Domtar Corp  (NYSE: UFS) Q1 2020 Earnings Call Transcript

Domtar Corp  (UFS) Q1 2020 earnings call dated May 08, 2020

Corporate Participants:

Nicholas Estrela — Director, Investor Relations

John D. Williams — President and Chief Executive Officer

Daniel Buron — Senior Vice-President and Chief Financial Officer

Analysts:

Anthony Pettinari — Citi — Analyst

Brian Maguire — Goldman Sachs — Analyst

Mark Connelly — Stephens — Analyst

Mark Wilde — The Bank of Montreal — Analyst

Steven Chercover — D.A. Davidson — Analyst

Adam Josephson — KeyBanc — Analyst

Paul Quinn — RBC Capital Markets — Analyst

John Babcock — Bank of America — Analyst

John Tumazos — John Tumazos Very Independent Research — Analyst

Presentation:

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Q1 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Friday, the 5th of May.

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

Nicholas Estrela — Director, Investor Relations

Thank you, Margaret. Good morning, and welcome to our first quarter 2020 earnings call. As many companies are doing, we are doing the call remotely this morning. Therefore, the sound quality may not be as usual, so we hope you can understand. Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. John and Daniel will be supported by Michael Garcia from our Pulp and Paper division and Michael Fagan from the Personal Care division.

During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of the website. As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar’s filings to the securities commissions for a listing of those. Finally, certain non-U. S. GAAP financial measures will be presented and discussed, and you can find the reconciliation to the closest GAAP measures in the appendix of this morning’s release as well as on our website.

So with that, I’ll turn it over to John.

John D. Williams — President and Chief Executive Officer

Thank you, Nick, and good morning, everyone. Let me begin by recognizing that this is an extremely challenging time for the world community. Our thoughts are with those most affected by the current crisis, particularly the men and women working on the frontlines. Before providing some color on our strong first quarter, I’d like to outline briefly what we have been doing to navigate the disruption caused by the COVID-19 pandemic. I’ll do so on two levels. First, with respect to our employees and communities; and second, with respect to the business.

At the onset of the crisis, we activated our crisis management process and created a pandemic committee to develop and implement protocols to protect the health and well-being of our employees and outside contractors. By acting early, we have kept our workplaces and our employees safe while maintaining substantially uninterrupted operations in our mills and production facilities. Some of the measures we took include work from home arrangements where possible, no international travel and only local travel by exception.

At the manufacturing level, we’ve modified work practices to ensure as best as possible physical distancing on the shop floor, during meetings and through noncontact receiving and shipping. We’re limiting visitors to our sites. Outside contract workers are subject to isolation controls, contact 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 feel safe. Our pandemic committee continues to check in regularly to review developments, update 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 caring. We have provided support to local medical workers, first responders and citizens in need. Many of our facilities have made important donations to help local hospitals and health care workers combat the pandemic. Additionally, many of our employees have made individual gifts to local agencies and organizations. I’m very proud of our contributions and of all we have done to support our communities.

Turning to the business itself, we’ve been proactive in reducing risk and safeguarding our ability to weather the current crisis. We’re taking the appropriate steps to optimize our operations and to remain an agile, reliable partner to our customers. In April, we announced the temporary shutdown of our Kingsport, Tennessee mill and the paper machine at our Ashdown, Arkansas mill for three months. And 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 reduced by approximately 227,000 short tons or approximately 30% of our uncoated freesheet paper capacity.

We will continue to closely monitor customer orders and backlogs and will adjust capacity accordingly. We’ve always believed that a strong balance sheet is a critical component to realizing stockholder value. And so we moved quickly to further strengthen liquidity and cash flow in order to ensure we have maximum optionality in pursuing our strategic vision. Earlier this week, we closed on a new $300 million five year term loan with the 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 SG&A expenses. Finally, our actions also include 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 COVID-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 to continue to build and expand a 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 as an essential business and protecting our financial stability. I’m 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?

