Q4 2019 Earnings Call
Good day, ladies and gentlemen, welcome to the Doctors Corporation for 2019 earnings Conference call. At this time all participants are not.
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Meeting over to Mr. neglect of Shirley. Please go ahead.
[laughter] good morning, and welcome to our fourth quarter and full year 2019 earnings call.
Our speakers today will be joining Williams, president and Chief Executive Officer, and Danielle do own senior Vice President and Chief Financial Officer, [laughter], There will be supported by Michael Garcia from our pulp and paper Division Michael.
Fagan from the personal care Division.
John anything yet, we'll 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 reviewed on towards filing so the securities commissions for listing of those [noise].
Finally, certain non U.S. GAAP financial measures will be presented and discussed and you can find the reconciliation to the closest GAAP measures in the appendix of this mornings release.
She was on our website.
So with that I'll turn it over to John.
Thank you Nick and good morning, everyone.
Opening remarks today will be on the full year 2019 results and I'll comment on the fourth quarter.
After Daniels financial review.
Well, there's a whole all business generated good cash flow and we continue to.
To execute on all strategy and return cash to shareholders.
Our teams are I'd draw the 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.
$563 million and $442 million of operating cash flow.
Oh 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.
For prices were higher and all cost performance was strong resulting in margin expansion.
We were proactive in responding to market conditions by Matt.
During all production to our customers demand.
We took 300000 tons of market related downtime for the unannounced the permanent closure of approximately 200000 short tons well, 7% about capacity.
Our ability to adjust quickly to changing market conditions reflects the agility about.
Team as well as the Optionality of our asset base. We've shown that we can find creative uses for all paper us that system on declines and we've identified repurchasing optionality for approximately half of all remaining paper capacity.
In pulp, we exit a very challenging 2019.
With market prices, appearing to reach the bottom.
Despite low prices at this time in the cycle all growth plan in pulp remained on track.
We had another year of volume growth in all fluff business with an increase of 5%.
We ramped up our investments on high return projects that will optimize in a prudent fish.
Currency is an further drive performance across all pulp assets.
We have focused on improving our competitiveness with improved scale smart investments and continuous improvement projects.
We're also improving customer and product mix was tissue hygiene and specialty markets continue to shows.
Strong global demand underlying the importance of winning with key customers in key markets.
Well market pulp business has grown significantly in recent years, becoming a vital part of our portfolio as we position done for the future in growing markets.
I will have more scale this year with expected.
Volume growth from strategic investments the restart of Espanola, an additional pulp production from Ashdown following the paper machine closure.
In personal care the past year was focused on improving all margins, we executed our restructuring initiatives as planned and all savings came in ahead of schedule.
We also simplified and stabilized the business by focusing on strategic customers, an S.K. you rationalization to improve the profitability of our portfolio.
As a result, we exited the year to 12% EBITDA margin for a 400 basis point improvement over the prior year.
I'll bet.
Performance since 2017.
Well executing on margin improvement plan, we achieve some important wins in our infant diaper business that will scale up this year.
[noise] 2020 will be focused on the development of strategic customer relationships and investing to drive future growth.
Ability.
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 a buyback program by 300 million.
Those.
These initiatives reflect our confidence in our cash flow generation and reinforce our commitment to returning cash to shareholders on a sustainable basis.
Oh 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 the strengthen our best performing mills reduce our cost structure and supports our innovation capabilities.
We have a solid foundation on which should continue to build and expand a clear strategic plan, a strong financial position position an attractive investment opportunities.
With that let me turn the call I would've done you know for the financial review before making further comments on all fourth quarter performance and Twentytwenty outlook Daniel.
Thank you John and good morning, everyone, let's start by going over the fine charter lights of the quarter on slide five.
We reported this morning, and there's lots of 59 cents.
Share for the fourth quarter compared to net earnings of 32 cents per share for the third quarter of 2019 adjusting for items earnings were three cents per share into fourth quarter compared to earnings of 89 cents per share for the prior quarter.
EBITDA before items amounted to $78 million compared to 140.
$7 million into third quarter.
Turning to the sequential valuation and learnings on slide six.
So David sales were $39 million lower than the third quarter due to lower sales in our pulp and paper businesses, partially offset by ourselves in our personal care business.
We see issuing them or decision.
Was $2 million higher when compared to the third quarter and as you any was $18 million are higher than the third quarter largely due to the ire reversal of incentive accrual in mark to market of stock based compensation that's occurred in the third quarter.
