Domtar Corporation
Q4 2019 Earnings Call Transcript

Published: 7 Feb 2020

[Operator:]

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Quarter Fourth 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this call is being recorded.I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead.

[Nicholas Estrela:]

Good morning and welcome to our fourth quarter and full year 2019 earnings call. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. They will be supported by Michael Garcia from our Pulp and Paper division; and Michael Fagan from the Personal Care division. John and Daniel will begin with prepared remarks, after which, they will take questions. During the call, references will be made to supporting slides and you can find this presentation in the Investors section of the website.As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements, subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings to the Securities Commissions for a listing of those. Finally, certain non-U.S. GAAP financial measures will be presented and discussed and you can find 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 Williams:]

Thank you, Nik. And good morning, everyone. My opening remarks today will be on the full 2019 year results and I'll comment on the fourth quarter after Daniel's financial review. For the year as a whole, our business generated good cash flow and we continue to execute on our strategy and return cash to shareholders. Our teams are agile and adjusting to market changes and execute it well on things under our control, particularly in extracting costs and driving efficiencies. In terms of financial performance, we delivered EBITDA before items of $563 million and $442 million of operating cash flow.Our solid financial position allowed us to return well over $300 million to our shareholders for the year through dividends and share buybacks, while continuing to invest strategically in our assets. Profitability in our uncoated free sheet paper business improved year-over-year despite challenging market conditions. Paper prices were higher and our cost performance was strong resulting in margin expansion. We were proactive in responding to market conditions by matching our production to our customers demand. We took 300,000 tons of market related downtime for the year and announced the permanent closure of approximately 200,000 short tons or 7% of our capacity.Our ability to adjust quickly to changing market conditions reflects the agility of our team, as well as the optionality of our asset base. We've shown that we can find creative uses for our paper asset as demand decline, and we've identified repurposing optionality for approximately half of our remaining paper capacity.In Pulp, we exit a very challenging 2019 with market prices appearing to reach the bottom. Despite low prices at this time in the cycle, our growth plan in pulp remained on track. We had another year of volume growth in our fluff business with an increase of 5%. We ramped up our investments on high return projects that will optimize and improve efficiencies and further drive performance across our pulp assets. We're focused on improving our competitiveness with improved scale, smart investments and continuous improvement projects. We're also improving customer and product mix as tissue, hygiene and specialty markets continue to show strong global demand underlying the importance of winning with key customers in key markets.Our market pulp business has grown significantly in recent years becoming a vital part of our portfolio as we positioned Domtar for the future in growing markets. And we'll have more scale this year with expected volume growth from strategic investments. The restart of Espanola an additional pulp production from Ashdown following the paper machine closure.In personal care, the past year was focused on improving our margins. We executed our restructuring initiatives as planned and our savings came in ahead of schedule. We also simplified and stabilized the business by focusing on strategic customers and SKU rationalization to improve the profitability of our portfolio. As a result, we exited the year to 12% EBITDA margin for 400 basis point improvements over the prior year.Our best performance since 2017. While executing our margin improvement plan, we achieve some important wins in our infant diaper business that will scale up this year. 2020 will be focused on the development of strategic customer relationships and investing to drive future growth and profitability.Turning to capital allocation. We will continue to take a balanced approach with a majority of future free cash flows to be returned to shareholders through dividends and buybacks. In 2019, we announced a dividend increase and raised our buyback program by $300 million. These initiatives reflect our confidence in our cash flow generation and reinforce our commitment to return cash to shareholders on a sustainable basis. Our financial position gives us the flexibility to reward shareholders and fund long-term growth opportunities and we remain committed to both.We're investing in projects that strengthen our best-performing Mills, reduce our cost structure and support our innovation capabilities. We have a solid foundation on which to continue to build and expand a clear strategic plan, a strong financial position and attractive investment opportunities.With that let me turn the call over to Daniel for the financial review before making further comments on our fourth quarter performance and 2020 outlook. Daniel?

