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Domtar Corp (NYSE:UFS)
Q3 2020 Earnings Call
Nov 6, 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 Q3 2020 earnings conference call with financial analysts. [Operator Instructions] [Operator Instructions]

Today is November 6, 2020. I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead, sir.

Nicholas Estrela -- Director, Investor Relations

Thank you, Carrie. Good morning, and welcome to our third 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. During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of the website.

As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings to the securities commissions for a listing of those. Finally, certain non-U.S. GAAP financial measures will be presented and discussed. You can find the reconciliation to the closest GAAP measures in the appendix of this morning's release as well as on our website.

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

John D. Williams -- President and Chief Executive Officer

Thank you, Nick, and good morning, everyone. Throughout this past quarter, our teams have demonstrated resiliency by continuously adapting to changing market conditions, maintaining a laser focus on health and safety, and taking decisive actions in running our operations and serving our customers under challenging and unprecedented conditions. We delivered a solid quarter with $118 million of EBITDA before items ahead of our expectations and better than the prior quarter while generating more than $120 million of operating cash flow.

Our efforts were supported by an improvement in market conditions, and were rewarded by strong momentum from the execution of the strategic initiatives we announced on the last quarterly earnings call. Due to our decision to implement a cost reduction program, we've generated considerable immediate benefits, which positions Domtar as a stronger, more resilient and more agile organization. We expect additional savings to come in the coming quarters.

In Paper, our cost reduction program, including the permanent closure of production facilities and the flow-through benefit of improved volume, drove better quarter three results. After the significant drop in market demand at the early stages of the pandemic, demand in most markets began to recover in quarter 3, and activity and momentum are still gradually improving. Our teams are doing an excellent job managing costs and delivering a strong operational performance at both our mills and converting facilities.

Our entire supply chain is performing well, and we remain close to our customers and suppliers so that we can respond swiftly to shifting market conditions and meet their needs. In Pulp, prices remained at cyclically low levels in quarter 3, and global market dynamics continued to be challenging. However, strong demand, maintenance outages and restocking in China brought markets back into better balance toward the end of the quarter. In this environment, our focus remains on serving the customers in end-use markets that are enjoying strong demand.

In Personal Care, we had a strong cost performance in the quarter. We continue to execute well against our objectives both commercially and operationally, which has contributed to our strong year-to-date performance. Year-to-date sales are 8% higher, while year-to-date EBITDA has improved by over 50% when compared to last year. Although revenue remains somewhat unpredictable due to the uncertainty around the global COVID-19 pandemic, we will benefit from the full run rate of new customer wins and by managing our inventory levels to service our customers through the volatility.

With that, let me turn the call over to Daniel for the financial review before making further comments on our strategic initiatives and the fourth quarter outlook. Daniel?

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

Thank you, John, and good morning, everyone. So far, 2020 has certainly been very challenging, but we are executing extremely well as evidenced by our financial results this quarter. Let's start by going over the financial highlights on slide four. We reported this morning a net loss of $1.67 per share for the third quarter compared to net earnings of $0.34 per share for the second quarter of 2020. Adjusting for items, our earnings were $0.33 per share in the third quarter compared to earnings of $0.36 per share for the prior quarter.

In the third quarter, we recorded $111 million of accelerated depreciation following the announced capacity closures and $68 million of restructuring costs related to our cost reduction program. These costs include mainly raw material and supplies inventory writedown and severance costs. We expect further closure and restructuring expense in the next few quarters as we continue to progress on our $200 million cost reduction program. EBITDA before items amounted to $118 million compared to $91 million in the second quarter.

Turning to the sequential variation in earnings on slide five. Consolidated sales were $112 million higher than the second quarter due mostly to higher sales in the Paper and Personal Care businesses. Depreciation and amortization was flat when compared to the second quarter, and SG&A was $6 million higher than the second quarter largely due to lower COVID-related wage subsidy and our incentive accruals. In the third quarter, we recorded an income tax benefit of $55 million, resulting in a book tax rate of 38%. This higher-than-expected tax rate is due mostly to the change in the mix of earnings and the impact of the CARES Act on our full year forecasted tax rate.

Now turning to the cash flow statement on slide six. Cash flows from operating activities amounted to $121 million, while capital expenditures amounted to $28 million. This resulted in free cash flow of $93 million in the third quarter. Our net debt-to-total capitalization ratio stood at 28% at the end of the third quarter. Turning to the waterfall on slide seven. When compared to the second quarter, EBITDA before items increased by $27 million due to higher productivity for $29 million; higher volume for $17 million; lower raw material costs for $13 million; higher selling prices for $10 million; and favorable exchange rates for $1 million.

These were partially offset by lower COVID-related wage subsidy for $16 million; and nonproduction agreement revenue realized in Q2 for $7 million; higher maintenance costs for $12 million; higher freight costs for $5 million; higher fixed costs for $2 million; and higher SG&A for $1 million. Now the review of our business segment starting on slide eight. In the Pulp and Paper segment, sales were 12% higher when compared to the second quarter and 17% lower when compared to the same period last year. EBITDA before items was $98 million, which was $33 million higher than the second quarter of 2020.

Our Paper business on slide nine. Sales were 23% higher versus last quarter and were 21% lower versus the same period last year. Estimated EBITDA before items was $119 million. Manufactured paper shipment were 20% higher when compared to the second quarter and 18% lower when compared to the same period last year. Average transaction prices for all our paper grades were $29 per ton higher than the last quarter, largely due to customer and product mix. Let's turn to our Pulp business on slide 10.