Daniel Buron — Senior Vice-President and Chief Financial Officer

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 9,700 employees for their incredible actions during this difficult time. Let’s start by over the financial highlights of the quarter on slide four. We reported this morning net income of $0.09 per share for the first quarter compared to a net loss of $0.59 per share for the fourth quarter of 2019. Adjusting for items, our earnings were $0.09 per share in the first quarter compared to earnings of $0.03 per share for the prior quarter. EBITDA before items amounted to $95 million compared to $78 million in the fourth quarter.

Let’s turn to the sequential variation in earnings on slide five. Consolidated sales were $34 million higher than the fourth quarter due mostly to higher sales in Personal Care. Depreciation and amortization was $2 million lower when compared to the fourth quarter. And SG&A was $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 realization 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 in the first quarter. During the quarter, we’ve paid $26 million in dividend, and we repurchased approximately 1.8 million shares for a total cash consideration of $59 million. Let’s turn to the quarterly waterfall on slide seven. When compared to the fourth quarter, EBITDA before item increased $17 million due to better productivity for $15 million, higher volume and mix for $10 million, lower SG&A 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. Now the review of our business segment starting on slide eight. Given significant customer overlap between the two businesses, EAM, a manufacturer of high-quality airlaid and ultrathin laminated cores, now reported results within our pulp business. This business was reported within our Personal Care segment in the past. In the Pulp and Paper segment, sales were flat when compared to the fourth quarter and 11% lower when compared to the same period last year. EBITDA before item was $66 million compared to $65 million in the fourth quarter of 2019.

Now our paper business on slide nine. We sales were 2% higher versus last quarter and were 9% lower versus the same quarter last year, while estimated EBITDA before items was $100 million. Manufactured paper shipment were 4% higher when compared to the fourth quarter and 8% lower versus the same period last year. Average transaction prices for all our paper grades were $6 per ton lower than the last quarter. Our April paper shipment were approximately 35% lower when compared to the monthly average in the first quarter, and we’ve entered 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 on slide 10. 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. Pulp shipments were 4% lower versus the fourth quarter and up 11% when compared to the same period last year. Average pulp prices decreased $13 per metric ton versus the fourth quarter. Our April pulp shipments were up by approximately 10% when compared to the monthly average in the first quarter, and we’ve entered April with average pulp prices in line with the average of the first quarter.

We also announced some price increase initiatives for both April and May. Our paper inventory decreased by 30,000 tons when compared to last quarter, while pulp inventory increased by 24,000 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 $34 million, $7 million higher than 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 a new $300 million five year term loan.

We do not have any material debt maturity until 2022, while our pension funds are well funded. Our key objective is to maintain the strong liquidity position as well 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 and maintenance activity will be temporarily delayed or reprioritized due to the current environment. With respect to maintenance, our total maintenance cost for the year are expected to be lower by $40 million. capex is expected between to be between $140 million and $150 million while interest expense is expected to slightly increase.

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

John D. Williams — President and Chief Executive Officer

Thank you, Daniel. We delivered solid results in the first quarter, supported largely by lower overall costs and a strong performance in our Personal Care business. Our paper volumes were 4% higher versus the fourth quarter, benefiting from seasonally stronger shipments as destocking 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 were strong. However, in the last five weeks, due to the COVID crisis and as a result of the lockdown 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 offset by an increase in online sales and in the club channels. Paper merchants are also seeing an important drop in their business, which is primarily serving commercial printers. As a result, our current expectation is for significantly lower demand for paper in the second quarter. However, we have seen a 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 30,000 tons in the quarter and 21% since the second quarter of 2019. While paper demand is uncertain, we believe that our inventory will be at appropriate levels given our recently announced capacity reduction plans. Last week, we completed the acquisition of the Appvion point-of-sale business. The combination of our world-class papermaking capabilities with the West Carrollton coater’s 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 by providing us coating technology and innovation capability that we did not have prior to the acquisition. I’m pleased to have closed this transaction on time given the complexities around the COVID-19 pandemic, and we’re proud of our employees and our new employees for making this transition during this difficult time.

