early April. Pulp inventory decreased by 21,000 metric tons.

Our Personal Care business on slide 12. Our EBITDA before item was line with the third quarter and increased $6 million versus the same quarter last year, mostly due to manufacturing cost savings and lower raw material costs. Same currency sale in the division improved 2% year-over-year, while EBITDA improved by 23%. Finally, as is usually our practice at this time of the year, you'll find on slide 13 through 15 our estimates for some key financial items for the coming year.

With respect to maintenance, our total maintenance cost for the year should remain flat, but our schedule will be busier than normal in the first half of the year as we transition many of our pulp and paper mills to an 18-month schedule and as we work on the Ashdown conversion. The first quarter of 2016 should therefore see an increase of $22 million in maintenance cost when compared to Q4 2015. This higher level of maintenance in Q1 will also affect our production volume and therefore, the absorption of fixed cost impacting our Q1 EBITDA by approximately $6 million to $8 million when compared to Q4 2015.

Now, let me explain the financial impact expected during the conversion of Ashdown paper machine to a fluff pulp line. This conversion will lead to the temporary closure of PM 64 and related pulp lines beginning in early April up until the start-up of the new fluff line in early July. We expect that this closure will impact our earnings by approximately $23 million and this mostly in the second quarter.

In 2006, we should benefit from lower interest expense following our 2015 refinancing activities and we currently forecast our effective tax rate to be between 24% and 26%. Finally, we expect that our capital spending in 2016 will be higher than 2015, primarily due to the Ashdown fluff pulp conversion.

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

John David Williams - President, Chief Executive Officer & Director

Thank you, Daniel. Looking back on 2015 as a whole, we executed well on things under our control, particularly in extracting costs and driving efficiency. With good cost performance across the board, we managed to partially offset strong pricing headwinds in the Pulp and Paper business. We still generated $713 million of EBITDA and $164 million of free cash flow in an above average capital spending year. All things considered a good performance.

Looking at health and safety, Domtar's consolidated frequency rate last year was 0.98, slightly above 2014, but still below 1, which is considered world-class. We're proud of that. However, our performance was tainted by a fatality at one of our pulp and paper mills, an unacceptable tragedy for family, friends and work colleagues.

That such incidents occur, despite the considerable resources and efforts we put into creating a safe workplace, means only one thing. We have to work even harder to make sure our people return home safely. And for this, I know we can count on the support and engagement of every one of our people.

Looking at our segments, profitability in our uncoated freesheet paper business remains strong. Our continuous improvement program helped drive annual production records at several mills resulting in lower costs. Our paper shipments trended better than forecast with our volumes outperforming the broader North American uncoated freesheet market. Lower imports, higher white collar employment and an increase in direct mail marketing, all, had a positive impact.

Our specialty paper volumes also continue to grow, increasing 3% for the year. That includes the best year ever for our thermal base stock business. On pulp, volumes for softwood grades were at record levels in 2015. The current cycle in global markets led the downward price adjustments throughout the year, but global inventory is currently at balanced levels.

In Personal Care, we further advanced on our growth plan. Our focus in 2015 shifted from building the necessary capabilities and product assortment to execution in the marketplace. We made solid progress on capturing the benefits from cost savings. We delivered on a number of capital projects. We further built sales and marketing capabilities. And we harvested investments in innovation with new product launches. Most important, we grew the business with a number of important customer wins that will be reflected in our 2016 top-line results.

These wins are first proof of the strength of our partner brand model, a unique go-to-market approach, which offers unprecedented alignment with the needs of our customers. We're bringing more innovation and flexibility to the private label market as well as technical expertise, category management and customer service. Our transformation journey is progressing. And we continue to move closer towards our strategic goal of generating $300 million to $500 million of annual EBITDA from fiber-based growth businesses.

In terms of capital allocation, we continue to return cash flow to shareholders last year, 91% of free cash in total, through a combination of regular dividends and share buyback. We announced a 7% dividend increase last February. And we expanded our stock buyback program by $300 million. Both actions reflect our confidence in our strategy and continuing ability to generate free cash flow. We will continue to pursue a balanced approach to the deployment of our capital, while maintaining the flexibility to execute on our strategic priorities.