Sales were 8% lower versus the last quarter and 6% lower versus the same period last year. Estimated EBITDA before items was a negative $21 million. Pulp shipments were 7% lower versus the second quarter and 5% lower when compared to the same period last year. Average pulp prices decreased $3 per metric ton versus the second quarter. Now let's look at page 11.

Our paper inventory decreased 20,000 tons when compared to the last quarter while pulp inventory increased by 38,000 metric tons. Our Personal Care business on slide 12. Sales increased 6% when compared to last quarter and 11% versus the same period last year. EBITDA before item was $31 million, $2 million lower than the second quarter and $7 million higher than the same period last year. Slide 13 outlines our maintenance schedule for the remainder of the year. 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. In Paper, strong production translated into an outstanding cost performance in the quarter and one of our best in recent years. A key focus for us in a weak demand environment is to protect our overall profitability, and we are delivering. Results in Paper improved substantially in the third quarter, reflecting our team's swift response in implementing cost savings in a healthier volume environment. We've seen several consecutive months of increased sales and business activity from the lows of April and May.

Our average paper prices increased by $29 per ton when compared to the second quarter as higher volume led to a significantly better mix of grades. We saw improvements across all core channels and most of our key customers. The office products channel is improving, and our customers are seeing good sell-through rates. The merchant channel also experienced a good recovery with growth across all of our partners. Although demand is improving, we continue to proactively balance our production with our customer demand and to tightly control inventory levels.

We took 38,000 tons of market downtime net of the mill closures, resulting in a 20,000 ton inventory reduction in the quarter. Over the last five quarters, we've lowered our inventory levels by nearly 130,000 tons as we adjust inventory to a new customer demand profile. As previously announced, we are permanently reducing our annual production capacity by 721,000 tons of uncoated free sheet. The Kingsport and Ashdown paper machines, which had been idled since April 2020, were permanently shut during the quarter.

The Port Huron mill is scheduled to cease operations in quarter one '21, and we're in the process of transferring a large portion of their grades to other mills. So we continue to support our key customers in those grades. Looking forward, return to the office and back-to-school remain key demand drivers for us. We believe that channel inventories are at relatively low levels, while import volumes have dropped to the lowest point in over a decade.

Our focus is continuing to maintain a low-cost supply chain and deliver orders to our customers in a reasonable lead time while meeting their changing needs. In Pulp, the global nature of the business and the differing end-use markets have led to wide-ranging impacts as a result of the COVID-19 pandemic. Most of our larger customers maintained steady volume through the quarter, while global tissue shipments remain above trend. We believe our pulp shipments were lower due to inventory adjustments at the customer level, while price realizations remained relatively flat when compared to quarter two.

Now let me provide an update on the strategic initiatives we announced last quarter. During quarter three, the Ashdown mill successfully restarted the bale pulp dryer following the curtailment of paper operations. This was a significant milestone for the mill on its journey to becoming a world-class softwood and fluff pulp mill and for its readiness to produce linerboard in the future. The dryer started up with hardwood pulp that was previously supplying our paper operations.

We'll transition from hardwood bales to softwood bales in quarter one of 2021, and we'll further optimize with some targeted investments to improve the productivity of the mill also in quarter one '21. Turning to our Kingsport mill. The conversion to recycled linerboard is proceeding as planned. We're putting all of our efforts into enabling a start-up by the end of 2022. Once complete, the Kingsport mill will become North America's premier lightweight containerboard facility, able to produce and market about 600,000 tons of high-quality recycled linerboard and corrugated medium manually.

That level of capacity will make Kingsport the second largest recycled linerboard paper machine in North America. Most recently, we've signed an agreement with Voith to provide equipment and technical services at our Kingsport mill and help build one of the most modern, lowest cost recycled containerboard mills in the world. We expect to receive our first equipment deliveries in the next few months with construction set to begin in the second quarter of '21. In the meantime, we're actively building our various teams, including sales, fiber procurement, quality and business processes.

Kingsport will be well positioned to be the go-to supplier to independent converters for quality, service and innovation. We're advancing our commercial strategy, and I'm very pleased with the feedback we've received so far from the markets and potential packaging customers. Kingsport is strategically located less than a day's drive for more than 60 independent corrugated customers, serving food, beverage and e-commerce markets. This represents nearly four million tons of annual containerboard demand. Since announcing our strategic entry into the packaging space, we've received a significant amount of interest from independent box converters as well as end-use customers.

Meetings with several different channel partners have resulted in a number of nondisclosure agreements with potential customers. The North American containerboard market is large, approximately 40 million tons per year, and growing at 2% or 800,000 tons per year. And it supports a variety of industries that align with many of today's trends, including e-commerce, environmental sustainability and more. Importantly, as demand for containerboard continues to grow at a rapid pace, many of the independent converters don't have the capabilities to grow at the same pace given the linerboard supply risk they place in the current market structure.

We intend to position ourselves as the go-to supplier to independent box converters by enabling their growth with a unique and compelling value proposition. As per the conversion road map, the work we're doing will result in Domtar having the ability to produce 2.5 million tons of containerboard at four facilities with market softwood and fluff pulp optionality at two of those sites. Overall, we're pleased with where we're headed and are even more convinced that the conversion road map will create significant shareholder value.

