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Domtar Corp  (NYSE:UFS)
Q1 2019 Earnings Call
May. 01, 2019, 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 Q1 2019 Earnings Conference Call with financial analysts. (Operator Instructions) As a reminder, this call is being recorded today, Wednesday May 1st, 2019.

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

Nicholas Estrela -- Director, Investor Relations

Good morning and welcome to our first quarter 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 with the Securities Commission for a listing of those. Finally, certain non-U.S. GAAP financial measures will be presented and discussed and you can find a 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. This morning we reported EBITDA before items of $205 million, which is a 27% improvement when compared to the same quarter last year. The improvement in our performance was driven by strong results in paper with margin expansion, accelerating price realizations, and additional volume momentum. Our average paper prices were higher compared to the fourth quarter as we continue to implement the recently announced increases while also benefiting from a favorable sales mix. Our paper shipments increased 2% as market demand improved seasonally when compared to the fourth quarter. We are also growing our business with our strategic customers, improving our customer mix, and capitalizing on growth opportunities. Market conditions allowed us to run full out on our paper operations and several of our paper machines operated at record production levels. Cost performance was strong resulting in 250 basis points of margin expansion despite some challenges procuring fiber. In Pulp, our results were solid but were impacted by lower prices, while our volumes were lower than expected mostly due to higher internal pulp shipments as a result of the wood fiber constraints.

Looking forward, we remain optimistic for the long-term fundamentals of the pulp grades we supply. Some of our energy and certain raw material cost were high in quarter one, which is typically a seasonally high-cost quarter. In particular, fiber costs were well above average due to the impact of record rainfall on fiber availability in the U.S. South. However, our efforts around continuous improvement initiatives and cost efficiencies led to some savings, specifically around chemical usage.

In Personal Care, we're making progress. Sales were in line with our expectations while EBITDA increased from the fourth quarter. We did well with productivity, which drove better operational efficiencies, as our new customer wins ramped up. Our teams are also delivering on our margin expansion plan that's expected to show solid progress throughout the year. We will also continue to focus on winning new business and volume. Our sales pipeline remains active with numerous opportunities to grow in both North America and Europe.

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

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

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on Slide 4. We reported this morning net earnings of $1.27 per share for the first quarter compared to net earnings of $1.38 per share for the fourth quarter of 2018. Adjusting for items, our earnings were $1. 44 per share for the first quarter compared to earnings of $1.63 per share for the prior quarter. EBITDA before items amounted to $205 million compared to $228 million in the fourth quarter.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $14 million lower than the fourth quarter due to lower sales in our Pulp and Personal Care businesses. Depreciation and amortization was $2 million lower when compared to the fourth quarter, while SG&A was $23 million higher than the fourth quarter due mostly to mark-to-market of stock based compensation. In the first quarter, we recorded an income tax expense of $24 million, or a tax rate of 23%, which is in line with our forecasted tax rate.

Now turning to cash flow statements on Slide 6. Cash flows from operating activities amounted to $55 million, while capital expenditure amounted to $46 million. This resulted in a free cash flow of $9 million in the first quarter.

Turning to the quarterly waterfall on Slide 7. When compared to the fourth quarter, EBITDA before items decreased by $23 million due to higher SG&A cost for $23 million, higher raw material cost for $16 million, and lower volume and mix for $9 million. These were partially offset by higher selling prices for $13 million, lower other costs for $11 million, and a favorable foreign exchange for $1 million.

Now the review of our business segments starting on Slide 8. In the Pulp and Paper segments, sales were 1% lower when compared to fourth quarter and 4% higher when compared to the same period last year. EBITDA before items was $204 million compared to $211 million in the fourth quarter of 2008.

Our Paper business on Slide 9. Sales were 4% higher versus last quarter and were 6% higher versus the same quarter last year while estimated EBITDA before items was $156 million, or 18% margin. Manufactured paper shipments were 2% higher when compared to the fourth quarter and 4% lower versus the same period last year. Average transaction prices for all our paper grades were $30 per ton higher than the last quarter.

Let's turn to the Pulp business on Slide 10. Sales were 13% lower versus the last quarter and were 1% lower versus the same period last year. Estimated EBITDA before items was $48 million, or 16% margin. Pulp shipments were 12% lower versus the fourth quarter and down 7% when compared to same period last year. Lower shipments were in part due to higher internal shipments to our paper business due to the wood supply shortage. Average pulp prices decreased $26 per metric ton versus the fourth quarter. Our Paper inventory increased 22,000 tons when compared to the last quarter, while Pulp inventory increased by 24,000 metric tons.

