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Domtar Corp (NYSE:UFS)
Q2 2020 Earnings Call
Aug 7, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Q2 2020 Earnings Conference Call with Financial Analysts. [Operator Instructions] [Operator Instructions]

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

Nicholas Estrela -- Director, Investor Relations

Thank you. Good morning, and welcome to our second quarter 2020 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. John and Daniel will be supported by Michael Garcia from our Pulp and Paper division; and Michael Fagan from the Personal Care division. During the call, references will be made to supporting slides, and you can find the 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. With regards to the review of strategic alternatives for our Personal Care division, we do not intend to comment on the details of the process unless and until we have an update to share.

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

John D. Williams -- President and Chief Executive Officer

Thank you, Nick, and good morning, everyone. Before discussing our second quarter results, I must recognize and thank our teams across our different businesses. I've personally been inspired to watch everyone come together to face our current challenges, embracing new ways of working and decisively taking actions to serve our customers in the face of unprecedented conditions. First half of 2020 has been extraordinary by any measure. No one could have anticipated the scale of the impact from this pandemic on the global economy and on our own businesses, along with the decisions we'd have to make to keep our people, customers and communities safe.

I'm very proud of how our teams work together to assess the risks, understand the consequences and take decisive action. Some of these decisions have not been easy, and we're aware of the impact, especially for those employees affected. But I believe that the response was the right one for the short, medium and long term, both for our people and our business. Our second quarter began during the early stages of the COVID-19 pandemic. As we started the quarter, we set clear, simple priorities to manage the business successfully through the important challenges that were happening with our customers, with the economy and with the operating environment.

We swiftly implemented various actions to maintain our financial flexibility, including a tight control on operating expenses, reducing our inventory, canceling and deferring some capital investments and suspending our capital allocation plan. We also announced several key strategic initiatives this morning that will position Domtar for a sustainable and successful future. Let me begin with a review of the quarter, and I'll comment further on some of the strategic initiatives following Daniel's financial review. In paper, the months of April and May were particularly challenging, as restrictions, closures and the resulting impact on consumer mobility had a significant effect on paper demand.

Several of our customers aggressively reduced inventories to match lower sales and to conserve cash. The impact varied somewhat across the channels with office supply facing the biggest volume challenge as offices across North America were closed. The merchant channel was also down as commercial printing slowed significantly in most markets. As a result, we made several adjustments to our mill operations to mitigate the impact of lower paper demand. We reacted quickly, and we're able to make decisions that allowed us to remove capacity and fixed costs through extended idling of some of our operations as well as reducing inventories.

We took down the Ashdown paper operations and the Kingsport and Hawesville mills for the majority of quarter 2. In addition to these moves, we took extended downtime at Johnsonburg and Rothschild. As a result, we removed 297,000 tons of our paper capacity. In the near term, some of the key unknowns to demand will be school reopenings, the level of return to the office and, of course, direct mail advertising. Nevertheless, July demand was a small improvement on June and was tracking to our expectations with activity and momentum gradually increasing despite the recent growth in COVID cases in the U.S.

Although we took significant market downtime in quarter 2, we have been able to reduce costs, while initiating cash conservation initiatives across the network. We've reduced paper inventory by 22,000 tons in quarter two and 52,000 tons year-to-date. Average paper prices were down $16 per ton, which was primarily a mix effect, driven by relatively higher exports and flex volume and a drop-off in higher-value merchant and office supply grades. In pulp, the global nature of the business and the different end-use markets have led to varied impacts from COVID-19. Key end-use markets in tissue, towel and personal care have experienced very strong demand and kept our order books full.

Our pulp shipments have increased 13% through the first half of 2020, with fluff pulp increasing by nearly 12% over 2019. Towards the end of the quarter, we began to see some demand softness in China related to the drop-off in printing and writing. However, North America remains strong with a solid consumer tissue market. Our focus will remain on keep inventories lean throughout the supply chain as the overall pulp supply demand balance is still uncertain. Average pulp prices were $17 per ton higher as price increases were realized in China on all grades and in fluff pulp in all markets.

Operationally, we had a strong production and cost performance across the pulp business despite some wood procurement challenges at the Canadian mills. In Personal Care, quarter two sales softened following a record first quarter, which was driven by pantry loading stemming from the COVID-19 pandemic. However, direct-to-consumer channels continued to deliver well above expectations as consumers adapt to new at-home behaviors. As expected, revenues were lower than in the prior quarter, albeit 6% higher year-to-date versus prior year. Reduced SG&A spend, good cost control and improved operational efficiencies supported a solid EBITDA performance.

Quarter two ended with an EBITDA margin of 14.4%, which was a 160 basis point improvement when compared to quarter one and the highest divisional margin since quarter four 2015. We had a very strong manufacturing quarter with record production volumes in April and set production records at several facilities, which drove cost per unit down versus quarter 1. Our operating rates have continued to improve, driven by a shift in our customer assortment and increased volume, which has opened up additional capacity across our network. This underpins our ability to continue to scale up and add significant new customer wins.

Turning to our overall outlook. We expect the environment to remain challenging. In paper, we expect demand to remain weak with some incremental recovery in quarter three and toward year-end. We expect near-term pulp markets to be impacted by seasonal softness, elevated global inventories and weak demand trends from paper markets. Personal Care will continue to benefit from the impact from new customer wins and productivity gains. Overall, raw material costs are expected to remain stable. So to wrap up, we're preparing for a range of scenarios and remain confident in our ability to maintain our overall strength and stability as well as to continue to support our customers. We remain focused on what we can control, and we will be agile and resilient as events unfold.