The high level of interest and initial customer feedback on our Kingsport plant are allowing us to accelerate some of our engineering work at our Ashdown mill for further expansion to linerboard. As detailed on our last earnings call, we have initiated a cost reduction plan, consistent with our priority to position Domtar for long-term success as a stronger, more resilient and more agile organization. We identified opportunities in three areas, including capacity reductions and asset closures, mill level cost savings and rightsizing support functions.

We're making solid progress and feel comfortable with our target to deliver $200 million in annual run rate savings by the end of '21. We announced the first wave of head count reductions related to asset restructuring in August, followed by a second wave in September, mostly through rightsizing support functions at all levels of the organization. It's never easy to make the decisions to reduce our workforce of talented and dedicated individuals. However, we have to take these necessary steps to better position our business for the future. The benefits of network optimization are already visible on our operating margins, while head count reduction is creating a more agile, streamlined and efficient core business.

These decisions are essential steps that will significantly improve our free cash flow and return on invested capital and support our repurposing program. In Personal Care, sales in Europe regained momentum in quarter 3, particularly in September, after a weaker second quarter following pantry loading in quarter 1. In North America, our year-to-date sales are 19% higher, led by the launch of several new customer brands. Towards the end of the quarter, we began servicing and expanding our share of wallet with one of our biggest customers in the U.S. We expect for the ramp-up to continue throughout the fourth quarter.

We were also recently awarded a contract extension for an additional year by another major retailer. This is significant as we only recently began to service them, and the contract extension is two years ahead of schedule. This is the direct result of the success we're having with our partner brand strategy. Our partner brand approach has proven successful in both infant diapers and adult incontinence products on both -- in both North America and Europe.

We're winning new business, and gaining the trust from leading retailers by leveraging our know-how and capabilities in absorbent hygiene markets to deliver end-to-end solutions for their store brand needs. As previously announced, we're exploring a range of value-creating alternatives for our Personal Care division following successful efforts to improve its operating structure and its cost profile. This action represents our ongoing commitment to drive profitable growth and maximize the value of our assets. As we stated last quarter, we do not intend to comment on the details of the process until we have an update to share.

Turning to our fourth quarter outlook. In Paper, volume is expected to be flat quarter-over-quarter, while mix should be slightly unfavorable due to the usual seasonality. In Pulp, we expect near-term markets to gradually improve in both demand and price, while Personal Care will benefit further from higher usage and the impact from new customer wins. Overall, raw materials are expected to remain stable, while planned maintenance costs will be lower.

So to wrap up, we continue to prepare for a broad range of outcomes while focusing on serving our customers, supporting our employees and strengthening our communities. We are a fiber-based company with leading market positions, strong financial liquidity and a well-defined strategy to continue on a clear path to sustainable long-term value creation. We're prudently managing the business through near-term volatility while continuing to strengthen long-term prospects through increased growth investments to create shareholder value.

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

Nicholas Estrela -- Director, Investor Relations

Thank you, John. So both John and Daniel will be available for questions. [Operator Instructions] Carrie, you can open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question will be from Anthony Pettinari from Citi.

Anthony Pettinari -- Citi -- Analyst

Hi, good morning.

John D. Williams -- President and Chief Executive Officer

Anthony, good morning.

Anthony Pettinari -- Citi -- Analyst

John or Daniel, can you talk a little bit more about the expected flow through and time line for the $200 million cost savings program? You outlined some of the activities you've already taken, but can you talk -- and apologies if I missed this, but can you talk about how much of the benefit you might be able to realize on a run rate basis maybe in 4Q? And then if you think about the flow-through maybe in the first half of next year versus the second half of next year, kind of any finer point you can put on it.

John D. Williams -- President and Chief Executive Officer

Certainly, Anthony. So as you know, we've said we see full run rate by the end of '21. I think the way to look at this is to really look at the margins we're capable of generating in our businesses over that time, and you've seen a pretty strong margin, obviously, in quarter three. And we're looking for those kind of margins to continue, if not slightly grow. So we're not planning to kind of give those run rate numbers because, obviously, there's lots of other moving parts. But I think you can judge us by the level of EBITDA you start to see from this business given the volume reduction.

Anthony Pettinari -- Citi -- Analyst

Okay. That's helpful. And then you talked about accelerating activities to prepare Ashdown for an eventual conversion into linerboard, I think, based on some of the conversations that you've had. I'm just wondering. Can you remind us what kind of original timetable you had envisioned for Ashdown?

How much that might be able to be pulled forward, whether it's a number of months or a number of quarters? Is the acceleration really driven by, whether it's converters or end customers, just a much stronger response than you expected or just potentially much stronger demand for your tons? Just -- if you can give any color there.

John D. Williams -- President and Chief Executive Officer

Well, I think it's -- I'll try and give you a helpful answer. It's all of the above. Just to recall, Ashdown would be about 400,000 tons of kraftliner. I think we have an internal question to ask ourselves is that do we actually have the resources and the capabilities to manage two large projects almost sequentially.

So the way we're looking at this is that sometime in '21, we would have made our choices. If that choice is a positive choice, you could say 2.5 years-ish, maybe a little longer before, actually, we're manufacturing there. So typically, I think we've thought about this as kind of maybe Ashdown comes in two or three years post-Kingsport, I think now we're looking to see could we accelerate that slightly.

Anthony Pettinari -- Citi -- Analyst

Okay, that's very helpful.I'll turn it over.

