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Domtar (NYSE:UFS)

Q3 2012 Earnings Call

October 25, 2012 10:00 am ET

Executives

Pascal Bossé - Vice President of Corporate Communications and Investor Relations

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

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

Analysts

Mark W. Connelly - Credit Agricole Securities (NYSE:USA) Inc., Research Division

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

James Armstrong - Vertical Research Partners Inc.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Benoit Laprade - Scotiabank Global Banking and Markets, Research Division

Stephen Atkinson - BMO Capital Markets Canada

David Quezada - Raymond James Ltd., Research Division

Albert T. Kabili - Crédit Suisse AG, Research Division

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

Michael A. Roxland - BofA Merrill Lynch, Research Division

Jeffrey Linn Gates - Gates Capital Management, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Domtar Corporation Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is Thursday, October 25, 2012. I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, Mr. Bossé.

Pascal Bossé

Great. Thank you very much, Valerie, and good morning, everyone. Welcome to our third quarter 2012 earnings call. Our speakers today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. John and Daniel will begin with prepared remarks, after which, we will take questions.

During the call, some references will be made to supporting slides, and you can find this presentation in the Investors section of the website.

As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements, subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings with the Securities Commissions for a listing of those.

And finally, certain non-U.S. GAAP financial measures will be presented and discussed, and you can find the reconciliation to the closest GAAP measures in the appendix of this morning's press release, as well as on our website.

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

John D. Williams

Thank you, Pascal. Good morning, everyone. This morning, we reported earnings before items of $1.87 per share and EBITDA before items of $207 million for our third quarter. Year-to-date, we're tracking well versus expectations despite average pulp prices down 18% and continued weakness in communication paper demand.

Let's now take a closer look at the third quarter. Our results, when compared to quarter 2, came from a good performance in Pulp and Paper and lower cost for planned maintenance. In paper, profitability on uncoated freesheet paper remain strong, prices were flat and EBITDA margins were up 20%. Volumes were stable quarter-over-quarter, driven by exports.

In pulp, the current down cycle in global markets led to further downward price adjustments. However, we announced price increases for softwood grades in October and November. Pulp shipments were strong and our volumes improved from the second quarter.

The Personal Care segment was in line with our expectations and continued its momentum, growing in sales and EBITDA. And our focus on cash, liquidity and working capital resulted in free cash flow of $140 million.

On capital allocation, we remained aggressive on our buyback program and repurchased approximately 578,000 shares of common stock or 1.7% of our equity.

So to summarize the third quarter, before I turn the call over to Daniel, sales volumes in paper were stable quarter-over-quarter. Pulp markets are now moving off the bottom. Personal Care continues to gain momentum, and free cash flow was strong. We're running our business prudently and executing well, but we're also laying the platform and the groundwork for initiatives that are going to meaningfully improve our company going forward.

So with these brief remarks, I'll turn the call over to Daniel, and I'll come back with the outlook. Daniel?

Daniel Buron

Thank you, John, and good morning, everyone. Let's start with the financial highlights of the quarter on Slide 4.

We reported this morning net earnings of $1.84 per share for the third quarter compared to net earnings of $1.61 per share for the second quarter of 2012. Adjusting for items, our earnings were $1.87 per share in the third quarter compared to earnings of $1.61 per share for the second quarter.

EBITDA before items amounted to $207 million compared to $202 million in the second quarter. Cash flow provided from operating activities amounted to $206 million. Capital expenditures were $66 million, therefore, free cash flow totaled $140 million.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $21 million higher than the second quarter, mostly due to higher shipments for Pulp and Paper. SG&A was $9 million lower than Q2, mostly due to the amortization of certain post-retirement benefit plans, partially offset by the mark-to-market on some stock-based compensation.

Our third quarter earnings include closure and restructuring costs of $2 million or $1 million after-tax, mostly related to the closure of the Personal Care administrative office in Europe.