With that, let me turn the call over to Daniel for the financial review before making further comments on some of the strategic initiatives that we announced this morning. Daniel?

Daniel Buron -- Senior Vice-President and Chief Financial Officer

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on slide five. We reported this morning net earnings of $0.34 per share for the second quarter compared to net earnings of $0.09 per share for the first quarter of 2020. Adjusting for items, our earnings were $0.36 per share in the second quarter compared to earnings of $0.09 per share for the prior quarter. EBITDA before items amounted to $91 million compared to $95 million in the first quarter. Let's turn to the sequential variation in earnings on slide six.

Consolidated sales were $266 million lower than the first quarter, due mostly to lower sales in our Paper business and to a lesser extent, lower sales in our Personal Care business. Depreciation and amortization was $1 million lower when compared to the first quarter, and SG&A was $9 million lower than the first quarter largely due to lower discretionary spending and $4 million of wage subsidy. Our second quarter effective tax rate was affected by the change in mix of earnings, recognition of additional tax credits and the impact of the CARES Act, which granted company the ability to carry back tax losses generated in the U.S. in 2020 to a tax year with a higher statutory tax rate. Now turning to the cash flow statement on slide seven.

Cash flows from operating activities amounted to $67 million, while capital expenditures amounted to $40 million. This resulted in a free cash flow of $27 million in the second quarter. Our net debt to total capitalization ratio stood at 30%, while total liquidity amounted to $906 million at the end of the second quarter. Turning to the quarterly waterfall on slide eight. When compared to the first quarter, EBITDA before items decreased by $4 million due to lower volume and mix for $61 million, lower productivity for $43 million and lower selling prices for $1 million.

These were partially offset by lower maintenance costs of $41 million, the recording of $33 million benefit related to a wage subsidy and the foregoing of a nonproduction agreement, lower fixed costs for $16 million, lower raw material costs for $5 million, lower SG&A costs for $5 million and a favorable exchange rate for $2 million. Now the review of our business segment starting on slide nine. In the Pulp and Paper segment, sales were down 22% when compared to the first quarter and 27% lower when compared to the same period last year. EBITDA before items was $66 million, which was flat compared to the first quarter of 2020.

Our Paper business on slide 10. Sales were 34% lower versus last quarter and were 36% lower versus the same quarter last year. EBITDA before items was $59 million and included $13 million of wage subsidy. Manufactured paper shipment were 32% lower when compared to the first quarter and 33% lower when compared to the same period last year. Average transaction prices for all our paper grades were $16 per ton lower than last quarter, largely due to product and customer mix. Our July paper shipment were about 20,000 tons more than the average of the second quarter, showing incremental improvement as the economy is restarting.

Our July paper prices were relatively stable when compared to the second quarter, and we saw or we expect a better mix. Let's turn to the Pulp business on slide 11. Sales were 12% higher versus the last quarter and were 4% lower versus the same period last year. Estimated EBITDA before items was $7 million. Second quarter results include $7 million from the termination of a nonproduction agreement related to our former Lebel-sur-Quevillon pulp mill and $11 million benefit of wage subsidy. Pulp shipments were 10% higher versus the first quarter and up 15% when compared to the same period last year.

Average pulp prices increased $17 per metric ton versus the first quarter. Our July prices were slightly above the average of the second quarter. Let's look at page 12. Our paper inventory decreased by 22,000 tons when compared to last quarter, while pulp inventory decreased by 2,000 metric tons. Our Personal Care business on slide 13. Sales decreased 14% when compared to last quarter and were flat versus the same quarter last year, mostly due to pantry loading, which occurred in the first quarter.

EBITDA before items was $33 million, $1 million lower than the first quarter and $13 million higher than the same quarter last year. Slide 14 outlines our maintenance schedule for the remainder of the year. Finally, given the two investments announced today, we are now expecting to spend between $160 million and $170 million in capex this year, an increase of $20 million versus our expectation last quarter. So this concludes my financial review.

And with that, I'll turn the call back to John. John?

John D. Williams -- President and Chief Executive Officer

Thank you, Daniel. Over the last several months, we've adapted quickly to changing white paper market conditions. Through this period, consistent with past practice, we've carefully reviewed our assets and operations and determined that implementing a companywide cost savings program, accelerating our plans to convert our Kingsport and Ashdown paper assets and exploring alternatives for our Personal Care business will help best position Domtar for the future. We're taking proactive steps that we're confident will result in a leaner, stronger organization and enhance value for all our stakeholders. Let me begin with the cost savings program.

Our plan is in direct response to the major transitions in our markets, consistent with our priority to position Domtar for long-term success. In line with these goals and current market conditions, we have commenced a significant cost savings program with a targeted $200 million in annual run rate savings to be realized by the end of 2021. The cost savings initiative includes capacity reductions and asset closures, mill-level cost savings and rightsizing support functions. This program will streamline operations, maximize productivity and improve operating margins.

It's also expected to improve communication flow and cross-functional collaboration, leveraging more efficient business processes. As part of the cost savings program, we will permanently close uncoated freesheet paper manufacturing at the Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at Ashdown, Arkansas, and the converting center in Ridgefields, Tennessee, which serves Kingsport. These actions will permanently reduce the company's annual uncoated freesheet paper capacity by approximately 721,000 short tons and will result in a workforce reduction of about 780 employees.