At the point of reference quarterly as Ginny expense should be between 100 and.
16 and $120 million.
In the fourth quarter, we recorded an income tax benefit the $26 million you to do a loss incurred during the quarter credits recorded related to prior year uncertain tax position additional texture. It it's related to energy projects and benefits related to the final mix of earnings.
Into year.
Now turning to the cash flow statement on slide seven [laughter].
Cash flow from operating activities amounted to $160 million wall of capital expenditure amounted to $98 million. This resulted in a free cash flow of $62 million into quarter.
For the full year cash flow from abroad.
Racing activities amounted to $442 million in capital expenditures amounted to 255 million dollar, resulting in a free cash flow of $187 million for the year.
During the quarter, we've paid $27 billion in dividend and repurchase approximately 2.3 million shares for a total cash consideration of.
The million dollars for the full year, we've returned a total of $329 million to our shareholder through a combination of dividends and stock buybacks.
Under our stock repurchase program, we repurchase up with some of these 6.2 million share. That's an average price of 35 dollar in 29 cents in 2019.
Okay.
As of December 31st we had $403 million remaining under our buyback program and add 56.9 million shares outstanding.
Turning to the quarterly waterfall on slide eight.
When comparing the third quarter EBITDA before items decreased by $69 million.
Due to lower average selling prices for $30 million higher as Jane you costs for $18 million lower probably TVC for $12 million higher maintenance were $4 million I'm afraid for $3 million and our raw material costs for $3 million. These were partially offset by higher volume and mix.
A $1 million.
Now the review all business segments, starting on slide nine.
In the pulp and paper segment sales were 5% of the word when comparing the third quarter and 12% of the world when compared to the same period last year, maybe they'll before them with $64 million compared to 126 million.
Dollars into third quarter of 2019.
Our paper business on slide 10.
Sales were 5% lower gross this last quarter and were 8% of the work through the same quarter last year well is submitted a bid up before the end was $95 million manufactured paper shipments were 2% lower when compared to the.
Third quarter and 9% of the work. This is the same day last year.
Raise transaction prices for all our paper grades were $30 for Bruton lower than the last quarter.
We've been through 2020 with paper price slightly below the fourth quarter average.
Let's turn to default business on slide 11 sales were five.
<unk> through the last quarter and worth 22% to work through the same period last year.
Submitted a bid up before them was negative $31 million box shipment were 3% of the workers. So the third quarter and up 2% when compared to the same period last year.
Rich pulp prices decreased $24 per metric ton goes through the third quarter.
Sure.
We then search wings, winning the wood pulp price down by about $15 go through the fourth quarter average lot is largely due to pricing lag provided in certain customer agreements.
Up inventory decreased by 36000 tons, when compared to last quarter, while pulp inventory decreased by 15000 metric.
Our personal care business on slide 13 sales were 7%.
Lower when compared to last quarter and were 5% August of this sort of 7% higher when compared to last quarter at 5% of the work versus the same period last year.
If it did before I get them was $28 million $3 million I read into it.
Third quarter finally, consistent with a threat. They said this time of the you'll find and slide 14 to 16, our estimates for some key financial items for the coming year.
With respect to maintenance, our total maintenance cost for the years are expected to decreased by $17 million kept to what extent spending is expected.
Just to be between 230, and $260 million well depreciation and amortization is expected to be between 290 and $300 million. So this concludes my financial review would that sold during the call back to John John.
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.
Oh paper shipments remain challenged during the quarter with seasonally slower demand on some further de stocking in certain channels as a.
Well, we took further market related downtime to about a balance all supply with our customer demand and to reduce inventory operationally before school to included a number of major outages at several locations.
We also initiated the second major planned boiler outage it espanola.
The generates a bank work that's.
Well I know is now complete and the recovery boiler went through its pre startup pressure testing in the fourth quarter.
We did anticipate a challenging start up off to the prolonged outage and operations have stabilized and our attention will now focus on consistently producing quality and B.S.K.
Well that maintenance.
Cost for the quarter were in line with all guidance the elevated level of outages led to the unfavorable productivity impact. In addition energy was higher in quarter four and we expect for cost to remain elevated in the current quarter, which is typically a seasonally higher cost period.
Looking ahead for our paper business, we expect all.
It should be more balanced with our customer demand due to recent capacity closures and lower imports.
The books also picked up in January and we expect our paper operations to run at a higher operating rate in quarter one.
The pulp business average prices went down but market fundamentals for softwood.