In the pulp business, prices in North America were down versus quarter 4, as expected, largely due to pricing lags in certain customer agreements, while prices remain relatively flat in China. Our pulp shipments were steady in quarter 1, with strong growth in fluff pulp, despite some logistical challenges and a major shutdown of operations in China due to COVID-19. We did see good demand from our North American tissue customers, and overall demand in the second quarter remained 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 China. Our tissue customers are well positioned while our fluff pulp business is strong and growing. We’re getting good feedback from our customers as we’re keeping their supply chains intact and covering their increased demand. On pricing, we have announced increases for several softwood and fluff pulp grades in both April and May.

Operationally, our key focus continues to be our Espanola mill. The mill started up during the last week of December after a 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% higher than quarter four and 11% higher against the same period last year, including significant shipments to support consumer stock up in preparation for in-home quarantine.

In addition, we were already off to an excellent start to the year 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 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 SG&A spend. Infant diaper sales volume was up 75% versus quarter four of 2019 due to the launch of a new customer and higher infant demand overall in response to COVID-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’re maintaining high levels of customer service during this period of growth, and we’re 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 2022. 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 gowns, testing kits, labels and many others. Our papers used for medical records, prescription pads, instructions that doctors send home with the patient, pharmaceutical inserts and other medical uses.

Fluff pulp is a key component in infant diapers and adult incontinence products. It’s also used in hospital pads and other absorbent products. Softwood pulp is used by our customers to manufacture towel and tissue products. And we provide hygiene products for baby care, adult incontinence and feminine protection. In these unprecedented times, we continue to take appropriate action to ensure we remain well positioned to weather an extended period of uncertainty. Our priority will remain on cash flow preservation with an immediate focus on reducing costs. Operationally, we’re running our assets the best we can to reduce the cost of balancing our production with customer demand.

In terms of outlook, we are facing a high degree of uncertainty and market volatility day-to-day and the longer term potential impacts of 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 all facing as the COVID-19 crisis continues to unfold around the globe are unprecedented.

What we do know is that Domtar will continue to be there for our employees, our customers and our communities as we always have been. We will continue to focus on long-term value creation for our shareholders, and we have the talent, the resources and operational resiliency to do so. I have never been more proud of our people, and I simply cannot thank them enough for everything they’ve done during this crisis.

So thank you for your time and support, and I’ll turn the call back to Nick for questions.

Nicholas Estrela — Director, Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] We can now take our first question from Anthony Pettinari from Citi. Please go ahead.

Anthony Pettinari — Citi — Analyst

Good morning.

John D. Williams — President and Chief Executive Officer

Good morning, Joe.

Anthony Pettinari — Citi — Analyst

Good morning, John, you gave some detail on the demand declines you’re seeing in freesheet. 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 sort of cause demand to inflect back higher?

John D. Williams — President and Chief Executive Officer

Certainly. So I mean, 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 think kind of the new normal is probably the paper sales we’re seeing at the moment in the current situation. So I think at the end of March, there’s a bit of inventory correction. So the last week in March was very quiet and then first week or two in April was very quiet. But we kind of reached a pace now that looks like something we can plan around.

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 is more people in a work environment where they’re going to print more heavily. We’ve built a model, which gives us kind of a view of each of the verticals in that space and where those verticals are strong where they’re working, where people are at home, where they’re not. So I think a key catalyst for all of us over the time is that kind of return to work. And quite frankly, when you look at that, that looks like a pretty gradual hesitant process.