[Daniel Buron:]

Thank you, John and good morning, everyone. Let's start by going over the financial highlights of the quarter on slide 5. We reported this morning a net loss of $0.59 per share for the fourth quarter compared to net earnings of $0.32 per share for the third quarter of 2019. Adjusting before items our earnings were $0.03 per share in the fourth quarter compared to earnings of $0.89 per share for the prior quarter.EBITDA before items amounted to $78 million compared to $147 million in the third quarter. Turning to the sequential evaluation and earnings on slide 6. Consolidated sales were $39 million lower than the third quarter due to lower sales in our pulp and paper businesses, partially offset by higher sales in our personal care business.Depreciation and amortization was $2 million higher when compared to the third quarter and SG&A was $18 million higher than the third quarter, largely due to the higher reversal of incentive accrual and mark-to-market of stock based compensation that occurred in the third quarter. As a point of reference, quarterly SG&A expense should be between $115 million and $120 million. In the fourth quarter, we recorded an income tax benefit of $26 million due to the loss incurred in the quarter, credits recorded related to prior year on certain tax position, additional tax credit related to energy projects and benefits related to the final mix of earnings in the year.Now returning to the cash flow statement on slide 7. Cash flows from operating activities amounted to $160 million while capital expenditure amount to $98 million. This resulted in a free cash flow of $62 million in the quarter. For the full year, cash flow from operating activities amounted to $442 million and capital expenditures amount to $255 million resulting in a free cash flow of $187 million for the year. During the quarter, we paid $27 million in dividend and repurchased approximately 2.3 million shares for a total cash consideration of $80 million.For the full year, we've returned a total of $329 million to our shareholder through a combination of dividend and stock buybacks. Under our stock repurchase program, we repurchased approximately 6.2 million shares at an average price of $35.29 in 2019. As of December 31st, we had $403 million remaining under our buyback program and add 56.9 million shares outstanding.Turning to the quarterly waterfall on slide 8. When compared to the third quarter EBITDA before item decreased by $69 million due to lower average selling prices for $30 million, higher SG&A cuts for $18 million, lower productivity for $12 million; higher maintenance for $4 million, higher freight for $3 million and higher raw material cost for $3 million. These were partially offset by higher volume and mix of $1 million.Now to review our business segment starting on slide 9. In the Pulp and Paper segment, sales were 5% lower when compared to the third quarter and 12% lower when compared to the same period last year. EBITDA before item was $64 million compared to $126 million in the third quarter of 2019.Our Paper business on slide 10. Sales were 5% lower versus last quarter and were 8% lower versus the same quarter last year, while estimated EBITDA before item was $95 million. Manufactured paper shipment were 2% lower when compared to the third quarter and 9% lower versus the same period last year. Average transaction prices for all our paper grades were $30 per ton lower than the last quarter. We've entered 2020 with paper price slightly below the fourth quarter average.Let's turn to the Pulp business on slide 11. Sales were 5% lower versus the last quarter and were 22% lower versus the same period last year. Estimated EBITDA before item was negative $31 million. Pulp shipments were 3% lower versus the third quarter and up 2% when compared to the same period last year. Average pulp prices decreased $24 per metric ton versus the third quarter. We've entered 2020 with pulp price down by about $15 versus the fourth quarter average largely due to pricing lag provided in certain customer agreements.Our paper inventory decrease by 36,000 ton when compared to last quarter, while pulp inventory decreased by 15,000 metric tons.Our personal care business on slide 13. Sales were 7% lower when compared to last quarter and were 5% lower versus -- sorry 7% higher when compared to last quarter and 5% lower versus the same period last year. EBITDA before item was $28 million, $3 million higher than the third quarter.Finally, consistent with our practice at this time of the year, you'll find on slide 14 to 16 our estimate for some key financial items for the coming year. With respect to maintenance, our total maintenance costs for the year are expected to decrease by $17 million. Capital expense spending is expected to be between $230 million and $260 million while depreciation and amortization is expected to be between $290 million and $300 million. So this concludes my financial review.With that I'll turn the call back to John. John?

[John Williams:]