Interest expense was $20 million, $2 million higher than last quarter due to the impact of the 30-year senior notes issued in August. In the third quarter, we reported a tax expense of $22 million or 25% compared to a tax expense of $27 million or 31% in the previous quarter.

Now turning to the cash flow statement on Slide 6. Cash flows provided from operating activities amounted to $206 million for the quarter. Capital expenditures amounted to $66 million. This resulted in a free cash flow of $140 million in the quarter. On this front, the work related to the conversion of our Marlboro Mill from the high-volume mill to a specialty and packaging mill is progressing well.

As a reminder, after this conversion and the full ramp-up of the new Appleton volume, our Communication paper capacity will be effectively reduced by an estimated of 270,000 tons.

Under our stock repurchase program, we repurchased 578,000 share of common stock at an average price of $75.42 for a total cash consideration of approximately $43 million in the quarter. Since the inception of the program, we have repurchased approximately 8.1 million shares of common stock at an average price of $80.53.

At the end of the quarter, we have $345 million remaining under this program and 35.3 million shares, including exchangeable shares, were outstanding. As a final note on our cash flow, since the beginning of the year, the additional or dividend in our share repurchase activities yield a free cash flow payout of 66%.

Turning to the quarterly sequential water slide -- waterfall slide on Slide 8. When compared to the second quarter, EBITDA increased $5 million due to lower G&A for $9 million, lower raw material costs for $7 million, lower maintenance cost for $7 million and lower freight cost for $3 million. These were partially offset by lower pulp prices for $12 million, lower paper prices for $5 million, and a negative impact of foreign exchange for $3 million and lower volume and mix for $1 million.

And now on Slide 9. In our Pulp and Paper segment, sales were up 2% compared to the second quarter and down 7% when compared to last year. Operating income before items was $103 million on the depreciation and amortization charge of $90 million. EBITDA before item was $193 million compared to $184 million in the second quarter. Our Personal Care segment reported an EBITDA before items of $19 million on sale of $111 million.

Now our Pulp -- our Paper business on Slide 10. In this business, we had an estimated increase in EBITDA before items of $9 million. Paper shipment were sequentially higher by 7,000 tons and down 63,000 tons when compared to the same period last year. Our average transaction prices for all our paper grades were $7 per ton lower than last quarter. In the third quarter, we filled 38,000 tons of lack-of-orders downtime, which is 15,000 tons more than in the second quarter.

Our Pulp business on Slide 11. EBITDA before items was flat at $16 million when compared to the second quarter. Pulp shipment were sequentially higher by 14% versus the second quarter and average pulp prices decreased by $27 per metric ton versus the second quarter. Paper inventories decreased by 38,000 tons, while pulp inventories increased by 15,000 metric tons. Finally, you'll find an updated schedule of our planned measured maintenance cost for the rest of the year on Slide 13.

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

John D. Williams

Thank you, Daniel. Despite stable paper volumes in quarter 3 when compared to the second quarter, we stay vigilant on balancing our production with our customer demand and continue with our efforts to size the business appropriately.

In paper, we shipped at 105% of our production capacity in the quarter, further reducing inventory levels by 10%, while taking 38,000 tons of market-related downtime. We continue to ramp up the Appleton volumes at our Marlboro facility as we transition the mill to produce specialty and packaging paper grades. On the last 12 month basis, our specialty and packaging volumes have increased by 10% despite a sluggish economic environment.

Ariva performed well below our expectations and what we believe to be its potential. Results in the quarter declined mostly to lower volumes and unfavorable mix in lower-margin grades. We do remain committed to improving the business, and our strategy remains the same.

We're growing our position in the digital space and packaging to build more volume, and we're removing costs from the various distribution warehouses. Since 2010, we've reduced Ariva's headcount by 15% and removed approximately $12 million from the cost line. So we continue to look at ways to improve, but there's still very much to be done.

