Domtar (UFS) John David Williams on Q1 2016 Results - Earnings Call Transcript

| About: Domtar Corporation (UFS)

Domtar Corp. (NYSE:UFS)

Q1 2016 Earnings Call

April 28, 2016 10:00 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

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hamir Patel - CIBC World Markets, Inc.

Randy Toth - Citigroup Global Markets, Inc. (Broker)

Paul Quinn - RBC Dominion Securities, Inc.

Mark Connelly - CLSA Americas LLC

James H. Armstrong - Vertical Research Partners LLC

Sean Finlay Steuart - TD Securities, Inc.

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation First Quarter 2016 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, April 28, 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, Angela. Good morning and welcome to our first quarter 2016 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, 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 Commission for a listing of those. Finally, certain non-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. This morning, we reported first quarter EBITDA before items of $130 million, on sales of $1.3 billion, consistent with the business update we issued on April 15. Our results in the Pulp and Paper business were affected by unexpected costs that arose during our planned maintenance outages.

During the quarter, we took maintenance outages of 9 of our 13 mills, with most of the additional costs occurring in three facilities. At Kingsport, due to unexpected findings during their outage, pressure diffuser issues at Hawesville and wood yard equipment repairs at Marlboro. Apart from these three mills, I'm pleased with how well we executed. Our teams are pretty agile, we quickly resolved the issues and they're now behind us.

In Paper, demand and pricing were relatively stable compared to the fourth quarter, and we announced price increases on a number of uncoated freesheet grades towards the end of the quarter.

In Pulp, the current cycle in global markets led to downward price adjustments. However, most of the erosion occurred in January with relatively flat prices through February and March. Productivity at Kamloops and Plymouth improved when compared to the fourth quarter, and we continue to see positive results with a number of our pulp mills from our continuous improvement and reliability programs.

In Personal Care, we had strong EBITDA growth when compared to the first quarter of 2015. Our North American business significantly improved compared to last year, while results in Europe were impacted mostly by customer destocking and some start-up costs.

At quarter end, we began executing on our new customer commitments, including the successful launch of a partner brand and the ramping up of volumes for a major account. And we will realize the topline benefits from this additional sales volume for the remainder of the year.

Although free cash flow was negative in the quarter, this was mostly due to above average CapEx spending. We further executed on our buyback program, repurchasing $10 million worth of shares. We will continue to pursue a balanced approach to the deployment of our capital, while maintaining the flexibility to carry out our growth strategy.

In health and safety, we ended the quarter with a total frequency rate of 0.88, slightly higher than last year's trend, but still below 1, which we consider as a world-class benchmark. Although we do have a positive trend, our objective is to further improve our position and keep employees healthy, productive and engaged.

In the quarter, we launched several initiatives that focus on creating a safer workplace – the One Domtar approach and Life – the two programs that we put in place to leverage better practices across the business in an effort to reduce and eliminate serious injuries.

To summarize the first quarter, the additional maintenance costs had a significant impact on our financial performance, but we do remain focused on improving results and on execution going forward.

With that, let me turn the call over to Daniel for the financial review, before making additional comments on our performance and outlook. 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 $0.06 per share for the first quarter compared to net earnings of $0.91 per share for the fourth quarter of 2015. Adjusting for items, our earnings were $0.35 per share in the first quarter compared to earnings of $1.11 per share for the fourth quarter. EBITDA before items amounted to $130 million compared to $204 million in the fourth quarter.

Turning to the sequential variation in earnings on slide five. Consolidated sales were $27 million lower than the fourth quarter mostly due to lower pulp prices and lower pulp and paper volume. Our cost of sales was $43 million higher when compared to Q4, mostly due to the impact of additional maintenance costs and higher raw material costs. Depreciation and amortization was in line with the fourth quarter, while SG&A was $3 million higher due to higher mark-to-market of some stock-based compensation.

Our first quarter earnings included an impairment charge of $21 million, and closure and restructuring costs of $2 million related to the conversion of a paper machine into a fluff pulp line at our Ashdown facility.

In the first quarter, we recorded an income tax benefit of $3 million. The $3 million benefit relates to the recognition in the first quarter of an R&D tax credit at the state level. We expect the effective tax rate for the remainder of the year to be between 22% and 24%.

Now, turning to the cash flow statement on slide six. Cash flows provided from operating activities amounted to $97 million, while capital expenditures amounted to $100 million. This resulted in a negative free cash flow of $3 million for the first quarter.