Thank you, Daniel. Let's take a closer look at the fourth quarter. We reported EBITDA before items of $78 million on sales of $1.2 billion. Consistent with the business update we issued on January 24th. Our paper shipments remain challenged during the quarter with seasonally slower demand and some further destocking in certain channels.As a result, we took further market related downtime to better balance our supply with our customer demand and to reduce inventory. Operationally, the fourth quarter included a number of major outages at several locations. We also initiated the second major planned boiler outages at Espanola. The generator bank work at Espanola is now complete and the recovery boiler went through its pre startup pressure testing in the fourth quarter. We did anticipate a challenging start up after the prolonged outage and operations of stabilized and our attention will now focus on consistently producing quality NBSK.Although maintenance costs for the quarter were in line with our guidance, the elevated level of outages led to the unfavorable productivity impact. In addition, energy was higher in quarter four and we expect for costs to remain elevated in the current quarter, which is typically a seasonally higher cost period. Looking ahead for our paper business, we expect our supply to be more balanced with our customer demand due to recent capacity closures and lower inputs. Our order books also picked up in January and we expect our paper operations to run at a higher operating rate in quarter one.In the pulp business, average prices were down but market fundamentals for softwood are improving. We see good demand across several grades and channels, while global inventory levels continue to decline down to 34 days in December from 37 days in September. And a record high 45 days in June. Based on what we currently see, we expect market fundamentals for softwood and fluff pulp to trend positively in the medium to long term, supported by demand growth and limited capacity expansion.In Personal Care, we had a strong finish to the year. EBITDA in quarter four increased when compared to last year driven by a strong operating performance in Europe, coupled with solid progress in our asset repositioning and startup activities in North America. EBITDA margin also continue to improve ending the year at 12%. The highest levels since quarter four 2017. We had a solid sales quarter despite continuing to make SKU and customer decisions, which will further enhance portfolio profitability.Our strong sales performance is a reflection of good momentum within our based business and solid demand notably in adult incontinence. We also began shipments for a new retail infant diaper customer late in the quarter, which we expect to continue to ramp up through the first quarter of 2020.In Europe, we achieved the strongest margin performance of the year mostly due to good sales momentum and a favorable product mix. We expect to build on this momentum in 2020. Our near term focus continues to be margin improvement and building value for our customers. We're developing and scaling strategic partnerships to deliver on our commitment to grow the profitability of the business.On capital allocation, we return $107 million to shareholders consisting of $80 million of share repurchases and $27 million of dividends. Our balance sheets in good shape which will allow for small investments and our best assets, while maintaining the flexibility to carry out our growth strategy and returning capital to shareholders. These initiatives will help build on our commitment to deliver sustainable growth and long-term value. Looking ahead to 2020, our paper volumes are expected to trend with market demand, while pulp volumes will increase due to higher pulp productivity of the Espanola and Ashdown Mills. Both the Pulp and Paper businesses will benefit from lower planned maintenance costs.Our personal care business is expected to benefit from margin improvement and higher sales following new customer wins. Finally, we anticipate overall costs including freight, labor and raw materials to marginally increase.So thank you for your time and support. And I'll turn the call back to Nick for questions.

[Nicholas Estrela:]

Thank you, John. So both John and Daniel will be available for questions. I'd ask our participants to ask a few questions at a time and return to the queue for follow-ups as we want to get as many people as possible. Cassidy, you can open up the line for questions.

[Operator:]

[Operator Instructions]Our first question comes from Anthony Pettinari of Citi.

[AnthonyPettinari:]

Hi. Good morning. John, you talked about improving market conditions and positive kind of long-term fundamentals in softwood. I guess in the more near term I was wondering if you could talk about kind of current market conditions specifically with regards to China and the Coronavirus. And we seem to see some signs of firmness in December and January, just kind of want to understand what's going on in the market right now and how that's impacting your business?

[JohnWilliams:]

Yes. Certainly. So let's talk the Coronavirus briefly. As you know, people start to go back to work on February the 9th which is kind of a one-week extension. I think then we'll begin to understand more about what this really means. Our view is it doesn't mean anything much in terms of overall underlying demand for the products into which we sell pulp i.e. if you think about it tissue, baby diapers, adult continents. I think providing people can get to the store and logistics still work. I don't see any slowdown there. Where we have seen some issues is product can get to port, but it may not actually at this point get to if you like our customer.So their working inventory down, if they are in production, of course, they won't be in production largely till after the 9th. I think we'll know more then but I think the fundamentals are still pretty good. We see growth as I said in end use products. We're pretty confident in our own customer mix. We've got up some more tons to sell this year, but it's not a dramatic amount of tons. So if I put all that together, we've seen, obviously, we've announced a price increase. We feel pretty good about that. So, overall, I think good kind of mid term, long term momentum as we come off this pricing trough that we found ourselves in.

[AnthonyPettinari:]

Okay. That's helpful. And then in your remarks I think you talked about being able to repurpose about half of your paper capacity. And as we think about 2020 kind of any update in terms of how you're thinking about conversion opportunities. And maybe relative attractiveness potential pulp versus container board conversions.

[JohnWilliams:]

Yes. Sure. I'm happy to answer that question. So as we've always said we're driven by the market in which we operate i.e. uncoated free sheets. So anything we think about repurposing has to be seen in the context of how that market is performing and obviously last year we took a lot of down time. We took a closure. We feel this year actually our supply demand balance will be much better. And certainly and if I look at January, I think that assumption is actually correct. So having said that though when we look at conversions, we still see the optionality we had both in pulp and in container board and I think as we get closer to feeling we have that need, will offer a bit more clarity but those choices we still think we have.

[Operator:]

Our next question comes from George Staphos of Bank of America.