So we are operating really, we’ve put three models together. We have a kind of the good news, it happens fast, V-shaped recovery. We have the midpoint it started a bit. It takes a while. And then obviously, we have the kind of it takes a very long time. We’re kind of tracking at the minute around that middle plan. And so far, as we look at the very beginning of May, and we look at the forward order book, May looks very similar to April. I’m 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’ve seen we’ve announced some price increases. On the Personal Care business, we think there was probably about $11 million of what is referred to as pantry loading, I think particularly on the baby diaper side. So that sales line has slightly quietened down. But actually, our adult incontinence business has come through kind of pretty dramatically. So there, we’re tracking very solidly against our sales expectation. I see no reason why that wouldn’t continue. Did I give you enough granularity?

Anthony Pettinari — Citi — Analyst

Yes. No, that’s extremely helpful. And then, I guess, maybe second question. In recent years, mill conversions have become part of the discussion. Given the capital intensity, I’m 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 think about a time line or maybe market developments that you would maybe have to see it before you might reengage on that topic or just…

John D. Williams — President and Chief Executive Officer

Yes, that’s a great question. Great question. So I think the way I see this is we haven’t lost sight of our strategy in all this. But quite frankly, our focus has reverted to a very short-term focus in terms of the visibility we can see whether that visibility is a month, two months, three months. So really, we are working our way through the short term to make certain that we take every opportunity we can to reduce costs and sort of maximize both earnings and cash in this environment. So I think we still have sight on the long-term opportunities. But for now, we’re very much dealing with the day-to-day.

Anthony Pettinari — Citi — Analyst

Okay, that’s helpful. I’ll turn it over thanks.

Operator

Next question comes from Brian Maguire from Goldman Sachs. Please go ahead.

Brian Maguire — Goldman Sachs — Analyst

Hey, good morning. Yes. Obviously, the volumes will be down quite a bit in 2Q in paper. And you’re taking prescriptive actions on maintenance costs. I guess just two questions around that. How much of the maintenance cost cut do you think is deferral and there will be some catch-up next year or maybe resetting back to the initial baseline next year versus how much of it is maybe savings from shutting the paper capacity that you’ve already announced? And as you think about the impact of decremental margins in 2Q from the volume declines, any way to think about what those decremental margins might look like, given the fixed cost absorption and some of the issues with price and mix that you called out in addition to the volumes?

John D. Williams — President and Chief Executive Officer

Sure. I mean I can’t give you the exact numbers, but I can give you maybe a 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, we’re always about balancing supply demand. So we try and ship, if you like, everything we make, depending on how everything works. So you can take a view that, that’s not a bad proxy for the sales line.

And we’re steering that downtime. The reason we take the shot is it’s 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 costs 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 of it in those terms, you’ve got a pretty good sense of where they come out.

Brian Maguire — Goldman Sachs — Analyst

Okay. And just on the maintenance costs, do you think that they will reset higher next year?

John D. Williams — President and Chief Executive Officer

Yes, that’s again my apologies. I’m sorry. I forgot the second part of the question. Yes, I think on maintenance, that’s an interesting question. So what we’ve tried to say to people is, look, internally we’re going to slam the brakes on everything we can slam the brakes on from a cost standpoint, maintenance standpoint, capex programs. And by the way, please don’t imagine that this is all going to come roaring back when the world gets better. You can tell us internally, look, I didn’t spend X this year, so I need it now.

So I’m hoping and beating the drum very hard, but actually, the level of maintenance expense comes down year-on-year in terms of kind of sustaining that kind of level. But I have been disappointed before, and I may be disappointed again. But we will do everything we can to kind of squeeze that maintenance. And we’re taking some substantive action just around parts in storage and the logistics of our maintenance just to make certain that we make sure there’s not too much cash tied up in maintenance spares.

Brian Maguire — Goldman Sachs — Analyst

Okay. That’s great. And then last one for me. Just you mentioned some uncertainty as to how the paper market looks more 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 this work from home measures and even if we have government action or some sort of a vaccine, whether or not there’s just permanent paper demand destruction, people kind of realize they’re able to get by without as much printing as they did in the past because they’re working from home more. What’s your kind of latest thinking on that?