Now to our outlook for 2016. As Daniel mentioned, our 2016 results are expected to include approximately $23 million of negative impact related to the fluff pulp conversion outage at our Ashdown Mill. The preparation work for the conversion, the largest investment in recent history for Domtar, continues as planned with a dedicated team managing the project. All of the major equipment has been purchased and fabricated with delivery expected in the current quarter.

The closure of Paper Machine 64 is set for early April. And we're now planning for the mill outage, which includes prioritizing key grades and adjusting inventory to fully support our customers. The line is scheduled to start-up early in the third quarter of 2016. And we expect the full ramp-up to be completed over a six-month period.

The initial ramp-up will include running baled softwood prior to the transition to fluff pulp production. We'll also be running product for trial with our own Personal Care business in addition to select customers. As we grow our share of wallet and win new business, we will ramp-up production of fluff pulp accordingly, but our target is to produce at least 50% fluff output on the new line by early 2017. Total capacity of the newly converted line will be 516,000 tons. However, due to pulp constraint, we'll be running at about 430,000 tons.

As a consequence, our 2016 pulp shipments should be higher than in 2015 as a result of that conversion in a market that we think will see some volatility due to the strong U.S. dollar and some recently announced capacity additions. We expect our paper shipments to be in line with market demand. And new customer wins and our brand relaunches are expected to generate above market revenue growth in our Personal Care sector. Finally, raw material costs should be moderately higher when compared to 2015.

So, thank you very much for your time and support. And I'll turn it back to Nick for questions.

Nicholas Estrela - Director-Investor Relations

Thank you, John. So, both John and Daniel will be available for questions. I'd ask our participants to ask a few questions at a time and return to the queue for follow-ups as we want to get as many people as possible. So, Petlanch, you can open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. We'll take the first question from the line of George Staphos from Bank of America. Please go ahead.

George Leon Staphos - Bank of America Merrill Lynch

Hi, everyone. Good morning.

John David Williams - President, Chief Executive Officer & Director

Good morning, George.

George Leon Staphos - Bank of America Merrill Lynch

Good morning. Thanks for details. Congratulations on the year, a lot of progress. I guess the first question I had – and I think these are all going to relate more or less to Ashdown. So, the inventory pick-up in paper that we saw in the fourth quarter, guys, I forget if you – or I didn't hear if you'd mentioned it, but I assume that's building inventory ahead of the shutdown in April. Is that correct? And if not, what's driving that?

John David Williams - President, Chief Executive Officer & Director

That's exactly correct. Yeah. That's exactly what it is, George.

George Leon Staphos - Bank of America Merrill Lynch

Okay. And then if I go to the maintenance schedule, on, I guess, page 13, we obviously see the maintenance pick up in 1Q and 2Q from prior year levels, again, that's Ashdown. And then it drops pretty sharply. So is there something about the middle of the year where you then flip the switch and go to the 18-month schedule? And kind of a related question, perhaps you had mentioned this in the past, but several years ago, you had experimented as a firm with going from 12 months to 18 months and that was pulled back. What have you found in more recent periods where you think you can go back to 18 months?

John David Williams - President, Chief Executive Officer & Director

Yeah. Can I just – I'll talk to the 18 months. So, there's no doubt that's our long-term objective. And we've managed that in a few mills and we'll continue to manage that. That's part of actually why you see what you see here, because, a couple I think it is of those mills where we now are into that 18-month program actually fall in quarter two. That's why you see that step-up, George. Does that help?

George Leon Staphos - Bank of America Merrill Lynch

Yeah.

John David Williams - President, Chief Executive Officer & Director

And that's obviously why you then see the step-down. So, our overall objective as we drive our continuous improvement program is to run the whole network, we're not there yet, but to run the whole network on an 18-month maintenance shutdown process.

George Leon Staphos - Bank of America Merrill Lynch

Okay. And maybe my last question then. If we think about the $23 million impact from Ashdown, is that purely maintenance expenditure or is there something reasonably large in there for, I don't know, lost sales? I would assume not, because you're already building the inventory. But is there anything else in that $23 million that's beyond just maintenance expense? Thank you.