In Personal Care, we're seeing solid growth in our markets, and we're in line to meet our 2012 targets. We're demonstrating good year-over-year growth in all channels, and we're successfully moving forward with our organic growth program. We're protecting our positions in contract markets, and we're building into future business channels. We're also maximizing growth with a newer, higher margin and faster product segments by leveraging EAM's R&D capabilities.

Our focus remains to become a leader in adult incontinence, taking advantage of market growth and quality M&A opportunities to deliver superior returns by building on our business.

On health and safety, our year-to-date total frequency rate improved to 1.03 compared to 1.25 last year, and we had 25% fewer injuries.

And finally, with the recently signed labor agreements at our Windsor and Kamloops mill, most of our labor contracts at our Pulp and Paper mills have been renegotiated through 2014 to 2018.

Now a quick rundown of our outlook. Looking ahead to the fourth quarter, we expect lower paper shipments when compared to the third quarter due to seasonal effects. In pulp, we do believe prices have bottomed, and we'll see some benefits from our announced pulp price increases.

In the medium to long term, we continue to believe that the growth in China and similar growing economies will support demand for softwood pulp and further tighten markets, as consumers increase their use of tissue-based products.

Finally, on costs, we expect a marginal increase in energy and chemical costs in the fourth quarter.

Thank you for your time and support. And with that, I'll hand it over to Pascal for the questions. Pascal?

Pascal Bossé

Great. Thank you very much, John. So Valerie, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now move to our first question. Our first question comes from Mark Connelly from CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Two quick things. First, you've spent a lot of time shifting the balance of your pulp position, and you seem to have paused in that process. Are you happy where that balance is now, or are you still open to looking for ideas to move it further? And then the second question is just a simple one. With respect to Personal Care, not everybody characterizes the spend on new product development as R&D. But how do you think about how much you're spending and whether you need to be spending more there?

John D. Williams

All right, Mark. I think the first question is about our sort of softwood to hardwood to fluff balance. Is that...

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Exactly.

John D. Williams

Well, as you know, we're making that conversion in Ashdown to be able to produce more softwood. We're going to be up and running there by the beginning of the year. So I think we'll see that balance. It swung a little bit towards hardwood at the minute. I think at the beginning -- I think year-to-date, we're about 12% on hardwood, but in the third quarter, we were closer to, I think, 20%. So we imagine that will come back a little bit over time. As we said before, we like the softwood grades because of the tissue dynamics. So we'll do all we can really to maximize softwood in the system going forward.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Okay, that's helpful.

John D. Williams

On the R&D question. With EAM, if you assume -- sort of that's the R&D engine of the business, I can't really give you the sort of cost of that business. But certainly, we're spending a good portion of our sales on R&D efforts at this point in time.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

And so you think that number is where it needs to be? You don't have to ramp it up from here?

John D. Williams

No, I think it's where it needs to be.

Operator

We will now move to our next question. And that question comes from Phil Gresh of JPMorgan.

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

Just on the bridge there from quarter-to-quarter, the SG&A save, the $9 million there, was that all kind of permanent saves that we should consider moving forward, or is some of that temporary just because of tough fundamentals and maybe some of that comes back?

Daniel Buron

Daniel Buron speaking here. In my remarks, I referred to that reduction was linked to amortization of some post-retirement benefits. So that decrease is almost entirely due to that. And that's a one type -- onetime type of event. So an SG&A of close to $90 million a quarter is a good proxy for the future.

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

Got it, okay. And then could you just talk about current trends in the paper business? Obviously, the volumes have been a bit weaker than normal in recent months. What do you think is driving that? And kind of what's your view heading here into the fourth quarter? And related to that, how are you thinking about the need to kind of continue to take the same amount or more downtime relative to your inventory position right now?