Our Personal Care businesses on Slide 12. Sales decreased 3% when compared to last quarter and were 6% lower versus the same quarter last year. EBITDA before items was $22 million, $2 million higher than the fourth quarter.

Let's turn to Slide 13. As you can see, the second quarter will be our most active quarter with regard to major planned maintenance shutdown in our Pulp and Paper businesses. We expect to spend approximately $43 million more than what we spent in the first quarter and this increase should be 60% in Pulp and 40% in Paper. As usual, this increased maintenance activity in the second quarter will impact fixed cost absorption by approximately $12 million.

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

John D. Williams -- President and Chief Executive Officer

Thank you, Daniel. We've had a good start to 2019. In our Paper business, higher prices and a favorable sales mix underpinned a very good quarter. Total production tonnage was high. Cost performance across our paper network was a strong and we expanded margins.

Our average paper prices were $30 per ton higher as we are implementing our announced price increases on several paper grades. The implementation of these increases is going as planned. We expect to fully realize the $60 per ton much (ph) increase on two million tons in the second quarter with a full run rate benefit by quarter three. We continue to have a positive outlook on paper. Our backlogs are strong and we're experiencing favorable market conditions. As competitive (inaudible) capacity, we're well positioned to support the increased demand from our customers and we remain their supplier of choice. We anticipate and are ready for opportunities to grow volume across several channels where we have unique value added supply chain capabilities. At our market pulp mills we had good operational performance where we continued to increase overall productivity despite some wood supply and winter-related challenges that affected our cost and volumes.

Prices were lower quarter-over-quarter, however prices in China began to stabilize after some downward pressure in the fourth quarter and earlier this year. We continue to remain optimistic in our long-term pulp outlook. We expect softwood and fluff pulp prices to trend positively in the medium to long term supported by demand growth and a deceleration of capacity expansion. In addition, our customers notably in the tissue, hygiene, and specialty sectors anticipate strong growth in their markets. As I noted, some of our operations mostly integrated paper mills were impacted by record rainfall, flooding and poor harvesting conditions that led to fiber shortages at some of our facilities.

Outside of the cost implications and constraint wood supply, our cost performance has tracked our expectations. In the second quarter, outages planned at several of our Pulp and Paper facilities so we will be vigilant on both safety and execution. In Personal Care, our actions to drive margin improvement that enhance our competitive position are beginning to generate tangible results. Margin expansion in quarter one was driven by better cost absorption, price increases, and strong production which drove favorable unit costs.

During the quarter, we began to wind down production at our Waco facility which will also include a workforce reduction of 148 people. The next steps include the relocation of infant and adult diaper lines to our Delaware and Greenfield facilities. This is scheduled to begin in the second quarter and the foreclosure will be completed by quarter three. These steps will optimize infant diaper production and drive reductions in fixed costs. Our margin improvement plan aims to increase efficiency and productivity, reduce our cost base and strengthen our long-term competitive position while focusing on growth opportunities. We'll do this through streamlining our manufacturing footprint and repositioning our assets to match our markets, optimizing our supply chain and standardizing our operational work systems, reducing complexity in our product and customer mix, and undertaking pricing initiatives.

Turning to overall capital allocation. We will continue to pursue a balanced approach to the deployment of our capital. Our balance sheet is in good shape which will allow for smart investments in our best assets while maintaining the flexibility to carry out our growth strategy and return capital to shareholders. We had a solid first quarter on the back of a strong 2018 and we will build on our commitment to deliver sustainable growth and long-term value creation for our shareholders.

Looking ahead, all paper shipments should benefit from higher demand from our customers following the announced capacity closures in the industry. Our paper prices should move higher as we continue to implement the announced increases across the majority of our grades. We do expect softwood and fluff pulp markets to remain balanced through the year due through the steady demand growth and limited new supply. We do anticipate across the freight labor and raw materials will marginally increase. The second quarter will be affected by seasonally higher maintenance costs in our Pulp and Paper business as we move into the planned outages at some of our major facilities. Personal Care is expected to benefit from the continued execution of our margin improvement plan and new customer wins partially offset by further raw material cost inflation. 2019 is shaping up to be a good year for Domtar and we remain very focused on operational excellence to take advantage of favorable market conditions.