We're 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 but.
Based on what we currently see we expect market fundamentals for softwood and fluff pulp to trend puzzle.
Visibly in the medium to long term supported by demand growth unlimited capacity expansion.
In personal care, we had a strong finish to the.
EBIT dollar in quarter, four increased when compared to last year, driven by a strong operating performance in Europe, coupled with solid progress.
Our asset repositioning and start up activities in North America.
EBITDA margins also continue to improve ending the year at 12% the highest level since quota for 2017.
We had a solid sales quarter, despite continuing to make S.K., you and customer decisions, which will further.
Enhanced portfolio profitability.
Oh 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.
Near term focus continues to be margin improvement I'm building value for our.
It was developing and scaling strategic partnerships to deliver on our commitment to grow the profitability of the business.
Capital allocation, we returned $107 million to shareholders, consisting of $80 million of share repurchases and $27 million of dividends.
Okay.
Alan sheets in good shape, which will allow for smart investments and all 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.
Okay. All paper volumes are expected to trend with market demand well pulp volumes will increase due to higher pulp productivity of the espanola Ashdown mills.
But it's a pulp and paper businesses will benefit from lower planned maintenance costs, a personal care business is expected to benefit for margin improvement on higher sales.
Sales following new customer wins.
Finally, we anticipate overall costs, including freight labor I'm raw materials to marginally increase so thank you for your time and support and I'll turn the call back to Nick for questions.
Thank you John So both John anything yet will be available for questions.
Yes, I'd ask or participants to ask a few questions at a time and returned to the queue for follow ups is we want to get as many people as possible Cassady you can open up the line for questions. Thank you. If he would like to ask a question. Please take note that press star one on your telephone keypad.
Speakerphone, Please make sure you touch and that's turned.
To allow your signal to reach our equipment again press star one to ask a question.
[noise] [noise] our first question comes from.
City.
Hi, good morning.
That's making money on.
John you talked about improving.
Market conditions and positive how long term fundamentals and softwood I guess in there in the more near term I was wondering if you could talk about kind of current market conditions, specifically with regards to you know China and the current a virus and you know we seem to see some signs of firmness in December and January just kind of want to understand what's going on.
I'm in the market right now and how that's impacting your business.
Yeah, certainly so let's talk the Corona bars briefly.
As you know if people start to go back to work on fiber in the ninth which is kind of the one week extension.
I think then we'll begin to understand more about what was really means.
Our view is it doesn't mean anything much in terms of overall underlying demand for the products into which we sell Paul you know I you know if you think about it tissue baby diapers I don't think coincidence I think providing people you know can get to the store and logistics still work I don't see any slowed down there where we have.
Seen some issues is product can get support but it may not actually at this point get too.
And if you like our customer so that working inventory down if they are in production of course, they won't be in production largely till after the ninth I think we'll know more then but I think the fundamentals it's still pretty good you know we see.
Growth as I said in the end use products [noise], we're pretty confident in our own customer mix. We've got some more tons to sell this yet, but it's not a dramatic amount of tons. So if I put all that together we've seen you know, obviously, we've announced a price increase.
We feel pretty good about that so.
Overall, I think you know a good kind of mid to long term momentum you know as we come off this this pricing trough that we found ourselves and.
Okay. That's helpful. And then you know in your remarks, I think you talked about being able to re purpose about half of your paper capacity and as we think about.
He 20 kind of any update in terms of how youre thinking about conversion opportunities and maybe you know relative attractiveness.
Potential Paul horse containerboard conversions.
Yes, sure I'm happy to answer that question. So as we've always said you know, we're driven by the market in which we operate I uncoated freesheet. So.
Anything we think about re purpose thing has to be seen in the context of how that market is performing and obviously last year. You know we took a lot of downtime. We took a closure we feel this year actually all supply demand balance will be much better and certainly and if I look at January I think that assumption is actually correct.
So having said that when we look at conversions you know we still see the Optionality, we had a both in pulp and in containerboard and I think you know as we get closer to feeling we have that need you know will offer a bit more clarity, but those choices. We still think we have.
Okay. That's helpful I'll turn it over.
Alright. Thanks.
Our next question comes from George Staphos.
Yep.
Hi, everyone. Good morning, Thanks Gail.
How's it going I wanted to.
Piggy back a bit on the commentary you had on.
Uncoated freesheet demand and and what.
Changes, you're saying and customer behavior. You you mentioned I think to Anthony's question, you've seen over it would pick up in January and you put a little bit more color on that to extent possible in that a couple of follow ons.