John D. Williams -- President and Chief Executive Officer

Okay. Thanks, Anthony.

Operator

Thank you. Our next question will come from Mark Connelly from Stephens.

Mark Connelly -- Stephens -- Analyst

Thanks. John

John D. Williams -- President and Chief Executive Officer

Morning.

Mark Connelly -- Stephens -- Analyst

John, you said that mix will be unfavorable as it usually is. But can you tell us whether these big changes in demand are making the mix swings much different than they usually are? As -- are orders getting spread out differently and changing the uncertainty? I'm just trying to get a sense of whether mix is sort of evolving or if it's significantly changed.

John D. Williams -- President and Chief Executive Officer

So a great question. So I think as you recall, Mark, in quarter 4, typically, we do quite a lot of the kind of work that we wouldn't usually do in a quieter demand period. And that, obviously -- we do some tablet, we do some of the stuff that drives the mix down just based on realized price and seasonality. Obviously, in a full-ish system, which we now are, there'll be slightly less of that than usual, but there'll still probably be some.

So I don't think anything has structurally changed. I think what we're seeing is, having taken out that level of capacity that we've taken out, obviously, there's business that we've walked away from. That business has been at the lower end of the profit stack. So what you saw in quarter three was margin move up as we had, if you like, better business at sort of the higher end of the profit stack.

That will reverse very slightly in December in the way it usually does. Maybe not quite so dramatic, but I think it will still be there. And as we then move forward, provided volumes stay around the sort of September levels, we do see the potential for mix improvement. One other thing we're also doing, of course, although it's relatively small tonnage, as we take tons off the Port Huron machines and we put them on to some of our other machines, we actually get a pretty nice cost benefit per ton as we supply those tons.

Mark Connelly -- Stephens -- Analyst

Right. Makes sense. Thank you, and just one more question. You referenced some of the steps to address inefficiencies at Ashdown from closing the paper production. Are there any big inefficiencies you're going to have to live with until you get to linerboard?

John D. Williams -- President and Chief Executive Officer

Not when we've done the work, Mark, but we haven't -- I mean, we're in the middle of the work. So I think in quarter 1, quarter two of next year, the profile of that mill, we have some labor practices that we've already negotiated to change. We'll be running as we want to run in that mill probably by quarter two of next year. So we're still in the midst of that change. And that's, quite frankly, partly what's driving some of our -- our pulp returns are not as attractive as they should be because, obviously, that's a large impact on our Pulp business.

Mark Connelly -- Stephens -- Analyst

Great. Perfect. Thank you very much.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

Our next question will be from Steve Chercover from D.A. Davidson.

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

Thanks and good morning.

John D. Williams -- President and Chief Executive Officer

Steve, good morning.

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

Good morning. It's terrific that you enjoyed substantially better productivity, but I hope that wasn't what surprised you, because I assume that you expect the best from your people. So what was it that did surprise you and helped you exceed your expectations?

John D. Williams -- President and Chief Executive Officer

Well, I think, one, because of the cost reduction program and how quickly we implemented it, I think we saw benefit there. Patently, one of the things we had done, Steve, is that we had put a hiring freeze in place. So we were running with a high number of vacancies. Now of course, what has now happened for most of those is those jobs are permanently gone.

So that helped us a bit as we tightened everything up. Patently, T&E is very, very tight because no one's going anywhere, so that's driven part of it. And of course, the big driver was the volume where volumes returned, as we say, quarter-on-quarter. And because we've done a great job on the cost side of things, that drop-through, of course, is even more dramatic as those additional tons come in. So that's really what drove it for us.

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

Okay. That's encouraging. And then -- and this isn't a loaded question, but after taking out the capacity and recognizing that there's still more to come at Port Huron, the 20,000 tons of market-related downtime, I assume your expectation is that's not going to be necessary once we normalize and start going back to school and back to offices. So is that accurate? And have you taken any market-related downtime in the current quarter?

John D. Williams -- President and Chief Executive Officer

It is accurate, and the answer to your question is no, we haven't. So we're operating a full system. And if I'm being truthful, some of our lead times are -- we actually need to bring back a bit because we're actually pretty full right now.

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

Great. That's what I want to hear. Thank you.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

Our next question will come from Adam Josephson with KeyBanc.

Adam Josephson -- KeyBanc -- Analyst

Thanks. Good morning -- Good morning, John and Daniel. and I hope you and your families are well.

John D. Williams -- President and Chief Executive Officer

Thank you, Adam.Thank you.

Adam Josephson -- KeyBanc -- Analyst

John, one more question on the paper profitability in the quarter. I think you indicated that the margins and the EBITDA per ton would be -- you think these are sustainable levels. I just -- I e back at the past several years. Your margin and EBITDA per ton in the third quarter were the highest in -- and not just year but in any third quarter, in many, many years, even though volume was down quite considerably year-on-year. Are you suggesting that you expect the margins and the EBITDA per ton to stay at these levels just for the third quarter? Or that these -- appreciating the third quarter is typically your highest margin quarter of the year.

John D. Williams -- President and Chief Executive Officer

Yes. I mean, you obviously have to think, Adam, about sort of maintenance intensity in particular quarters, right? So that will swing the numbers around quite dramatically. But undoubtedly, when we did the math to look at what do we need to do here to maintain kind of high teens margin in our Paper business on a sustainable basis, that is why $200 million of costs simply have to come out of this business to enable us to do that. Now you're right.

