Q1 2020 Earnings Call
[music].
Good day, ladies and gentlemen.
Welcome to the Domtar Corporation Q1, Twentytwenty earnings Conference call.
At this time, all participants are in listen only mode.
Following the presentation, we will conduct a question and answer session and participants are asked to press star One to register for a question.
She would you require any assistance during the call.
Please press Star then zero on your Touchtone phone.
As a reminder, this call is being recorded today Friday.
Oh from me.
I would now like turn the meeting over to Mr. Nicholas Astrella. Please go ahead Sir.
Thank you my Greek.
Good morning, and welcome to our first quarter 2020 earnings call as many companies are doing we are doing the called remotely. This morning, therefore, the sound quality NATO and they may not be as usual. So we hope you can understand.
Our speakers today will be John Williams, President and Chief Executive Officer, and Danielle do all senior Vice President and Chief Financial Officer.
John anything yet will be supported by Michael Garcia from our pulp and paper Division.
Michael Fagan from the personal care Division.
During the call references will be made to supporting slides and you can find his presentation in the investor section of the website.
As a reminder, all statements made during the call that are not based on historical facts are forward looking statements subject to a number of risks and uncertainties many of which are outside our control.
I invite you to review Domtar's filings to the securities commissions for listing of those.
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 as well as on our web sites, so with that I'll turn it over to John.
Thank you Nick and good morning, everyone.
Let me begin by recognizing that this is an extremely challenging time for the world community.
Oh thoughts or were those most affected by the current prices, particularly the men and women working on the front lines.
A full providing some color on a strong first quarter I'd like to outline briefly what we have been doing to navigate the disruption caused by the Cobiz 19 pandemic.
I'll do so on two levels first with respect to our employees and communities and second with respect to the business.
The onset of the crisis, we activated a crisis management process and created a pandemic committee to develop an improvement protocols to protect the health and wellbeing of our employees an outside contractors.
[noise] by acting early we have kept our work places on our employees safe, while maintaining substantially uninterrupted operations and our mills production facilities.
Some of the measures. We took include work from home arrangements, where possible no international travel I'd only local travel by exception.
Of the manufacturing level, we've modified work practices to ensure as best as possible physical distancing on the shop floor during meetings and through no income tax receiving in shipping.
We're limiting visitors to our sites outside contract workers are subject to isolation controls contacts tracing health monitoring physical distancing and hygiene controls.
In all cases, we're partnering with our colleagues individually and proactively to ensure they are protected and feels safe.
Our pandemic committee continues to check and regularly to review developments updates safety protocols as appropriate and communicate regularly with all of our locations.
For our communities the company and our employees have stepped up in a major way to express our value of Kerry.
We have provided support to local medical workers first responders and citizens in need many of our facilities are made important donations to help local hospitals and healthcare workers combat the pandemic.
Additionally, many of our employees have made individual gifts to local agencies and organizations.
I'm very proud about contributions and of all we have done to support our communities.
Turning to the business itself, we've been proactive and reducing risk.
Safeguarding our ability to whether the current prices were taking the appropriate steps to optimize our operations and to remain an agile reliable partner to our customers.
In April we announced a temporary shutdown of our Kingsport, Tennessee mill and the paper machine at all Ashdown all console mill to three months.
We also announced the temporary shutdown of our Hawesville, Kentucky Mill until July.
Which will be completed in two phases.
Over a three month period, our production capacity will be a reduced by approximately 227000 short tons or approximately 30% of our uncoated freesheet paper capacity.
We will continue to closely monitor customer orders and backlogs and we'll adjust capacity accordingly.
We've always believed that a strong balance sheet as a critical component to realizing stockholder value I.
So we moved quickly to further strengthen liquidity and cash flow in order to ensure we maximum optionality and pursuing our strategic vision.
Earlier this week, we closed on a new 300 million dollar five year term loan with a priest proceeds being used to further improve our liquidity.
As a result, we now have over $900 million of liquidity, providing the financial flexibility to manage through the uncertainties of the current environment.
We have revised our capital plans and reduced our forecasted 2020 capital expenditures by nearly 40% to $140 million.
In addition, we are reducing maintenance spending for the year by $40 million.
We've deferred certain projects to future years, and we are being more restrictive on discretionary capital.
We've taken aggressive actions to manage working capital and to reduce operating costs discretionary spending and SGN a expenses.
Finally, our actions also includes the suspension of our capital return program, which will result in the suspension of both the share repurchases and our quarterly dividend.
Longer term there has been no change in our capital allocation strategy.
As in the past we remain committed to a balanced program that will include returning a majority of free cash to shareholders over time.
Despite the headwinds from Cobot 19, our focus remains on long term value creation.
We are taking thoughtful decisive actions to be responsive to the current market environment, while positioning our businesses to quickly regain momentum as we see market conditions improve.
We have a solid foundation on which should continue to build and expand the clear strategic plan a strong financial position.
And attractive investment opportunities.
As the global pandemic continues we remain focused on navigating through the crisis by keeping our employees and their families safe serving our customers is an essential business.
