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Domtar Corp (NYSE:UFS)
Q4 2019 Earnings Call
Feb 7, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Quarter Four 2019 Earnings Conference Call. [Operator Instructions]

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

Nicholas Estrela -- Director of Investor Relations

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 at the Securities Commissions for a listing of those.

Finally, certain non-US GAAP financial measures will be presented and discussed, and you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release as well as on our website.

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.

My opening remarks today will be on the full year 2019 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 continued to execute on our strategy and return cash to shareholders. Our teams were agile and adjusting to market changes, and executed 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 freesheet 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 assets as demand declines, 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 have reached 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 are 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 position Domtar for the future in growing markets and will have more scale this year with the expected volume growth from strategic investments, the restart of Espanola and 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 at a 12% EBITDA margin for a 400 basis point improvement over the prior year, our best performance since 2017.

While executing our margin improvement plan, we achieved 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 the 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 -- 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 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 for 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 variation in 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 accruals 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 and $120 million.

In the fourth quarter, we recorded an income tax benefit of $26 million due to the loss incurred in the quarter, credit recorded related to prior year on certain tax position, additional tax credits related to energy projects and benefits related to the final mix of earnings in the year.

Now turning to the cash flow statement on slide 7. Cash flow from operating activities amounted to $160 million while capital expenditures amounted 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 amounted 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 shareholders through a combination of dividends 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 31, we had $403 million remaining under our buyback program and had 66.9 [Phonetic] million shares outstanding.

Turning to the quarterly waterfall on slide 8. When compared to the third quarter, EBITDA before items decreased by $69 million due to lower average selling prices for $30 million, higher SG&A costs for $18 million, lower productivity for $12 million, higher maintenance for $4 million, higher freight for $3 million and higher raw material costs for $3 million. These were partially offset by higher volume and mix of $1 million.

Now the review of our business segments, 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 items 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 items 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 shipment 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 decreased 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% 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 will 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 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 D. Williams -- President and Chief Executive Officer

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 24. Our paper shipments remained 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 outage at Espanola. The generator [Indecipherable] work at Espanola is now complete and the recovery boiler went through its pre-start-up pressure testing in the fourth quarter. We did anticipate a challenging start-up after the prolonged outage and operations have 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 book has 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're currently seeing, 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 start-up activities in North America. EBITDA margins also continued to improve, ending the year at 12%, the highest level 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 base 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 returned $107 million to shareholders, consisting of $80 million of share repurchases and $27 million of dividends. Our balance sheet's in good shape, which will allow for smart investments in 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 at 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 on 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 -- Director of Investor Relations

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.

Questions and Answers:

Operator

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

Anthony Pettinari -- Citigroup -- Analyst

Hi, good morning.

John D. Williams -- President and Chief Executive Officer

Anthony, good morning.

Anthony Pettinari -- Citigroup -- Analyst

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.

John D. Williams -- President and Chief Executive Officer

Yeah. Certainly. So let's talk the coronavirus briefly. As you know, people start to go back to work on February 9, which is kind of the 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 incontinence. 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 they're 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 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.

Anthony Pettinari -- Citigroup -- Analyst

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 of potential pulp versus containerboard conversions?

John D. Williams -- President and Chief Executive Officer

Yeah, sure. Happy to answer that question. So, again, as we've always said, we're driven by the market in which we operate, i.e., uncoated freesheet. 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 downtime. We took a closure. We feel this year actually our supply demand balance will be much better. And certainly 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 containerboard, and I think as we get closer to feeling we have that need we'll offer a bit more clarity. But those choices we still think we have.

Anthony Pettinari -- Citigroup -- Analyst

Okay. That's helpful. I'll turn it over.

John D. Williams -- President and Chief Executive Officer

All righty. Thanks.

Operator

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

George Staphos -- Bank of America -- Analyst

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

John D. Williams -- President and Chief Executive Officer

George, good morning.

George Staphos -- Bank of America -- Analyst

How's it going? I wanted to piggyback a bit on the commentary you had on uncoated freesheet 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 the extent possible? And then a couple of follow-ons.

John D. Williams -- President and Chief Executive Officer

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 nor am I going to get paper [Indecipherable] can I just get paper. So a lot of product came in. That product has taken a long time to find a home. We think that's now largely over. And so we are back into a more sort of supply demand balance perhaps than we have been in, and I think when you look at how imports of 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.