Under our stock repurchase program, we repurchased shares for an amount of $10 million during the quarter. From January 2011 to March 2016, we returned a total of $1.3 billion to our shareholders for dividends and share buybacks representing 74% of our free cash flow. At the end of the quarter, we had 62.6 million common shares outstanding.

Turning to the quarterly waterfall on slide seven. When compared to the fourth quarter, EBITDA before items decreased by $74 million due to higher maintenance costs of $33 million, $11 million of which was related to the unexpected additional spend, lower productivity of $14 million, $4 million of which was related to more outage days.

Higher SG&A and other costs of $11 million, lower volume and mix of $8 million, higher raw material costs of $8 million, and lower selling prices of $7 million. These were partially offset by a favorable foreign exchange rate impact of $4 million and lower freight cost of $3 million.

Now, the review of our business segments starting on slide eight. In the Pulp and Paper segment, sales were 2% lower when compared to the fourth quarter and down 5% when compared to the same period last year. EBITDA before items was $115 million compared to $180 million in the fourth quarter of 2015.

Our Paper business on slide nine. Sales decreased 1% while estimated EBITDA before items was $26 million lower when compared to the fourth quarter. Manufactured paper shipments were 1% lower when compared to Q4 and 2% lower when compared to the same period last year. Our average transaction prices for all our paper grades were $3 per ton higher than last quarter. In the quarter, we took close to 10,000 tons of lack of order downtime to balance our production to our customer demand.

Our Pulp business on slide 10. Estimated EBITDA before items decreased $39 million when compared to the fourth quarter. Pulp shipments were sequentially lower by 4% versus the fourth quarter and up 5% when compared to the same period last year. Average pulp prices decreased by $20 per metric ton versus the fourth quarter. Our paper inventory were flat compared to the last quarter, while pulp inventory decreased by 13,000 metric tons.

Our Personal Care business on slide 12. Our EBITDA before items was $30 million, 11% higher than the same quarter last year, mostly due to manufacturing cost savings and lower raw material costs, while same currency sales in the division were flat year-over-year.

Before concluding my remarks, I would like to remind you that the second quarter will be a very busy Pulp and Paper maintenance quarter and that we plan to spend approximately $14 million more than what we spent in the first quarter. This high level of maintenance activity will also impact our production volumes and therefore the absorption of fixed costs.

I expect the unabsorbed fixed costs will affect our Q2 result by approximately $7 million more when compared to Q1. In addition, the financial impact expected in the second quarter for the conversion of the Ashdown paper machine to a fluff pulp line will be approximately $23 million, and this special spend will still be considered as an item in our Q2 reporting.

So this concludes my financial remarks, and with that, I'll turn the call back to John.

John David Williams - President, Chief Executive Officer & Director

Thank you, Daniel. Moving to my business review, in Paper, our volumes were solid, most notably in business papers. Despite strong shipments, we took further steps to balance our production with customer demand by taking close to 10,000 tons of lack of order downtime.

In addition, we permanently closed paper machine 64 at Ashdown, the largest paper machine in our network, in preparation for the fluff pulp conversion. The closure will reduce our annual uncoated freesheet paper production capacity by approximately 364,000 short tons.

Paper prices were flat in the quarter, and we announced price increases covering a vast majority of our product offering, including business papers and commercial printing and converting grades. We expect to implement most of the price increases in the second and third quarters, with a full run rate impact by the fourth quarter.

In Pulp, global inventory levels remain relatively balanced, while demand remains strong notably in China. Prices for softwood grades improved in April, and we expect price momentum through the second quarter supported by seasonally better demand combined with maintenance downtime.

The fluff market also continues to have positive growth fundamentals. Our key customers are growing, and the developing markets are expanding. The Ashdown conversion work has become a key focus for the mill and for the overall business. The project is progressing on plan. We're quickly ramping up the preparation work, and we look forward to supporting our key customers with a new world-class facility later in 2016.

Turning to raw materials, most of our major input costs including fiber, chemicals, and energy were higher in quarter one, which is considered to be a seasonally high-cost quarter largely due to weather. Freight costs declined across all sectors of our business, reflecting lower diesel prices, better trucking availability, and lower ocean freight rates.

We had a good first quarter in Personal Care year-over-year. Our topline was impacted by fewer shipping days. That said, it was a great quarter for execution with continued delivery of our cost savings plan, and EBITDA are up 11% versus quarter one of 2015. Our North American business had a strong EBITDA performance.