Protecting our financial stability.
Im proud of our entire team and their efforts to ensure that our business is fully operational during this unprecedented situation, whilst adhering to the strict health and safety protocols that we put in place.
With that let me turn the call over to Daniel for the financial review before making further comments on our first quarter performance and our outlook Daniel.
Thank you John and good morning, everyone.
I hope everyone is staying healthy and safe during this global health crisis.
I'd like also to thank our 9700 employees for their incredible actions during this difficult time.
Let's start buying over over the financial highlights of the quarter on slide four.
We reported this morning net income of nine cents per share for the first quarter compared to a net loss of 59 cents per share for the fourth quarter of 2019.
Adjusting for items, our earnings or nine cents per share in the first quarter compared to earnings of three cents per share for the prior quarter.
EBITDA before items amounted to $95 million compared to $78 million into fourth quarter.
Let's turn to the sequential valuation in the earnings on slide five.
Consolidated sales were 34 million dollar higher than the fourth quarter due mostly to ourselves in personal care.
Depreciation and amortization was $2 million lower when compared to the fourth quarter and is there any with $10 million lower than the fourth quarter, largely due to mark to market of stock based compensation and lower discretionary spending.
Our first quarter.
2020 effective tax rate was 33%, which was affected by a small increase in evaluation allowance related to the expected they elevation of certain state tax credits.
Now turning to the cash flow statement on slide six cash flows from operating activities amounted to $88 million, while capital expenditures amounted to $62 million.
This resulted in a free cash flow of $26 million into first quarter.
During the quarter, we've paid $26 million and dividend and we repurchased epilepsy, approximately 1.8 million share for a total cash consideration of $59 million.
Let's turn to the quarterly waterfall on slide seven.
[noise] when compared to the fourth quarter EBITDA before items increased $17 million due to better productivity for $15 million higher volume and mix for $10 million lower as Jenny for $9 million lower raw material costs for $6 million lower freight for $3 million.
And a favorable foreign exchange rate for $2 million. These were partially offset by higher other costs for $11 million lower selling prices for $10 million and higher maintenance for $7 million.
Well the review our business segments, starting on slide eight.
Given significant customer overlap between the two businesses E M. A manufacturer of high quality Airlaid and cutting laminated scores now report. This result within our pulp business. This business was reported within our personal care segment in the past.
In the pulp and paper segment sales sales were flat when compared to the fourth quarter and 11% lower when compared the same bigger last year.
Maybe they'll before at them were $66 million compared to $65 million into fourth quarter of 2019.
Now our paper business on slide nine.
Sales were 2% harvest this last quarter and were 9% of the were aggressive the same quarter last year, while estimated EBITDA before items was $100 million.
Manufactured paper shipments were 4% higher when compared to fourth quarter, and 8% lower versus the same period last year.
Average transaction prices or all of paper grades were $6 per ton lower than the last quarter.
Our airport paper shipped memoir, Fs method, 35% lower when compared to the monthly average in the first quarter and Weve enter and krill April with paper prices approximately $15 per ton below the first quarter average. We also expect a negative mix in the second quarter.
Let's turn to our pulp business sounds like them.
Sales were 5% lower versus the last quarter and were 15% lower versus the same period last year estimated EBITDA before items was a negative $34 million Bucks shipment were 4% of the work versus the fourth quarter and up 11% when compared to the same period last year average Paul.
Prices decreased $13 per metric ton versus the fourth quarter.
Our April pulp shipments were up back plus metric, 10% when compared to the monthly average in the first quarter and Weve enter April with average spot prices in aligned with the average of the first quarter.
We also announced some price increase initiatives for both April in me.
Our paper inventory decreased by 30000 ton when compared to last quarter, while pulp inventory increased by 24000 metric tons.
Our personal care business on slide 12.
Sales increased 14% when compared to last quarter and were 11% higher versus the same period last year, largely due to the ramp up of a new business and customer pantry loading.
EBITDA before items was $24 million $7 million higher in the fourth quarter.
Turning to liquidity and capital we are prudently managing our balance sheet and liquidity position in this uncertain and volatile environment, We just announced that we further strengthened our financial flexibility with your new 300 million dollar five year term loan.
We do not have any met the old debt maturity until 2022, while our pension fund our well funded are a key objective is to maintain the strong liquidity position as with as a solid balance sheet.
Finally, you will find on slide 13, and 14, our revised assumption for 2020.
Some of our near term capital project can maintenance activity will be temporarily delayed well. He provides our eyes due to the current environment with respect to maintenance our total maintenance costs.
For the year I expected to be lower by $40 million Capex is expected between to be between 140 and $150 million, while interest expense is expected to slightly increase.
So just comfortable my financial review and will that ill turn the call back to John John.
Thank you Daniel we delivered solid results in the first quarter supported largely by lower overall costs on a strong performance in our personal care business.
Our paper volumes were 4% higher versus the fourth quarter benefiting from seasonally stronger shipments as de stocking was largely complete in several channels late in the quarter. We also saw some customer prebuying to avoid supply chain concerns until mid March our order books with strong.