[GeorgeStaphos:]

HI. Everyone. Good morning. Thanks for the detail. How is it going? I wanted to piggyback a bit on the commentary you had on uncoated free sheet demand and what changes you're seeing in customer behavior. You mentioned I think to Anthony's question, you've seen a little bit of a pickup in January. Could you put a little bit more color on that to extent possible? Then I had couple of follow-ons.

[JohnWilliams:]

Sure. So if you recall, our premise has been that an inventory bubble was built around the dramatic closure from GP. And that inventory bubble caused a number of people to think not, really, am I going to get paper, no, am I going to get paper and attractive price. Can I just get paper? So a lot of product came in. That product has taken a long term, long time pardon me to find a home. We think that's now largely over. And so we're back into a more sort of supply demand balance perhaps than we have been. I think when you look at how imports have reduced.Also we've seen a number of customers who at that moment in time felt I have to go elsewhere because I'm not sure the domestic supply base is going to give me product. We've actually seen a number of large accounts now move. Some to us some to others in terms of wanting to get domestic supply just because of the supply chain challenges of buying imports. So I think we're in a much more settled place, George, in terms of supply demand than we have been.

[GeorgeStaphos:]

John. I know it wouldn't really be a factor in the US market per se but do you think that to the extent that pulp globally crashed last year, which meant that some of your non integrated producers of paper may have also seen some customers destocking. And those producers destocking because they were getting more favorable pricing. You think that was an effect at all in the market or not really at all.

[JohnWilliams:]

I think there was a bit of an impact from the non integrated pulp buyer, who could produce a bit of paper thinking well now actually there's room for me to make a little bit of margin. So I'll open up and as I think pulp starts to ramp back up again and get its momentum back in pricing that becomes a much less attractive thing to do.

[GeorgeStaphos:]

Understood. My other question I'll go back into queue. Thank you as always for outlining the maintenance schedule for this year versus last year. Can you comment, obviously some of it had to do with just the project going on last year, but what should we take away in terms of the reduction in maintenance spending this year. And what are the implications for 2021. I recognize you're not just going to give us guidance on that, but are this level good to carry forward or could next year be up again because this year was down.

[JohnWilliams:]

Well. So, yes, 2021 is hard to answer. I would say as a current working premise this level is about right. Actually this year I think we have nine major maintenance shuts last year we had eight. So we just had more work to do last year when we got various discoveries. But perhaps we weren't expecting so if our sense of what we're going to find is correct this is a pretty good number to take forward I would say, George. A little bit of indications in there of course as there always is but it's a reasonable number.

[Operator:]

Our next question comes from Adam Josephson of KeyBanc Capital Markets.

[AdamJosephson:]

Good morning, everyone. Thanks for taking my questions. I appreciate it. Good morning, John. John or Daniel, if Daniel, you mentioned exit poll prices were $15 below the fourth-quarter average if I heard you correctly. And I think you attributed that to some lags in certain customer agreements. Can you just elaborate on what exactly you're talking about there? And how that jives with your commentary about softwood fundamentals improving?

[JohnWilliams:]

Adam, let me take. Daniel and I are actually in separate places today due to the fact that I couldn't land anywhere yesterday. So let me take it. We have --essentially we have certain customer contracts, I guess, I would say where if there's a bell curve of pricing in real time, the way those contracts are constructed is that bell curve is kind of delayed. So the upward movement of pricing is delayed to level things off and the downward movement of price is delayed at kind of tail end. So what you've seen is reset in a couple of those contracts just based on contractual agreements, which said you didn't see that decline in the fourth quarter, but you've seen it in the --at the beginning of the first quarter. So that's really what's driven this view of how our pulp prices shifted slightly differently to what you might imagine if you just took the public data.

[AdamJosephson:]

And was that softwood or fluff, John, just to be clear or both?

[JohnWilliams:]

Bit of both.

[AdamJosephson:]

Bit of both, okay. On the free sheet market, John, for 2020, obviously, the market was down and at normal amount last year. So you have easing comps and you have a presidential election for whatever that's worth. Historically, there's been solid boost to demand in yours in which that has been the case. So do you expect the market decline of less than the long-term 3% to 5% or not necessarily.

[JohnWilliams:]

We're not planning for that. We're planning for that 3% to 5% but of course if everything looks like the Iowa Caucus; it's going to be very different.

[AdamJosephson:]

Understood. Just in terms of the buybacks and the timing of them, you had elevated inventories really throughout the second half of the year. And obviously that's what led to the pre announcement. So why buyback so much stock during that period when you're having these inventory difficulties rather than just waiting to get those cleared out and then say, okay, we got this figured out now we'll go into the market and buyback some stock.