John D. Williams — President and Chief Executive Officer

Sure. Well, I think I just look back to ’08, ’09. And if you look about kind of what happened there, patently, 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. And then it’s very so it leveled off with a slight increase in the year here, sometimes, I think, mostly based on inventory or imports.

So to my mind, I don’t think we’re going to see 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, 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 them move. But to what level I’d be, I think, a fool to forecast at this point.

Brian Maguire — Goldman Sachs — Analyst

I appreciate the comments stay safe thank you.

Operator

Next question comes from Mark Connelly from Stephens. Please go ahead.

Mark Connelly — Stephens — Analyst

Thanks. John, Domtar was one of the first companies to set a clear target for return on cash to shareholders. And you were also at one point pretty reluctant to embrace a huge dividend. But you’ve managed the balance sheet and capital allocation well, and it took over to knock the dividend out. 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 such a big dividend in the future?

John D. Williams — President and Chief Executive Officer

Actually, Mark, no. I don’t think it does. So we would very much feel the majority of free cash going back to shareholders is absolutely what we’d stick to. I think we need more clarity and the world needs to look a little bit clearer for us to decide exactly how that will manifest itself, but that commitment stays there.

Mark Connelly — Stephens — Analyst

Very good. And just one more question. Negative EBITDA in pulp is something that in normal times doesn’t really last very long because producers either shift or stop. Can you talk a little bit about the challenges that we face now with fluff demand is nice, but the paper grade demand is maybe not so good? And it’s not as simple as producing more fluff and stuffing out into the market. So can you talk about how the market is reacting now and how you see these results overall?

John D. Williams — President and Chief Executive Officer

Certainly. So let’s talk about our grade profile because that’s obviously important. As you say quite rightly, we’re building the fluff business. That’s largely responsible for the volume increase. Obviously, some of that is internal to our own Personal Care business. So that growth helps us, if you like, in the fluff pulp market as we win that new business. So my outlook there is again, if you think about the fluff pulp market and how it’s 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 where they’re also doing BSK. So the question there becomes where’s the arbitrage for them in terms of getting added value.

I think on NBSK, the tissue grades where we’re and some of the specialist stuff that we’re supporting, I think the big debate here is going to be that softwood that was going into printing and writing, we think that’s about one million tons. How much of that will still be consumed by printing and writing and how much of that will kind of filter 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 slog at this level of pricing versus history. So there’s definitely a lot of momentum, I think, out there to make sure that we take every opportunity we can to improve that.

Mark Connelly — Stephens — Analyst

Thank you, John. Good luck.

John D. Williams — President and Chief Executive Officer

Thank you.

Operator

Next question comes from Mark Wilde from the Bank of Montreal. Please go ahead.

Mark Wilde — The Bank of Montreal — Analyst

Good morning. John, first, I just want to come back on this sort of outlook in terms of how much paper demand just structurally goes down. I didn’t catch your comment there real clearly. Let’s just say we are down, I don’t know, 20% or 25% right now. How much of that do you think actually comes back as we start to normalize?

John D. Williams — President and Chief Executive Officer

Yes. So the answer is I don’t know. I would say the all I can go back to is history, where if you recall in ’08 and ’09, we had kind of double-digit decline during for quite some time, particularly that fourth quarter ’08, 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 ended, if you like. And then it leveled off.

So my view would be you could see I don’t know what the right numbers are, but you could see something not dissimilar happening again, but very hard to tell because I think when these sorts of things happens, everyone is screaming the world’s change, consumer behavior changed. Actually, consumers on the whole, I would argue, are relatively conservative. So we’ll just have to see where it leads us.

Mark Wilde — The Bank of Montreal — Analyst

Just to tie this together with kind of how you’re thinking about your capacity base over the next year or two, 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 has clearly changed that thinking. I don’t know whether you’re ready to kind of share anything with us, but it doesn’t seem like the sort of indefinite shuts at like three different mills are probably a long-term solution.