However in the last five weeks due to the cobot crisis and as a result of the locked down of schools offices retailers and other business sectors. We experienced a reduction of orders major office product retailers are seeing a significant drop off in both their business to business and retail volumes, which has been partially.
The offset by an increase in online sales and in the club channels.
Pay the merchants are also seeing an important dropping their business, which is primarily serving commercial printers.
Results. Our current expectation this are significantly lower demand for paper in the second quarter. However, we have seen the decrease in imports to North America, which should provide a slight offset to lower demand.
Specialty and packaging papers, including label papers and medical grades are all experiencing relatively solid demand.
Many of these grades are required to support the central businesses.
We had strong productivity from lower market related downtime, while inventory fell by 30000 tons in the quarter and 21% since the second quarter 2019 wallpaper demand is uncertain. We believe the our inventory will be at appropriate levels, given our recently announced capacity reduction plans.
Last week, we completed the acquisition of the out for you and point of sale business.
The combination of our world class paper, making capabilities with the west cartons coaches significant scale makes for a globally competitive point of sale business and provides new opportunities for our future growth.
We believe the business has the potential for significant commercial optimization by leveraging our brand reputation and value proposition.
The Pos business will accelerate our efforts to target specialty paper applications and plastic substitution growth opportunities go and providing us coating technology and innovation capability that we did not have prior to the acquisition.
I'm pleased to close this transaction on time, given the complexities around the cobot 19 pandemic and we're proud of our employees and our new employees, but making this transition during this difficult time.
In the pulp business prices in North America were down versus quarter floor as expected largely due to pricing lags in certain customer agreements while prices remained relatively flat in China.
Our pulp shipments were steady in quarter, one with strong growth in fluff pulp. Despite some logistical challenges and a major shutdown of operations in China, Judah Cobot 19.
We did see good demand from our north American tissue customers and overall demand in the second quarter remains strong, particularly in China as they continue to reopen their economy.
Our leverage to softwood and fluff pulp grades is proving to be favorable in the current environment.
And we are aligned with strong end use segments across diverse markets.
Going forward, we expect to capitalize on strong tissue and towel markets in both North America and in China.
Our tissue customers are well positioned while fluff pulp business is strong and growing.
We're getting good feedback from our customers as we're keeping their supply chains in tact and covering their increased demand.
On pricing, we have announced increases with several softwood and fluff pulp grades in both April and May.
Operationally a key focus continues to be our espanola mill. The mill started up during the last week of December after nearly 60 day outage to replace the generating bank on the recovery boiler.
Some challenges remain as we transition to a streamlined operation, but we've made significant improvements in the power and recovery areas of the mill.
In personal care, we had a record sales and EBITDA quarter.
First quarter sales were 14%, Ireland quota for an 11% higher against the same period last year, including significant shipments to support consumer stock up in preparation for in hone corn gene.
In addition, we were already off to an excellent start to the prior to the outbreak.
With a strong performance in several channels and the scale up of major new customer wins.
EBITDA margin for the quarter finished at 13%.
Which was a 130 basis point improvement versus the prior quarter.
In addition to strong sales EBITDA was supported by good productivity as well as a reduction in SGN a spend.
Infant diaper sales volume was up 75% versus quarter Federal 19.
Due to the launch of a new customer and higher infant demand overall in response to cobot 19.
We continue to increase operating rates and we have further opportunities to open up more capacity across the network.
We have established rapid response teams to maximize productivity to support our new customer wins, an uptick in demand and inventory replenishment.
We are maintaining high levels of customer service. During this period of growth my garnering positive feedback from customers.
Our current planning assumption is for pantry inventory levels to return to normal in the second half of the year.
Overall, we're operating from a strong financial position with good liquidity and no debt maturities until Twentytwenty too.
Our business is resilient offering paper pulp and hygiene products for daily consumer needs and delivering essential products to customers worldwide.
Our specialty paper products have many medical applications, including use in hospital gallons testing kits labels and many others.
Our papers user medical records prescription pads instructions that doctors and home with the patient pharmaceutical inserts and other medical uses.
Fluff pulp is a key component and infant diaper as an adult incontinence products. It's also used in hospital pads and other absorbent products.
Softwood pulp is used by our customers to manufacture child in tissue products. When we provide hygiene products with baby care adult incontinence and feminine protection.
In these unprecedented times, we continue to take appropriate action to ensure we remain well positioned to whether an extended period of uncertainty.
Our priority will remain on cash flow preservation with an immediate focus on reducing costs.
Operationally, we are running our assets the best we can to reduce the cost of balancing our production with customer demand.
In terms of outlook, we're facing a high degree of uncertainty in market volatility day to day on the longer term potential impacts in the global economy remain unclear.
In paper, we expect significantly lower demand in the second quarter.
We do anticipate demand for softwood and fluff pulp to remain strong driven by accelerated growth in tissue and towel, while personal care will continue to benefit from increased usage and the impact from new customer wins.
So to wrap up the challenges we're facing as the cobot 19 crisis continues to unfold around the globe are unprecedented.