The Kingsport and Ashdown paper machines, which have been idled since April 2020 will not resume operations. The Port Huron and Ridgefields operations are expected to shut down by the end of the first quarter 2021. The cost savings program is an important and necessary step that will significantly improve our free cash flow and return on invested capital and enables our repurposing program. We have a talented and dedicated workforce at Domtar and decisions that affect people are never easy. However, we're taking the necessary steps to better position our business for the future.

Improving our performance, creating synergies across our network and rethinking our support functions are pivotal components of our cost savings plan as we create a more agile, streamlined and efficient core business that's well positioned for long-term success. Let's move on to the asset conversion announcements. Those who followed our company know that we regularly evaluate the merits of repurposing assets to generate earnings and enhance value for our shareholders. Our decision to convert both Kingsport and Ashdown is consistent with the road map, which we made public nearly two years ago and which will continue to be implemented as we adjust our white paper capacity to match customer demand.

Let me begin with the Kingsport conversion. We've seen a significant global shift in demand away from fine paper grades. While we expect the decline to level off as the economy recovers and businesses reopen, we do not believe that paper demand will reach its prepandemic levels, and we have determined some time ago that containerboard will maximize the value of the Kingsport assets. There are a number of reasons why we're excited to enter the containerboard market. First and foremost, it's the largest paper grade market in North America and enjoys solid growth prospects.

It's a 40 million ton market, which has grown at about 2% or approximately 800,000 tons per year. Containerboard products support a variety of industries, including agriculture, manufacturing and distribution and align with many of today's mega trends, including the growth in e-commerce and environmental awareness. We chose Kingsport as our first conversion location because of its scale, capabilities and geography. Looking at scale, once fully operational, Kingsport will produce and market approximately 600,000 tons of high-quality recycled linerboard and medium, which will make it the second largest recycled containerboard machine in North America.

Kingsport has the potential to be one of the lowest cost recycled linerboard mills in the country, utilizing a high-quality paper machine originally built in 2002 with a speed of 4,500 feet per minute and 346 inches wide. On capabilities and location, Kingsport will be a premier producer of high-strength linerboard, corrugated medium and packaging grades, with a unique and compelling value proposition for our customers. We'll be offering lightweight containerboard as well as have the capability to provide industry standard grades, utilizing proprietary fiber technology to develop superior strength characteristics.

The mill is well positioned to be the go-to supplier to independent converters for quality, service and innovation. It's less than a day's drive from over 60 independent corrugated customers serving food, beverage and e-commerce market, representing nearly four million tons of annual containerboard demand. We expect the conversion to take approximately 28 to 31 months, which means we'll complete the project at the latest by the first quarter of 2023. The conversion is expected to cost between $300 million and $350 million, with the majority of those costs incurred in 2021 and 2022.

Repurposing the Kingsport mill provides Domtar with a very best strategic entry point into a growing market with a very competitive, low cost asset. We view this as a strategic first step to building a large value-adding business in the containerboard market. We've already placed the order for the stock preparation system from Voith. They'll provide us with all elements of the system, including receiving conveyors, pulping, fiber separation, screening, cleaning and reject handling. The second part of our plan is the conversion to 100% softwood and fluff pulp at Ashdown, Arkansas.

The fiber line conversion will require $15 million to $20 million of capital investments to convert the remaining fiber line to softwood, which will take 12 to 14 months from the time of approval. In the interim, Ashdown will produce additional market hardwood pulp until it converts the fiber line to softwood pulp. The conversion of the fiber line to 100% softwood is also necessary for an eventual expansion into containerboard. Following the fiber line conversion, Ashdown will be a world-class market pulp mill with an estimated annual production capacity of 775,000 tons of fluff and softwood pulp. We're very excited about both of these attractive opportunities.

With these two conversions, Domtar continues to deliver on its strategic road map by making value-creating investments in its world-class facilities and to this end, provides a long-term future for the Kingsport and Ashdown mills. Turning to the strategic review of Personal Care. Working together with our advisors, we will evaluate a range of value-creating alternatives, including a potential sale of the business. We're approaching this process with an open mind to all opportunities and strategic alternatives.

However, there can be no assurance that the review will result in a change or in a specific outcome. We're embarking on this review now because of the significant progress we've made over the last years to improve the position of the business. In addition, the scale-up of new customers and the sales pipeline gives us confidence in the prospects of the business. We are realizing the benefits of our margin improvement plan, which has resulted in several initiatives, including the consolidation of our North American manufacturing footprint. We also streamlined expenses and simplified our operating structure for increased productivity, and we have generated supply chain efficiencies.

We're very pleased of the results our investments are driving and remain confident in the long-term prospects of the business. Ultimately, the review is meant to build on this positive momentum and our ongoing commitment to profitable growth and maximizing the value of our assets. To conclude, we believe we have set the stage for Domtar to be in a strong position, continuing on our clear path to sustainable long-term growth. I'm encouraged by the tangible progress we have made in the quarter in executing on our strategic priorities. We're focused on supporting our employees, our customers and communities and on being good stewards of our capital.

Thank you for your time and support, and I'll turn the call back to Nick for questions. Nick?

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 only two questions at a time and return to the queue for follow-ups as we want to get as many people as possible. Shelby, you can open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Anthony Pettinari with Citi.

Daniel Buron -- Senior Vice-President and Chief Financial Officer

Good morning, Anthony.