George Staphos -- Bank of America -- Analyst

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. Do you think that was an effect at all in the market or not really at all?

John D. Williams -- President and Chief Executive Officer

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 is 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.

George Staphos -- Bank of America -- Analyst

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 [Indecipherable] 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 '21? I recognize you're not necessarily going to give us guidance on that. But is this level good to carry forward or could next year to be up again because this year was down?

John D. Williams -- President and Chief Executive Officer

Well, so, yes, '21 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 that 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. Little bit of inflation in there of course, as there always is. But it's a reasonable number.

George Staphos -- Bank of America -- Analyst

All right. Thanks. Very clear. I will turn it over and come back. Thank you.

John D. Williams -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Adam Josephson of KeyBanc.

Adam Josephson -- KeyBanc -- Analyst

Good morning, everyone. Thanks for taking my questions. I appreciate it.

John D. Williams -- President and Chief Executive Officer

Good morning.

Adam Josephson -- KeyBanc -- Analyst

Good morning, John. John or Daniel -- Daniel, you mentioned our exit pulp 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 drives [Phonetic] with your commentary about softwood fundamentals improving?

John D. Williams -- President and Chief Executive Officer

Adam, let me take that. 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.

Adam Josephson -- KeyBanc -- Analyst

Okay.

John D. Williams -- President and Chief Executive Officer

Essentially, we have certain customer contracts, I guess I would say, where if there is 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 the kind of tail end. So what you've seen is a 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 at the beginning of the first quarter. So that's really what's driven this view of how our pulp prices have shifted slightly differently to what you might imagine if you just took the public data.

Adam Josephson -- KeyBanc -- Analyst

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

John D. Williams -- President and Chief Executive Officer

Bit of both.

Adam Josephson -- KeyBanc -- Analyst

Bit of both? Okay. On the freesheet market, John, for '20, obviously, the market was down and on normal amount last year. So you have easing comps and you have a presidential election for whatever that's worth. Historically, there has been some boost to demand in years in which that's been the case. So do you expect a market decline of less than the long-term 3% to 5% or not necessarily?

John D. Williams -- President and Chief Executive Officer

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.

Adam Josephson -- KeyBanc -- Analyst

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 buy back 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, OK, we've got this figured out, now we'll go into the market and buy back some stock?

John D. Williams -- President and Chief Executive Officer

Well, Adam, I mean, I think there is just no perfect time on the timing. I think if you look at the price we 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've kind of missed the trick, to your point, in that case.

Adam Josephson -- KeyBanc -- Analyst

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. There was a significant deceleration in growth from what we've seen in years past, and we're not really seeing 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?

John D. Williams -- President and Chief Executive Officer

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's a better proxy.

Adam Josephson -- KeyBanc -- Analyst

Thanks so much.

John D. Williams -- President and Chief Executive Officer

Okay.

Operator

Our next question comes from Brian Maguire of Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good morning, guys.

John D. Williams -- President and Chief Executive Officer

Brian, good morning.

Brian Maguire -- Goldman Sachs -- Analyst

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. The paper market, as many have mentioned, very weak. You took a lot of economic downtime, I think 300,000 tons in 2019. With the inventories clearing, maybe they could get a little bit better as 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 containerboard conversions as being an attractive option. And then 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 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 and you might have to take some capacity out, how would you kind of be able to fund that as 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 a conversion timing and how would you kind of fund that if you had to do it today.

John D. Williams -- President and Chief Executive Officer

Okay, Brian. Well, and 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 uncoated freesheet 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 will 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 freesheet demand.

And if you look at our choices, we have some choices we think in the kind of mid term, where we could actually do something sensible around pulp which would not preclude us from doing containerboard in time. So we think about that pretty carefully in terms of market places we want to be in and where we have our 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 paper. So, I think if you put all that together, it's really the demand in uncoated freesheet that drives us to conversion and the attractiveness of that market.

And of course, timing these things is always a challenge. We opened a lot of fluff pulp capacity in 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. This is a 30 year investment when we make it. I think the reason we're taking our time is, one, uncoated freesheet is still a great place to be, and, although we've taken that shut in Ashdown last year, we still feel pretty confident that we have optionality in this network.