What we do know is done so we'll continue to be there for our employees our customers in our communities as we always have been.
We will continue to focus on long term value creation for our shareholders.
When we have a talent the resources and operational resiliency to do Sir.
I have never been more proud about people.
I simply cannot think them enough for everything that.
During this crisis.
Thank you for your time and support and I'll turn the call back to Nick for questions.
Thank you John.
Both John and Danielle will be available for questions I'd ask our participants to ask a few questions at a time and return to the kuper follow ups as we want to get as many people as possible.
You can open up the lines for questions.
Thank you Sir as a reminder, please press star one on your telephone keypad.
I'll now take our first question.
From Anthony Pettinari from Citi. Please go ahead.
Good morning.
Hi, good morning.
Good morning, John you gave some detail on the demand declines you're seeing in free sheet and I was just wondering if you saw an acceleration of demand declines as you went from March to April and then early may or if you're seeing any signs of sequential stabilization and then just when you talk to your customers is there any way that they're thinking about.
Catalysts, whether it's back to school or commercial printing coming back or anything that would cause demand to inflect back higher.
Certainly so.
Obviously, if one assumes April is sort of the new normal for the moment and we look at where we're tracking in may.
That seems pretty level one to the other so.
We thing kind of the new normal is probably the paper.
Sales were seeing that at the moment.
In the current situation.
So I think at the end of March was a bit of inventory corrections over the last week in March was very quiet and then first we go to in April was very quiet, we kind of reached a pace now that looks like.
Like something we can plan around.
[music].
If I think about what the catalyst is.
Undoubtedly if you think particularly around business papers printing papers, you think around cut size.
Obviously, what we need as more people in our work environment, where they're going to print more heavily we built a model.
Which gives us kind of a view of each of the verticals in that space and you know where those verticals as strong whether working where people are high whether or not so I think a key catalyst for all of US overtime is that kind of return to work and quite frankly, when you look at that that looks like a pretty.
The gradual hesitant process.
So we are operating ready we booked three models together, we have a kind of you know.
The good news it happens fast V shaped recovery, we have the midpoint.
Stuff is a bit it takes a while and then obviously we have the kind of it takes a very long time, what kind of tracking at the minute around that middle plan.
And so far as we look at the very beginning in May and we look at the forward order book May looks very similar to April I am speaking, obviously, specifically to the paper business because that's where your question was.
The pulp business looks very solid from a volume standpoint, and you're seeing we've announced some price increases on the personal care business. We think that was probably about $11 million of what is referred to as pantry loading I think particularly on the the baby diaper side.
So that sales line has slightly quieten down, but actually our adult incontinence business has come through kind of pretty dramatically.
There were tracking very solidly against ourselves expectation when I see no reason why that wouldn't continue so I'll give you enough granularity.
Yet another that's that's extremely helpful. And then I guess, maybe second question in recent years, you know mill conversions have become part of the discussion.
Given the capital intensity I am guessing those are sort of off the table for the time being I'm. Just curious if you had any additional thoughts on how you're thinking about a timeline or may be market developments that you would maybe half this need before you might reengage on that topic or just yet.
Great question, Great question, I think away I see this is we havent lost sight of our strategy and all this.
But quite frankly, our focus has reverted to a very short term.
Our focus in terms of the visibility we can see whether that visibility is a month to month three months.
So really we're working our way through the short term.
To make certain that we take every opportunity we can to reduce cost and sort of maximize yes, both earnings and cash in this environment. So.
I think we still have sites on the long term opportunities, but for now we're very much dealing with a day today.
Okay. That's helpful I'll turn it over.
Thanks.
Next question comes from Brian Maguire from Goldman Sachs. Please go ahead.
Hi, good morning, good Yervoy sharing ammonium Danielle.
Yes, obviously, the volumes will be down quite a bit in QQ in paper.
And.
Are you taking prescriptive actions on maintenance cost I guess, just two questions around that yeah, how much of that the maintenance costs kite do you think is deferral and there'll be some catch up next year, maybe resetting back to the initial baseline next year versus you know how much of it is maybe savings.
Getting the paper capacity that you've already announced and you think about the.
Packet decremental margins in two came from the volume declined any anyway to think about what is the second our margins might look like and fixed cost absorption and some of the achievement with price and mix that you called out in addition to the volumes.
Sure I mean, I can't give you the exact numbers, but I can give you maybe.
Our way to think about it. So you can see what we've done to our capacity.
You can get a sense of the contribution of each one of those tons.
Which will no longer be there because again were well was about balancing supply demand. So we try and.
Ship, if you like everything we make depending on how everything like so you can take a view that thats not a bad proxy for the sales line.
And with steering that downtime. The reason we take a shot is actually much more cost effective to take a mill out for a period of time than it is to kind of sprinkle downtime across the network because that actually minimizes the.
The cost Youre.
You're actually getting where you can't recover those costs in terms of lost overhead recovery. So I think we've taken all the right moves there.
To be honest the impact of that it's kind of too early to tell where we think the numbers will fall, but I think if you think you bet in those terms you get a pretty good sense of weather, where they come out.