John D. Williams — President and Chief Executive Officer

That I would agree with. So 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.

Mark Wilde — The Bank of Montreal — Analyst

And 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 repurposing?

John D. Williams — President and Chief Executive Officer

No, I wouldn’t say that. I don’t think so.

Mark Wilde — The Bank of Montreal — Analyst

Okay. All right. One other question on capacity. I’m just kind of curious on the situation, again, out at Kamloops. We’ve had all of these kind of sawmill shutdowns in BC, residuals are big sources of kind of fiber. What’s the situation at Kamloops right now? And how are you thinking about that asset going forward?

John D. Williams — President and Chief Executive Officer

Sure. So we are securing 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 sawmills that are operating. Where we will suffer a little bit we think is on pricing. So our 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 it’s probably going to cost us a little bit more money than it has historically. But nothing that I think embarrasses us in terms of overall costs.

Mark Wilde — The Bank of Montreal — Analyst

Okay. Right. And then the last one for me. I wondered if you guys can just help us a little bit with sort of the cadence in terms of Personal Care performance. As we move through the balance of this year and then into 2021, it’s a very nice first quarter here. I’m just trying to get a sense when we kind of do the puts and takes with maybe some pantry destocking in the second half, but maybe you’re still picking up incremental business. How should we think about the performance of the business?

John D. Williams — President and Chief Executive Officer

Sure. Well, in quarter 1, we think there was about $11 million, particularly focused in the baby diaper business around pantry loading. That, we imagine, will not repeat. And if you think about our business, Mark, so you’ve got kind of the baby business, that was the big beneficiary of the pantry loading. The AI business, two things interesting things are happening. One, obviously, there is a lot of product we supply to hospitals and nursing homes. Patently, we’re seeing growth there.

So I think what’s going to happen is we’re going to see that momentum happen 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 stuff. On the baby side, we have some new some increased contract volume coming through in the middle of the year. So you should see that momentum continue through 2020. And you should see the kind of margin that you’ve seen in quarter 1, there may be a few puts and takes to your point here and there, but I think we should be able to sustain that level of margin, if not improve it towards the back end of the year. So I think that’s how it’s going to play out, if that gives you a little bit more help.

Mark Wilde — The Bank of Montreal — Analyst

Yeah, that is helpful. John, I’ll turn it over. Thank you.

John D. Williams — President and Chief Executive Officer

Thanks, Mark.

Operator

Next question comes from Steven Chercover from D.A. Davidson. Please go ahead.

Steven Chercover — D.A. Davidson — Analyst

Thanks and good morning everyone. I was just wondering why are you moving EMS from Personal Care to pulp. What’s the rationale?

John D. Williams — President and Chief Executive Officer

EAM. Yes. So let me just explain that because I think no, it’s quite right, sorry. Sorry to correct you. So that really is a little nonwovens business. Its major business is selling to feminine hygiene producers. 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 syndicated, when we look at our major accounts on fluff pulp, particularly, who are looking for product solutions, the combination of that EAM technology in terms of the absorbent core of the product and our ability to sell in fluff pulp actually is pretty compelling.

We’ve had that, I guess, validated, I would say, by one of our largest Chinese customers who very much like the idea that we can give them innovation and product solutions on those two parameters. So that’s why we’ve done it. It’s not a vast amount of earnings, but we think from a sales and development standpoint, the two products that EAM is selling, as you know, it’s in Jesup, Georgia, NovaThin and NovaZorb, both of which are all about, as I said, this absorbent core technology. So we are thinking combined absorbent core, fluff pulp get the innovation stream running across those 2, 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. Does that give you a bit more color? Is that a bit helpful?

Steven Chercover — D.A. Davidson — Analyst

Yes. I think EMS I said it was kind of Freudian because I need some. But beyond that, that’s located in Jesup, Georgia. Is that correct?

John D. Williams — President and Chief Executive Officer

Correct.