John D. Williams

Yes, I mean, Phil, I think it's hard to see a catalyst for volume. So we're expecting, as we say, a sort of seasonal decline in the fourth quarter as we would expect. I mean, there's a little bit more life occasionally then it goes a little bit quieter again. So I think we feel that, that long-term decline trend is still very much there. There'll be quarters when it's worse, quarters when it's a little bit better. And we are very committed, as we said before, to make sure we balance our supply chain. So if we see the need for further downtime, we would take it. Patently then, if that downtime becomes excessive, then we have to think of closure and repurposing. As I've said before, we have a plan along those lines when we need it and when we need it, we'll action it.

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

Okay. And just following up on Mark's question about hardwood versus softwood, if you do have to close a paper machine and your left with residual hardwood capacity, is it something that we should continue to consider as likely to be kind of converted over to softwood, like you did that at Ashdown?

John D. Williams

Yes, I mean, it obviously depends on the fiber balance in terms of the local forestry if that's softwood is available to you competitively, which it absolutely is in Ashdown. So it's a mill-by-mill choice, Phil, depending on the wood basket.

Operator

We will now move to our next question, from James Armstrong of Vertical Research.

James Armstrong - Vertical Research Partners Inc.

First question is a little bit of a follow-up. With the general softness in the uncoated freesheet demand, do you think it's around time for the industry as a whole to start taking out additional capacity to tighten the market back up?

John D. Williams

I can't possibly answer that question, James. I can really only really talk about us. And as I've said before, it's very clear that we are prepared within our own supply chain to make those kind of decisions.

Daniel Buron

If I can add, if you look at -- we've reduced inventory 38,000 tons in the third quarter, and we took 38,000 tons of lack-of-order downtime. So you can assume that our system was more or less full without reduction of inventory. And we have the Appleton deal that is ramping up. So we feel confident with our balanced capacity and demand side.

James Armstrong - Vertical Research Partners Inc.

That helps a lot. Switching gears a bit, on the paper distribution side, it still seems to be struggling. Can you help us understand the plan on that going forward? Will it be a -- basically a -- will it just run around these rates for the foreseeable future, or how do we get back to profitability in that segment?

John D. Williams

That's a very good question. I mean, there is no doubt that we see that business as a route to market. We see it as an inherently low-return business, James. And if we can get it to 1%, 1.5% return on sales, I think -- we'd think we've done a pretty good job. It's a low-margin business. So the 2 things we have to do is -- have to make certain that it's a secure route to market for Domtar tons, which it actually is. And we have to get that top line to grow so we've developed actually, I think, a very strong program on digital printing, which is a great marketing piece, and we're building business. We've got a stronger sales leadership now that's helping us drive the packaging business. And we have to continue to reduce the cost line. Those are the 2 things we just have to keep doing because it's a very disappointing number at this point.

Operator

We'll now take our next question from Bill Hoffman of RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

John, I was just wondering if you could talk a little bit about strategic acquisitions and the like, just wondering where the Personal Care business is and if it's been nice fit? I just wondered what you see potentially in that vein? And then the second question is, just with regards to the Appleton deal, one, just want to know how the timing is going? And then also, if you see any other opportunities like that for the industry here in North America over the next little while?

John D. Williams

Yes, sure. Let's take Personal Care. Globally -- so I'll be very specific. I mean, obviously, adult incontinence is a piece of the Personal Care industry. The adult incontinence business, sort of $8 billion, $8.5 billion business globally, growing at 5%, mostly pretty decent margins. About half the industry is owned by private equity or divisions of larger businesses. We see an opportunity to move around that space with our growth that we can already get from the business we own today. We have a run rate of about $75 million of EBITDA today. We think we can get that in 3 to 5 years, we can double it. We said very clearly, we're looking for $300 million to $500 million of EBITDA from that business. So if you do the math, and you make the GAAP, you can see pretty clearly the M&A we need. And we think that's available to us, so we're going to keep moving down that route, to be frank. Does that answer your question?

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Yes.