Okay.
Just on the maintenance costs do you think that they reset higher next year. So yes, that's a great my apologies I'm, sorry, I forgot the second part of the question.
Yeah, I think on maintenance that's an interesting question. So what we've tried to say the people is look internally, we're going to slamming the brakes on everything we can slamming the brakes on from a cost standpoint, and maintenance standpoint, capex programs by the way. Please don't imagine that this is all going to come Roaring back when the world gets better and you've.
Can tell us internally look you know I didnt spend ex this year, so I need it now so I am hoping.
Beating the drum very hard but that is actually the level of maintenance expense you know comes down a year on year.
In terms of kind of sustaining that kind of level, but.
I have been disappointed before I may be disappointed again, but we will do everything we can to kind of squeeze that main and we're taking some substantial of action you know just around parts in storage and logistics of our maintenance just to make certain that we we make sure there's not too much cash tied up and maintenance spares.
Okay.
That's great and then last one from me just.
You mentioned some uncertainty as to how you know that paper market. That's my longer term as a result of all this obviously.
There's a lot of uncertainty, but what's your thinking on how structural or longer lasting.
Yeah. These work from home measures and.
Even if we have government action or some sort of the vaccine whether or not there was just permanent paper demand destruction of people kind of realize they're able to get by without as much printing as they get in the past or anything there working yeah, mhm more but you're kind of latest thinking on that.
Sure well I think I just looked back show Aito nine and if you look about you know kind of what happened there tightly the volume reduction was not as dramatic as it is today.
But when we came out that loss of volume pretty much stayed with us.
Then you know, it's very slots so it leveled off with a slight increase in the year here, sometimes I think mostly based on in Montreal imports. So to mine mine I don't think we're going to see where wherever we come out is the new normal, but I think there is a risk let's be honest that.
This some level of volume destruction stays with US now of course after that I. Our view is it settles back to the sort of 3% to 5% where it's been for a long time, it's too early to tell at this minute right now.
Our sales volumes very much reflect our expectations. So I think as people come back to work, we're going to see the move but to what level I'd be I think.
A full to forecast at this point.
I appreciate the comments and stay safe.
Thank you you too.
Next question comes from Mcenany from Stephens. Please go ahead.
Thanks.
John downtime was one of the first companies to set.
Sure.
Target return on cash to shareholders.
And you are also one point pretty reluctant to embrace a huge dividend, but youve managed to balance sheet capital allocation well to covert to not give it announced so that's pretty good. So my question is does this change your big picture thinking about either having a target return on capital or having to pay dividend in the future.
I'm actually Mark no I don't think it does so we would very much feel that you know the majority of free cash going back to shareholders is absolutely what we'd stick to I think we need more clarity in the world needs to look a little bit clear up for us to decide exactly how that will manifest itself.
But that commitments stays there.
Yeah, just one more question negative EBITDA on pulp is something that in normal times doesn't usually last very long because pretty juju shift or stop can you talk a little bit about the challenges that we face now with no slots demand is nice, but the paper grade demand is.
Maybe not so good and.
It's not a simple is producing more slawson stuffing out into the markets. You can you talk about how you how the market is reaction from now on how you think this resolves itself.
Certainly so let's talk about our grade profile, because that's obviously important as you say quite rightly you know we're building a fluff business, that's largely responsible for the volume increase.
Obviously, you know some of that is.
Internal to our own personal care business or that that growth helps us if you like in the in the fluff pulp market is as we win that new business.
So my outlook there is.
Again, if you think about the fluff pulp market and how it supplied and you think about the dynamics around end use products.
I feel pretty good about that marketplace. Obviously, a number of people have kind of swing mills that are also doing B.S.K. So the question there becomes you know.
Whereas the arbitrage for them in terms of getting added value I think on NBS K. you know the tissue grades were aware and some of the specialists stuff that we're supporting.
I think the big debate here will is going to be that softwood that was going into printing and writing we think thats about a million tons, how much of that will still be consumed by printing and writing and how much of that will kind of fill through its way into the rest of the market. It's too early to tell that yet.
But I have to say so far.
Although one feels positive about the momentum to your point. This is a very long slogan.
At this level of pricing versus history. So.
You know, there's there's definitely a lot of momentum I think out there to make sure that we take every opportunity we can to improve that.
Okay.
Thank you John Good luck.
Okay. Thanks.
Next question comes from Mark Wilde [noise].
From Bank of Montreal can you go ahead.
And John Daniel.
Good morning, good morning.
John first I just want to come back on this.
Outlook in terms of how much paper demand just structurally goes down I didnt catch your comment there real clearly, let's just say we are down at around 20 or 25% right now how much of that you think actually comes back.
Now as we start to normalize.
Yes. So the answer is I don't know.
I would say the all I can go back to his history, where if you recall in at low eight or nine you know we had kind of double digit decline. During you know for quite some time, particularly that fourth quarter run rate if you recall.