In Europe, we gained a percentage point in share in a flat market, and we had good customer sales throughput to consumers following the product relaunch in Spain in quarter four. Overall, productivity was higher as we ramped up ahead of the delivery of new customer wins, driving operating leverage and resulting in favorable cost per unit.

We also continue to make good progress on growing the business by securing some additional wins and retaining two existing key accounts that were up for bid. Our unique partner brand strategy focuses on winning with channel leaders and offering turnkey solutions towards a three-step plan.

First, in material and design, we focus our R&D and innovation capabilities to deliver distinctive products designed to improve skin health and improve patient outcomes. Second, mechanical flexibility gives us the proprietary and flexible manufacturing platform to make unique products and solutions for our strategic customers.

Third, category management and digital technology focus on our customers' unique attributes while servicing them through consumer engagement models and value chain solutions. I'm pleased that our strategy is beginning to resonate with our customers and we're confident of making further progress this year.

Finally, on the front end of the business, our sustainability report received national accolades from two public relations organizations in the category, Sustainability and CSR Reporting.

Now, to our outlook for the remainder of the year. Our paper shipments should trend with market demand. The announced price increases in paper are expected to positively impact results towards the end of the second quarter and onward into 2016. The second quarter itself will be affected by seasonally higher maintenance activity in our Pulp and Paper business, in addition to the cost of $23 million related to the fluff pulp conversion outage at our Ashdown mill.

Personal Care results will benefit from the new customer wins, market growth and cost savings from the new manufacturing platform. Finally, input costs are expected to marginally increase.

In summary, given the timing of maintenance activity and costs related to the fluff pulp conversion, our first half results are expected to remain subdued. The second half however, the benefits from the Ashdown conversion, lower maintenance, higher prices and the impact from new customer wins in Personal Care will significantly improve our results.

Thank you 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, Angela, you can open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. And our first question will come from the line George Staphos from Bank of America. Please go ahead, sir.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hey. Good morning, everyone. This is actually John Babcock on the line for George.

John David Williams - President, Chief Executive Officer & Director

Hi John.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Just wanted to quickly follow up with you on essentially the maintenance and some of the operating items that occurred during the quarter. I mean, you talked about how maintenance will be about $40 million or higher in 2Q. But, I wanted to get a sense for what items within the bridge we should ultimately remove from there as we're bridging to 2Q given the higher maintenance level?

Daniel Buron - Chief Financial Officer & Senior Vice President

If you look at the slides, you're going to have our forecasted maintenance for the rest of the year. And the one additional item that actually shows in my prepared remarks is this unabsorbed fixed costs additional spending, if you will, in Q2 of around $7 million.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. But, as we are going to bridge that from 4Q 2015 to 1Q 2016, I just want to get a sense for which of those items ultimately – it's almost like productivity, that's probably not going to recur, right, so we'll add that back. I would guess that raw materials, I mean that's obviously based on our own assumptions, but were there any other items that we should be adding back to the quarter though to make sure that we can get a sense?

Daniel Buron - Chief Financial Officer & Senior Vice President

Yes. If you look at raw material costs increase that we were showing on our waterfall, a little bit more than 50% of that is actually usage linked to winter. As we are entering into the summer season, obviously that will disappear. And the other item, I think, that one needs to consider is there was a significant shift in currency, the Canadian dollar versus the U.S. dollar, over the last couple of months that will have an impact on our results in Q2.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. And now moving on to Personal Care, I just want to get a sense for how much from new contract wins was ultimately in revenues for the quarter?

John David Williams - President, Chief Executive Officer & Director

Very little, to be honest, because it was really the tail end of the quarter when we really started shipping, and we were a little bit delayed. Actually, one of the customers delayed slightly due to sort of outwork and just getting organized and selling through stock. So, really the impact of that, we really see coming through in quarter two. I think the way to look at it is, we're expecting – if the market is, say, growing about 3%, we're expecting to grow sort of double the market as this kicks in. Does that help you think about the topline?

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Yes, a little bit. So, I guess as we kind of look out through the year, I mean obviously you'll have the market growth. Correct me if I'm wrong, but I thought it was kind of around 3% to 4%-ish in that range.

John David Williams - President, Chief Executive Officer & Director

I think about 3%. And we'd expect to operate sort of double that, so we'd be looking for 6% growth from here on in.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Perfect. And then as far as margins, I mean what do you ultimately see as kind of longer term target (19:31).