[JohnWilliams:]

Well, Adam, I mean I think there's just no perfect time on the timing. I think if you look at the price we've paid for our stock on average and the price we were paying, we still felt it was a very compelling way to return money to shareholders. So I don't feel that we got a missed a trick to your point in that case.

[AdamJosephson:]

Right. Okay. And just last one, John, you talked about how, I think half of your remaining paper machines could be converted. And you've talked about conversions quite a bit the US box market was flat last year, was a significant deceleration and growth from what we've seen in years past. And we're not really saying the e-commerce impact anymore. And the economy slowing. Do you have a particular view as to what box demand will actually grow by if you think it's actually a growth market for the foreseeable future? Just in light of your discussion about potential conversions.

[JohnWilliams:]

No. Certainly. I mean we think sort of industrial production is a pretty good benchmark. So not GDP but industrial production. So as that moves around, I mean my experience when I ran a European business for eight years in that space GDP could do a number of things but really industrial production was what was telling us as to whether or not we were going to see growth. Obviously, the difference these days has been e-commerce but to my mind that that's a better proxy.

[Operator:]

Our next question comes from Brian Maguire of Goldman Sachs.

[BrianMaguire:]

Good morning, guys. First question just want to tie together a couple of ones that have already been asked, but maybe from a little bit of a different perspective that the paper market as many have mentioned very week, it took a lot of economic downtime I think 300,000 tons in 2019 with the inventories clearing maybe that gets a little bit better. The Riverdale conversion should probably take a little capacity out but, it still seems like as you guys it's your premise that more capacity is going to need to come out of that market. You still talked about container board conversions as being an attractive option. I mean you spent over $200 million on buybacks in 2019, which I guess would have been enough to kind of fund at least one conversion there or roughly with the bottom end of the range for doing that so.I guess should we read something into the decision to go ahead with an aggressive buyback as opposed to go ahead with a conversion at this time. And if the need arose to do a conversion at some point in 2020 given paper demand looks a little bit soft then you might have to take some capacity out. How would you kind of be able to fund that? The CapEx will still be a bit elevated in your plan for 2020 obviously; EBITDA and cash flows aren't in a great spot given what's going on in the pulp and paper markets. So just kind of a question around what should we read into on conversion timing. And how would you kind of fund that if you had to do it today?

[JohnWilliams:]

Okay. Brian, well, it was a long question. Let me try to answer it. So I think the way you have to see this is we are driven by conversions based on how we see uncoded free sheet demand and how we see what that means to us in terms of asset utilization. So as we progress we're always very careful to look at that. We'll take our downtime then we'll take our shot. You have to remind yourself that the downtime we took in quarter four, some of that was obviously motivated by the fact that we needed to reduce our inventory because we were just running with too much stock based on how positive we were feeling about the marketplace earlier in the year.So I think that's important. So conversion doesn't kind of stand alone as a decision. It only stands alone in the context of uncoated free sheet demand. And if you look at our choices, we have some choices we think in the kind of midterm where we could actually do something sensible around pulp, which would not preclude us from doing container board in time. So we think about that pretty carefully in terms of marketplaces we want to be in and where we have a presence. And quite frankly, there are some other choices we may have for some of our mills which would mean we keep them full, but we keep them full doing something slightly different in terms of paper grades and lightweight papers.So I think if you put all that together, it's really the demand an uncoated free sheet that drives us to conversion and the attractiveness of that market. And of course timing these things is always a challenge. We open a lot of fluff capacity Ashdown at a time I think when most of us felt pulp was going to be challenged. And in fact for two years fluff pulp pricing was very strong. So this is a third year investment when we make it. I think the reason we're taking our time is one uncoated free sheet is still a great place to be and although we've taken that shot in Ashdown last year, we still feel pretty confident that we have optionality in this network.S it's a long-winded answer for which my apologies, but I think you-- one needs to think about the optionality we have in this network. It's still very strong.

[BrianMaguire:]

Okay. Appreciate the detailed answer there. I guess looking to personal care, the margin improved a lot. I think you are guide into better margin in 2020 and sounds like sales will be up too with some new business wins. I just wanted; I think you talked about eventually get into sort of a mid-teens margin. Is that-- do you think there's a line of sight to that at some point in 2020, is it like an exit rate maybe the low end of that mid-teens level and maybe just expand a little bit more on the diaper business wins and what I could contribute to volume growth in 2020.