Quarter three, you could argue, everything lined up. But unquestionably, we're targeting those kind of margins on a sustainable basis. We have a full system. We can certainly make some choices around product mix and customer selection at this point. And I think more and more, as we build that going forward and we keep squeezing the cost position, that's where we're going to find ourselves.

Adam Josephson -- KeyBanc -- Analyst

All right. I appreciate that, John. And just one on the customer conversations you've had with converters and others. I mean, up until recently, I mean, the market suddenly tightened a couple of months ago. Before that, converters were virtually being bombarded with offers by all manner of producers. And then as you know, in the last few months, conditions dramatically changed. For how long, I don't know, and it doesn't seem like anyone else does either.

So I guess I'm just wondering what you are bringing to the table to converters or end market buyers that perhaps many of these other companies that have recently either added capacity or have announced capacity are adding to the market because there's obviously more than 10 machines coming on over the next couple of years. And I'm just wondering, again, if you're more targeting the independents with Kingsport and subsequently Ashdown? Or it's more large end market buyers that you may be able to strike some deal with whereby you team up and build some box plants, etc?

John D. Williams -- President and Chief Executive Officer

Well, it's -- in all honesty, it's really the independents at this point. And I think the large buyers, they also have a view, I think, that they also would like to support some of the independents. If there was something -- somebody really competitive behind those independents in terms of containerboard production. So we're looking at it two ways. I think we're emphasizing the cost position of this mill. This is going to be an incredibly competitive mill under any circumstances. So that's kind of route one in terms of making certain that this is a profitable enterprise.

From a market standpoint, I mean, having obviously operated a large integrated system myself while trying to sell to independents, the independents are always very watchful of you because they know your priority is actually your integrated system. So if you're selling to those independents saying, "Look, you're our priority. We want you to succeed, and we're going to help you drive your business forward," they're only too willing to have a conversation. Do you have to be competitive? Absolutely. Of course, you do, over time. But we think that's a very strong proposition.

And again, I think if you start to look at the European structure of containerboard, a business that I was used to operating in that space for a number of years, independents have a much stronger position. Typically, they're better at servicing their customers sometimes than the big integrateds are. And they are more fleet of foot in finding market opportunities. So I think if you put all that together with a strong containerboard business supporting them, you can change the dynamic here in quite interesting ways. And of course, we believe very strongly that it's going to be the uniqueness of our market approach that actually really drives the difference.

Adam Josephson -- KeyBanc -- Analyst

Thanks a lot, John.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

Our next question will be from Paul Quinn from RBC Capital Markets.

Paul Quinn -- RBC Capital Markets -- Analyst

Thanks. Good morning, guys.

John D. Williams -- President and Chief Executive Officer

Paul, good morning.

Paul Quinn -- RBC Capital Markets -- Analyst

Two questions. One on the potential containerboard side. One of the advantages that you said when you had a number of fluff pulp mills is we have assurance of supply for our customers. And just wondering how you're going to become the go-to supplier for independent box makers with just Kingsport. Is that more of a five to 10-year goal as opposed to a three year goal?

John D. Williams -- President and Chief Executive Officer

Yes. So great question. So I think you're right, Paul, that, over time, you have to have another site. Obviously, we have a runway to four very competitive mills. I do think it will be compelling, if we can, to think about Ashdown and its 400,000 tons of kraftliner. I think if you're then a kind of two mill system, with those two grades, you're in a better space. So I think, over time, we have to make that journey. But everything we're seeing right now, to be frank, and certainly, the conversations we're having, are incredibly positive around just the Kingsport facility.

Paul Quinn -- RBC Capital Markets -- Analyst

Great. And then just on the pulp side. We got September stats out and soft was up at 46 days, which I can't recall when it was back up at 46 days, and I can't believe the price is still up at this point, given that inventory. It doesn't seem like anybody that we track has got a ton of inventory. Are you starting to doubt these stats, as the market seem better than 46 days in inventory globally?

John D. Williams -- President and Chief Executive Officer

It does, absolutely, particularly in China. It does. To be honest, I think there was a pre-buy for kind of pantry loading and a post by post pantry loading. I think that inventory has kind of worked its way through now. So I'm slightly with you. I'm not sure I can wrap my head around -- it doesn't feel that way, put it that way. And if I look at October, we've had one of the strongest months in pulp than we've ever had in terms of volume. So I'm struggling to see that, too.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. Get your rest. best of luck.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

Our next question will be from George Staphos from Bank of America.

George Staphos -- Bank of America -- Analyst

Hi, everyone. Good morning. thanks for the detail...

John D. Williams -- President and Chief Executive Officer

George, good morning.

George Staphos -- Bank of America -- Analyst

Hey, how you doing? I wanted to piggyback perhaps on Paul's topic and go into pulp a bit. So my first two questions. Can you give us a breakdown of what you think the mix of pulp will be in tonnage terms in Ashdown in '21, how it compared versus '20 and what you'd expect sort of '22, '23 in that time frame? We're not going to hold you to the ounce here but just a rough order of magnitude.

And then the follow-on question. Look, it's been a tough time for a lot of pulp producers over the last couple of years unless you're in South America. Recognizing you're in different grades and different products, and hopefully, fluff gives you some ballast against the cyclicality, nonetheless, the fluff producers in North America are losing money right now. Why do you believe that this is a business -- and try to put some numbers around this, that you can actually earn cost of capital through a cycle, not just when prices are back up $300 a ton from where they're at right now?