John David Williams - President, Chief Executive Officer & Director

Great question. So we've said really, we see that business with mid-teen margin. So we've been at 15. We're a little bit below that by a point. About now, I think that's largely some of the noise in the system for the start-up. So mid-teen margins over the long term, I think, is certainly our aspiration. And as we see overhead recovery come through from filling up this machine part, there's no reason why we can't get there.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Great. And then just my last question before I turn it over, on the fluff pulp market, I mean, clearly we've seen that the growth outlook in China and elsewhere has come down a little bit. Wanted to get a sense from you, ultimately, how you're still viewing demand in the market longer term, and then also how some of the new fluff projects in Brazil, and then also the recently announced one in the U.S., how it could impact the overall fundamentals there.

John David Williams - President, Chief Executive Officer & Director

If you take the fluff pulp market, people believe there's about 250,000 tons of annualized growth in that market or probably roughly a 6 million ton annualized sales number, so that gives you a sense of the growth going forward.

To be actually honest, we have a very focused plan for selling sort of the ramp-up tons that we are going to put through into Ashdown and when we're really going to be fully fluff, because obviously our mill can actually swing from softwood bales to fluff.

So I'm really focused on that, to be honest, and making sure that we offer the customer the value and we build that business. So that's really my, or our, shall I say, focus at this point in time.

John P. Babcock - Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. Sounds good. Thanks for the color.

John David Williams - President, Chief Executive Officer & Director

You're welcome.

Operator

And we'll now take our next question from Hamir Patel of CIBC Capital Markets. Please go ahead.

Hamir Patel - CIBC World Markets, Inc.

Hi, good morning.

John David Williams - President, Chief Executive Officer & Director

Good morning.

Hamir Patel - CIBC World Markets, Inc.

John, last quarter, you characterized the new product wins in Personal Care as representing – I think the figure was about $100 million of additional revenues on a run rate basis...

John David Williams - President, Chief Executive Officer & Director

That's correct, yes.

Hamir Patel - CIBC World Markets, Inc.

...in 2016. So, is that figure still on track? I mean, you referenced there were some delays with one customer.

John David Williams - President, Chief Executive Officer & Director

That was a couple of weeks, to be honest, so I don't think it's anything. I mean, the question is, that's the value of the new wins. Of course, the question then is what happens in the core business, Hamir. So, certainly, one of our customers is finding sort of in terms of the competitiveness of the market, they're not quite hitting their plan, so whether that nets out to a slightly different number based on things happening in the core business, but certainly, from what have we won in terms of the value, that's what we've won.

Now, at the moment, we're in sell-in mode, and the real judgment, of course, will be how that product sells out to the consumer. If we find that's a little sluggish patently then, we'll probably have to put some work in which will result in small costs in terms of digital activation, some of the things we do for our customers to make certain that their product actually sells through to the consumer.

But so far, the signs are pretty good. So, hand on heart, I know what I've won. The question is does the core business move around a little bit just based on sell-out, and of course, what are competitors doing in some of these key markets. Does that help a bit?

Hamir Patel - CIBC World Markets, Inc.

No, that helps a lot. Thanks.

John David Williams - President, Chief Executive Officer & Director

Okay.

Hamir Patel - CIBC World Markets, Inc.

And just following up on the prior question on fluff demand, from what I gather, there's been some advancements on, I guess, the fluffless diaper side. Any thoughts there on what that might mean for both fluff demand and then also your portfolio in Personal Care?

John David Williams - President, Chief Executive Officer & Director

Well, that's a great question. So, yeah, undoubtedly, some of the consumer products come. If you think of the holy grail of particularly baby diapers, it's got a thinner and a great fit but still functionally, highly effective. And certainly, some people are thinking of different ways to do that, and of course there are big supply chain savings. I think that might slow the growth down a bit, but I don't really, at this point, see the market going no growth because it really depends on consumer acceptance. And there are marketplaces where a fluffy soft diaper is perceived to be the quality item, if you take my point. So, it really depends on consumers and specific consumer markets.

In addition, if you think of incontinence, which obviously, the heavy and medium incontinence products have far more intensity of fluff pulp than baby diapers just based on size, and of course, the functional need of the product and you look at the growth platform there, it still looks pretty strong.

So, I don't see growth reversing. Will it slow a bit? Maybe. But then if you think about the vast number of consumer in the world who currently aren't using a disposable diaper and how motivated major brands are to change that, I still think you'll see growth.

Hamir Patel - CIBC World Markets, Inc.

Okay. Thanks, that's helpful. And just a final question I had for Daniel was, could you give us an indication of what portion of your volumes in both cut size and offset are directly tied to changes in the RISI benchmarks.