[JohnWilliams:]

Sure. So obviously we have a 2020 plan. We had a very strong January in that business. So I feel we're on the road to sort of sustained margins at the kind of level we saw in quarter four. Whether we exit the year a couple of points above that. So I can claim I'm in the mid-teens. I'm not sure yet. I think we need to get further down the track. I think we've done two very interesting things in the personal care business. So of course we shut the Waco facility. We have generated that -- we're generating the cost savings we expected. And we've also really focused the customer profile into major accounts. So what that's allowed us to do is actually simplify our business. So we've actually got rid of hundreds of SKUs this kind of ugly tail that we had which was causing so much complexity.What that means of course is we put five diaper lines out of Waco back into our Delaware facility. We now have a really focused infant business in the US. And we think the operating efficiencies we're going to get from that as we fully ramp up, which we have yet to do are going to be quite dramatic. We saw some of them come through in January, but I think we've got more to get. So I'm feeling very positive actually about the momentum behind that business. So I mean I hope that answers your question. But I think that's the way we see it.

[Operator:]

Our next question comes from Mark Wilde at BMO Capital Markets.

[MarkWilde:]

Good morning, John. Good morning, Daniel. John, I wondered if we could just jump back to Brian's kind of question around personal care. Is there any way that you can kind of help us in thinking about sort of cadencing and scale of improvement that you would expect in personal here as we move through the year.

[JohnWilliams:]

Let me see how I can help. So I can give you some top-line help. So our view is you're going to see solid sales growth throughout the year. We have some business clicking in probably now third quarter, which I think we'll see the sales jump. You could take rough rule of thumb that margin somewhere between 10 and 12 on an annualized basis perhaps building towards the year-end or maybe a little further. I think that's the way I'd see it, Mark. I can't give you much more, obviously we're not people to give guidance, but I think if you put all that together you'd say strong top-line growth EBITDA following at the kind of levels we've seen and then that's a reasonable rule of thumb for that business in 2020.

[MarkWilde:]

And as you look at that business, John, over the next two or three years. I mean is it --is a mid-teens EBITDA margin a good margin target in that business or could you do better over time?

[JohnWilliams:]

Well, that's a great question. So if you look at the major competitor, we're showing margins very similar. In fact, quarter four is slightly ahead of their annualized margin. If I think I've got my numbers right probably by a point. I think mid-teens are a good place to get to. Certainly, if we were a branded house we'd be looking for margins that were slightly higher than that, but I think, Mark, that's going to be a scale question actually more than anything else. But certainly on a business that has got a runway in sales terms over time to $1.3 billion to $1.5 billion with the asset base we have in place, which are numbers I know we've given you before.And we can get the economies of scale, we could get a bit more ambitious but for now I just want to get to that point.

[MarkWilde:]

Yes. All right. Well, I think we'd all be happy to see that point.

[JohnWilliams:]

Me too.

[MarkWilde:]

And just shift a gears a little bit, can you just update us on what the trade situation is right now with the kind of white paper imports?

[JohnWilliams:]

Yes. Sure. So we've got-- there's a current case which is Portugal, Brazil, China, Indonesia, Australia on sheeted products. That's the circumvention case on sheeter roles where people, so those are where the duties currently sit then there's some people who we believe have been trying to circumvent that. That's the same five countries except for Portugal and the Commerce Department accepted that filing, questionnaires have been sent to producers and importers. So we're expecting something back from commerce on that and then of course, there's something that probably turned up in the press I think recently with the trade association leading a project on sort of filling countries. So this would be sort of Thailand, Finland, Israel, Germany Colombia, South Korea, Argentina which in all in is probably about 200,000 to 230,000 tons so but that's just very early stages. Does that give you enough color on that?

[MarkWilde:]

Yes. I mean are there any kind of key resolution points coming at us over the next six months?

[JohnWilliams:]

Well, maybe on the circumvention case from the Department of Commerce where something should emerge within that kind of timeframe.

[Operator:]

Our next question comes from Mark Connelly of Stephens Inc.

[MarkConnelly:]

Two things. First can you let us know how satisfied you are with your inventory levels near term in both white and pulp? You've obviously made a lot of progress. And the second question was about your comment about supporting innovation. Is there anything you can share with us in terms of new products or new approaches to markets?

[JohnWilliams:]

Certainly, Mark. So I think on inventory, it would be foolish to say as the CEO you're ever happy. And if I look at the inventory turns we were capable of a while back, we're still not at that level of inventory term that I would like to get to. I think we're in a good place, but I think we could be in a better place. I don't think it's a dramatic number but I would always like to make certain we're running the network as tightly as we can. So are there further opportunities? They're probably peripheral but we'll have to see. I think that's always something all wants to do to kind of tighten that working capital wherever one can.On the innovation side, as you know a couple of things. So we have sort of organized a biomaterials business. We think there are some interesting opportunities there. On the paper side, we're always interested in the whole atmosphere around plastics as a potential negative. So we're doing a lot of R&D work on can we generate paper grades that substitute for plastic. Whether that's a kind of stretchable paper, the whole number of things. We've really upped our game there in terms of R&D and in terms of testing product. That's one of the things actually our network allows us to do particularly out of Nekoosa and Port Huron and Espanola. So it's not a lot of tons but we think there's potential over time to build some meaningful tonnage.