Sure. So if you recall.
Oh premise.
Has been but an inventory bubble was built around you know the dramatic closure from GP.
And that inventory bubble caused a number of people to thing no I really am I going to get paid but no I am I Gonna got paper and I've tried to price kinda I just got paper so a lot.
Product came in that product has taken a long term long time pardon me to find a home.
We think that's now largely over and so you know we're back into a more.
Sort of supply demand balance perhaps than we have been I think you know when you look at how impulsive reduced.
Also.
We've seen a number of customers who at that moment in time felt you know I have to go elsewhere, because I'm not sure all the domestic supply base is gonna give me product, we've actually seen a number of large accounts now move.
Some to us some two others in terms of wanting to get domestic supply just because of the supply chain.
LNG is a buying imports so I I think we're in a much more central place George in terms of supply them on them we have been.
[noise], China I know it wouldn't really be a factor in the U.S. market for say, but do you think that can extend that Paul globally crashed last year.
Which.
Men that some of your non integrated producers of paper May have also seen some customers de stocking and those producers de stocking because they were getting more and more favorable pricing you think that wasn't effect at all in the market or not really at all.
I think that was a bit of it impact from the non integrated.
By.
You know who could produce a bit of paper thinking well you know now now actually there's room for me to make a little bit a margin. So all 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.
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 just that the Praj had gone on last year, but you know what should we take away in terms of the reduction maintenance spending this year.
And one of the implications for 21, I recognize you're not going to try and give us guidance on that but is this level good to carry forward or connecture be up again, because this year was down.
Well so it gets to anyone is hard to on so I would say is a current working premise. This levels about right actually this year I think we have nine major.
A maintenance shuts last year, we had eight so we we just had more work to do last year. When you know we got various discoveries that perhaps we weren't expecting so if all sense all what we're going to find is correct. This is this is a pretty good number to take full what I would say George.
Little bit of education in their goals as there always is but it's a reasonable number.
Alright, Thanks, very clear I will turn it over come back Thank you [noise].
Thanks.
Our next question comes from Adam just.
Good morning, everyone. Thanks for taking my questions I appreciate it come on at the.
Tony morning, John.
John Daniel Daniel You mentioned exit pulp prices were 15 box below the fourth quarter average if I heard you crackling I think you attributed that to some lags.
And certain customer agreements I can you just elaborate on what exactly you're talking about there and.
Uh huh.
That jives with your commentary about Salford fundamentals improving.
Adam Let me take that Daniel and I are actually in separate places today due to the fact that I couldn't land anyway yesterday. So let me take [laughter] when we have.
Essentially we have certain customer.
Contracts I guess, I would say where it if there's a bell curve of pricing in real time. The way. Those contracts are constructed is that bell curve is kind of delayed. So you know the upward movement the pricing is delayed to level things off but downward movement.
End of prices the light at the tail end, so what what you've seen it is a reset in a couple of those contracts just based on contractual agreements, which said you know you didn't see that decline in the fourth quarter, but you've seen it in the and the at the beginning of the first quarter. So that's really what's.
Driven this.
This view of how a pulp prices sort of shifted slightly differently. So what you might imagine if you just took the public data.
And with that software fluff, John just to be Claire or both.
Both.
What about okay on the on the freesheet market shot for 20, obviously the market was down.
And our normal amount last year. So you have easing comps any other presidential election for whatever that's worth they historically, there's been silos to demand and years in which that's been the case. So do you expect a market decline of less than not the long term, 3% to 5% or not necessarily.
We're not planning for that.
We're planning for that three to five but of course you know.
If everything looks like the Iowa cool, because it's going to be very different [laughter] [laughter] understood.
In terms of the buybacks and the timing of you had elevated inventories really throughout the second half a year and obviously, that's what led to the.
The preannouncement, so why buyback so much stock during that period, when you're having these inventory difficulties rather than just waiting to get those cleared out and then say okay. We got this figure it out and I won't go into the market and and buybacks and stock.
Well I don't have to be I, I mean, I think there's just no perfect time on the.
Timing I think if you look at the price we've paid for all stock on average and the price we were paying we still felt it was a very very compelling wager returning money to shareholders.
I don't feel that we got a missed a trick to your point in that case.
Right, Okay, and just last one John do you talked about how I think half of your remaining paper.
Machines could be converted.
And you've talked about conversions quite a bit.