Daniel Buron - Chief Financial Officer & Senior Vice President

Actually, almost none in our case. The only big contract, if you will, we have in our Paper business is the contract we have with (25:01) for specialty paper. The rest, we do have some pricing arrangement. Very little are linked to RISI. It's more time based. So, the one – if you're referring to implementation of the price increase, that's why we're referring to a delay of a bit in Q2, another bit in Q3, and the full run rate in Q4 this year.

Hamir Patel - CIBC World Markets, Inc.

Okay. Great. Thanks. That's all I had. I'll turn it over.

John David Williams - President, Chief Executive Officer & Director

Okay. Thank you.

Operator

And we'll now take our next question from Anthony Pettinari of Citi. Please go ahead.

Randy Toth - Citigroup Global Markets, Inc. (Broker)

Yes. This is actually Randy Toth, sitting in for Anthony.

John David Williams - President, Chief Executive Officer & Director

Hi.

Randy Toth - Citigroup Global Markets, Inc. (Broker)

I think you – yeah, hi. I think you guys just referenced some more additional wins in product care. Can you quantify those? Were they more on the adult incontinence side or baby diapers, and is it in excess of $100 million in sales that you previously announced?

John David Williams - President, Chief Executive Officer & Director

Yes, that's a great question. So it's a bit of both, if I'm being honest, a good size win in adult. Rough numbers, we think, are about $40 million. They will come in very much at the tail end of this year. So there might be a little bit of impact on this year, but I don't expect it to be dramatic. The good news is, of course, it means the pipeline looks pretty solid for 2017. Did that help?

Randy Toth - Citigroup Global Markets, Inc. (Broker)

Yes, perfect. Thank you.

John David Williams - President, Chief Executive Officer & Director

Okay.

Randy Toth - Citigroup Global Markets, Inc. (Broker)

And then just other question. I think you targeted 50% of fluff pulp by early 2017 for the Ashdown conversion. Do you have incremental demand from your customers to fill that target, or is that 50% assuming you're going out and competing for it?

John David Williams - President, Chief Executive Officer & Director

Well, let's explain what we're going to do because I think, essentially, we are going to put our in-house fluff pulp sales, i.e., where we sell to ourselves our own Personal Care business. That will be the launch customer essentially for Ashdown. And then that balance from Plymouth will move into our export markets. So that's going to be nearly 25% of Ashdown's sort of back 50% – half of the 50%, excuse me. I'm getting confused in my percentages there.

And then – so the balance of what we really need from our customer base, we're pretty confident about. We have a very good relationship with some major key accounts, and they already know and we're already discussing how we're kind of going to move that volume to them. So we've got a very detailed sales plan by customer, by geography, in fact, by individual customer facility. So, I'm feeling pretty good that we can get there.

Randy Toth - Citigroup Global Markets, Inc. (Broker)

Okay. Perfect. Thank you. I'll jump back in the queue.

John David Williams - President, Chief Executive Officer & Director

All right. Thanks.

Operator

Your next question will come from the line of Paul Quinn of RBC Capital Markets. Please go ahead.

Paul Quinn - RBC Dominion Securities, Inc.

Yeah. Thanks very much, and good morning. Just a couple of questions.

John David Williams - President, Chief Executive Officer & Director

Paul, good morning.

Paul Quinn - RBC Dominion Securities, Inc.

One on the paper price side, you've announced a number of price hikes across the board, and just wondering how you're looking at this – the implementation of these price increases versus what you've done in the past. Is it sort of going along as normal? Do you see any issues that we haven't seen in past years?

John David Williams - President, Chief Executive Officer & Director

I think, no, Paul, actually. I think we're feeling pretty good about it right this minute. But I don't see any kind of special shocks. I mean, obviously, you've seen a little bit of new capacity come in at 90,000 tons out of Catalyst. It's mostly West Coast, it'll probably pick up. They are selling or probably sell to places where maybe some imports have been displaced. But I mean, you know many people have said, well, this is an easy game, let's do it, and they found it far tougher than they were expecting to find it. So, my view on the price increase, I think, we carry on and so far, so good.

Paul Quinn - RBC Dominion Securities, Inc.

Have you guys noticed any changes in the imports coming into North America in terms of behavior from some of these importers?

John David Williams - President, Chief Executive Officer & Director

Yeah. I mean, certainly. Obviously, what you've seen is some of the people with very heavy duties aren't there. You've seen one or two have reasonable level of duties stay in and you've seen one or two Europeans looking for some spot volume from the usual suspects.