Daniel Buron - Chief Financial Officer & Senior Vice President

Well, it's actually – George, Daniel speaking. It's actually not maintenance. Maintenance is kind of a different bucket for us. It's all the fixed and semi-variable costs that will still be in the mill while we're not running 64. That will become A1, our pulp line, and some – our fluff line, sorry, and some pulp mill at the same time, because we need to close an alternation of pulp line as A64, PM 64 is down. So it's fixed cost absorption that will have no production assigned to it for that period of time.

George Leon Staphos - Bank of America Merrill Lynch

All right, so early in the year. So the first half of the year, you've got a double penalty. You've got the maintenance and you also have Ashdown. Would that be fair?

Daniel Buron - Chief Financial Officer & Senior Vice President

That's fair. And, overall, if you look at the maintenance for the year, it's flat year-over-year.

George Leon Staphos - Bank of America Merrill Lynch

Yeah.

Daniel Buron - Chief Financial Officer & Senior Vice President

Because we've moved some mills to 18 months and because of Ashdown, we have this pack, if you will, in the first half and we go back to more normal in the second half.

George Leon Staphos - Bank of America Merrill Lynch

All right. Thank you. I'll turn it over.

John David Williams - President, Chief Executive Officer & Director

Thanks, George.

Operator

Thank you. And the next question comes from the line of Anthony Pettinari from Citi. Please go ahead.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Good morning.

John David Williams - President, Chief Executive Officer & Director

Good morning.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

I was wondering if you could talk to maybe the trajectory of Personal Care earnings in 2016, if it's possible to talk about when some of the new customers wins flow through. And you've done $32 million, $33 million in EBITDA for the last few quarters. Is that a decent way to think about maybe the first half of the year or should we see some of those customer wins impact EBITDA sooner rather than later?

John David Williams - President, Chief Executive Officer & Director

Let's just talk, if we may, briefly about the top-line on that. So, on the top-line, shipments to, if you like, the two major wins, so the one in Europe and the one in the U.S., happened about now and through the end of the quarter. So we would see the kind of really full EBITDA impact coming through in quarter two and then sort of moving through for the rest of the year. So, quarter one, kind of, steady as she goes and then the real benefit. And now, the reason behind that, because actually the margins are pretty good on the new business, it's really start-up costs, outward generation, trialing, et cetera. That's why that happens in quarter one.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. Okay. That's helpful. And to think about kind of overall Personal Care EBITDA margins for the year, I mean, those may be more comparable to last year. It's really on the revenue side where you're seeing the growth. Is that fair to say?

John David Williams - President, Chief Executive Officer & Director

Exactly. So, you see kind of the same percentage relationship, but you should see the benefit of that growth.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And then just maybe a follow-up on CapEx. The guide for 2016 is up $50 million to $60 million. Is Ashdown all of that or is there maybe a little Personal Care in there? And then just thinking – I don't know if it's possible to guide to kind of a normalized CapEx rate once Ashdown is completely over with. How do we think about that maybe moving forward?

Daniel Buron - Chief Financial Officer & Senior Vice President

The Ashdown conversion is definitely a big chunk of our CapEx next year. This is around $130 million. We also have a couple of other profit improvement projects. One is actually turbine generator in Windsor, Quebec. There's a little bit of additional actually CapEx that were supposed to be as done in 2015 that had been moved to 2016 in the Personal Care business. Normal CapEx in that business – I think the Pulp and Paper should be around $150 million. That's enough for maintaining the asset loss, a very small amount for cost reduction, profit improvement project. And the Personal Care is probably around $30 million to $40 million. So, around $190 million, $200 million for that business in the current configuration makes a lot of sense.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's very helpful. I'll turn it over.

John David Williams - President, Chief Executive Officer & Director

Thanks, Anthony.

Operator

Thank you. And the next question comes from the line of Mark Wilde from BMO. Please go ahead.

Mark William Wilde - BMO Capital Markets (United States)

Good morning, John. Good morning, Daniel.

John David Williams - President, Chief Executive Officer & Director

Good morning.

Daniel Buron - Chief Financial Officer & Senior Vice President

Good morning.

Mark William Wilde - BMO Capital Markets (United States)

All right. John, first question. That $300 million to $500 million of EBITDA from fiber-based growth businesses, just to be clear, does that include fluff pulp?