John D. Williams -- President and Chief Executive Officer

You're welcome. So your answer on Ashdown is about 600,000 tons of fluff pulp is the capability, George. And obviously, that comes -- I mean, that's -- that will be what it is. And obviously, we have the opportunity to make softwood bales. But if you add it all up, that's the volume. As we began, we were making more softwood bales. Now we're making less. And our goal over time, of course, is really to largely make fluff. So I hope that kind of gives you that set of the numbers. To your question about...

George Staphos -- Bank of America -- Analyst

On of course is there ways -- forgive me for interrupting. Is there any way to split it for next year, which -- I know it's going to be market-dependent obviously, but 50 -- 60-40, any way you could slice that for us?

John D. Williams -- President and Chief Executive Officer

I would think 75-25 is about a reasonable rule of thumb. But please don't hang me at the stake if it's slightly different.

George Staphos -- Bank of America -- Analyst

Understood. It's pulp.

John D. Williams -- President and Chief Executive Officer

All right. Let me answer your market question because I think that's a very interesting question. So I think the only way to look at this is where is this product, what is this product servicing in terms of end use? So we know it's serving the adult incontinence business. We know it's also serving the feminine hygiene business, and of course, it's serving the baby business. So if you take those three businesses, you say to yourself, adult incontinence has an enormous amount of runway.

Even if products are redesigned, as some are, to kind of reduce the level of fluff pulp as the technology improves slightly, there's still -- this is a 5%, 6% market growth year after year after year, at least, I mean, as far as you can see, out until 2050. The baby business, undoubtedly, in developing markets, is a sort of low decline business right now but may revert back to being sort of a GDP business.

And of course, in developing markets, is growing like Topsy as people come out of cloth diapers into disposables. The feminine hygiene business, which is the smallest sector, is now really starting to grow after a pretty slow start in places like India and China, where there were some kind of cultural barriers, I guess, one might say, to those types of products. So I come away saying those markets are going to continue to grow at a nice clip, and fluff pulp is the product there to really give those markets what they need. I think what we've done, too, which is kind of interesting.

The EAM business that we don't talk about very much is really well positioned in the feminine hygiene space. And we're now -- we put that together with our Pulp business and really are talking to our major accounts in that space around a true, technically driven product offering, and I think there, too, actually, over time, we're going to improve some of our margins. So I put all that together, and I would say I still believe that's a business where we can achieve our cost of capital over time.

George Staphos -- Bank of America -- Analyst

So John, I'll turn it over. But it sounds like your view is the growth is going to give you some form of a price premium that's larger than what you've seen over time, so that when prices decline again, you won't be underwater. Is that your takeaway?

John D. Williams -- President and Chief Executive Officer

It is. And I think one thing that's an internal issue, George. We've chopped and changed quite a lot at Ashdown, if you think of what we've done. We were making paper at Ashdown. That created some overhead absorption. When we stopped making paper, some of those overheads stayed with us. There's a lot of noise there. So then -- so I think, as I've said -- answered to a previous question, I would say, quarter two of next year, we're going to see that business operating as it should.

We think that's some pretty solid numbers. Other issue in our Pulp business has been -- we're doing a lot of work to a single line Espanola and take costs out of that. Those two bits of work together, I think, will make our pulp profitability look pretty different from where it is at the trough of this cycle.

George Staphos -- Bank of America -- Analyst

Okay, thank you very much.

John D. Williams -- President and Chief Executive Officer

You're welcome.

Operator

Our next question will be from John Tumazos from John Tumazos Very Independent Research.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Thank you very much.

John D. Williams -- President and Chief Executive Officer

John. Hi.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Hi. Congratulations on all the progress. The pulp mix slipped to 34% of the total pulp in 3Q. Is there any particular reason why the higher value would be the most competitive category?

John D. Williams -- President and Chief Executive Officer

You're talking around volume, John?

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Yes, you're just -- your chart that says percent of total.

John D. Williams -- President and Chief Executive Officer

Yes, John. Yes, got it. So I think there, I would say, that was the grade that, when pantry loading really started at the end of quarter 1, that benefited the most because people were buying, thinking, "my God, this is the future. The consumers stuck at home, they're going to buy diapers, they're going to buy adult incontinence products." Huge, massive retail shortages. So the back end of that supply chain reacted accordingly, and we were shipping a lot of fluff pulp.

Now actually, as it transpired, the usage as distinct from the pantry loading really never really shifted, I mean other than wipes, of course. So when you look at that, there was then this continued shipment into quarter two of fluff pulp. And then the customers thought, "I've got too much inventory here at fluff pulp.

I'm also not getting the volume I was expecting from my products because, actually, there was no usage increase from the pantry loading." And therefore, in quarter three, actually orders were pretty quiet. So I think that is a temporary issue. We still have the customers we had. So we're not losing customer share. It's very much, I think, around that inventory correction. That gives you a bit more color.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Yes, thank you. If I could ask another, we've gone five consecutive sequential quarters of improving Personal Care. What do you think is the normal margin after you win the next few customers? Do you think the target is $30 million of quarterly EBIT? Or $40 million of quarterly EBIT? Or is it too soon to say?

John D. Williams -- President and Chief Executive Officer

Can I answer that in percentage terms, if you don't mind? Sir.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Sure.