Thank you, as ever 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 as usual. We ask our participants to ask a few questions at a time and return to the queue as we want to get as many people as possible. Michelle, you can open up the line for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question today will be from Brian Maguire with Goldman Sachs.

Derrick Laton -- Goldman Sachs Group Inc. Research Division -- Analyst

Hey, good morning, it's Derrick Laton for Brian.

John D. Williams -- President and Chief Executive Officer

Good morning.

Derrick Laton -- Goldman Sachs Group Inc. Research Division -- Analyst

Thanks for taking my question. So a quick one on Paper, it looks like the market's tightened a bit after the Georgia Pacific mill closure. It sounds like your increases going through pretty well, according to your expectations. But it looks like in Pulp and Paper week, it seems like some of the commentary there was a little bit more negative and it seems like maybe an increase direct from imports. Are you beginning to see that become an issue at all? And do you think there's a threat from that that could impact this price increase?

John D. Williams -- President and Chief Executive Officer

That's a good question. Let me tell you what I think has happened. So I think when the closure was announced, a lot of people were thinking well this is 8% of industry capacity. And actually GP was supplying some very specific customers who went out to find paper, really I think very concerned about whether they were going to get supplied. They found some paper but I'm not sure from what I would recall kind of overall sustainable supply chains over time. In addition, of course, they were producing pretty much right to the end. So if you think about sort of the average stock in the industry, some of that paper and probably still quite a lot of it actually is still in the system. So my premise at the moment is that -- our premise I should say, is that that will work its way through certainly by the end of the second quarter. And then particularly in the cut size grades, we're going to see a reasonable supply demand situation. I don't think we're going to have -- like a great shortage but certainly the operating. The operating rate opportunity for us will be considerable that we can pretty much sell everything we can make. So I think that's what's happening in the paper business at this moment. So it's just a little bit too early to tell as to where this will shake itself out over time. Does that give you a little bit more color on that?

Derrick Laton -- Goldman Sachs Group Inc. Research Division -- Analyst

Yes, yes that's helpful. And then similarly on the coated paper side, it seems like there's been some shift in production there on to the uncoated freesheet side. Are you seeing that at all as a threat? And is that maybe more focused on the offset roles relative to cut size?

John D. Williams -- President and Chief Executive Officer

Well, it's definitely about offset roles. And of course, I think with the most recent announcement you've seen where pretty much 8% of industry capacity on coated is coming out, that's obviously going to change things slightly in the short-term.

Derrick Laton -- Goldman Sachs Group Inc. Research Division -- Analyst

Thank you. And then, just on the pulp side, you mentioned the fiber shortage was part of the reason for volumes coming a little bit light. Are you seeing anything improving a bit as we're looking into 2Q? Or is that going to be a little bit of a continuation of an issue there?

John D. Williams -- President and Chief Executive Officer

So we are -- just to be clear, on the fiber side it's really that shortage of fiber caused us to prioritize paper over pulp and that meant we were producing and selling less pulp tons. Although we did build a bit of inventory in pulp ahead of the closures for the coming for maintenance in quarter two. And it was really focused in the U.S. South just in terms of weather, soaking wet forests are very hard to harvest from, all your costs increase. So when we put all that together quarter two we think we're through that now.

Derrick Laton -- Goldman Sachs Group Inc. Research Division -- Analyst

Got it. It's helpful. Thank you.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

Next we'll move to Anthony Pettinari with Citi.

Randy Toth -- Citigroup Inc Research Division -- Analyst

Good morning. This is actually Randy Toth sitting in for Anthony. Can you touch on the potential debottlenecking that could occur as a result of this pulp optimization work? I think you're on year two or four, so when all is said and done, could that increase capacity meaningfully?

John D. Williams -- President and Chief Executive Officer

Yes. But it's in the sort of tens of thousands, at the most hundred thousand of tons. It's not a massive increase. It's really across our whole system around productivity. It's also about cost reduction. So we don't see that as a kind of issue from a capacity standpoint. It's really more about efficiencies.

Randy Toth -- Citigroup Inc Research Division -- Analyst

Okay, that makes sense. And then just, you stated that GP's closure was focused on certain subset of customers. Would it be fair to say that some of the import jump we've seen in 1Q was related to those customers attempting just to build volumes and inventory? And longer term could we see those customers move to more domestic and reliable suppliers?