John D. Williams

Okay. On the Appleton business, I think the run rate in quarter 3 was about 34,000 tons. We think if full rate, it's a bit more than that. So that's building quite nicely. We're still doing some trials. So Marlboro is not fully utilized yet on those grades, but it will be, probably in the next 6 to 8 months [ph] when we spend the capital. I think on other opportunities, they are few and far between. Because obviously, you need somebody who does something else to the substrate, and there aren't too many of them. So we keep looking, but I travel, hopefully, on that one, but I have yet to arrive.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Great. So I guess that with regards to your paper mills, as the demand declines over time here, more likely they have to do closures and/or conversions in another products yourselves then?

John D. Williams

I mean, I think that depends. We look at those other grades all the time. We're always scanning the horizon to see where our skills match. We need a couple of things to be able to do that to avoid closure, I guess, to your point. If you take Plymouth, we knew we had a globally competitive mill, and we knew we had a globally competitive product, and we like the dynamics of the market. So that's the way we look at repurposing.

Operator

And our next question comes from Anthony Pettinari of Citibank.

Anthony Pettinari - Citigroup Inc, Research Division

With regards to the specialty and packaging papers, I think that you said that you saw a 10% volume increase in what was otherwise a pretty soft market. And I guess just following up on the last question, if communication papers, if we can kind of think of that as seeing secular decline of 3% to 4%, what is sort of a sustainable growth rate for the specialty and packaging papers business?

John D. Williams

Well, it's -- I mean, if you've got what you've got, it's a GDP growth business, so 2% to 3% a year. We're obviously seeing a lot more than that because our base business is giving us that growth, and we're ramping up Appleton, so that's why you see our levels of growth.

Anthony Pettinari - Citigroup Inc, Research Division

Right, right. But on a kind of a sustainable basis, 2% 3%?

John D. Williams

Yes, absolutely.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. And then can you just remind us the split in that specialty and packaging papers classification between thermal paper, security paper, packaging paper, kind of what's really constituted there?

John D. Williams

I can't. I can give you a sort of macro number, which basically, if you take our system, 3.4, then probably 450,000, 500,000 has the dynamics of technical and specialty, and the rest has the dynamics of printing papers. Is that what you're looking for?

Anthony Pettinari - Citigroup Inc, Research Division

Okay, okay. Yes -- no, that's helpful. And then I think just finally, if you could comment on the kind of dynamics you're seeing currently in the North American fluff market? I think there is a competitor earlier today talking about having bought on capacity a little bit quicker than they originally expected. Are you seeing other pulp markets seem to be picking up a little bit? Are you seeing fluff improve after some weakness earlier this year?

John D. Williams

Yes, we're seeing a slightly better realization price. It's not really price increase, actually. It's more mix driven and geography driven. Of course, when capacity is coming out, the Rayonier capacity is coming out, so that probably balances the 2. And certainly, the explosion, as you may know, there's been an explosion of 20% of the world's SAP, so these are the super absorbent polymers that go into diapers and AI, has come off the market a very -- a horrible event in Japan. One of the alternatives there is that people put in more fluff and less SAP, so it would very interesting to see as that develops and the facts emerge, whether or not that actually drives some fluff pulp usage, and therefore drives the price slightly. It's too early to tell at this point.

Operator

And our next question comes from Benoit Laprade of Scotia Bank.

Benoit Laprade - Scotiabank Global Banking and Markets, Research Division

Daniel, you mentioned $90 million per quarter going forward for SG&A. I'm just wondering if you, at this point in time, could provide some guidance for next year in terms of capital expenditures, interest depreciation and tax rate?

Daniel Buron

It's a little bit early, Benoit, to share that, but I think our guidance of CapEx this year is to 40 to 60. So I think it's a good working premise to work with that. But we'll give you more precise information at the Q4 earnings call. Depreciation should not change. Interest rate is $20 million this quarter. We still don't have the full run rate of the 30-year bond that we've issued, add a couple, so it's probably $22 million a quarter that you're going to see in 2013. But we'll give, again, more precise information, as is our practice, at the Q4 earnings call, we'll give you what we believe is important for you to understand the business for 2013.

Operator

And our next question comes from Stephen Atkinson of BMO.