John David Williams - President, Chief Executive Officer & Director

Yes, it does.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And so, is it fair to say that you would be open to growing the fluff pulp business, beyond just sort of the conversions that you've been doing at the mills? Will you go beyond that?

John David Williams - President, Chief Executive Officer & Director

I'm not certain that we would, but we'd look if it was possible.

Mark William Wilde - BMO Capital Markets (United States)

Okay. All right. And then I'm just curious about, sort of, managing that growth in fluff and growth in Personal Care because it seems like potentially they'd put you in a position of being both a supplier and a competitor for some folks. Can you talk about that?

John David Williams - President, Chief Executive Officer & Director

Well, I think when you look at that – I mean I think that's speculation at this point. But if you look at back half, I think, obviously, we're in that position where the million tons of fluff pulp which we'll have. And actually as long as we show our customer that we're offering them value in that space, I think, in only one instance that we've been told, look, if you do that, we're not going to buy pulp of you. So, most of our customers seem indifferent, provided we're really offering them the value in the fluff pulp area.

I think what they're after, obviously, is a good, steady supplier. And, quite frankly, I think the reason, we need those – we need two mills. It's because what we've heard back from some of our customers is, with only one mill in our system doing fluff pulp we're not really a long-term strategic supplier. With two mills, they see what we are. So, to my mind, I think that issue kind of goes away.

Mark William Wilde - BMO Capital Markets (United States)

Okay. That's fair. Just switching gears over to paper. Can you give us your read on kind of what's going on, kind of, throughout the supply chain with cut size inventories right now? And how you expect the duties to kind of play out over the next few quarters?

John David Williams - President, Chief Executive Officer & Director

Yeah, certainly. So you see pretty clearly in a couple of weeks we'll get the final ITC decision.

Mark William Wilde - BMO Capital Markets (United States)

Yeah.

John David Williams - President, Chief Executive Officer & Director

My personal view is that a lot of the impact that's going to happen has been happening. So there isn't some momentous event about to happen. Those people where the tariffs are, I think, going to be relatively high are already not here, maybe a little bit of inventory still there being run down, but they're not really shipping. If you look at some of the levels of the potential tariff, it seems to us highly likely. Certainly, one of the Brazilians might well keep shipping just based on what's happening on the currency. And it's felt, I think, that the Portuguese might well keeping shipping. That's certainly happening right now. So, to my mind, it's a little bit of a tightening. You've seen some of that benefit already in 2015. So I'm not expecting it to be overly dramatic, to be honest, in 2016.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And, John, just sort of order of magnitude in terms of inventory build that happened in anticipation of these duties, any way to quantify that?

John David Williams - President, Chief Executive Officer & Director

Well, I mean, to be frank, we've really build our inventory around the Ashdown closure, Mark, because it's not like that machine has not been doing anything. It's been relatively busy. So, most of our build has been around the Ashdown conversion. And some of that build, a little bit, maybe less than 10,000 tons, has been around a pickup in some cut size, which we've already been seeing. So, I think, we're feeling pretty good about that.

Mark William Wilde - BMO Capital Markets (United States)

Okay. Last question. Can you just help quantify the financial benefit from the roll in of these new product wins in Personal Care that you talked about with Anthony?

John David Williams - President, Chief Executive Officer & Director

I could give you the top-line. So, we believe, in 2016, we're going to see close to $100 million of additional sales on a run rate basis from the wins we've had.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And it sounds like we would get that for three quarters of the four quarters. Is that correct?

John David Williams - President, Chief Executive Officer & Director

Yeah. I would think – if you think the market is growing at 3%, we'd be disappointed not to grow twice that, as a minimum.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And you said the new wins are pretty reasonable margin business?

John David Williams - President, Chief Executive Officer & Director

Yeah.

Mark William Wilde - BMO Capital Markets (United States)

Okay. All right. Sounds good. I'll turn it over.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. The next question comes from the line of Mark Connelly from CLSA. Please go ahead.

Mark Connelly - CLSA Americas LLC

Thanks, John. Two things -

John David Williams - President, Chief Executive Officer & Director

Good morning, Mark.