John D. Williams -- President and Chief Executive Officer

I think that's a very interesting question. So if you look at imports, I think imports at their maximum level probably reached sort of 11% to 12% of total industry supply. They are not there yet. My guess would be some of those supply chains could easily be challenging, let's put it those ways. So perhaps those customers over time will be thinking, like solved my immediate problem, how do I now build a supply chain that's sustainable for the future and therefore how do they think about domestic supply. As I said in my earlier answer, I think it's too early to tell how that's going to shakeout, but if I look at sort of past history that's typically what happens.

Randy Toth -- Citigroup Inc Research Division -- Analyst

Okay, that's very help. I'll turn it over. Thank you.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

And next we'll hear from George Staphos of Bank of America.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Morning, it's actually John Babcock online for George. Just actually I wanted to tag along to Brian Maguire's question, just on kind of increased pricing, I was wondering if you could talk about how implementation of this price increase is tracking relative to past increase and show me how should we think about that?

John D. Williams -- President and Chief Executive Officer

Sure. I mean I can only talk about the past. But I mean, I would say it's very much the place we would have expected from our past experience and nothing has happened so far that gives us concerned around it.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. That's fair. And then moving on to wood cost, how much of a headwind was that in the quarter? Is there any way you could give us a sense for the kind of dollar impact for the quarter?

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

I think total wood cost increase was $19 million in the quarter. You normally have a little bit of seasonal in Q1, just the winter, the snow, the highs. I would say around 12 was probably abnormal if you will in the quarter and that's what we believe we'll get back in the second and third quarter. It's going to take a little bit more than a quarter for the price to go where it was before but we believe it will go back.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. And how are you feeling about inventories in the Pulp and Paper channels right now?

John D. Williams -- President and Chief Executive Officer

Sure. So if you take paper obviously we have a model we are working to around those tons from GP not being available and therefore a need to produce in order to supply those tones, so that's one of the reasons inventory is built a little bit. The other reason of course is we're taking a couple of shots, one of which is in our largest paper mill in the second quarter, so that causes us to build start ahead of that shot. We dialed back actually some of our export business, so that's meant, we have got a more stock sitting available if you like for the domestic environment. So, I would say it's as high as we wanted to be. I wouldn't want to see it creep that much higher but if our assumptions around kind of quarter two, quarter three, second half are correct, we'll work our way through that. On the pulp side, that's absolutely about really the shots coming up and need to supply through the shots.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. That's fair. And then just last question before I turn it over. I was wondering on the pulp side of things again, if you could talk about, I mean, you mentioned the fiber impact on volumes but wanted to get a sense, I mean, there was a little bit of weaker demand in China. So, wanted to essentially understand whether or not there was some impact there from end market witness, as well?

John D. Williams -- President and Chief Executive Officer

Yes, sure. I think the impact in China was largely really Chinese New Year where essentially nothing happens for two to three weeks. So we would imagine and are planning for the fact that our pulp volumes sort of revert back more to the norm.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. So you wouldn't say that the impact to volumes was really much driven by end market demand but more driven by that kind of fiber issue?

John D. Williams -- President and Chief Executive Officer

I think -- that's a great question. I think you really have to think about the end-use markets we are supplying. So most of our pulp is going into tissue grades, it's going into Personal Care, so it's going to diapers, adult diapers, feminine hygiene. So the end-use demand and of course some specialty areas as well, which look pretty solid. So if you look at end-use demand, I think that end-use demand has a lot of runway pretty much for us as far as, you know, if you take end-use demand tissue diaper, adult diaper over the next 20 to 30 years it's very strong. I think what occasionally happens as we know is that inventory is bumping in various different directions and therefore buyers and sellers take different positions. But my view is overall if you look at the softwood pulp grades they have a very strong future. There isn't much capacity coming in. Container board obviously needs softwood so that's another pressure on softwood and we're -- as you know we built our pulp business very much around softwood grades. So we're very positive about those grades over the medium to long-term.

John Babcock -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

And next we'll hear from Mark Connelly with Stephens Inc.

Mark Connelly -- Stephens Inc. -- Analyst

Thanks. John, fluff prices have --

John D. Williams -- President and Chief Executive Officer

Good morning.

Mark Connelly -- Stephens Inc. -- Analyst

Good morning -- have historically been moving less and slower than paper grade pulp but it's been harder for us to see that relationship in the last year. And with destocking it's gotten maybe even harder recently. Do you think that the relationship between fluff prices and other paper grade prices has changed? Is China doing something different in the way they are buying that's going to make that price relationship work differently?