John D. Williams -- President and Chief Executive Officer

Good morning.

Anthony Pettinari -- Citi -- Analyst

Good morning. John, with regards to the containerboard conversion, you talked about some of the preparatory work you've already completed on the machinery side. I'm just wondering if it's possible to say, whether you had initial conversations maybe with independent converters or potential partners? And would you consider either buying or building some box plants of your own over the next few years in anticipation of Kingsport?

John D. Williams -- President and Chief Executive Officer

Anthony, thanks for the question. So yes, we've had conversations, but as customers, not as potential acquisitions with converters. And yes, we've certainly had conversations in terms of partnering generally. If I'm being truthful, I actually believe we can find a market for the 600,000 tons without needing to have box plants. I think it's quite likely, however, as we grow and we think around our next conversion, we'll have to think about whether that's appropriate.

But at the moment, I believe pretty strongly, actually, that, that independent converter who can find a really powerful partner, who's really lined up behind them from a containerboard standpoint, I think we bring something very interesting there in allowing them to be competitive in this market. So I think for now, I don't see box plants certainly not in the short term and maybe not even in the medium term.

Anthony Pettinari -- Citi -- Analyst

Okay. That's very helpful. And then outside of Kingsport, you identified Hawesville, Marlboro, and I think Ashdown as well as candidates for conversion into containerboard down the road. Just wondering if you could say anything more about those three mills from a cost and location perspective, what might be the most attractive or might make the most sense for a next stage conversion? And then from a time-frame perspective, is this next three to five years or next five to 10 years or any further thoughts there?

John D. Williams -- President and Chief Executive Officer

No. Okay. I mean, I don't think there's a specific order, Anthony. I think the way we see this is really around the demand for uncoated freesheet. And obviously, we're quite happy to manufacture uncoated freesheet. If you take a look at the capacity we're taking out and our expectation of forward sales, there is a level of decline that will come into that marketplace, we imagine, or we're planning for, if you like, that will kind of drive some of that timing and probably will drive location. Post making the full softwood conversion in Ashdown, of course, we have enabled, if you like, the Ashdown conversion.

At the minute, Marlboro is focused on lightweight. So we'd have to think rather carefully about where we place that lightweight before we think about Marlboro. And of course, Hawesville will be a very competitive mill. So we wouldn't be doing anything that isn't at least kind of top quartile in terms of the cost position. All the studies we've done said all these facilities are: one, very convertible to containerboard from a technical standpoint, I've got people in the business who've done it before. And two, all of them will be very cost competitive. So I think if you look at that timing, is this a 10-year journey to the potential sort of two million tons or more? The answer is, I think it could well be. Does that help you?

Operator

And we are going to take our next question from Mark Connelly with Stephens.

Mark Connelly -- Stephens -- Analyst

Thank you. Just to follow-up on that a little bit. Did you consider a virgin liner conversion or were the recycled economics just overwhelmingly compelling? On paper, they almost always are. And aside from the proximity issue at Kingsport, were there other key factors that made this a clear win over the others or was it a close race?

John D. Williams -- President and Chief Executive Officer

I would say that's an interesting question, Mark. I would say it was a relatively close race, but the winner emerged early on. A couple of reasons. Obviously, it's a great paper machine, one of the newest around. So we felt that was helpful. It certainly has some back-end challenges as a fine paper mill in terms of it requires chips, for example. So we just felt it was a very obvious choice. And then when you look at its proximity to market and what it can reach, that's where we settled in the end.

Also, when we looked at paper decline and the grades where that decline was really relatively intense, we felt Kingsport was the place to do this because it was really making a lot of cut size, and we can do some of that elsewhere. So to give you an example of how I'll give you a bit of granularity. If you think about our thinking when Marlboro is making cut size, but it's actually making cut size for export. Obviously, the margins of that are not that attractive. So we can shut the Kingsport mill. And if we need to, we can make cut size for domestic purposes at Marlboro, which actually enhances the Marlboro mix. So that's the kind of way we thought about it. If that helps probably too much to give you an idea. Okay.

Mark Connelly -- Stephens -- Analyst

No. That is helpful. And did you consider virgin at all at that mill?

John D. Williams -- President and Chief Executive Officer

No. No. That was never going to be on the cards because of the back end of the mill.

Mark Connelly -- Stephens -- Analyst

Okay. And just one last question. Investors have underestimated the growth of fluff market for years, including me. Is containerboard at Ashdown inevitable? Or if fluff continue to outperform expectations, would that be a potential alternative?

John D. Williams -- President and Chief Executive Officer

Well, it wouldn't be an either/or. The thinking would be, we'd still be a major fluff pulp producer to the sort of volumes we probably have. What would give would be our southern softwood production as we steer that, if you like, into containerboard. So there might be a slight decline in fluff pulp, but it's not an either/or choice, Mark.

Operator

And we'll take our next question from Brian Maguire with Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Thanks, good morning, thanks for all the news this morning. Just on the strategic review and the mill conversion, I guess, I just wanted to get a sense of how intertwined the two are? $350 million is a lot of capital to lay out for a company of your size. So should we be thinking about it being a little bit contingent upon a successful outcome in the Personal Care review process?

And as you get further into the process, if it becomes obvious that there is more assets in your portfolio that makes sense to be lumped into the included into the strategic review process, would you be open to that? Or is it always going to be really just a Personal Care process?