Mark Connelly - CLSA Americas LLC

Can you talk about the nature of the cost and productivity that you'll be doing in 2016? And do you expect those improvements to allow you to produce more paper on fewer machines? And then second question is about M&A. Obviously you've had a lot other priorities and there's been a slump in M&A generally. But would it be logical that we would see you go back to your earlier comments of wanting to build critical mass in Personal Care in 2016?

John David Williams - President, Chief Executive Officer & Director

Yeah. So, let me answer those two questions. So, if you look at what we've been doing in our Pulp and Paper business, it's been very much about – focused really on getting pulp production up, because, obviously, we can sell pretty much every ton of pulp we produce. So, that's really been our major focus, productivity, whilst being efficient in our paper machines and ensuring we're getting sufficient quality out of our paper machines.

Obviously, over time, to your point, that leads to, can you get – how would I put it – as much production as possible on those fewer machines as possible. And I think actually, funny enough, the fact that we're able to shut a large machine in Ashdown is partly a monument to the fact that we've got a lot better at production. And we're feeling confident we can move a number of those grades elsewhere. So I think that's part of the reward.

Mark Connelly - CLSA Americas LLC

Okay.

John David Williams - President, Chief Executive Officer & Director

And, over time, as we get more successful, obviously, I'm looking for that reward every which way I can find it. So, I mean that's part of the driver behind that, to your point. So, I'd – second part of your question was?

Mark Connelly - CLSA Americas LLC

Whether we're going to see you shift back towards M&A? Two years ago, you talked about looking for more critical mass.

John David Williams - President, Chief Executive Officer & Director

Yeah. So, what we own today in Personal Care with the asset base we'd have in place by end of 2017, we believe has run rate up to about $200 million of EBITDA. And, obviously, now we have a fluff pulp business that will give us some reasonable earnings. But if we could find other things to do and some bolt-ons, really, in fiber or across the piece that we think we have a right to own in terms of telling the world we own them, we'd still look.

Mark Connelly - CLSA Americas LLC

Okay. Very helpful. Thank you.

John David Williams - President, Chief Executive Officer & Director

Thanks.

Operator

Thank you. And the next question comes from the line of Danny Moran from Macquarie. Please go ahead.

Danny Moran - Macquarie Capital (USA), Inc.

Yeah. Good morning. Congrats on the strong finish for the year, guys.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Danny Moran - Macquarie Capital (USA), Inc.

With leverage down here close to 1.5 times, can you remind us your target leverage ratio and what you would be willing to lever up to?

Daniel Buron - Chief Financial Officer & Senior Vice President

I think we look at, at risk, when we're talking about leverage. And we believe that a business like us, given our portfolio of asset and portfolio of businesses we're in, would be an acceptable risk if we bring the leverage around three times. Obviously, this is an award cycle answer. So, we have some room to maneuver in that part of our overall capital occasion that we're trying to balance between, keeping some dry powder on our balance sheet to be able to seize M&A opportunity and also returning cash to our shareholder to the tune of north of 50%. But, as I shared in my prepared remark, we are at 72% since 2011.

Danny Moran - Macquarie Capital (USA), Inc.

Okay. Great. And then just on the M&A pipeline. With the sell-off in the market, have you actually seen multiples come down to where things are starting to look a little more attractive?

John David Williams - President, Chief Executive Officer & Director

I mean, obviously, on a sort of macro level, the answer to that, Danny, was obviously yes. But, frankly, we've suffered a bit too. But we're obviously always watching just to see if there is value there. We have felt for some time, particularly in the consumer goods space, so that multiples was so toppy that it was sort of stopping us doing anything. So, now we take a bit more careful look if those values come off a bit.

Danny Moran - Macquarie Capital (USA), Inc.

Okay. Great. And then last one, can you give us a sense for what you're seeing thus far in January, early Feb for Paper and Pulp volumes and any notable change in imports following the DOC ruling?

John David Williams - President, Chief Executive Officer & Director

Not really. I mean, pretty much steady as she goes, to be honest.

Daniel Buron - Chief Financial Officer & Senior Vice President

Yeah.

Danny Moran - Macquarie Capital (USA), Inc.

Okay. Great. Good luck in the year.

John David Williams - President, Chief Executive Officer & Director

Thank you very much.

Operator

Thank you. The next question comes from the line of Chip Dillon from Vertical Research Partners. Please go ahead.