John D. Williams -- President and Chief Executive Officer

You mean between fluff and say southern softwood which was sort of how we all looked at it historically, Mark, is that the question?

Mark Connelly -- Stephens Inc. -- Analyst

Yes, just trying to get a sense of whether that historical pattern is different.

John D. Williams -- President and Chief Executive Officer

Yes, I mean that's a great question. I think the answer could be, may be, but I'm not sure -- and the only safe reason I think about maybe in fluff pulp there have been a specific instance where a major customer reengineered some products to reduce usage on fluff pulp, which was kind of a one-off event which the market had to adjust to. I think that maybe separated the two grades a little bit from where it was historically. And of course, southern softwood is a smaller market and therefore is inherently more volatile potentially than fluff. So I think in that respect I'm not sure you can read it that way anymore. I also think that as people are producing fluff pulp of these days there's really less -- they need -- their costs are actually now looking very similar to when they're making ordinary softwood which is different to history, so maybe all that has changed the dynamics a little bit. Does that help?

Mark Connelly -- Stephens Inc. -- Analyst

Yes that's very, very helpful. Just one question for Daniel, do you have any sense of how we should think about working capital for the rest of the year? Obviously you've explained why we had to build this quarter but it almost sounds like some of that inventory you may need to keep and maybe that relationship for the rest of the year is a little different?

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

I think there are two reasons why we have more inventory. I think John explained the Pulp and Paper side because of shuts. We've also built a little bit of inventory in Personal Care given the way foreclosure and the movement of machine, so we need to be able to serve our customers well and the machine that will be moved won't be producing. So, I see that going back to normal. I see that kind of almost cash in the bank before year-end, so I see that coming back to normal levels by year-end.

Mark Connelly -- Stephens Inc. -- Analyst

But is there some component with this GP thing that you're just going to be carrying higher inventories because you're doing more business?

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

No. I don't think so. I think we'll be able to manage with more or less the same level we used to.

Mark Connelly -- Stephens Inc. -- Analyst

That's great news. Thank you.

John D. Williams -- President and Chief Executive Officer

Thanks, Mark.

Operator

And we'll hear from Keetan Memtoro (ph) with BMO Capital Markets.

Keetan Memtoro -- BMO Capital Markets -- Analyst

Thank you. First question on Personal Care, what kind of EBITDA run rate are you targeting as you kind of sort of exit 2019? Just give us a rough sense of how your margin improvement plan is tracking versus your target?

John D. Williams -- President and Chief Executive Officer

Right. So, Ken, let me answer that question. So our objective in that business is sort of mid-teen EBITDA, low to mid-teen. So we'd be thinking that from kind of year-end looking forward into 2019 we are at those kinds of levels or moving toward those kinds of levels. That's I think what we would consider to be success in 2019 as we moved into 2020.

Keetan Memtoro -- BMO Capital Markets -- Analyst

Got it. And at this point based on what you're seeing you think you're kind of on track to achieve that kind of target?

John D. Williams -- President and Chief Executive Officer

Yes, indeed. Because the closure -- the Waco closure really kicks in to quarter three, quarter four. Our customer wins really start to benefit as we sort of settle the volume down. Our SKU rationalization will be helping by then, so right now where -- actually versus where we thought we would be, we're very slightly ahead, so so far so good.

Keetan Memtoro -- BMO Capital Markets -- Analyst

That's good news, thank for that. And then turning to coated papers, again for one more minute, I mean some of the recent stacks that we've seen on coated paper volumes, they have been down very very sharply. So how do you think about kind of the ripple effect into kind of the uncoated -- your uncoated business with volumes down as sharply as they are?

John D. Williams -- President and Chief Executive Officer

Well, so I mean obviously coated manufacturers can take of their coat and can make uncoated free sheet and they've done that historically. I have to say that has largely been opportunistic. They haven't really built supply chains around that. And of course you now see this closure in Maryland of 450,000 tons from Verso just been announced 60 days. It's about 8% of coated capacity as far as we can make out, which would probably bring operating rates in the coated industry up into the sort of low 90s, which suggest therefore their need if you like to make uncoated freesheet would therefore be reduced.

Keetan Memtoro -- BMO Capital Markets -- Analyst

Alright. That's very help. I'll turn it over. Good luck in 2019.

John D. Williams -- President and Chief Executive Officer

Thank you very much.

Operator

And next we'll hear from Chip Dillon with Vertical Research.

