The conversion will reduce Domtar's paper output by 330,000 tonnes or some 10 per cent of total capacity.
About 142 of the 940 jobs at the Ashdown mill in Arkansas will be terminated over the next two years as a result of the conversion.
Domtar (TSX:UFS) expects to take a mainly non-cash pre-tax earnings charge of US$117 million, including US$3 million for severance, employee benefits and training. It also said the conversion could reduce the carrying value of the mill.
About US$40 million of the planned investment will be spent next year and US$120 million in 2016.
The Montreal-based pulp company said it will convert one of the mill's three remaining paper machines in the third quarter of 2016, boosting overall annual fluff output to nearly one million tonnes.
The Ashdown mill will produce up to 516,000 tonnes of fluff pulp per year, exceeding the 448,000 tonnes of capacity at its mill in Plymouth, N.C., that was converted in 2010.
Chief executive John Williams said the investment is an important step in Domtar's efforts to generate US$300 million to US$500 million of EBITDA from growth businesses by 2017.
"We are expanding our presence in a growing business that will allow us to support our top-tier supplier position with some of the world's largest producers of absorbent hygiene products," he said in a news release.
The added fluff production is expected to generate US$70 million to US$80 million from international customers. About 25 per cent of the current fluff production at Plymouth is used by Domtar to make its own incontinence products with the remaining 330,000 tonnes sold to global customers.
The company is also investing an unspecified amount as part of its normal capital spending plans for a pulp bale line that will increase its flexibility to manufacture papergrade softwood pulp if market conditions warrant.
Analyst Leon Aghazarian of National Bank Financial said the conversion isn't surprising and makes sense given the three to four per cent annual decline in paper demand.
"Today's announcement represents a logical evolution of Domtar's production capacity in the context of market dynamics in paper, pulp and personal care," he wrote in a report.
At the same time, fluff pulp demand is growing. Global production was 5.4 million tons in 2013 and is expected to increase 3.7 per cent annually over the next five years. Fluff prices are at multi-year highs of about US$1,050 a tonne.
Despite the conversion, Aghazarian expects Domtar will remain the North American market leader for uncoated freesheet, commonly used in office paper. It currently has a market share above 30 per cent.
Since entering the adult incontinence business in 2011 with the acquisition of Attends HealthCare, Domtar has added four companies including the European Attends business and U.S.-based EAM Corp., which develops and supplies the core material used in feminine hygiene products, baby diapers and puppy pads.
The global incontinence business is forecasted to grow by five to seven per cent annually from its base of nearly US$9 billion. In particular, demand for the adult products is growing in pockets of the U.S. southeast which have large populations of seniors.
On the Toronto Stock Exchange, Domtar shares were down 51 cents at $47.21 late Wednesday afternoon.
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