John D. Williams -- President and Chief Executive Officer

Well, sorry, there's a lot of meat to that question. Let me so to answer the first part of the question, I think sort of what you're asking is the conversion contingent on receiving some funds from somewhere. The answer is no. Because I think with the $200 million what we're doing on cost savings and actually, our ability to generate a certain level of cash even in these conditions and the fact that we had $906 million of liquidity, it's not conditional. So it's going to happen. To your question about assets, we're always aware of the fact there may be value-adding opportunities to shareholders that the better owners for some of these assets might appear. And we always have an open mind to that. So I would never close that door.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. And just on the concept of more mills being converted, I know in the past, John, you said you don't really want to be a 1-mill system. That was the case with fluff. As you think about Kingsport in a 2023 sort of time line, is there enough time and optionality for Ashdown to join in, in that sort of time line and give you a sister mill?

John D. Williams -- President and Chief Executive Officer

Yes. That's a great question. So I think over time, we're going to see us move along that time line we've given you. Excuse me, not the time line, but sort of the assets that we've given you. So if you look at slide 17 in the deck, it kind of tells you where our opportunities are. Obviously, over time, we'll build that business. What it is contingent on, though, of course, is where we find ourselves in uncoated freesheet and the volumes available to us three or four years' time.

As you can tell by our planning and the capacity we're taking out in our own supply chain, we have a pretty definite view that demand does not recover to sort of prepandemic levels. Now what has made us think that is our experience through the '08-'09 recession, where if you recall, market was down 13% to 15%. Even though it leveled off, it never came back. So that's our premise why we can be confident enough taking this level of capacity out. But how that plays out in terms of decline or stabilization over the next few years will determine some of the timing around the conversions. Does that help?

Operator

And we'll take our next question from Paul Quinn with RBC Capital Markets.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah, thanks very much. Morning, when I take a look at the amount of downtime that you took in Q2 and I annualized that, you're at like 1.2 million tons, and you're taking out 721, which basically is about 60% of the annualized downtime. So is that suggesting in rough numbers you expect 40% of the demand to come back?

John D. Williams -- President and Chief Executive Officer

I can't do your math. But I would say the level of demand decline we've experienced in the height of COVID, we would expect half of that decline to come back. That's pretty much how the maths work. So...

Daniel Buron -- Senior Vice-President and Chief Financial Officer

We reduced inventory in the quarter also.

John D. Williams -- President and Chief Executive Officer

Right.

Paul Quinn -- RBC Capital Markets -- Analyst

Right. Okay. And then just on additional conversions, I mean, you stated that Kingsport and Ashdown are not conditional on the sale of Personal Care. If you sold Personal Care, would that free up the offense on Hawesville and Marlboro?

John D. Williams -- President and Chief Executive Officer

I think these are all economic choices based on market demand, Paul. So if you believe that the earnings potential offset against the capital, offset against what you're earning currently in those mills is really compelling and the right economic decision, obviously, that's a decision we would make. If you didn't feel that, we just we would keep running making decent margins as we currently are in those mills and look to the level of decline to sort of dictate some of our timing. I'm you've seen us do this many times. But if we see a market decline and downtime sort of starts to seep into the system, that's the point we have to think about doing the next thing.

And we're only really going to get visibility on that, quite frankly, as the world returns to whatever we consider to be normal at whatever time that happens to be. And if you think about whether on if you think about potential proceeds, if you look at in those ways, you've seen our approach has been to invest in the business, to make sure we have a strong balance sheet and then think about returning to shareholders. So I think if we get some proceeds, we'll think around those issues then. Too early to tell at this point.

Operator

We'll take our next question from Sean Steuart with TD Securities.

Sean Steuart -- TD Securities -- Analyst

Thanks, good morning. A couple of questions. With respect to the Personal Care strategic review, it sounds like you're focused on a sale of the business. Can you speak to any other potential outcomes through that review if offers don't meet your...

John D. Williams -- President and Chief Executive Officer

I think Nick gave you a pretty clear disclaimer of the fact that we weren't prepared to discuss that at this point, Sean. So if you don't mind, I won't discuss it.

Sean Steuart -- TD Securities -- Analyst

Okay. On 2021 capex, given that you're going to be spending pretty aggressively on the repurposing. Can you give us an initial view on what those numbers might look like?

John D. Williams -- President and Chief Executive Officer

Well, so what we normally do is, we give you sort of full clarity on that in our quarter four earnings call because, obviously, we also have to think about building the budget for 2021, which we have not yet begun to do. So if you don't mind, but we will absolutely commit to give you the clarity then. Because if you think about as a rough number for now, just to help, it's probably about 50-50 of Kingsport between 2021 and '22. So we spent half the money in 2021, half the money in '22, rough and ready, OK?

And then you just think about sort of the regular capex that we put into the business, which, obviously, in the new world we've suppressed specifically to make sure we generate cash. I think that would give you a rough enough idea of what sort of 2021 would look like. But I wouldn't want to make myself a hostage in fortune until we put the budget together.

Operator

And we'll take our next question from Adam Josephson with KeyBanc.

Adam Josephson -- KeyBanc -- Analyst

Good morning, thanks for taking my quite. Appreciate it.

John D. Williams -- President and Chief Executive Officer

Good morning, John.