As far as market was flat last year was a significant deceleration in growth from what we've seen in years past 10, we're not really doing the ecommerce impact anymore in the economy slowing or do you have a particular view as to what.
Box demand well 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 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.
Experienced when I ran a European business for eight years, a you know 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 the mine mine, but that's that's a better proxy.
[noise].
Thanks, so much.
Okay.
Our next question comes from Brian Maguire of Goldman Sachs.
Hi, good morning, guys [noise].
Hi, good morning.
First question kind of tied together a couple of ones that have already been asked but maybe from a little bit for different perspective, yeah that the paper market as many of mentioned you know.
Very weak if you took a lot of economic downtime at 300000 tons. In 2019, you know with the inventory clearing maybe they can tell a little bit better you know never Dale conversion should probably take a little capacity out but it still seems like as you guys. You know what's your premise that more capacity is kind of need to come out of that market.
You know you still talked about.
Containerboard conversions as being an attractive option.
Yeah, and then you spent over $200 million on buybacks and 2019, which I guess what had been enough to kind of find at least one conversion there roughly.
The bottom end of the range for doing that so I guess, you know two should we read something and.
To the decision to go ahead with an aggressive buyback as opposed to go ahead, but they convert at this time and.
If they need to raise two to do that conversion at some point in 2020, given you know paper demand looks a little bit softer than you might have to take some capacity out you know how would you kind of be able to find that has a capex moves.
I'll be a bit elevated a in your plan for for 2020, obviously you know EBITDA cash flows are in a great spot given what what's going on in pulp and paper markets. So you know just kind of the question around you know what should we read into on a conversion timing and how would you kind of find that if you had to do.
Today.
Okay, Brian well I was a long question, let me let me 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.
Yes in terms of asset utilization.
So as we progress we're always very careful to look of that you know, we'll we'll take a downtime then we'll take a shot you have to remind yourself that the downtime. We took in go to fool you know some of that was obviously motivated by the fact that we needed to reduce our our inventory because we're just.
During the two much stock based on how positive we were feeling about the market place earlier in the year. So I think that's important so conversion doesn't kind of standalone as a decision. It only stands alone in the context of uncoated Freesheet Tomorrow and if you look at all choices. We have some choices are we thinking.
The kind of mid to where we could actually do something sensible around pulp, which would not preclude us from doing containerboard in time.
So you know, we think about that pretty carefully in terms of marketplaces, we want to be in and where we have a presence and quite frankly.
Frankly, there are some other choices we may have some of the ball mills, which would mean you know we keep them full but we keep them full doing something slightly different kinds of paper grades and lightweight papers. So I think if you put all that together.
It it's really the demanded uncoated freesheet the dry.
Gives us the conversion on the attractiveness of that market and of course timing these things.
[noise] is always a challenge you know we opened a lot of fluff pulp capacity and Ashdown at a time I think when most of as well you know pulp was gonna be challenge will in fact, you know for two years fluff pulp pricing was very strong so.
You know this is a 30 year investment when we make it I think the reason we're taking our time is one you know uncoated freesheet still a great place to be and you know, although we've taken that shut in Ashdown last year, we still feel pretty confident the you know we have optionality in this network. So.
So long winded down so for which my apologies, but.
I think you <unk> one needs to think about the Optionality. We haven't this network is still very strong.
Okay I appreciate the at the detailed answer there [laughter] live in a personal care you know the margin improved a lot I think you're guiding to better margin and a 2020 and sounds like sales with the appeal with that so many business might just fine.
Thank you talked about getting eventually get into sort of a mid teens margin is that yes, I do think there's a line of sight to that at some point in 2020 as like an exit rate yeah, maybe the low end of that mid teens level and yeah. They just expand a little bit more on the other diaper business wins and you know what that could contribute to volumes and then.
2020.
Show Oh. So obviously you know we have a 2020 plan we had a very strong January in that business.
So I feel well we're on the road to sort of sustained margins other kind of level. We saw encoder fool, whether we exit the you know a couple of points above that so I can.
Claim I'm in the mid teens I'm not sure yet I think we need to get further down the track I.
I think we've done two very interesting things in the personal care business. So of course, we shut the wake up facility. We have generated that were generating the cost savings we expected.
And we've also really focus 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 SK use this kind of ugly tail, we had which was causing so much complexity. What that means of course is you know we put five diaper lines out away.
Go back into our Delaware facility, we now have a really focused.
Infant business in the U.S.