[Operator:]

Our next question comes from Steve Chercover of D.A. Davidson.

[SteveChercover:]

Thanks and good morning. To help calibrate Q1 results, I was hoping you could tell us how fibre cost in the US South might differ year-over-year. Obviously, last year's I think the wettest on record.

[JohnWilliams:]

Yes. We're not expecting massive inflation in the first quarter on fiber costs. One of the reasons being, Steve, is actually our inventories, So our chip piles are in better shape than they were this time last year. We're pretty secure. I mean I say that but it was like Armageddon as you're probably aware in the southern US yesterday. So we've had no damage but the place is soaking wet, which is obviously what drives the cost. Winter up in around our Canadian Mills hasn't been an issue. Kamloops, the lumber industry sort of firing back again and the local governments helping to make sure that our fiber costs don't go mad on us just based on what's going on up there. So we're not expecting much inflation in that space.

[SteveChercover:]

Okay. Thanks. And then switching to fluff pulp. Any idea why it's been so challenge in terms both price and volumes? Since presumably it has better growth prospects than commodity market pulp.

[JohnWilliams:]

I'm not sure I can answer that question. I mean I can only speak for ourselves. I mean the pricing piece has been, I think, it's been partly driven of course that you're always comparing fluff pulp to southern softwood pricing and actually the Delta between fluff pulp and southern softwood is still about a $100 and $110 a ton which historically is a reasonable Delta, but I think it's tailed down as southern softwood is tailed down and because a lot of people have swing capacity, they've looked at that southern softwoods and said, look, I tell you what, I'm better off selling fluff pulp even if I'm selling that fluff pulp a little bit of a discount or sort of the current price. And as that happened, fluff has slid perhaps further than you would expect. Does that give you a bit of color on that?

[SteveChercover:]

Yes. Thank you. And then finally with respect to conversions, I'm just wondering when you look at the end markets and so far you've really only done it in the fluff pulp. Does the valuation multiple plays into your thought process? So if for instance the end market was deemed by Wall Street to be even less compelling than free sheet would that play into your conversion analysis --?

[JohnWilliams:]

Thinking. I mean the answer that yes but so I would say it's one of the things you're obviously going to consider. All the EBIT dollars other value differently than if you're in XYZ market. I think to us but one starts off with is do we have a place to be competitive? Do we have a story to tell where the customer can see the value that we can create both for them and for ourselves? But undoubtedly part of that consideration of course as well is that seen as a fully what you will higher value category than others.

[Operator:]

Our next question comes from George Staphos of Bank of America.

[GeorgeStaphos:]

Hi. Thanks for taking the follow on. I just want to come back to a comment you made, John, about uncoated free sheet. And not that I'm surprised, but you said it's still, I think a great place to be or your positive on uncoated free sheet. Is it a positive market to be in? And if I quoted you correctly in the first place because just of the fundamentals themselves, obviously recognizing what's been a challenging demand environment or is it a great place to be; a good place to be because of the optionality. What frames that? I know the answer but all the above but if you could give us a bit more color and why you think. It would be great.

[JohnWilliams:]

I'll try not to be that obvious in my response, George, I promise. So I think two things. Patently, with supply demand in good shape, this is a profitable enterprise right. This is an attractive place to be in terms of the EBITDA you can generate when you get those things right. We have a strong position in this market as the market leader. I think that we've been able because of that to differentiate our offering versus some of our competition. So we're feeling good about the value proposition that we're offering our customer base. And to your point, I think, because of our asset base which I will consider specific to us, we have some very interesting choices we can make in a world of high -- in a world of capital intensity to make certain that we can make good money off those assets pretty much in perpetuity.So I if I put those two things together, I said to myself, yes, of course the challenge of managing a top line that's declining in paper. But a growth position in pulp and a growth position in personal care. So put all that together, I feel pretty good about that.