John D. Williams -- President and Chief Executive Officer

So that is a business that I target at mid- to high teens EBITDA. So that's where I think that business -- my experience in a previous life with that kind of business was certainly in that space, if not slightly higher. The world's changed slightly. But certainly, mid solid teens EBITDA, you should see from that business week in, week out.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

So if the strategic review process takes a little longer, it's to your benefit as the margin steadily improves.

John D. Williams -- President and Chief Executive Officer

Yes. I don't -- that's a great question. Yes. I mean -- I don't think we're sort of trying to gasp over some finishing line here in terms of the margin opportunity in that business. If I talk to the business specifically as distinct from the market, we still have a lot of operating leverage that we can find in our Delaware business, which is really focused on our baby business.

So we're seeing overall equipment efficiencies we could add a number of points to as we settle the place down after the Waco move, and we've rebuilt six machines. The same, I think, is true in a new inco line that we put into our Spanish business and also into our Swedish business. So yes, I think that there's both market growth and operating leverage.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Excuse me for my interest. I've never been through a diaper plant. Are these lines very easy to add, just one more line where there's no single massive bottleneck like a digester and a paper mill?

John D. Williams -- President and Chief Executive Officer

Correct. Yes. Yes. It's a classic...

John Tumazos -- John Tumazos Very Independent Research -- Analyst

[Indecipherable]

John D. Williams -- President and Chief Executive Officer

Yes. It's a classic converting business, John. Now they're large complex pieces of machinery. But yes, you put a line in, and you don't need to kind of reinvent the back end to do it.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Thank you for your patience.

John D. Williams -- President and Chief Executive Officer

No, thank you -- thank you for your interest. Much appreciated.

Operator

Our next question will be from Mark Wilde from Bank of Montreal.

Mark Wilde -- Bank of Montreal -- Analyst

Hi, good morning, Mr. William.

John D. Williams -- President and Chief Executive Officer

Good morning, Sir.

Mark Wilde -- Bank of Montreal -- Analyst

John, I wanted to just come back again to kind of the marketing and market development work over at Kingsport. You mentioned that you're talking with lots of different independent converters. I'm just curious. There are several big foreign players who are building out, converting in the upper Midwest, Indiana, Ohio, elsewhere. What about them as potential partners or customers for you?

And also, what about the idea of just looking at maybe some different pricing structures going forward? I mean, your big risk at Kingsport is always going to be kind of the fluctuations in OCC and purchased energy costs. So could we move away from market prices and potentially move some of this business to kind of a -- more of a fixed margin business?

John D. Williams -- President and Chief Executive Officer

Well, let me answer the first question. So obviously, these are all people I know very well, having competed with them for eight years in Europe. So absolutely, we will have discussions with them. I mean, on your second point, I think for us to be compelling, we have to be open minded both about the business model and kind of how we're going to ship and supply and what's our relationship going to be with end use customers. So we have an open mind on all that, Mark, to be truthful.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. All right. That sounds good. And then the other area I wanted to ask about is just over in the Paper business, whether you can potentially pick up some share with bigger buyers because your two biggest competitors are sounding a little ambivalent about sort of their future in the white paper business. And so I'm just curious as to whether that opens up some opportunities for you in terms of customer dialogue.

John D. Williams -- President and Chief Executive Officer

Well, I believe it does very strongly. We've -- I mean, you know us well enough, I mean, we, I think, have always -- certainly since -- ever since I've been here, I have positioned ourselves very much as people who are committed to this industry. And of course, now I think the good news is that if Ashdown will be the next conversion to containerboard, there is no impact on our fine paper business from doing that, Mark, because obviously, we've already taken that paper machine out. So we can grow into that containerboard space as well as stay a dedicated, focused, uncoated freesheet supplier.

So to your point, I mean, that is a story, and it's also is helpfully the truth that we tell our customers that we are the people who are going to run the most cost-competitive, the most focused and the most product development-orientated fine paper business, and we're going to keep doing it. I think our little move into thermal with West Carrollton, for example, tells you we'll also look for if there are any interesting little verticals that we could perhaps do some stuff with to create a bit of added value, we'll do it. So you make a very good point.

Mark Wilde -- Bank of Montreal -- Analyst

Okay. All right. Sounds good. I just have two number of questions for Daniel, if I can slip them in. One is maintenance was down about $75 million this year off of '19. If Daniel could help us think about where that might be in '21. And then also, what benefit was there in the third quarter from wage subsidies and other government incentives? And then what does that look like as we move to fourth quarter?

John D. Williams -- President and Chief Executive Officer

Daniel, do you want to take that?

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

Yes, I will. So maintenance, we're in the budget process, but we've pushed a little bit of maintenance from 2020 to 2021. So next year starts with probably more mills that will go down. But through our cost saving program, we have -- I mean, working hard to keep that in balance. So we'll be able to share more at our next call in terms of what we expect for maintenance.

But I think it's going to be flattish to this year, but we need to do the work or complete the work before being more precise there. In terms of the cadence wage subsidy, we got, I think, $8 million, $7 million, $8 million in the quarter. It's slowly reducing with the formularies. So expect a smaller number in Q4, and we'll see if it's still available to us early next year. But for the next quarter, $5 million, $6 million is probably a good assumption.

Mark Wilde -- Bank of Montreal -- Analyst

Okay, that's helpful. Thank guys, I'll turn it over.

John D. Williams -- President and Chief Executive Officer

Thanks, Mark.