So, it's a long-winded answer, for which my apologies. But I think one needs to think about the optionality we have in this network. It's still very strong.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. I appreciate the detailed answer there. And just moving to Personal Care, the margin improved a lot. I think you're guiding to a better margin in 2020, and some of the sales will be up to with some new business wins. I just wanted to -- I think you talked about eventually getting to sort of a mid-teens margin. Is that -- do you think there is a line of sight to that at some point in 2020 as they get exit rate at maybe the low end of that mid-teens level? And maybe just expand a little bit more on the diaper business wins and what they could contribute to volume growth in 2020.

John D. Williams -- President and Chief Executive Officer

Sure. So, obviously we have a 2020 plan. We had a very strong January in that business. So I feel we are 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't 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 -- 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 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. 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.

Brian Maguire -- Goldman Sachs -- Analyst

Okay. That's great. I'll get back in the queue. Thanks.

John D. Williams -- President and Chief Executive Officer

Sure. Thank you.

Operator

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

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning, John. Good morning, Daniel.

John D. Williams -- President and Chief Executive Officer

Mark, good morning.

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning. John, I wonder 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 Care as we move through the year?

John D. Williams -- President and Chief Executive Officer

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 will see the sales jump. You could take, rough rule of thumb, that margin somewhere between 10% [Phonetic] and 12% [Phonetic] on an annualized basis, perhaps building toward 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'll not be able 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.

Mark Wilde -- BMO Capital Markets -- Analyst

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

John D. Williams -- President and Chief Executive Officer

Well, that's a great question. So, if you look at the major competitor, we are 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 1 point. I think mid-teens is a good place to get to. Certainly, if we were a branded house, we'd be looking for margins that was 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 then 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.

Mark Wilde -- BMO Capital Markets -- Analyst

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

John D. Williams -- President and Chief Executive Officer

Me too. Me too.

Mark Wilde -- BMO Capital Markets -- Analyst

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

John D. Williams -- President and Chief Executive Officer

Yeah, sure. So we've got -- there is a current case which is Portugal, Brazil, China, Indonesia, Australia on sheeted products; there's the circumvention case on sheeter rolls where people -- so those are where the duties currently sit. Then there is some people who we believe have been trying to circumvent that. That's the same five countries, except for Portugal, and the Commerce Department's 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 is something that probably turned up in the press I think recently with the trade association leading a project on sort of fill-in countries. So this will be sort of Thailand, Finland, Israel, Germany, Colombia, South Korea, Argentina, which, all in, is probably about 200,000 tons, 230,000 tons. But that's just in very early stages. Does that give you enough color on that?

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah. I mean, are there any kind of key resolution points coming at us over the next, I don't know, six months?

John D. Williams -- President and Chief Executive Officer

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

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. All right. That's helpful. I guess that's it for me right now, John. I'll turn it over.

John D. Williams -- President and Chief Executive Officer

Thanks, Mark.

Operator

Our next question comes from Mark Connelly of Stephens, Inc.

Mark Connelly -- Stephens, Inc. -- Analyst

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?

John D. Williams -- President and Chief Executive Officer

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 turn 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 are 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 we always do to kind of tighten net 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, a whole number of things. We've really upped our game there in terms of R&D and in terms of testing product. And 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 is potential over time to build some meaningful tonnage.

Mark Connelly -- Stephens, Inc. -- Analyst

Super. Thank you.

John D. Williams -- President and Chief Executive Officer

Okay. You're welcome.

Operator

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

Steven Chercover -- D.A. Davidson -- Analyst

Thanks. Good morning.

John D. Williams -- President and Chief Executive Officer

Steve, hi.

Steven Chercover -- D.A. Davidson -- Analyst

Just to help calibrate Q1 results, I was hoping you could tell us how fiber cost in the US South might differ year-over-year. Obviously, last year was I think the wettest on record.

John D. Williams -- President and Chief Executive Officer

Yeah. 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 at 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 -- so around our Canadian mills hasn't been an issue. Kamloops, the lumber industry is sort of firing back again and the local government is helping to make sure that our fiber costs don't go mad on us just based on what's going on out there. So we're not expecting much inflation in that space.

Steven Chercover -- D.A. Davidson -- Analyst

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

John D. Williams -- President and Chief Executive Officer

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 $100, $110 a ton, which historically is a reasonable delta. But I think it's tailed down as Southern softwood has tailed down. And because a lot of people have swing capacity, they would look at that Southern softwood and said, look, I tell you what, I'm better off selling fluff pulp -- even if I'm selling that fluff pulp at a little bit of a discount to 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?