Stephen Atkinson - BMO Capital Markets Canada

Question on the tissue business, like, my understanding is that in Europe is you're expanding geographically. And in North America, I guess, it's in the region as well. Would you be able to talk about, number one, how that's going? And number two, any new products, product development?

John D. Williams

You mean the Personal Care business?

Stephen Atkinson - BMO Capital Markets Canada

Yes, yes. Sorry, yes.

John D. Williams

No worries. I just wanted to be clear so I could answer the question properly. Yes, I mean, I don't want to go, to be frank, go into the details for sort of competitive reasons. But there are product areas -- there are 2 ways of looking at the business. There's the product area, and there is the channel. So our businesses have been largely in the away-from-home, if you like, channels. So the institutional channels, which is about 62% of the market, very much focused on sort of heavy inco [ph], taking care of the patient. What is happening right now is that the homecare part of that market, i.e. where people are being cared for at home is growing. That has a different distribution need. It has a different product need. So again, we're working in that area. The other area is, obviously, retail, where we see an opportunity to get retail distribution, either for private label or brand, and we're very active there. And that is focused on light incontinence products. So again, we have to sort of fill out our range in that area. So those are the 2 drivers of that business. Does that help? Does that give you enough clarity?

Stephen Atkinson - BMO Capital Markets Canada

Sure, that's great.

Operator

And our next question comes from David Quezada of Raymond James.

David Quezada - Raymond James Ltd., Research Division

My question is about the sort of cash returns to shareholders going forward, beyond the existing buyback plan. Is the plan still to potentially look for additional authorization from the board after that? And just talk -- thinking about dividends in general, is there an additional increase at some time, some of your installment table?

John D. Williams

David, thanks very much for the question. I mean, now is the time of the year we begin to engage the board in those discussions. And I think all I can really do at this point is reiterate our commitment. Our commitment is very clear, that we will give the majority of free cash back to shareholders, and we stand by that commitment. So therefore, the question is kind of a balance between, if you like, the fixed charge of the dividend and the share buyback piece. And I think we've said fairly clearly, we know our yield at the moment is a little bit below the average. So one should expect over time that we'll move that yield.

Operator

And our next question comes from of Al Kabili of Credit Suisse.

Albert T. Kabili - Crédit Suisse AG, Research Division

Just along those lines on capital allocation, as far as share buybacks, John, the percentage of buybacks this year, as a percentage of free cash flows, is trailing a little bit below last year. And I was wondering if you could address that a little bit. Is that just timing? Maybe you can just address that a little bit.

John D. Williams

I mean, I think it really is timing. So I don't think there's any cunning plan behind that, to be frank, Al. it really is timing. I mean, We've committed to finish, if you like, that share buyback. We still have several hundred million to go, and we'll work our way through it.

Albert T. Kabili - Crédit Suisse AG, Research Division

Okay, all right. That's helpful. And then I guess, secondly, related to Appleton, if you could just comment -- you mentioned the trials, but just a little bit on the returns thus far, how are the returns on that business and efficiency, the margins are stacking up versus your expectations?

John D. Williams

It's a bit early to tell on a real run rate basis because we've been doing a lot of trials, so there's a lot of machine time to some extent. I mean, when we're really up and running, our expectation on a per ton basis is that sort of mid-point of the kind of gross margin we'd would expect per ton. And then over time because, as you know, we have a sort of cost-plus arrangement with Appleton, it'll stay around those levels. But on efficiency gains, we give -- they take half, and we take half. So if we can do it better and better, we can grow that margin over time. And I think the other issue there, of course, it's a growing market. That thermal market is growing by 4% or 5% a year. So we're going to get growth out of those tons if things go well.

Albert T. Kabili - Crédit Suisse AG, Research Division

Understood, okay. So you're still thinking kind of similar returns and then probably more of that ramps up next year as the -- on the volume, right?

John D. Williams

You got it.