Paul Quinn - RBC Dominion Securities, Inc.

Okay. And then just flipping over to the Pulp side, just trying to understand the realized $20 per metric ton price drop, and where I see benchmarks they were less in that and plus you had the currency wins on probably the Canadian pulp production. So I'm just wondering if there was some kind of mix shift in the quarter what explains your transaction price being down more than benchmarks.

John David Williams - President, Chief Executive Officer & Director

Actually no, there's nothing sort of substantive in terms of mix shift I think. And if you look at our mix, once we've moved largely away from hardwood now, it's a very small part of our mix, it stayed pretty stable.

Paul Quinn - RBC Dominion Securities, Inc.

Okay.

John David Williams - President, Chief Executive Officer & Director

But as you know, one ship of Pulp is a lot of pulp, so that moves into a quarter that can throw the numbers around.

Paul Quinn - RBC Dominion Securities, Inc.

Great. Okay. Great. Thanks, guys.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question will come from the line of Mark Connelly of CLSA. Please go ahead.

Mark Connelly - CLSA Americas LLC

John, you've talked about R&D commitment in Personal Care and I'm just wondering if you can help us understand how you measure the success of your R&D spend. Are we talking about how much products have been introduced in the last three years or is there a better way to think about it?

John David Williams - President, Chief Executive Officer & Director

I think that's a pretty good way to think about it. So let's talk about that, thank you for the question. So, as you know, we bought a business called EAM out of Jesup in Georgia, which is really focused on absorbent cores for personal hygiene products, that's why we bought it. We have used that, Mark, as the real engine for innovation. So, a key part of our pitch to our partner brand customers is that we have the capacity and the mechanical flexibility in terms of our machine part to offer you a bespoke product fit for purpose in terms of the price point you need to generate and also the consumer who comes through your door.

The old methodology, if you like, in private label was everybody gets the same thing, which is kind of national brand equivalent, and the only difference is the packaging, right? It says X brand customer X versus customer Y. So actually that sort of R&D drive is critical to our entire pitch in terms of our partner brand strategy.

So, to my mind, if you look at our ability to win business in terms of the consumer insights we have, the promise we are making that we are actually going to run your brand as if it was a major brand that's distinct from just we'll put a different – the same thing in a different bag. I think the whole sales momentum that we're seeing says that that's the success of our R&D. I'm sorry, it's a long-winded answer, but I think it's important to understand it's absolutely front and center of everything we're trying to do in that business.

Mark Connelly - CLSA Americas LLC

Okay, that's super. And I'm just curious if you've had any different thoughts about your long-term white paper decline rate. We're seeing things a little bit better in the short run. I'm just wondering if anything is changing in your mix or technology out there that makes you think it's going to be better than that.

John David Williams - President, Chief Executive Officer & Director

You mean sort of versus the three to four to five that we always talk about?

Mark Connelly - CLSA Americas LLC

Yes, the three to four that you've always talked about, yeah.

John David Williams - President, Chief Executive Officer & Director

Yes. I don't see anything at this point that changes that. However, you're right. The sort of slope seems to be getting shallower. I think it's just too early to tell what that really means at this point. And if I saw that slowing over a year or 18 months, I think we might come back and recalibrate. I think it's just too early to make that decision at this point.

Mark Connelly - CLSA Americas LLC

Okay. So there's nothing really obvious to you that's caused that shift in the slope you had?

John David Williams - President, Chief Executive Officer & Director

Well, I remember certainly...

Mark Connelly - CLSA Americas LLC

More sustainable, maybe.

John David Williams - President, Chief Executive Officer & Director

Well, thank you. I mean, I think if you look at what drives the marketplace, I mean, there's no doubt on the cut size/business papers, white collar employment helps. So, white collar employment growing slightly is inclined to reduce that slope. I think that's what you're saying, because if you look at the gray mix that looks like one of de facto grades these days in terms of declining position, so I think that's part of it.

I think also, to be honest, there are certain straws in the wind. Another thing that's happened, for example, of course is book paper has actually slowed down in terms of its decline, if not growing slightly. And in fact, independent bookstores are now one of the fastest-growing retail sectors in North America, having got murdered for a whole number of years.

In addition to that, a lot of stuff in the press about cursive writing for kids, how that helps them learn and how actually using paper helps you retain things. So, I think there's the beginning of some thinking around, although the new technology has high utility and we're all using it, that paper has its place, if you like, in the marketplace. And as that happens, maybe the slope slowly softens. But I mean, those are anecdotal, but that might have something to do with that.