Steven Chercover -- D.A. Davidson -- Analyst

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 [Indecipherable] in the fluff pulp. Does the valuation multiple play into your thought process? So, if for instance the end market was deemed by Wall Street to be even less compelling than freesheet, would that play into your conversion analysis?

John D. Williams -- President and Chief Executive Officer

I mean, the answer to that, yes, but. So I would say it's one of the things you're obviously going to consider, all those EBIT dollars valued differently than if you're in X, Y, Z market. I think to us -- but one starts off with, 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 is, well, if that scene is a, call it what you will, higher value category than others.

Steven Chercover -- D.A. Davidson -- Analyst

Got it. Okay. Thank you.

John D. Williams -- President and Chief Executive Officer

You're welcome.

Operator

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

George Staphos -- Bank of America -- Analyst

Hi, thanks for taking the follow-on.

John D. Williams -- President and Chief Executive Officer

You're welcome.

George Staphos -- Bank of America -- Analyst

I just want to come back to a comment you made, John, about uncoated freesheet. And not that I'm surprised, but you said it's still I think a great place to be or you're positive on uncoated freesheet. Is it a positive market to be -- 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? And I know the answer will be all of the above, but if you could give us a bit more color on why you think it's great.

John D. Williams -- President and Chief Executive Officer

I'll try not to be that obvious in my response, George, I promise.

George Staphos -- Bank of America -- Analyst

Okay.

John D. Williams -- President and Chief Executive Officer

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 would 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 if I put those two things together, I'd say 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.

George Staphos -- Bank of America -- Analyst

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 the financial crisis, after [Indecipherable] your free cash flow has been in a range basically of, 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 basis? You said you'd be balanced -- 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 longer-term, the pluses and minuses of being in the public market, etc.? How do you all think about that on a going forward basis? Thank you.

John D. Williams -- President and Chief Executive Officer

Right. So, I think what you have to ask yourself is kind of what's the investor proposition, right, why am I in this business as an investor. And I guess the way I see this as, you're getting a great yield, you 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 at 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 [Phonetic]. Does that help?

George Staphos -- Bank of America -- Analyst

Thanks, John.

John D. Williams -- President and Chief Executive Officer

You're welcome.

George Staphos -- Bank of America -- Analyst

It helps. To be continued. Thank you. Good luck in the quarter.

John D. Williams -- President and Chief Executive Officer

Okay. Thanks.

Operator

[Operator Instructions] Our next question comes from Brian Maguire of Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

[Technical Issues] on the capex. It came in a little high in the 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 kind of [Indecipherable] about it?

John D. Williams -- President and Chief Executive Officer

Sure. So, a rough rule of thumb would be anywhere between sort of $150 million, $180 million is kind of the stay alive, keep the assets, in good shape capex, Brian. 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 button down the hatches -- but 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 button 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 the $150 million, $180 million to sort of $110 million. But you don't want to do that for long.

Brian Maguire -- Goldman Sachs -- Analyst

And just on the 4Q being a little bit elevated?

John D. Williams -- President and Chief Executive Officer

Yeah, 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 in that, really.

Brian Maguire -- Goldman Sachs -- Analyst

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

John D. Williams -- President and Chief Executive Officer

I can't comment on that.

Brian Maguire -- Goldman Sachs -- Analyst

Got you. Okay. I had to try. But thanks again.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

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

Mark Wilde -- BMO Capital Markets -- Analyst

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

John D. Williams -- President and Chief Executive Officer

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.

Mark Wilde -- BMO Capital Markets -- Analyst

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

John D. Williams -- President and Chief Executive Officer

Certainly. So, I think the task -- the thinking has to be around, how do you mitigate the risk of entry, what does that mean, right. Are you in partnership with somebody either at the containerboard 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 containerboard and is looking really to kind of commoditize, to be fair, the actual conversion piece. So, we look at -- 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 tons of containerboard into the open market. But if I'm really going to build a business, we have to work to mitigate that risk.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. Good enough, and good luck.

John D. Williams -- President and Chief Executive Officer

Thank you very much.

Operator

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

Nicholas Estrela -- Director of Investor Relations

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

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Nicholas Estrela -- Director of Investor Relations

John D. Williams -- President and Chief Executive Officer

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

Anthony Pettinari -- Citigroup -- Analyst

George Staphos -- Bank of America -- Analyst

Adam Josephson -- KeyBanc -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Mark Connelly -- Stephens, Inc. -- Analyst

Steven Chercover -- D.A. Davidson -- Analyst

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