Albert T. Kabili - Crédit Suisse AG, Research Division

It sounds like. Okay, and then final -- I guess final question really then relates to maintenance costs. And they were a little lower this quarter. And I think the fourth quarter outlook versus how you were thinking about it last quarter, and I was wondering, what was driving that? And is that a sustainable level going forward?

John D. Williams

All right. Well, I think this is more of sometimes-you-get-lucky question. Obviously, when you take that mill down, you've done pretty good analysis up to that point. But sometimes, when you're actually in amongst it, you find other issues. We found less issues than we were expecting, I guess, in quarter 3. And therefore, we had a little bit of a benefit. In quarter 4, we recalibrated very slightly, I think, probably by a couple of million, but no more. Overall, on an annualized basis, I mean, this is about the right level we feel for the assets we own to make sure that we keep them as we should keep them.

Operator

And our next question comes from Paul Quinn of RBC Capital Markets.

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

John, you've given pretty good color on the fluff markets in terms of pulp. I'm just wondering if the other segments that you're in were seeing some capacity [indiscernible] for the hardwood. What are you expecting? You've characterized it as a bottom in terms of pricing. But are you expecting decent gains going forward here?

John D. Williams

Well, I mean, I can answer [ph] what we've done. You can see what we've done on softwood, a couple of price increases in the last few weeks. So I think that -- let's see, but I mean, it looks like it's going to hold. I mean, people are nervous about the tariff bay issue, but we'll see. So I think we move reasonably confident forward, but it's pretty hard to see what -- how those kind of volumes will affect the marketplace. On hardwood, we're a very small player. And in the end, we kind of get what we get on hardwood.

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

All right, okay. In terms of innovation, you've got a number of initiatives out there. I just wondered if you could give us an update on those projects and any change in plans going forward?

John D. Williams

Yes, sure, sure. So on the CelluForce business, we got 30 development agreements. We should have our first real order in the next sort of 3 to 6 months. On the LignoBoost, we're very much on time. We're doing the work and actually have a very strong pipeline. Obviously, we're doing a lot of sampling as we speak. So I'm very confident, actually, on that lignin piece. We're going to get the sales line. We've got about 25,000 tons of lignin to sell. It's going to be -- and of course, we will then get the productivity improvement in the mill. So there, I'm very, very positive. And, really, the trick for us is to make sure we get the most money per ton we can for that lignin. And then we have a FAS paralysis project in Dryden with Patel [ph]. Again, pretty good early signs. And as these opportunities come to us, as I've said before, we have a very disciplined gate process. So if we see any more, we'll probably do them. But again, we're not going to bet the stores. So this is really going to be investment capital, I guess, I would say, I guess to see if we can generate value. Does that help?

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

Very much so.

Operator

[Operator Instructions] We'll now move to our next question. Our next question comes from Michael Roxland of Bank of America Merrill Lynch.

Michael A. Roxland - BofA Merrill Lynch, Research Division

It's Mike Roxland in for George Staphos. Just a really quick question. I wonder if you could comment about what you're seeing in Asia and other market pulp demand if possible. How much is really the real takeaway in pulp versus how much is stocking up?

John D. Williams

That's almost impossible to answer unless you actually go to the customers. When we do go to the customers, they are obviously comfortable holding considerably more stock than we are here. But given the current behavior and the amount of tissue capacity going in, we're really supplying those large tissue manufacturers. That's where most of our business is. We feel pretty good about it, actually, at this point in time. And if you look at global stocks, you see 27 days. The balance is assumed to be about 30 days. So the dynamics at the moment suggest there is runway in that business.

Michael A. Roxland - BofA Merrill Lynch, Research Division

Got you. So you feel good with underlying demand, particularly given the pulp -- the tissue expenses are trailing there, but there is also some -- there is the potential given where inventory levels are for some restocking as well?