And when it started to return it came back pretty much at that level that didn't come back in at the level, where we end to it if you like and then it leveled off so my view of being a you could see I don't know what the right numbers all but you know you could see something not dissimilar happening again them, but very hard to tell because.
Yes.
I think when these sorts of things happens everyone screaming you know the world's change consumer behavior changed.
Actually consumers on the whole I would argue a relatively conservative so we'll just have to see.
Well, it where it leads us.
It's tie this together with kind of how you're thinking about your capacity base over the next year to my sense was that you guys thought you had at least until the end of the year before you had to really make any further decisions about the capacity base.
This is entirely.
Change that thinking I don't know, whether you're ready to kind of share anything with us, but it doesn't seem like the sorta indefinite shots. It like three different mills are probably a long term solution.
That I would agree with that said the debate becomes what next and to be honest Mark I'm not trying to avoid the question. We just don't have the visibility to make those choices at this point.
And then would you say kind of the range of options John has narrowed at all for you in terms of kind of what you're able to do with your capacity base in terms of.
Every purposes.
No I wouldn't say that Oh, I don't think so.
Okay, all right, but one other question on capacity I'm, just kind of curious on the situation again out it Kamloops. We've had all of these kind of sawmills shutdowns and B C renewals are big source of what kind of fiber.
What's the situation at Kamloops, right now and how are you thinking about that asset going forward.
Sure. So we are secure in the fact, we know we can get supply.
We're taking some actions around shipping we're taking some actions around the relationship with another couple of of saw mills that are operating where we will suffer a little bit. We think is on pricing. So we are stocks are pretty good in that mill at this moment in time, we have a solution.
We believe if you like on the supply chain side in terms of chip supply and wood supply.
But we're going to have it's probably going to cost us a little bit more money than it has historically, but nothing that.
You know I think embarrasses us in terms of overall costs.
Okay. Alright, then the last one from me I wondered if you guys can just help us a little bit that's sort of big cadence, saying in terms of personal care performance.
We move through the balance of this year and then in the 21 I'm very nice first quarter here I'm, just trying to get a sense. When we kind of do the puts and takes with CNO, maybe some pantry de stocking in the second half, but maybe you are still picking up.
Incremental business.
How should we think of underperformance of the business.
Sure well encoder won the we think that was about $11 million, particularly focused in the baby diaper business around pantry loading.
That we imagine will not repeat.
And.
If you if you think about our business Mark So you've got kind of the base. The baby business that was the big beneficiary of the pantry loading the AI business to thing the interesting things are happening. One obviously there is a lot of product we supplied to hospitals and nursing homes patiently, we're seeing growth there.
So I think what's going to happen is we're going to see that momentum happened in AI from a market perspective, and we are winning a few kind of customers in the basic sort of block and tackle territory local account sales staff.
On the baby side, we have some new.
An increase contract volume coming through in the middle of the year. So you should see.
Momentum continue through 2020, and you should see.
You know.
The kind of margin that you've seen in quarter one.
There may be in a few puts and takes to your point here in there, but I think we should be able to sustain that level of margin if not improve it towards the back end of the here.
So I think thats, how its going to play out if that gives you a little bit more help.
That is helpful. John I'll turn it over thank you.
All right. Thanks much.
<unk>.
Question comes from Steven Chercover from D.A. Davidson. Please go ahead.
Thanks, Good morning, everyone.
I was just wondering if money why are you moving en masse from personal care to pulp what's the rationale.
Ian Yes, so let me just explain that because I think I think that's correct, sorry, sorry to correct here.
So that that really is a little nonwovens business. Its its major business is selling to feminine hygiene produces.
So it's selling to a lot of people, who would sort of see themselves maybe as competitors to our personal care business. It's also actually selling to our personal care business, we have a view and actually I think it's been vindicated.
When we look at our major accounts on fluff pulp, particularly who are looking for product solutions. The combination of that Ian technology in terms of the absorbent core of the product and our ability to sell them fluff pulp.
Actually is pretty compelling we've had that.
I guess validated I would say by one of our largest Chinese customers, who you know very much likes the idea that we can give them innovation and product solutions are on those two parameters. So that's why we've done it it's it's not a vast amount of earnings.
But we think from a sales and development standpoint, the two products. The him is selling as you know it's in Jesup, Georgia, Nova thin Inovas old both of which are all about as I said this absorbent core technology. So we're thinking combine absorbing core fluff pulp get the innovation stream running.
Across those two you're going to have a great story to tell and it's going to resonate with the customer and so far that's working so I'll give you a bit more colors that'd be helpful.
Yeah. Thanks, I think DNS I said, it was kind of for radian, because I need some.
But beyond that [laughter], that's located in Jesup, Georgia is that correct.
Correct is that will.
And so last question sorry to be so interested in this but are the margin in in that segment.
How are they compared to the remainder of personal care or perhaps mid cycle pulp.
On personal care they would be.
Sort of mid teen I think low low to mid teen the I am a margins.
So I mean, it is not transforming the pulp.
Kind of overall EBIT dollars. It's a it's rounding errors is being disrespectful to it but it's a small number much more compelling is the.