Operator

Thank you. Our next question will be from Adam Josephson from KeyBanc.

Adam Josephson -- KeyBanc -- Analyst

John, thanks so much for taking my couple of follow-ups. On -- just back to Ashdown for a moment. So are you able to share with us any work you've done on roughly what the cost of conversion would be either on a just absolute basis or a per-ton basis compared to what you're spending at Kingsport? And then relatedly, if Ashdown is going to be kraftliner, obviously, Kingsport is recycled. When you talk to these independents and perhaps others, do they -- have they expressed any preference for recycled versus kraft? I ask simply because, as you know, Europe is -- vast majority recycled.

John D. Williams -- President and Chief Executive Officer

The other way around, yes.

Adam Josephson -- KeyBanc -- Analyst

And then almost -- yes, I'm sorry, go ahead, John.

John D. Williams -- President and Chief Executive Officer

No, the answer to that question is no. They haven't expressed a preference.

Adam Josephson -- KeyBanc -- Analyst

And on the cost -- yes, I'm sorry, go ahead.

John D. Williams -- President and Chief Executive Officer

On the cost, it's a little early, to be honest. We think at least the level of Kingsport may be a tiny bit higher, but we're working on that right now. It's really all around the work we would have to probably do at the back of the mill, Adam, and we're just working that out.

Adam Josephson -- KeyBanc -- Analyst

Right. And then, John, just one last one on these conversations you've had. Has anything taken you by surprise in terms of the response you've gotten or the requests on the part of either the independents or others with whom you might do business either in terms of pricing, service levels, etc?

John D. Williams -- President and Chief Executive Officer

Not really. I think -- so I don't want to be naive here, right? Of course, they're going to welcome us into the market because they're looking to change the dynamic of that marketplace. The proof of the pudding will be us shipping product out the door to these customers. But certainly, I feel that the initial response has been, I guess I would say, as positive as I was expecting.

And one of the reasons, of course, is having run one of these businesses for a number of years in Europe, I'm only too well aware of the frustration of independents who have to put a lot of their supply into integrated containerboard producers, right? It's just -- you're always concerned that you're really not the priority. So -- and I think that message has been coming loud and clear from the people we've been talking to.

Adam Josephson -- KeyBanc -- Analyst

Okay. Thank you, John.

John D. Williams -- President and Chief Executive Officer

You're, welcome.

Operator

Next question will be from George Staphos from Bank of America.

George Staphos -- Bank of America -- Analyst

Hi, guys. Thanks for taking my follow-up. Hey, Daniel, could you just give us a quick reminder on what capex should be for this year and if you have an early read on '21? Just seeing the real strong cash flow in the quarter and certainly in relation to capex, which was relatively lower, just kind of jogged my brain to ask that question. And then I had one last follow-on, at least for me, on container board.

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

So we expect capex this year to end around $160 million, which is in line with what I've shared with you last quarter. We might be a tiny bit lower than that. I mean there's always kind of a risk of some capex to move out and go into next year. As for capex for next year, again, as I said on the maintenance discussion, we're in the budget process. So it's very early to share that. But it's going to be way more because of the Ashdown -- sorry, the Kingsport conversion, but we'll have a precise number in our next call.

George Staphos -- Bank of America -- Analyst

Okay. But aside from Kingsport, which obviously is an important place to put the capital, is there any area where you need to do any kind of catch-up spending? Or no, it would be up more or less just because of projects?

John D. Williams -- President and Chief Executive Officer

Daniel, may I answer that one, if you wouldn't mind?

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

Go ahead.

John D. Williams -- President and Chief Executive Officer

George, there's one area. As you may recall, we had a very aggressive plan, I would say, on our Pulp business, some of which was capex-driven, to reduce costs and make ourselves more efficient. In the light of COVID, we chose not to do that really because let's all batten down the hatches, as we said at the time. So in our budget process, we're certainly going to have a good, long discussion around should we reawaken that program. And we have the potential for one capex program in our EAM business which we're just looking at, which would be a kind of one-off. But other than that, it's pretty much kind of business as usual.

George Staphos -- Bank of America -- Analyst

Okay. Understood. And my question on containerboard, and I recognize this is kind of a tough place to talk about this question. But given the fact that you've said you've gotten tremendous interest, that's my word, not yours, but certainly very good interest from your potential customers and their customers for the mill and what you expect to be pretty high-quality sheet and the fact you're going to have an open business of an open open until to how you market the product, answering Mark's question from earlier, do you anticipate the product coming out of Kingsport will be selling more or less on top of whatever the market index is for similar products? Should it be at a premium? Or maybe not a premium because you'll be at lower cost? How would you have us think about that, recognizing it's difficult to talk about that in a public forum? Thanks and good luck with the quarter.

John D. Williams -- President and Chief Executive Officer

The answer is I just can't answer the question, George, but thank you for asking it.

George Staphos -- Bank of America -- Analyst

Okay, John. I appreciate your patience with it. Thanks.

John D. Williams -- President and Chief Executive Officer

All right, take care.

Operator

And I'm showing no further questions in the queue at this time.

Nicholas Estrela -- Director, Investor Relations

Okay. Thank you, Carrie. Well, we will release our fourth quarter and full year 2020 results on Thursday, February 11, 2021. Thank you for listening, and have a great day. [Operator Closing Remarks]

Duration: 60 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

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

Adam Josephson -- KeyBanc -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

George Staphos -- Bank of America -- Analyst

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

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