John D. Williams

Yes, that's the way I would see it. It's very hard to tell. It's very difficult to actually track it all the way through. You go to a tissue manufacturer in China, we've been to a number recently, and there are palettes and palettes, I mean, at least probably 3 months stock is considered normal, I would say, just because of the supply chain.

Operator

We'll now move to our next question from Mark Friedman of Gates Capital.

Jeffrey Linn Gates - Gates Capital Management, Inc.

It's actually Jeff Gates. I have 2 questions. First, your deal to sell the hydro assets that you announced in June, when do expect that to close? And how much EBITDA will you lose from that? And then secondly, the OPEC gain of $9 million, in which piece of the business is that in?

Daniel Buron

Okay. So first question, the deal, we expect it to close in Q4. Obviously, there's a closing condition [indiscernible] needed that are not under our control, but our best guess is it's going to close end of fourth quarter. The EBITDA -- I mean, that's a business that is sold for its future power generation more than its current power generation. So the EBITDA will be -- that will be meaningless for us. Second question, the PRIBs [ph] are all linked to the Pulp and Paper business.

Jeffrey Linn Gates - Gates Capital Management, Inc.

What would be the split be between Pulp and Paper?

Daniel Buron

That's impossible to make. I mean, that we're doing both products in many, many mills. So the split is not feasible but -- all through that segment.

Jeffrey Linn Gates - Gates Capital Management, Inc.

But when you presented Pulp and Paper separately in your presentation, you must have made some split?

Daniel Buron

Yes, we did. So I'll have to come back. I think -- as normal, we -- I mean, there is more employees in our paper business and that's in terms of -- headcount related, the lion's share of that is probably 80-20 rule, 80 in the paper and 20 in the pulp.

Operator

And we have a follow-up question from Phil Gresh of JPMorgan.

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

I just wanted to follow-up, just kind of looking back over the past couple of years on the paper side of the business. Your EBITDA per ton there is kind of running at $235, $240 per ton. This year, it's kind of taken a -- it's taken a bit of a step down from there. And obviously, the price increase in the spring didn't really materialize. And so I guess I'm kind of wondering, is this kind of a new slightly lower level than perhaps kind of the peak levels we saw in 2010 and 2011, or would you say that this is just a softer year and kind of what we saw before would be something you think would be a more normal type of return for this business moving forward?

John D. Williams

That's a good question, Phil. I mean, We see it as a softer year. I mean, you have to think of the effect the lack-of-order downtime has on those numbers. And you're quite right. I mean, the price increase was a concept rather than a reality. So, I mean, put all that together, it's a softer year in a slightly worse demand situation than perhaps has happened in previous years. So I don't think this is the future to some extent. I think it was a difficult year, a lot of economic uncertainty, a few straws in the wind here and there. And of course, that lack-of-order downtime does drive up coach and horses, if you like, to some of the margins. So that's the reason, if that helps you?

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

That does help. And there's 1 other question. I mean, obviously, some of your end customers here, Staples and others, they're shutting a fair number of stores right now. And they obviously sell more than just paper. But is this something that concerns you at all, just as you think bigger picture about what's happening at the end customer level? And then secondarily, along those lines, if we see a merger between any of those retailers, how do you think that would impact your business?

John D. Williams

Well, I think, yes, they're finding life difficult. But actually, we are largely a supplier of Staples in their wholesale business rather than their retail business. So, in fact, they have -- I forget the exact numbers, but something like 3,000 salespeople on the road, selling -- actually, we feel pretty good about that partnership at this moment in time. I mean, the merger question, of course, that one was tried many moons ago and didn't happen. And you ask yourself, is there room for 2 people rather than 3? But at this moment in time, what might happen if that were to happen, I mean, is pure speculation. I can't really speculate on that.

Operator

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

Pascal Bossé

Great. Thank you very much, Valerie. I want to thank all of our participants in today's call. And I guess we'll speak with you back in -- next time in January for our fourth quarter earnings release. So thank you very much, and you all have a very good day.

Operator

Thank you. Ladies and gentlemen, this concludes your 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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