Chip A. Dillon - Vertical Research Partners LLC

Yes. Hi. Good morning.

John David Williams - President, Chief Executive Officer & Director

Chip, hi.

Chip A. Dillon - Vertical Research Partners LLC

A question for you all on the capital spending. I know, Daniel, you mentioned that sort of if you build in maintenance plus the normal array of growth projects, we could see $190 million to $200 million number. Is that something that we should expect in 2017?

John David Williams - President, Chief Executive Officer & Director

Sorry, Chip. I mean, on Pulp and Paper – you're talking about the total entity, right? You've added the -

Chip A. Dillon - Vertical Research Partners LLC

The total company, the total company, I'm sorry, yes.

John David Williams - President, Chief Executive Officer & Director

I think it really depends. If you take the Personal Care business, you would say sort of $30 million to $40 million is, if you're growing at market, it's relatively steady, you haven't got much product innovation, and kind of steady state. Now, if we felt there were some other opportunities either in geography or in product or there was a large win or a large launch, you might see it a little bit higher than that. But that's the kind of steady state number for the business. Does that help?

Chip A. Dillon - Vertical Research Partners LLC

Yeah. Yes. And then I guess your intent, I guess to ask differently, is to get to a steady state number in 2017 with a little upside for what you just mentioned in Personal Care?

John David Williams - President, Chief Executive Officer & Director

Yeah. So to give you an idea of sort of how it would work, a machine with everything that goes around it might be $25 million, $30 million, depending on whether it's baby or whether it's adult incontinence and depending on the geography actually that it's placed in. So, if you think about that and you have to order a machine or two a year, you are a little bit over that steady state number. But the asset base we will have by the end of 2017 gives us runway to $200 million. So, if we start to buy more, our expectation will be that it will get us past $200 million in EBITDA.

Chip A. Dillon - Vertical Research Partners LLC

Okay. By the end of 2017?

Daniel Buron - Chief Financial Officer & Senior Vice President

Yeah.

Chip A. Dillon - Vertical Research Partners LLC

Yeah. Okay.

John David Williams - President, Chief Executive Officer & Director

Yeah.

Chip A. Dillon - Vertical Research Partners LLC

And then that's very helpful. And then shifting gears, you mentioned – and I might have misunderstood you – that I think the Ashdown converted capacity would be 516,000 tons, but you mentioned 430,000. Is that sort of a number for 2017 or is that an indefinite number that you would hold at...

John David Williams - President, Chief Executive Officer & Director

Well, we're a little bit pulp constrained, as we're obviously still supporting two paper machines. So, essentially, it's – whilst we're running those two paper machines and that pulp line, that's what the pulp line would be producing.

Chip A. Dillon - Vertical Research Partners LLC

I understand. Okay. And then, lastly, just speaking about the pulp markets, it seems like we're seeing some cross currents in terms of softwood markets, at least in late January, early February. What is your sense? You think we've sort of hit bottom, you think in light of some of the announcements we've seen of increases or how do you see the markets?

John David Williams - President, Chief Executive Officer & Director

Well, I mean I could only talk about us really. I mean I think you know us well enough that we're always looking for that opportunity. If we think the dynamic shifting a little bit towards the seller, we'll look for a price increase. I mean that's certainly what we felt in North America and why we announced what we announced.

Chip A. Dillon - Vertical Research Partners LLC

Okay. All right. Thanks, guys.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. The next question comes from Sean Steuart from TD Securities. Please go ahead.

Sean Steuart - TD Securities, Inc.

Thanks. Good morning, everyone.

John David Williams - President, Chief Executive Officer & Director

Good morning, Sean.

Daniel Buron - Chief Financial Officer & Senior Vice President

Hey, Sean.

Sean Steuart - TD Securities, Inc.

A couple questions. John, your mention of an expectation of higher raw material cost in 2016. Can you go into a bit more detail on where you're expecting that inflation to come from?