The rationale behind the sale story.
Gotcha, Okay. Thanks, Stacy alrighty. Thanks.
Next question.
[noise] comes from Adam.
Josephson from Keybanc keep going.
John Anyhow, Nick Good morning, I Hope you in your Phantom units along.
Thank you.
Good morning, Thank you.
John just back to the re purpose thing issue I think Anthony asked about it earlier you started talking about it three years ago and you've made it clear throughout that it was dependent upon what happened in your white paper business.
And obviously you've seen it.
Serious downturn in that business now I know you're in capital preservation mode, but I'm just thinking if if you wouldn't announced the conversion now with the white paper industry and the situation had at San <unk>.
When would you I mean, I just I don't know what would be up a better opportunity. There now to say look we're going to do it we were not going to spend a cash for another year year and a half whatever it may be but we think now is the right time to do it given the state of the white paper business.
Well so that's a great question my view at the minute is.
I really do feel I need clarity on where this plays out over the next few months.
Because I could look in every crystal ball, Adam I, just I know, where it's going to fall and because I don't know where it's going to fall. It's hard to think around what is the appropriate asset. If you are going to make that announcement and you all going to move into Containable, if you like sooner rather than later.
We're all you're going to move into Paul what are you going to do with the asset so and I think it's it's not absolutely binary of course, if you. If you look at what we did with that via in and what we do that code or in West Carlton that really is all about all bennettsville on what we call our mobile mill in South Carolina actually now being a world class.
A slight white paper manufacturing facility and he is an opportunity to add value. So.
Again, I'm not pushing the question into the future I'm just sitting here, saying you know what we do not have clarity at this point about what we'll do the right thing to do next the minute we have that clarity and we have an informed review abound forward paper demand.
We will what we will do what we consider to be appropriate.
Sure no. Thank you I, just want a personal care and kudos by the way in a really good quarter and <unk> business.
Okay. Obviously in recent in recent years, you've had a more difficult time in that business and there are obvious obvious differences between that business, which is obviously, partly marketing based on the rest of your company, which is just.
Purely manufacturing.
Do you consider that business a core part of the company for the foreseeable future.
Because I was I think I've said early I think I've been reasonably consistent that I think there's still plenty of rum way in that business for us under our ownership.
And to your point.
You know I think now we really beginning to see momentum and I. You know we've created that momentum to some extent because of course, we shut the facility in Waco.
We moved five machines to Delaware, Ohio facility, we've had a fantastic start out with Ghana generating productivity, we have very much partnering with the customers.
Going to win in that space.
And you know all the C. right now there's potential tailwinds around some raw materials. So if I put all that together I just sit down I think to myself you know we've had one really strong <unk> cool huh I'd like to have a few more under my belt before I.
Thought about the next step.
<unk> totally understood and I appreciate that John It. It's just one last one on capital allocation, which is.
He spent 60 million buying back stock in the corridor I assume it was February excuse me January February March that you could correctly, Vermont and then I've see you find yourself in a position in which you have to suspend the Devon and so I'm just wondering.
Just about the progression because I mean, you spent almost $300 million buying back stock in the last three quarters in Minneapolis and spend the Devon and if I'm shareholder I'm, taking while I don't know going for how do I know what this company's cap allocation strategy is gonna be when it seems to vary you know from quarter to quarter year to year.
Pending Hon circumstances that are unforeseen.
Yeah, I guess that by by you know I go to that would be if anybody had this in their full cost 2020. They have my deepest respect cried because I don't think any of us or anything like this coming.
So to my mind, you know as as I said, I think Oh, yeah, but we've always said you know more of them yeah, 50% of them all a tree cash will return to show lists we absolutely hold to that.
In the current environment. However, we feel very strongly that it's the prudent thing to do that kind of pulled in our homes across everything the impacts cash.
To make certain you know, we if we have with strong on liquidity, but to make something we come out of this.
You know as healthy as we possibly can be and you know was sufficient firepower to take advantage of any opportunities. We see so we certainly haven't lost that commitment of free cash going back to show those.
The challenge right now is what was that level of free cash going to be in a very uncertain whoa.
Mm totally understood. Thanks, so much on best of luck.
All right I'm. Thank you.
You know take our next question.
I'm, Paul acquaintance from RBC caps on our cats.
<unk>.
Oh good morning.
Yeah. Just had one question just you you taking credit, but it downtime on the paper side.
Had three quarters of negative v. bit done upside is there anything that you can do downtime related on the hope side to lower that that lost.
I I think they also that's probably know pool that may sound pathetic I don't so, but but really you know those markets.
Yeah, but they're a commodity market there is.
No I think we've moved a mix pretty aggressively.
Over the last few years to be in places, where there is solid them on so to my mind, if I look at what's happening at all pulp business I look at certain mills I think one thing must remember in Nepal business, you know espanola, obviously cost us a lot of money last year as we had it shot and it wasn't generating overhead recovered.
So.
But this year I think we're going to do better operationally <unk> no I I don't see a solution on the side is to just to take any capacity out from our standpoint.