Adam Josephson -- KeyBanc -- Analyst

So you talked about being a preferred supplier to the independent converter market as part of the Kingsport announcement. And so roughly speaking, I think the converter market is about three million to 3.5 million tons. In North America, you're talking about, call it, almost 20% of that with the Kingsport conversion. So that's that would be a big slug of tons going into that market under the presumption that you won't be able to export those tons given the location of the mill and the fact that the paper is recycled not kraft.

Can you just talk about how you intend to find a home for that many tons, presuming it's all domestic? Obviously, it's recycled. Are you planning to go directly to some and buyers rather than just exclusively targeting independent? Just any additional thoughts on where exactly you intend to place these...

John D. Williams -- President and Chief Executive Officer

Yes. Sure. But obviously, I'm not going to kind of declare my market and sales hand because obviously, there are sort of competitive elements to think about. However, I do think one of the things we all struggle with is the definition of what's an independent converter. Very often, the definition is anyone who has no interest in any type of containerboard mill. Now as you know, there are some very large independents actually who may own a small mill and buy hundreds of thousands of tons more than that mill can actually produce for them, but they're not considered independent.

So when you do that math, we see a larger opportunity perhaps than that definition of independent would give you. And undoubtedly, a number of them have already reached out to us. And to your question, we have talked to a number of end users. To be honest, until we have announced as we now have, that was always kind of a glint in our eye and a glint in their eye. What I'm anticipating is over the next year or so or 18 months, perhaps, actually, we confirm that up because now we're going to do this. We've already placed the order for some machinery. So I think that will develop over the next 18 months.

Adam Josephson -- KeyBanc -- Analyst

I appreciate that, John. And just in terms of the cost of conversion, it's about $540 a ton. There have been some high-profile conversions done at below $400. So I'm just hoping to understand a little better why such a high cost to conversion? I know each conversion is different. But any thoughts there? Is it possible to do it for less than $540? Any background there would be helpful.

John D. Williams -- President and Chief Executive Officer

Certainly. So if we come in at about $300 million, obviously, that's about $500 a go. We pulled out a list of some other conversions. So again, these are raw numbers, but we think Green Bay is at about $667, IP Riverdale is about $667, but of course, that is white top kraftliner. Pratt and Wapakoneta, we think, was about $688. So we don't feel versus I think a good comparator for us is probably Pratt and Wapakoneta. And to my mind, we look pretty competitive. So of course, that's a greenfield. We're a brownfield. So that differential, I think, is understandable. They're a fine organization. So I don't feel we're miles off against comparative conversions or even new mills. If that helps?

Operator

And we'll take our next question from George Staphos with Bank of America.

George Staphos -- Bank of America. -- Analyst

Everyone, good morning. Good work with the process here.

John D. Williams -- President and Chief Executive Officer

Thank you.

George Staphos -- Bank of America. -- Analyst

First question, kind of a couple of parts to it on Ashdown. Now recognizing you're already in the process of converting Ashdown to pulp, when you look at the fluff market and you look at profitability overall in pulp for the North American producers, it's not been tremendous over the last couple of years because the commodity markets really driven by hardwood to China have really depressed pricing ultimately when you look at it. So why are you still optimistic that this will be a high-returning project? What kind of mix do you anticipate at Ashdown between fluff and softwood? And does it require the containerboard line to be viable longer term?

My second question is just as you look at the other conversion candidates in your fleet, do you anticipate those only being virgin? Or would you consider doing a recycled line and have fiber flexibility that you wouldn't necessarily have at Kingsport for the reasons that you mentioned to the earlier question?

John D. Williams -- President and Chief Executive Officer

Let me see if I can answer both of those and remember them both. So I think on Ashdown, the pulp cycle, which I guess is really the major part of your question, I think it's absolutely right that this has been a longer time when pulp prices have not been have not moved as one might have anticipated and whether or not the premium for fluff pulp is realizable, given the number of people who can swing from softwood to pulp. If you do that, the arbitrage of being into fluff pulp versus being into southern softwood, you're going to sell fluff pulp and you might get a little bit silly around what you're expecting to get for it.

I think that will shift over time, and the reason I think it will shift over time is what's really driving those products is the end use. Now the baby business, stable growing in the developing world, but stable to declining in the developed world. But the adult incontinence business has a ton of runway. So I still think we will see a world where that pricing will move back. Again, if again, we make decisions based on economics. If we are successful, I believe we will be with Kingsport and our entry into containerboard, and we then feel the right economic decision is then to put a containerboard machine into Ashdown.

We'll do that. That will reduce slightly, obviously, our pulp output not dramatically, but slightly. We'll make that choice if we think it's the right choice to make. On the other mills, we have reasonably obviously, we're in fantastic fiber baskets on kraftliner. So would we want to give ourselves the flexibility of a test liner machine as well? Who knows? But at the minute, we're really focused on kraftliner. If that answers the question?

George Staphos -- Bank of America. -- Analyst

It does, John. Do you have a view on the mix ultimately softwood versus fluff at Ashdown?

John D. Williams -- President and Chief Executive Officer

Yes.

Daniel Buron -- Senior Vice-President and Chief Financial Officer

Yes.

John D. Williams -- President and Chief Executive Officer

Daniel, please.

Daniel Buron -- Senior Vice-President and Chief Financial Officer

The mill will be capable of doing around 600,000 ton of fluff and the rest in softwood bale. But the fluff machine is actually flexible to move from fluff to bale if we if the market dictate that it's better to sell bale. So a lot of flexibility in Ashdown.

Operator

And we'll take our next question from Steve Chercover with D.A. Davidson.