[GeorgeStaphos:]

Okay. Thanks for that John. And I guess the second question I had is maybe a little bit longer term, bigger picture. If I look at Domtar's financial performance over the last number of years. After financial crisis, after black liquor, your free cash flow has been in a range basically of a call it $150 million to $350 million before dividends. The returns have been relatively stable but not growing. Your stock price has been relatively stable and so if somebody was looking at that without looking at who the company was on the cover of the annual report. If, in fact, anyone looks at physical annual reports anymore. They wouldn't necessarily think that is an equity return, but it's really more of a bond like return. How do you think that if you agree with that premise might impact your capital allocation on a going-forward base?You said you'd be balanced; you want to keep the balance in good shape. You want to invest in growth, but there really hasn't been a lot of growth that we can see from these numbers. What do you think it means in terms of the capital allocation for Domtar for a longer term? The pluses and minuses of being in the public market et cetera. How do you all think about that on a going forward basis? Thank you.

[JohnWilliams:]

Right. So I think what you have to ask yourself is kind of what the investor proposition right. Why am I in this business as an investor? And I guess the way I see this says, you're getting a great yield; you'll continue to get a great yield therefore from a capital allocation standpoint what we have to do I think managerially is not go chasing the rainbows trying to necessarily outrun the top-line, the decline in the paper business. So we have to be very thoughtful about how we time whatever it is we do to give more life to this asset base. And therefore keep earning money from the asset base that we have.So to my mind, I think it's about a level of caution to make certain that you're always sitting there thinking, I'm going to have a conservative balance sheet. I'm going to understand that dividend is a priority. I'm going to understand that I'm going to keep my promise in terms of capital allocation to make certain that I don't do anything foolish, if you like, in terms of betting the store. Does that help?

[Operator:]

Our next question comes from Brian Maguire of Goldman Sachs.

[BrianMaguire:]

One on the CapEx. It came in a little high in fourth quarter, just wondering if any reasons for that or anything any discrete projects in that. And then within the guidance for 2020 how much would be growth CapEx, and if the world changed suddenly and you had to kind of get to kind of a lower level of CapEx. Where do you think that could bottom out at?

[JohnWilliams:]

Sure. So a rough rule of thumb would be anywhere between sort of 150 - 180 is kind of the stay alive, keep the assets in good shape CapEx front. Anything more than that may well be growth particularly in the personal care space and will be projects where we're looking for productivity or we're looking for cost reduction. So if you said to me, if you had to batten down the hatches, if you look --if you take a long look back when we were a bigger business in volume terms and asset terms actually, what we were able to do in 2009 to really batten down the hatches on CapEx. Yes, we could always do that again if we had to. I think in the end you kind of pay the piper in out years a little bit. But you can get this if you really want to be lean and mean and the world's ending you can get this down below that 150 - 180 to sort of 110. But you don't want to do that for long.

[BrianMaguire:]

It is on the 4Q being a little bit high elevated?

[JohnWilliams:]

Yes. I am sorry. Sorry, I forgot that part of the question, my apologies. I mean on that really we just had some good projects that we needed to complete. We had a few projects we brought forward a little bit from 2020 into 2019. So some deposits got paid nothing more mysterious than that really.

[BrianMaguire:]

Okay. I'm not sure if you can comment on it but have you been active buying your stock back so far in 1Q?

[JohnWilliams:]

I can't comment on that.

[Operator:]

And our final question comes from Mark Wilde of BMO Capital Markets.

[MarkWilde:]

Two follow ups, John. One is we are seeing some consolidation in the specialty paper segment of the market and I wondered whether there's a role for Domtar in that process at all.

[JohnWilliams:]

I don't think so. One of the reasons, I'm always --those businesses are full of 1,000 ton, 2,000 ton; 500 ton, businesses products customers. So kind of consolidating that I'm not sure that makes much sense for us. I think quite honestly, we've got opportunities to develop product and grow organically in that space, which I'd rather take on.

[MarkWilde:]

Okay. The other one I have, John, is just when we think about these conversions. And I'm thinking kind of more about the container board than pulp, but the biggest challenge to me is kind of market access in kind of channels to market. Could we just get your updated thinking on that issue?

[JohnWilliams:]

Certainly. So I think the task -- the thinking has to be around how you mitigate the risk of entry. What does that mean, right? Are you in partnership with somebody either at the containable end of things? Are you in partnership with somebody at the corrugated box plant end of things or the sheet feeder end of things? Are you in partnership with a large customer for example who is kind of interested in seeing value all the way back to container board and is looking really to kind of commoditize, to be fair, the actual conversion piece. So we look at where -- we have discussions with people on all those parameters just to mitigate that entry risk because I agree with you that there is an element of risk to that.I'm not completely convinced that I couldn't put out a few hundred thousand of containable into the open market, but if I'm really going to build a business, we have to work to mitigate that risk.End of Q&A

[Operator:]

And at this time, we have no further questions in queue.

[Nicholas Estrela:]

Thank you, Cassidy. We will release our first quarter 2020 results on Thursday April 30, 2020. Thank you for listening. And have a great day.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.