Okay.
We we sell everything we make you know I mean that that's how it works and we have major contracts you know obviously in the U.S. what people right now taking you know the maximum they can because you know what's happening in the tissue and towel space.
Hmm.
The month seems pretty equal among all hopeless at least eight that right now.
Sorry, Oh I have trouble hearing now can you just say that again.
Yeah, sure disarming and imply that you've got the same margin at each of the cold facilities that you'd get.
No summer bit higher than others, but no no you know everything is well above you know cash costs at this moment in time is it still makes sense to run.
Okay.
Uh Huh that's like.
Thank you.
Next question comes from John Babcock from Bank of America things go ahead.
Mine just wanted to ask a couple of questions on behalf of George <unk>, starting out you know as I can talk about which are seen on the ground in China and then also why we're putting the Tories up in the core.
Sure you're talking pulp in China, I'm, assuming is that right.
That type, Utah, you don't even call. Okay sure. So I mean, good demand. Some logistic challenge is just because of containers and shipping. So you know we've had to work hard and I have to say I would complement a supply chain and transport bugs just to make sure. We you know we get what we need in terms of our ability to find containers to ship.
So strong them on on fluff, Paul M.B.S.K. is fine.
So again I think you know you you you have to keep thinking about we don't really supply into paper grade very much when much more about tissue towel and baby you know baby CAD diapers and <unk>. So.
When I look at all customer base in China that they're getting volume out now they're all open they were all consider the central businesses all the way through this so feeling pretty good about that I mean on the inventory side. You know when you think about that in one tree growth I mean, it's a shipment due to the you know maybe a ship didn't leave.
Beep.
I I have no worries about that about that small increase and of course, we have we have got some downtime coming up in the food quota and tells US a maintenance. So you know to my mind.
It's in no way reflective that we have a done on challenge in adult business.
Okay, and then I was wondering if you could also talk a little bit about the demand that you've seen in pulp so far in two kids.
It's very very good I mean, exactly where we thought it would be.
Yeah, and then you know just just kinda last question here I was wondering didn't talk about.
Personal care and ultimately your need to spend and or reduce spend on marketing you know just given kind of where demand is at the at this juncture.
Well. So you know remember <unk> were largely private label.
They just still brand, we obviously have a branded position in retail in Spain, where we are very much the market leader.
The demand is very very strong. So you know when demands off the charts of goes.
Throw a marketing dollars that everything I think one business that doesn't have much visibility in our personal care business is a direct to consumer business H.D.I.S., which is based in Saint Louis, Missouri, They're actually we do market through T.V. Then we you know we follow up with phone calls and have a kind of trusted advisory. So this full.
[noise] people there need these products delivered at home that businesses now showing double digit growth as people are looking for alternatives to reach L.. We have a brand in that business school reassured, which is doing quite nicely, albeit still relatively small, but still pretty solid so I I feel good to actually about.
<unk> driving that business overtime.
Yeah, and if you don't mind just one last question here you know one of the show a large paper distributors mentioned yesterday that they were seen Ah print demands down you know as much as 50% or so in April are you seen numbers anywhere near that that's something that you know might be that no beyond.
Kinda demand decline you're seen so far.
I mean, I think I think what we're saying as as we said you know we've taken about 30% capacity out.
You know across all obviously, we have a very broad range of paper grades going to all kinds of different places you know 30% to 35%.
<unk> what that means to the sales line is is reasonably.
<unk> is a pretty good rule of thumb I think in terms of what we're experiencing.
But not 50 to a point.
[laughter] thinks that.
<unk>.
Next question comes from John.
Nice huh, John to myself very independent research teams color.
Thank you very much for taking my question.
Yeah, disrupt the junk or your operational adjustments to the unprecedented crisis.
Maybe it's too early to think about.
The Big picture.
But here share prices.
What appears to be the value of either of you to business segments.
Maybe not quite.
Oh, you, maybe each business isn't worth the market cap plus.
But you appear on your values.
Sick, a a practical alternative split the company.
To publicly traded and it is for the two segments or even three if.
Split up from a paper.
Obviously, John I I wouldn't speculate on an open line on that subject, but I think.
We are always thinking about you know what were the best value is for the child or where the best value is for the for the entity I I think on Palton paper, obviously that that's so technically intertwined do you could debate that.
<unk>, obviously costs low caste system is a very different to some extent type of business. Although you know strong forward integration in terms of all thought fault sales. So you know we we think about that in terms of the portfolio. All the time I think quite frankly.
As I said in my remarks earlier in the in the very short I'm here.
You know, it's just button down the hatches minimize your costs do sensible things and see what <unk>, what you get to the other end of this so quite frankly, that's why we focused at the moment.
Thank you.
Thank you.
[laughter] gave the question I would like to trying to call back for any additional are closing remarks.
[noise]. Thank you Marguerite we will release, our second quarter 2020 results on Thursday July 30, 2020, Thank you for listening and had a great thick.
[noise] [noise] peak today's column. Thank you for your participation.
<unk>.
Oh.
[laughter].
[laughter].