Steve Chercover -- D.A. Davidson -- Analyst

Thanks, good morning everyone. Just a quick as if we haven't talked about Kingsport enough, but what happens to the kraftline since it's going to be a recycled mill? It just sits idle?

John D. Williams -- President and Chief Executive Officer

You mean the back end of the mill?

Steve Chercover -- D.A. Davidson -- Analyst

I always thought the pulp mill was the front end of the mill, but yes.

John D. Williams -- President and Chief Executive Officer

I mean, I always call it the back end, for which my apologies. Yes. I mean that would be idled, obviously. So anything that is unique to the kraft process would be idle.

Steve Chercover -- D.A. Davidson -- Analyst

Okay. And then on wage subsidies, how much did you get? Who is it from? And how is it allocated across the two business segments? Forgive me, if I missed that.

John D. Williams -- President and Chief Executive Officer

Are you talking about the Canadian subsidy, the $25 million?

Steve Chercover -- D.A. Davidson -- Analyst

Yes. Well, I guess now you just answered two of the questions. I guess, if it's in Canada...

John D. Williams -- President and Chief Executive Officer

If I may...

Steve Chercover -- D.A. Davidson -- Analyst

I think you answered all three.

John D. Williams -- President and Chief Executive Officer

Yes. I did very well there. So why don't we Daniel, maybe you could take us through just the detail of that $25 million?

Daniel Buron -- Senior Vice-President and Chief Financial Officer

Yes. About $11 million was in the pulp business, $13 million was in the paper business and just $1 million was actually in the Corporate segment. It's all coming, as John mentioned, from the Canadian wage subsidy linked to the COVID-19 situation.

John D. Williams -- President and Chief Executive Officer

So it's by headcount as to where it fits in the business, if that helps.

Operator

And we'll take our next question from Mark Wilde with Bank of Montreal.

Mark Wilde -- Bank of Montreal -- Analyst

Good morning, John.

Daniel Buron -- Senior Vice-President and Chief Financial Officer

Good morning, Daniel.

John D. Williams -- President and Chief Executive Officer

Mark, good morning.

Mark Wilde -- Bank of Montreal -- Analyst

Good morning. I wondered if you could help us with $200 million of cost savings? Just breaking that out, getting a sense of how much of that stems from just mill closures, mill downsizing versus other elements?

John D. Williams -- President and Chief Executive Officer

So it's about 1/3, I think, on the mill closure side, 1/3 on sort of future manufacturing efficiencies and reductions and 1/3 across the rest of the network and about 1/3 in terms of central roles.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. And John, just on Kingsport, the timing. It seems like 28 to 31 months is a pretty long time line for something that you've been studying for a long time, particularly when you've got a mill in place already. Can you just address that issue?

John D. Williams -- President and Chief Executive Officer

Yes. Sure. So I've obviously told the troops that's too long as I would. But actually, a lot of it's driven by machine manufacturer and timing, Mark. So I think we're a little conservative there. We said at the latest. So if I could bring that forward three to six months, I would I am encouraging the troops so to do.

Operator

And we'll take our next question from Mark Weintraub with Seaport Global.

Mark Weintraub -- Seaport Global -- Analyst

Thank you. Maybe just following up a bit on Mark's question, first off. Is the paper machine ordered? Or when does that part of the process get into play at Kingsport?

John D. Williams -- President and Chief Executive Officer

About two months, within the next eight weeks for the paper machine itself. We've ordered most of the back end, but we have yet to order the machine.

Mark Weintraub -- Seaport Global -- Analyst

Okay. Great. And then, I completely understand that the rate of decline in uncoated freesheet is going to be a huge factor in how you think about any the timing of any additional moves. But would you also want to see how Kingsport plays out before you would embark on next steps? Or is that not necessarily the case?

John D. Williams -- President and Chief Executive Officer

I think in a perfect world, that makes sense. We don't live in a perfect world. But obviously, yes, I'd want to be very confident that we have a business, and it's a viable business. I'm convinced we will. But bad timing, the world might not allow us that luxury. So we'll have to see.

Operator

[Operator Instructions] We'll take our next question from Adam Josephson with KeyBanc.

Adam Josephson -- KeyBanc -- Analyst

Thanks very much for taking my follow ups. John, just in terms of the assumptions underlying your entry into containerboard, you talked about the market having you're thinking the market's a 2% grower-ish. North America has the world's highest prices. There's a lot of capacity that's been announced. There's a Spanish company that announced last just last week that it's entering the market. So how are you thinking about the price? How are you thinking about the supply demand dynamics in this market over the next couple of years, given your view of what the growth rate will be, given the supply that's been announced and given that the U.S. obviously has the world's highest prices by a pretty comfortable margin?

John D. Williams -- President and Chief Executive Officer

Sure. So I think what we're doing is unique. In terms of we're starting with testliner, we're going to build great relationships with those independent converters. They are, to some extent, screaming for somebody to really support them against the big beasts as they see them of the integrated models. So I think that gives us a great entry point. I do believe very strongly that we'll be able to make a they will be able to make a great product from what we're going to sell them that gives them opportunities in their marketplace.

Because in the end, if you really think about it, there's no such thing as a containerboard market. There's a box market that's served by the containerboard business, and we've set ourselves up, I think, very competitively to do that for those independents. Obviously, personally, I've operated in a containerboard and corrugated market that was way more competitive. In Europe, less consolidated. And I think we're ready to do so. We've done lots of sensitivity analysis around pricing, and it's a very attractive project at a range of pricing.