Mark Connelly - CLSA Americas LLC

That's super. Thanks very much, John.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question will come from the line of James Armstrong of Vertical Research Partners. Please go ahead.

James H. Armstrong - Vertical Research Partners LLC

Good morning. Just a few quick questions.

John David Williams - President, Chief Executive Officer & Director

Good morning.

James H. Armstrong - Vertical Research Partners LLC

Good morning. Few quick questions from me. First on M&A, could you update us on how you think about M&A and if your thinking has changed at all? Or do you plan to focus more on organic growth for the foreseeable future?

John David Williams - President, Chief Executive Officer & Director

No. I think we still see that opportunity in M&A. As you know, we've always really said, there's a few criteria by which we view M&A. So, it has to be fiber-based. Preferably, of course, we have to have growth as we have a core business that is not growing. It's got to be competitive; it's got to be low cost; we've got to have synergy opportunities. We're obviously not limited, James, to Personal Care, I think fiber-based. We've got to be disciplined. We still are looking to build considerable EBITDA from growth businesses, so that we kind of reduce our reliance a little bit on that core paper business because we're trying to offset that decline.

We're looking for stability in cash. And of course, we think over time, as the business has more runway, that would lead to a higher valuation. So we're still there. And as we've said, our overall objective has always been to not bet the store. If it was very compelling, we might go that far, but I think mid-sized is what we're looking for. Did that help?

James H. Armstrong - Vertical Research Partners LLC

Yes. So just a little clarification, would you be surprised if an M&A opportunity came up that was outside of white paper and the general tissue business?

John David Williams - President, Chief Executive Officer & Director

Sorry, would I be surprised or – sorry, I don't quite understand your question.

James H. Armstrong - Vertical Research Partners LLC

In other words, would you be willing to go outside those two main buckets?

John David Williams - President, Chief Executive Officer & Director

Well, we'd certainly – I think I'd go back to my fiber piece. If it was fiber-based, added value, we saw synergies, we'd consider it.

James H. Armstrong - Vertical Research Partners LLC

Okay. Switching gears, the hardwood and softwood spread still is pretty wide. Is there any sign that you're seeing that that spread will narrow, or any further substitution from softwood to hardwood that you're seeing or have we hit a stability point?

John David Williams - President, Chief Executive Officer & Director

Well, gosh, who knows. I think we're not seeing it because you're still seeing softwood growing at around 2% year-on-year sort of at the macro. So I'm not seeing – really, it's a tissue producer's opportunity. If they're going to knock up against product quality, I don't think you're going to see that. So I don't really see that happening. But I mean, the bigger issue is if the hardwood differential becomes too enormous, it's then whether or not there is an opportunity to move softwood as one would like. I mean, that – I think there is that issue.

James H. Armstrong - Vertical Research Partners LLC

And then lastly, just on the tax rate, you're guiding 22% to 24% this year. As we look out, any reason that that should not remain stable or should go up in the remainder – remaining years?

Daniel Buron - Chief Financial Officer & Senior Vice President

It should be around 22%, 24%, James. Obviously, if something happens in any quarter that changed – I mean, this is a forecasted rate, so if something happens that changed during the year, that makes more – creates more profit let's say in Canada versus U.S., you're going to see a slight movement. But our best forecast, as we speak, is between the 22% and 24%.

James H. Armstrong - Vertical Research Partners LLC

Okay. Thank you very much.

John David Williams - President, Chief Executive Officer & Director

Thanks, James.

Operator

And your next question comes from Sean Steuart at TD Securities. Please go ahead.

Sean Finlay Steuart - TD Securities, Inc.

Thanks. Good morning.

John David Williams - President, Chief Executive Officer & Director

Sean, good morning.

Daniel Buron - Chief Financial Officer & Senior Vice President

Hi, Sean.

Sean Finlay Steuart - TD Securities, Inc.

A couple of questions. Daniel, SG&A as a percent of sales has been trending higher at an accelerating rate in recent quarters. And you referenced stock-based comp and I guess some of the R&D spending on the Personal Care side. Is there anything else contributing to that growth, particularly in Q1, but even in the quarters leading up to it?

Daniel Buron - Chief Financial Officer & Senior Vice President

I guess the answer is unfortunately I think the erosion we had in pulp and paper price over the last few quarters is probably explaining the large portion of that relationship that you're seeing. I mean we – I think I said a couple of times that our normal SG&A in that business given the current construct is between $100 million and $105 million. This quarter, it's at $103 million, so this is right there. As we are implementing the price increases in the paper business, the relationship between sales and SG&A will go down.