John David Williams - President, Chief Executive Officer & Director

Well, I think it's really a discussion around the Pulp and Paper business more than it's a discussion around the Personal Care business. So, we think there is some – a few issues potentially around wood. It's a very localized business. Local dynamics make a big difference. If you think about what we're doing in Ashdown, so really we've been buying a lot of hardwood and very little softwood. Now we have to go out and find all that softwood. So, if you think about that impact in our raw materials that makes an impact. Not necessarily means we're buying more expensively but we're buying a more expensive wood. You take my point?

Sean Steuart - TD Securities, Inc.

Understood.

John David Williams - President, Chief Executive Officer & Director

So, I think that impact. We buy roughly $1 billion of wood every year. So, we think there's a little bit of inflation in there. I think that's the major item.

Sean Steuart - TD Securities, Inc.

Any follow on relief on the chemicals side expected in 2016?

John David Williams - President, Chief Executive Officer & Director

No, not really, not at this point in time. I mean you would imagine. You look at oil as a feedstock and you say to yourself, but, of course, it's really about mostly the kind of converting ability around some of the chemicals we buy. So, we're not looking for any dramatic there. We got some major benefit about a year ago when we actually really rejigged our specialty chemicals supply within our Pulp and Paper business. That's going to run through, but there'll probably be a little bit of inflation in that, but still off the lower base than we've had historically.

Sean Steuart - TD Securities, Inc.

Okay. And the second question I had was on the Personal Care fourth quarter results. The same currency sales growth you reported, can you give us an idea of how much of that was price versus volume?

John David Williams - President, Chief Executive Officer & Director

It was mostly volume.

Sean Steuart - TD Securities, Inc.

Any additional commentary you can give us on general unit price trends?

John David Williams - President, Chief Executive Officer & Director

Well, yeah, it's – I'm not trying to avoid the question. It really depends on where we're selling the product. So, there's been some price pressure in the sort of long-term care, acute care area. It's actually been very solid in the retail area. And we've had some price pressure in some of our Nordic businesses. But we've been very strong actually in Southern Europe. So, it's a bit of a mismatch is the wrong word, but it varies. In addition, currency throws it all around because we've also got the kroner to the pound and the kroner to the euro. But, overall, a little bit of price pressure in what I would call the healthcare sector, but not so much in the retail sector.

Sean Steuart - TD Securities, Inc.

Got it. Okay. That's all I had. Thanks, guys.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. And the next question comes from the line of Gilles Marchand from Knights of Columbus. Please go ahead.

John David Williams - President, Chief Executive Officer & Director

Gilles, hi.

Gilles Alfred Marchand - Knights of Columbus

Hi. I was wondering if the company is considering a potential spin of the Personal Care business that's been rumored.

John David Williams - President, Chief Executive Officer & Director

No.

Gilles Alfred Marchand - Knights of Columbus

Excellent. Thanks.

Operator

Thank you. And we'll take the next question from George Staphos from Bank of America. Please go ahead.

George Leon Staphos - Bank of America Merrill Lynch

Thanks very much. I mean, I think, John, you already largely answered this, but additional color would be appreciated, if you have. Have you seen any effect yet in imports from countries that really were not party to the trade suit? Has it been material at all from your vantage point? It wouldn't look that way from us? There has been a pick up that's been more than offset by the countries that are affected in this trade suit. But what have you seen from your vantage point?

John David Williams - President, Chief Executive Officer & Director

That's a great question. So, yeah, undoubtedly, a little bit of noise about all the Europeans going to appear, nothing substantial, as you're saying the numbers don't show it at this point. If you think about the Europeans, that market has actually got much better this year. I think they've had three price increases. So probably economics say they're happier in their home market than exporting because, of course, by the time they've paid the freight and they've stored, et cetera, it might not be wildly attractive. But I'm sure they'll knock on the door for some of the bid business, I would imagine, George but -

George Leon Staphos - Bank of America Merrill Lynch

Yeah.

John David Williams - President, Chief Executive Officer & Director

So far nothing wildly dramatic.

George Leon Staphos - Bank of America Merrill Lynch

Okay. And then on fluff pulp – and this question has been asked in the past about – it's not just you but there are some other companies that are obviously making conversions. You wouldn't be doing Ashdown if you didn't feel comfortable that you needed the product down the road. So, with that as a context, is there anything that gives you a little bit more pause about the long-term growth outlook relative your prior expectations or you still feel pretty comfortable with that demand growth? And what are the whys and wherefores around that from here?