Chip Dillon -- Vertical Research -- Analyst

Yes, good morning everyone. A quick question John is, if we go back about five years, when we saw the Cortland Mill shut, there was a big surprise in terms of the magnitude of the import response. The mill in Port Hudson is, it's basically called off, it's been less than two months since it shut down. Would you say the tariff structure that's in place today would make such a swamping of imports less likely to take place? And are there other reasons you might not see the same kind of response given that the Port Hudson shutdown is comparable to Cortland?

John D. Williams -- President and Chief Executive Officer

Well, so I mean Cortland was a fair bit bigger Chip. But I think certainly the duties will make the difference. I also think that the customers that were being supplied by GP are fairly specific set of customers who will look to a mix -- I think over time of also having domestic producers just to keep their supply chain reasonably balanced. So -- there's no question. I think domestic supplies have to remain competitive. Well, you have to have a value proposition that's compelling enough for people not to build a sort of supply chain from imports. I do also think that -- what's happening in the markets -- so what's happening in the European market of uncoated freesheet and what's happening in other markets of uncoated freesheet, the dynamic is very different there now in terms of kind of the earnings they're getting from their domestic market. So it's not like America is this great sort of shiny spot that it used to be in terms of pricing, although still attractive, but I don't think you divert domestic tons here, if you were thinking about defending your domestic position in Europe. So to my mind, I don't think to your point that it's going to happen again.

Chip Dillon -- Vertical Research -- Analyst

Got you. And then just on an unrelated note, the CapEx guidance for the year, the $220 million to $240 million is unchanged since early February and I just didn't know if you could update us on your thoughts on the timing of any kind of actual steps toward any converting activity. And does this number include any work that would anticipate something happening in 2020?

John D. Williams -- President and Chief Executive Officer

No it doesn't. So as you know we have a plan. I think we've been pretty transparent about that plan but that plan is really driven by our view on the dynamics on uncoated freesheet. And obviously right now as you can hear by what we're saying and what we're experiencing we have a pretty positive outlook on uncoated freesheet for some time.

Chip Dillon -- Vertical Research -- Analyst

And just quickly, you mentioned in yesterday's announcement regarding a mill in Maryland. Did you see that -- was that mill actually pretty active in not coating their paper and actually was that an influence you either were concerned about or actually were feeling that might not be there if they fall through on their plan?

John D. Williams -- President and Chief Executive Officer

Actually I don't know the detail of that well enough to pass comment but I guess I would see it on a systems basis. If you look to that announcement carefully and it says very clearly that they can manufacture those grades in other parts of the network. Now that suggests to me that if other parts of that network were doing uncoated freesheet they'll now do the main grades. So I think that's the way it has influenced us this thing from what that mill is specifically shipping.

Chip Dillon -- Vertical Research -- Analyst

Very, clear. Thank you so much.

John D. Williams -- President and Chief Executive Officer

You are welcome.

Operator

And next we'll hear from Adam Josephson with KeyBanc.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks, good morning everyone.

John D. Williams -- President and Chief Executive Officer

Good morning.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Good morning, John. (technical difficulty).

John D. Williams -- President and Chief Executive Officer

Adam, your line is crackling rather badly. I don't know -- I'm having a bit of trouble hearing you.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Is this better?

John D. Williams -- President and Chief Executive Officer

No. I don't know what we can do -- We have one other question, Adam. Do you mind if we took it and you could redial and see if we can improve the line? Is that all right?

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Sure, thank you.

John D. Williams -- President and Chief Executive Officer

Alrighty, we'll hear from you in a moment. So, if we can move to the next question?

Operator

We'll hear from John Tumazos with John Tumazos Very Independent Research.

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

Thank you for taking my question. Concerning Personal Care, the revenues were $15 million less than a year ago but you made reference to developing a new customer which if it's material, say 1% or 2% of revenue would be $2.5 million or $5 million. And you made reference to price hikes which if they were material should be at least 1% or 2% revenue, or $2.5 million or $5 million. So it's sort of gives the impression there is a $20 million or $25 million revenue decline bouncing around Personal Care, even though people keep getting older and needing the product. Does that mean that the Waco Texas plant decreases that big an impact or some competitors making it in road, is my question. And then second, I understand the $10 million impairment this quarter and $7 million or so in December. But why do you impair in dribs and drabs rather than just writing off the whole $587 million goodwill balance? It doesn't seem -- I just don't understand why it's dribs and drabs.