Adam Josephson -- KeyBanc -- Analyst

Sure. No. Understood. And just while on the recycled versus virgin dynamics in the market, so obviously, recycled has been growing at a much faster rate in the U.S. in recent years, and much of the new capacity that's been coming in is recycled. Europe is much more recycled than the U.S. is. But any thoughts of the extent to which you expect future growth in this market to be recycled versus kraft and how that's informing your decision of which machines to convert?

John D. Williams -- President and Chief Executive Officer

I don't think so, Adam, actually. No. I mean you're quite right. It's almost a mirror image, right, between Europe and the U.S. in terms of kraftliner versus testliner, so 80 rough and ready, 80/20. I think there's an opportunity here for testliner, but kraftliner always has its place. So I'm not sure there's a massive swing involved.

Operator

And we'll take our next question from Steve Chercover with D.A. Davidson.

Steve Chercover -- D.A. Davidson -- Analyst

Thanks. Just a quick follow-up. Are you going to establish a recycling network for Kingsport? Or how do you anticipate getting...

John D. Williams -- President and Chief Executive Officer

So that's a great question. So we've obviously done the work. We believe I mean, I don't we don't need to put assets in place. But when we look at it, we're very confident. We're near a number of metropolitan areas. We're confident we can find sufficient material. So we've done that. In fact, I was reading that work a few weeks ago. So we consider ourselves to be in very good shape. And let's not forget, I have people in this business who've done this before. So I think we're in good shape there.

Steve Chercover -- D.A. Davidson -- Analyst

Okay, thanks to stay safe thank you.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Brian Maguire with Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Just a couple at the end here. Any sense what the cash costs would be needed to achieve the $200 million of cost savings you're targeting?

John D. Williams -- President and Chief Executive Officer

You mean in terms of restructuring costs?

Brian Maguire -- Goldman Sachs -- Analyst

Yes, exactly.

John D. Williams -- President and Chief Executive Officer

Yes. You mean in the cash outflow. We're still calculating some of that. That $200 million is largely people. Unfortunately, these things have to be done. So depending on kind of where they're located we'll give you that number when we have that number, but we're just working out the detail of it now.

Brian Maguire -- Goldman Sachs -- Analyst

So like kind of $1 spent for $1 of annual savings...

John D. Williams -- President and Chief Executive Officer

Probably better than that. I would think better than that.

Brian Maguire -- Goldman Sachs -- Analyst

Better than that?

Daniel Buron -- Senior Vice-President and Chief Financial Officer

That's going to be I think it's going to be significantly better than that.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. And then any sense what your operating rate would be in uncoated freesheet next year once the mills are closed and we're at the new normal level of demand?

John D. Williams -- President and Chief Executive Officer

Oh, absolutely. I mean, in the 90s, if not. I mean pretty much running full.

Operator

We'll take our next question from Benoit Laprade with Scotiabank.

Benoit Laprade -- Scotiabank -- Analyst

Good morning. A quick one probably for you, Daniel. In terms of the Canadian emergency wage subsidies, would you expect to qualify again for continued payments in Q3 here?

Daniel Buron -- Senior Vice-President and Chief Financial Officer

We should qualify, but they've changed program significantly for the months to come. And our view is it's going to be a way lower number for us. If memory serves me well, this is 1.2 times the decline in sales in your Canadian operation, and we're actually running quite well in Canada right now. So we should get something, but it's going to be a fraction of what we got in the first four months.

Operator

We'll take our next question from Mark Wilde with Bank of Montreal.

Mark Wilde -- Bank of Montreal -- Analyst

Thanks, John. I have two follow-ups. The first one is just some clarity for people because I think that when you talked about ordering a paper machine for Kingsport, what you really meant, I assume, is just the equipment to modify the existing machine. Is that correct?

John D. Williams -- President and Chief Executive Officer

That is correct.

Mark Wilde -- Bank of Montreal -- Analyst

What is that approximate cost in the grand scheme of things?

John D. Williams -- President and Chief Executive Officer

We will we're looking it up as we speak.

Daniel Buron -- Senior Vice-President and Chief Financial Officer

$140 million.

John D. Williams -- President and Chief Executive Officer

About $140 million, Mark.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. Just one other related question. If somebody came into you like next week and said, "Gee, we have other ideas for Kingsport. We might be interested in just buying the mill from you." How much money are you on the hook for already with the equipment suppliers that would just be gone? So it's kind of the breakup fee as it were.

John D. Williams -- President and Chief Executive Officer

If they come to me, I'd tell them, Mark.

Mark Wilde -- Bank of Montreal -- Analyst

Could you give us some sense of what that might be, what you're already on the hook for?

John D. Williams -- President and Chief Executive Officer

I don't think I want to do that. Thank you.

Operator

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Nicholas Estrela -- Director, Investor Relations

John D. Williams -- President and Chief Executive Officer

Daniel Buron -- Senior Vice-President and Chief Financial Officer

Anthony Pettinari -- Citi -- Analyst

Mark Connelly -- Stephens -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

Sean Steuart -- TD Securities -- Analyst

Adam Josephson -- KeyBanc -- Analyst

George Staphos -- Bank of America. -- Analyst

Steve Chercover -- D.A. Davidson -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

Mark Weintraub -- Seaport Global -- Analyst

Benoit Laprade -- Scotiabank -- Analyst

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