John David Williams - President, Chief Executive Officer & Director

Good question. So, I think, the way you have to look at this is you have to look at the end use market. So, obviously, this is a product in baby diapers. It's a product in adult diapers. It's a product in feminine care. You look at the growth on all those areas, they are pretty dramatic. I mean we think fluff pulp is a 3% a year growth market, so assume it's around a 6 million ton market a year. That gives you some sense of what that might be. We've got, I think, a very strong sales plan in place. It does help us to be forward integrated actually with our own Personal Care business.

And, of course, we have that opportunity to be careful as we move into that market in terms of baling southern softwood. So I think with all that in place, we will have roughly a million tons to sell into that market, maybe a little bit less, maybe 850,000 tons. My view is we're in a strong place from a cost standpoint and we're in a very good place, I think, in terms of the quality of the product we manufacture. So, overall, I think we've got a good market position which I think over time will prove its worth.

George Leon Staphos - Bank of America Merrill Lynch

All right, John. Thanks. I'll turn it over. Have a good quarter.

John David Williams - President, Chief Executive Officer & Director

Thank you so much.

Operator

Thank you. And the next question is from Paul Quinn from RBC Capital Markets. Please go ahead.

Paul Quinn - RBC Capital Markets

Yeah. Thanks very much.

John David Williams - President, Chief Executive Officer & Director

Hi, Paul.

Paul Quinn - RBC Capital Markets

Just following up on the – yeah. Good morning, John. Just following-up on the fluff market question or topic. You described a 3% growth. I get the market as 6.6 million tons globally, which is basically 200 million – sorry, 200,000 tons a year growth and it looks like about 1.5 million tons coming on over the next say 12 months to 18 months. So I'm just trying to – in terms of modeling, how should I think about your production mix going forward in 2016, 2017, 2018 between fluff and -

John David Williams - President, Chief Executive Officer & Director

On your number, Paul, have you got the Sun capacity in there?

Paul Quinn - RBC Capital Markets

Yeah.

John David Williams - President, Chief Executive Officer & Director

Yeah. Okay. So, I mean we all know that's very early days. So -

Paul Quinn - RBC Capital Markets

Yeah.

John David Williams - President, Chief Executive Officer & Director

I'm not sure – I'm not wishing to argue with your calculation. I'm not sure I'd include that at this point. But I think if you look at where we are, again, I mean, I'll need to repeat myself. I think we've got a great product. Is it going to get a little bit difficult? Maybe for a while, who knows, but my view is if I look at our product mix, probably 2016 we're really going to focus on getting ourselves qualified in our own Personal Care business with our Ashdown volume and also in a few key accounts, all of whom know our agenda that we want to be with them and are prepared to help us qualify. And then I think the product mix shifts probably by – in 2017, full 2018, we're probably at full volume on fluff pulp. But I think there's a pretty steady ramp-up as we balance between bales and fluff.

Paul Quinn - RBC Capital Markets

Okay. That's helpful. And maybe you could just give us a little color on the qualification process around fluff to be -

John David Williams - President, Chief Executive Officer & Director

Yeah. Sure. I mean obviously – I'd be happy to. It depends on the customer, depends how they buy, depends on their technical resources, but it can take you three months to nine months to qualify with a major account in fluff pulp. Why? Because, of course, this is a key ingredient of a consumer product and they are highly sensitive to how their consumer, whether that be the baby, whether that be the elderly person, whether that be the woman in Fem high (48:54) responds to these products in the final product. So, it's actually a technical sell and an R&D based sell to these major accounts. So, it's not – I have fluff pulp meter parked on my door. It's actually a pretty technical qualification. And in terms of how your grade interacts with their machines, the kind of yield they're going to get, does it actually de-pulp effectively and quickly, is it soft, is it harsh, all those issues really count to that customer base.

Paul Quinn - RBC Capital Markets

Great. Best of luck for the conversion.

John David Williams - President, Chief Executive Officer & Director

Thank you very much.

Operator

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

Nicholas Estrela - Director-Investor Relations

Thank you, Petlanch. So, as a reminder, we will release our first quarter 2016 results on Thursday, April 28, 2016. Thank you for listening and have a great day.

Operator

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

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