And we think the operating efficiencies, we're going to get from that as we fully ramp up which we have yet to do are going to be quite dramatic we saw some of them come through in.
January but I think we've got more to get so I'm feeling very positive actually about in the momentum behind that business. So.
I mean, I hope that answers your question, but I I think that that's the way we said.
Okay, that's great Yeah, I'll I'll get back into queue. Thanks.
Sure. Thank you.
Our next question comes from.
Okay.
[noise] morning, John Good morning, Daniel Good morning morning, John I Wonder if we just jumping back to let the Brian's question around a personal care is there any way that you can kind of help us in thinking about sort of.
Cadence.
Thing and scale of improvement that you would expect in personal care as we move through the year.
Let me see how I can help so.
I can give me some top line help so so all view is you're going to see you know solid sales growth.
Throughout the year, we have some business clicking in probably now third quarter.
Which I think we'll see the sales job you could take.
Rough rule of thumb, you know that margin somewhere between 10 and 12 on an annualized basis, perhaps building towards the year Randall maybe.
A little further I think that's the way I'd say it all I can give you much will obviously when we don't people to give guidance, but I think if you put all that together you'd say strong topline growth.
You know EBITDA following up the kind of levels, we've seen and then Oh, that's that's a reasonable rule of thumb for that business and 2020.
And in July.
That business John you know over the next two or three years I mean isn't it is a mid teen EBITDA margin a good margin target in that business.
Well I think overtime.
That's a great question so.
If you look at the major competitor.
With showing margins.
Very similar in fact go to fall slightly ahead of their annualized margin. If I think I've got my numbers right probably by point.
I.
I think mid teens is a good place to get to.
Certainly if we were a branded house, we'd we'd be looking for margins that was slightly higher than that but I think mark that's gonna be.
Scaled question actually more than anything else, but you know certainly on a business that has got a runway in sales terms over time too.
In a $1.3 billion to $1.5 billion with the asset base, we have in place which are numbers I know, we've given you before.
And we can get the economies of scale, we could get a.
Bit more ambitious but for now I just want to get to that point.
Yeah, all right well I think we'd all be happy to see that point [laughter], just shifting gears a little less.
I'm showing just update us on what the trade situation is right now with the kind of a white paper imports.
Yeah sure. So we've got you know there's a current case, which is a Portugal, Brazil, China, Indonesia, Australia are on sheeted products. That's the circumvention case on sheet or roles you know where people. So those are whether duties. Currently sit then there's some people who we believe we've been trying to circumvent that.
That's the same five countries, except for Portugal, and you know the Commerce Department is accepted that filing questionnaires have been sent to produces an importers.
So you know we're expecting something back from commerce on that and then of course, there's something that probably turn up in the press I think recently.
The trade Association, leading a project on sort of filling in countries. So this would be sort of tie them, Finland, Israel, Germany, Columbia, South Korea, Argentina, which you know.
In Poland is probably about 200 230000 tons, so, but that's just getting very early stages.
So I'll give you enough color on that.
Yeah, I mean are there any kind of key resolution points coming at us over the next.
Six months.
Well, maybe on the circumvention case from the department of Commerce, where something should emerge within that kind of timeframe.
Okay, all right that's helpful.
[noise] I guess or I guess, that's it for me right now John I'll turn it over.
Thanks, Mike.
Our next question comes from Mark Connelly of Stephens.
Two things first can you can you let us know how satisfied you are with your inventory levels.
Near term in both <unk> and and pulp you've obviously made a lot of progress.
The second question was about your comment about supporting innovation.
Is there anything you can share with us in terms of new products or or new approaches to markets.
Certainly Buck so I think on inventory you know it would be foolish.
Just to say it was the C or your ever happy.
And if I look at the inventory turns we were capable all of a while back.
You know, we're still not at that level of inventory turns that I would like to get too I think we're in a good place, but I think we could be in a back to place I don't think it's a dramatic.
Number, but you know I would always like to make certain were running the network as tightly as we can.
So all that further opportunities.
Probably peripheral but.
You know what we'll have to say something about doing something he wants to do to kind of tie not working capital wherever one can on the innovation side.
As you know a couple of things.
So we.
Absolutely organized a biomaterials business, we think there's 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 you know can we generate paper grades that substitute for plastic whether that's the kind of stretchable paper.
The whole number of things, we've really dog game, there in terms of R&D and in terms of testing protocol.
And that's one of the things actually on network allows us to do particularly out of.