Sean Finlay Steuart - TD Securities, Inc.

Okay. Got it. And John, you referenced your views on fluff pulp capacity growth and the industry's ability to absorb it. Can you give us your thoughts on paper grade pulp capacity additions and you clearly see a tightening market seasonally right now and your comments were pretty positive near-term, but how is your thinking evolving on paper grade pulp market balance over the next couple of years?

John David Williams - President, Chief Executive Officer & Director

You mean pulp being sold to paper makers?

Sean Finlay Steuart - TD Securities, Inc.

Yes. I'm thinking just...

John David Williams - President, Chief Executive Officer & Director

I think you have to – that's a great question. So you have to look at our mix. Our mix is really now heavily skewed towards tissue manufacturers. We're still supplying here and there to paper grade, but I think almost now next to nothing that we do in Asia is paper grade and there are probably one or two people in the U.S. where it's paper grade. So we're not really participating heavily in that. But kind of obvious reasons really that we see that – we see tissue with growth and we just don't see that growth in the paper grades.

Sean Finlay Steuart - TD Securities, Inc.

Yes. Maybe I should – maybe paper grade is the wrong term, but I'm just thinking in terms of NBSK and you clip this growth on that.

John David Williams - President, Chief Executive Officer & Director

Sorry. On a broader basis, pardon me. I misunderstood you. I mean, I think again I look at our grades and our customers and where we're building the business and the relationships we have. And I think the way I see it, maybe I'm being overly simplistic, is that can we sell effectively to our customer base. And I see nothing that suggests I can't, to be frank. I went and visited one of my major accounts the other day who quite frankly was incredibly positive about the way we build the relationship, the technical support that we've given them, it's a very demanding customer.

So I think providing we keep doing that, I'm confident we can move around that space and make sure we're supplying to customers who have growth and recognize the value we bring them.

Sean Finlay Steuart - TD Securities, Inc.

Okay. Thanks for the context.

John David Williams - President, Chief Executive Officer & Director

Thank you.

Operator

And your next question will come from Hamir Patel of CIBC Capital Markets. Please go ahead.

Hamir Patel - CIBC World Markets, Inc.

Thanks. Hi, John. Just one follow up with all this talk of Brexit, can you help us gauge how much of the Personal Care business comes out of the UK and is that all supplied from your European operations?

John David Williams - President, Chief Executive Officer & Director

Are you only asking this question because I'm an Englishman, have you asked anybody else exactly? Let me give you the data. Essentially, if you look at our English or UK business, it's really produced in two or three places. So it's produced in Aneby up in Sweden, out of euros and the large new customer win is produced at this point in time actually in Delaware, Ohio but will eventually move itself to probably to our Spanish facility. Now, so when you then look at that, two things you have to decide really – what's the effect of Brexit.

So, is it the UK sails off into the sunset, it was a highly successful independent economy, in which case the pound gets higher, or is it a fiasco and the pound collapses. So it's hard to tell. I don't think anybody knows which way that's actually going to go, but there's a little bit of risk. But to be honest, I don't think it's substantive enough to think about it as a major issue at this point. And I think the fact that we're supplying out of the U.S. and we're supplying out of Euro gives us a little bit of an edge. Did that help?

Hamir Patel - CIBC World Markets, Inc.

Yes. I'm sorry, what was the sort of percent of sales figure for that?

John David Williams - President, Chief Executive Officer & Director

How much of our total Personal Care sales are in the UK?

Hamir Patel - CIBC World Markets, Inc.

Yes.

John David Williams - President, Chief Executive Officer & Director

I have to give you a very rough number. I would think maybe 8%.

Hamir Patel - CIBC World Markets, Inc.

Okay. That's a little bigger than I expected. Okay. That's all I have. Thanks.

John David Williams - President, Chief Executive Officer & Director

Well, let's just be clear why that is, and that is also because we've just won a major account which has made a huge difference to it. Yes.

Hamir Patel - CIBC World Markets, Inc.

Right.

John David Williams - President, Chief Executive Officer & Director

Okay. All right. Thank you.

Operator

And there are no further questions at this time. I'd like to hand it back over to our speakers for closing remarks.

Nicholas Estrela - Director-Investor Relations

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

Operator

And this concludes today's call. Thank you for your participation. You may now disconnect your lines.

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