John D. Williams -- President and Chief Executive Officer

All right, John. May I talk to the first one and Daniel would talk to the second one, would that help you?

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

Of course, that's wonderful.

John D. Williams -- President and Chief Executive Officer

Alrighty. So, as I think as we've talked about previously, one of our accounts took quite a chunk of business out of us a while back. So we are paying to some extent volume catch up to make up for that. Now from a margin standpoint that was OK business but not great business but it creates a hole in the comparative sales line that will probably work its way out by quarter three I would think this year. So that's what you're seeing. So that's what's driving that sales line issue that you discussed. So there's nothing more I guess mysterious than that. So basically as we win new business, part of that business is making up for that hole that was created by one of our larger diaper accounts actually not taking all the business away but taking a substantial piece of the business away. That is also to some extent what drove our thinking around Waco, saying to ourselves well rather than living without level of overhead we'll actually put that business into Delaware and make certain therefore that we can operate productively and profitably on lower volume. So that's why we've taken some of the actions we've taken. On the other issue, I'll defer to Daniel and he'll talk to you about that.

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

Let me clarify something as it's implied in your question. So the $7 million we've seen in Q4 and the $10 million we've see in Q1 is not related to intangible asset. It's actually fast depreciation of asset that are located or still located as we call that when we use what once that we call actual is done. And you should see more or less similar amount in Q2 and it should be done after that. And the reason why it's not in one chunk it is fast depreciation. This is just responding to GAAP, the accounting principle. This is all they asked us to do that when there is a closure of an asset.

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

So Daniel following up if these was tangible assets charge as appeared, how do you justify the large goodwill balance when the results don't seem to justify a goodwill balance? You're anticipating a year from now the business will be turned around.

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

There is no more goodwill in that business. There is intangible customer relationship and all other intangibles. And the dcf (ph) of that business is justifying those assets one by one.

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

Thank you.

John D. Williams -- President and Chief Executive Officer

Alright, John. So could we return to Adam?

Operator

Yes. Next we'll hear from Adam Josephson with KeyBanc.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

John, is this better?

John D. Williams -- President and Chief Executive Officer

Way better. Thank you.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I guess we're not -- this is from my side. I guess we're not paying our phone bills here at Keybanc.

John D. Williams -- President and Chief Executive Officer

At least we can hear you. Ask away.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Amen to that. Daniel, just a couple of modeling ones and then I'll ask John a couple big-picture ones. Can you give us Daniel exit -- pricing exit rates for both freesheet and pulps compared to the average prices during the quarter and then anything on how much more pricing you might be expecting in Q2 beyond the exit rate?

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

Exit rate of paper was actually $10 higher than the average of Q1. And exit rate of -- exit price of pulp was $20 less than what we experienced in the quarter. Obviously, the future we'll see we're confident we are going to get our price increase -- there's a lot of price increase in paper. And I mean if you look at trade publication right now on pulp, U.S. is still going down. China is stable. So we'll see how that will unfold.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

And just Daniel, on the $10 ton higher exit rate for paper, how much of the $60 does that exit rate reflect?

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

Probably a bit more than half done.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

With based on that exit rate?

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

Yes.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. Got it. And then...

John D. Williams -- President and Chief Executive Officer

Adam, just one note of caution, remember that only two million tons are impacted by that price increase.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

So we should ignore the other one million tons for the purposes of that $60?

John D. Williams -- President and Chief Executive Officer

Exactly and obviously that's a fair swing in the mobile so I didn't want to offer the wrong idea.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I appreciate you clarifying that John. A couple others, one on pulp, you know producer inventories are quite high relative to history. Look at the Chinese, more data. Inventories are quite high. The European core data inventories are quite high. So based on everything one looks at, pulp inventories are very high relative to historical levels. And obviously the Chinese paper market is under a fair bit of pressure at the moment. What is informing your view that the pulp market has stabilized from here?