Nekoosa <unk> your own and Espanola. So yeah, it's not it's not a lot of tons, but we think there's potentially <unk>.
Super Thank you.
You're welcome.
Our next question comes from cheap.
D.A. Davidson.
Thanks, Good morning.
Right.
To help calibrate Q1 results I was hoping you could tell us how fiber cost in the U.S. so might differ a year over year. Obviously last year was I think the wettest on record.
Yeah, what we're not expecting.
Massive.
Relation in the first quarter on fiber costs, one of the reasons being Steve is actually all inventories. So you know a chip paals were in better shape than they were at this time last year.
I say that but it was like Oh, My God knows you are probably.
No damage, but you know the places soaking wet which is obviously what drives the costs winter up in so around a Canadian mills hasn't been an issue Kamloops, the lumber industry sort of firing back again and the local governments, helping to make sure that you know off by because I've got Mad on US just based on what's going on up there. So.
We're not expecting much inflation in that space.
Okay. Thanks, and then switching to fluffed Paul.
Any idea why it's been so challenge in terms of both pricing volumes since presumably it has better growth prospects and.
Commodity market Paul.
[laughter].
I'm not showing it on to that question I mean, I can I speak for ourselves I mean, the the the pricing piece has been.
I think it's been partly driven of course that you're always comparing fluff felt a southern soul food pricing.
And actually the delta between fluff pulp and sell them self what is still about 100 hundred and 10 Bucks a town, which you know historically is a reasonable delzer, but I think its its tail down to the southern software does tiled down.
Because a lot of people have swing capacity.
That little shit that southern software that said <unk> I'll tell you what I better off selling fluff, Paul even if I'm selling that fluff, Paul, but a little bit of a discount to sort of the current price and as that's happened fluff as slid perhaps further than you would expect does that give me a bit of color on that.
Yes. Thank you and then find more with respect with respect to conversions I'm just wondering when you.
Look at the end markets and so far you really want again and into.
Fluff pulp does evaluation multiple play into your thought process. So you know if for instance.
The end market was deemed by.
Bye.
Wall Street to be even less compelling then freesheet with that plan to your conversion analysis thinking.
I mean the onset.
Yes, but.
So I I would say, it's one of the things you're always you're going to consider you know all the although z. bit dollars value differently than if you're in X.Y.Z. market I I think to us, but one starts off with you know is.
Do we have a place to be competitive.
Do we have a story to tell whether customer can see the value that we can create both with them and for ourselves, but on down to the you know part of that consideration of course as well you know, it's not seen as a call. It what you will hire value category than others.
Got it okay. Thank you.
You're welcome.
<unk> I think of America.
Hi, Thanks for taking the font they want to come back to a a common you may John about uncoated freesheet and not that I'm surprised but you said, it's still I think a great place to be or your positive on uncoated freesheet.
Positive market to me and if if I if I quoted you correctly in the first place.
Cause just of the fundamental themselves you know you know obviously, recognizing what's been a a challenging demand environment or is it a great place to be a good place to be because of the Optionality. You know what you know frames that and I know the actual ball the above but if you could give us a bit more color and why you think it's great.
I'll try not to be that won't be as in my responds, Georgia promus. So I I think two things painting really you know with supplied them on in good shape. This is this is a profitable enterprise right. These this is this is an attractive place to be in terms of the bit though 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 own bring buzz is some of our competition. So we're feeling.
You know good about the value proposition that we're offering customer base and to your point I think because of our asset base, which I would consider specific to off we have some very interesting choices. We can make a you know in in a world of high.
<unk>.
In a world of capital intensity to make certain the you know we can make good money off those assets pretty much in perpetuity. So if I put those two things together I said to myself, yes of course, the challenge of managing you know at fault line those declining in paper, but a growth positioning bulb and a growth position in person. Okay. So put all that together.
I feel I feel pretty good about that.
Okay.
Thanks for that John and I I guess, the the second question I had.
Maybe a little bit longer term bigger picture you know if I look at Dom Tar as you know financial performance over the last number of years.
After the financial crisis after black liquor.
You know you're free cash flow has been in a range basically of you know call. It 150 million to $350 million before dividends. The returns have been relatively stable, but not growing your your stock price has been relatively stable and so you know if somebody was looking at that without looking at.
You know who the company was on the cover the annual report if in fact anyone looks at you know fiscal annual reports anymore.
You know they wouldn't necessarily think that is a an equity return, but it's it really more of a bond like return how do you think that if you agree with that premise might you know impact your capital allocation on and going forward base. You said you you'd be balance you ought to keep the balance in good shape, you want to invest in growth.