John D. Williams -- President and Chief Executive Officer

Well because -- whether it has in the very short term, I don't know, but I think in the medium term -- so looking at a few months out, the inherent demand in the grades that we are supplying and the inherent demand in the end use to which they're going is growing. So in that geography obviously baby diapers are growing and everywhere across the globe adult incontinence is growing and tissue is growing pretty quickly. So, I put all that together, I just say to myself, there are going to be stocks along the way whether that may be buyers take a position, whether there's some spot tonnage that perhaps was going into paper grades that's now trying to be sold into tissue and some of those other grades that consist sort of buy stand in softwood. But overall I'm not sitting here thinking there's any inherent demand concern. And I think stocks came down about 3.5 days if I recall, albeit as you say quite rightly from fairly high levels. But my view is I think that that will work its way through. And if I look at our customers and our customer relationships we do have the luxury that we don't sell through agents in China. We have our own people on the ground. I think that gives us pretty good visibility.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

I really appreciate that. And just one last one. I know Chip was asking earlier about your CapEx plans and conversion plans and you have nothing -- nothing in the offing as yet. As you know, as well as anyone, the global container board conditions have weakened quite a bit in recent months. Prices in the U.S., Europe, and China are all falling. Brazilian demand is weak too. How does what's happened in the next several months and could it be capacity announcement, how all of these developments affected your medium to long-term view of the attractiveness or lack thereof of the industry and consequently your plans to potentially convert some of your machines to container board?

John D. Williams -- President and Chief Executive Officer

Yes. Well so, as we've always said, we're really driven more by uncoated freesheet prospects, I guess I would say. And as I said earlier, we see solid runway for this grade for quite some time. I think if we see issues developing as we've talked about before we have the optionality around pulp, as well as some of those container board choices. You are exactly right. I think in the short term, having lived through container board cycles when I ran one of those businesses, I still think that the long-term prospects for that business are pretty strong. You can drive yourself crazy trying to time it. But if you really think about who we are, we are looking now two years out, 18 months out, before we really have to make a choice, so let's see what happens then really.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Just last question along those lines. From the time you let the market know that you are considering, potentially converting some of your machines to container board to now much has changed globally and in the U.S., has everything that's changed in any way affected your view?

John D. Williams -- President and Chief Executive Officer

It certainly has made us think around the pulp opportunities we have in the network as carefully as the container board opportunities.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Got it. Thanks so much, John.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

And next we'll move to Paul Quinn with RBC Capital Markets.

Paul Quinn -- RBC Capital Markets -- Analyst

Yes, thanks very much. Good morning, guys.

John D. Williams -- President and Chief Executive Officer

Paul, good morning.

Paul Quinn -- RBC Capital Markets -- Analyst

Just a question, you've been partially successful on the uncoated freesheet price increases. Just wondering if we've seen or are you guys have seen any change in behavior from domestic, say coated paper producers as well as whether you're seeing certain countries increase shipments in the North America on the offshore side?

John D. Williams -- President and Chief Executive Officer

Yes. So I mean -- imports we've seen an increase. It's been -- I mean it's still a relatively small number but it's been sort of a large number from the delta because the delta was relatively low. And obviously we negotiate with our customers who are aware of what else is going on in terms of the dynamics and we have had success in moving price. So behind all that one makes the assumption that of what other people are doing?

Paul Quinn -- RBC Capital Markets -- Analyst

Okay and then just a question on capital allocation. I mean free cash flow was kind of muted in this quarter but I expect it to accelerate quite quickly with price increases you're getting and hopefully a recovery in pulp markets. Has there been a change in capital allocation? Are you going to hold some back for an eventual conversion in the container board or pulp?

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

I think our long-term strategy is still the same there. Probably, we're going to return the majority of our capital to shareholders. We've been delivering north of 60 -- I think the number was 65%, 67% since we've made that commitment. We will stay there. And if at some point there is a cash sitting in the balance sheet, we will revisit, how we're going to deal with it but right now I don't think that's a problem for 2019.

Paul Quinn -- RBC Capital Markets -- Analyst

That's fair enough. Good luck, guys. Thanks.

John D. Williams -- President and Chief Executive Officer

Thank you very much, Paul. Thank you.

Operator

(Operator Instructions) And there are no further questions at this time. I would like to turn the call back over to John for any additional or closing remarks.

John D. Williams -- President and Chief Executive Officer

Thank you, Michelle. So we will release our second quarter 2019 results on Thursday, August 1st, 2019. Thank you for listening. Have a great day.

Operator

And that will conclude today's call. We thank you for your participation.

Duration: 49 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

Derrick Laton -- Goldman Sachs Group Inc. Research Division -- Analyst

Randy Toth -- Citigroup Inc Research Division -- Analyst

John Babcock -- Bank of America Merrill Lynch -- Analyst

Mark Connelly -- Stephens Inc. -- Analyst

Keetan Memtoro -- BMO Capital Markets -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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

Paul Quinn -- RBC Capital Markets -- Analyst

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