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 Donald her longer term.
Pluses and minuses of being in the public markets et cetera, how to how to you all think about that aren't going forward basis. Thank you.
Right. So I I think what you have to law school, so it's kind of wolves.
The Investor proposition right why why why am I in this business is an investor.
I guess the way I see this as you know you're getting a great yield you continue to get a great yield.
That full from a capital allocation standpoint.
We have to do I think Managerially is no go chasing the rainbows trying to necessarily out <unk> of 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 of baffle keep.
Money from the asset base that we have so.
So to my mind, I think it's about a level of caution.
It makes a and the you'll you'll was sitting there thinking you know I'm going to have a.
Conservative balance sheet I'm going to understand the you know about dividend is a priority I'm going to understand that I'm going to keep my promise in terms of capital allocation to make so little to.
Do anything foolish, if you like in terms of betting there'll still.
Thanks Shuttle.
It helps to be continued thank you good luck on a quarter alright. Thanks.
And that's your mind you'd like to ask a question. Please press start key file by that one.
Sorry.
The next question <unk> of Goldman Sachs.
Buttons on the Cat Bacsik came in a little high in in fourth quarter. Just wondering if any reasons for that or anything I. Just me projects in that and then you know within the guidance for 2020, you know how much would be a growth cat backs and you know we it's a you know if the world changed suddenly and you had to kind of.
Got to kind of a lower level of cap X., where do you think <unk> back I bought about it.
Show, So a rough rule of thumb would be anywhere between sort of 150 180.
Kind of the stay alive keep the assets in good shape complex Brian.
<unk>.
Anything more than that may well be grows, particularly in the <unk> and we'll be projects you know, where we're looking for productivity or we're looking for cost reduction. So if if you said to me.
If you have a button down matches. If you look if you take a long look back when we were a big of business in volume jobs on asset terms actually you know what we were able to do to to in 2009.
To really button down the <unk>.
Yes, we could always do that again, if we have to I I think in the end you got to pay the Piper and now is a little bit but you know you couldn't you can get this if you really wanna be lean and mean and the world's ending you can get this down you know below that 150 hundred and 82 710, but you don't want to do that for long.
I just on the four q. being a little bit I elevated yeah, sorry, sorry, I forgot that part of the question My apologies I mean on that really we just had some some good projects that we needed to complete we had a few projects we brought food a little bit from 2000.
From 220 into 2019, so some deposits got paid nothing more mysterious than that really.
Okay I'm not sure if he can comment on it but maybe been active buying your stock back so far and one q.
I can't comment on that.
Gotcha, Okay had to try the thanks again.
Thank you.
Yes, I know question comes from I.B.M.L. capital markets.
To follow ups job at one is we are seeing some consolidation and especially paper segment of the market and I wonder whether there's a role for for downtown in that process at all.
I don't think so one of the reasons.
I'm old was.
Those businesses a full of.
No 1000 sound 2500 ton businesses products customers.
So.
Consolidating that I'm not sure that makes much sense for us I I think quite honestly you know, we've got opportunities to develop products and grow organically in that space, which I'd rather take.
But the other one I have John it's just when we think about these conversions and I and I'm thinking kind of more bucks containerboard than.
The biggest challenge to me is is kind of market access and and kind of channels to market.
Could we just get your you know updated thinking on that issue.
Certainly so I think the task the thinking has to be round.
How do you mix it gave the risk of injury, what does that mean right Oh you in partnership with somebody either the Containable would end of things are you in partnership with somebody at the corrugated Bucks plus end of things all the sheet feed the end of things you know.
You in partnership with a large customer for example, who is kind of interested in seeing value all the way back to constrain aboard an is looking really to.
Kind of come motor ties to be fair, though the the the actual conversion piece. So we look at.
We have discussions with people on all those parameters.
Just.
<unk>.
That injury risk because I agree with you that there was an element the rest of that I'm not completely convinced that I couldn't put out.
A few hundred thousand tons of containerboard into the open market, but you know if I'm really going to build a business we have to to me the guy that risk.
Okay, good enough and good luck.
Thank you very much.
And at this time, we have no further questions and you.
Thank you Cassidy, we will release, our first quarter 2020 results on Thursday April 30th 2020, Thank you for listening and have a great date.
Yeah, I'm anything plus your teleconference me now disconnect.
[laughter].
[laughter].