Steven Chercover — D.A. Davidson — Analyst

Is that and so last question sort of be so interested in this, but are the margins in that segment, how are they compared to the remainder of Personal Care or perhaps mid-cycle pulp?

John D. Williams — President and Chief Executive Officer

On Personal Care, they would be sort of mid- teen, I think, low to mid-teen is the EAM margins. So I mean it is not transforming the pulp kind of overall EBITDA. It’s rounding error is being disrespected to it, but it’s a small number. Much more compelling is the rationale behind the sales story.

Steven Chercover — D.A. Davidson — Analyst

Okay, thanks Steve.

John D. Williams — President and Chief Executive Officer

Already. Thanks.

Operator

Next question comes from Adam Josephson from KeyBanc. Please go ahead.

Adam Josephson — KeyBanc — Analyst

Good morning. John, just back to the repurposing 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 a serious downturn in that business now. I know you’re in capital preservation mode.

But I’m just thinking if you wouldn’t announce the conversion now with the white paper industry and the situation that it’s in, when would you? I mean, I just I don’t know what would be a better opportunity than now to say, look, we’re going to do it. We’re not going to spend the cash for another year, 1.5 years, whatever it may be, but we think now is the right time to do it given the state of the white paper business.

John D. Williams — President and Chief Executive Officer

Well, so I mean 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 don’t 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 are going to move into containerboard, if you like, sooner rather than later or are you going to move into pulp, what are you going to do with the asset. So and I think it’s not absolutely binary, of course.

If you look at what we did with Appvion and what we do with that coater in West Carrollton, that really is all about our Bennettsville, what we call our Marlboro mill in South Carolina, actually now being a world-class lightweight paper manufacturing facility, and here’s 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 will be the right thing to do next. The minute we have that clarity and we have an informed view about forward paper demand, we will do what we consider to be appropriate.

Adam Josephson — KeyBanc — Analyst

Sure. And just one on Personal Care, and kudos, by the way, on a really good quarter in that business.

John D. Williams — President and Chief Executive Officer

Thank you.

Adam Josephson — KeyBanc — Analyst

Obviously, in recent years, you’ve had a more difficult time in that business, and there are obvious differences between that business, which is obviously partly marketing based and 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?

John D. Williams — President and Chief Executive Officer

Well, if you recall, what I’ve we’ve always said, and I guess I’ve always said is that we think there’s runway in that business we need to capture regardless of how we see the best way to create value. I mean, is creating value keeping that in our portfolio when we’ve got it to the kind of levels we want to get it to or is the way to create value to divest it or merge it or whatever it may be, I’m still at the point, as I think I’ve said earlier, I think I’ve been reasonably consistent. But I think there’s still plenty of runway in that business for us under our ownership. And to your point, I think now we’re really beginning to see momentum.

And I we’ve created that momentum to some extent because, of course, we shut the facility in Waco. We moved five machines to our Delaware, Ohio, facility. We’ve had a fantastic start-up. We’re generating productivity. We have very much partnered with the customers who are going to win in that space. And obviously, right now, there’s potential tailwinds around some raw materials. So if I put all that together, I just sit down thinking myself, we’ve had one really strong-ish quarter. I’d like to have a few more under my belt before I thought about the next step.

Adam Josephson — KeyBanc — Analyst

Totally understood. And I appreciate that, John. And just one last one on capital allocation, which is, obviously, we spent $16 million buying back stock in the quarter. I assume it was February excuse me, January and February, not March, but you could correct me if I’m wrong. And then obviously, you find yourself in a position in which you had to suspend the dividend.

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, and then you had to suspend the dividend. And if I’m a shareholder, I’m thinking, well, I don’t know going forward, how do I know what this company’s capital allocation strategy is going to be when it seems to vary from quarter-to-quarter, year-to-year, depending on circumstances that are unforeseen.

John D. Williams — President and Chief Executive Officer

Yes. I guess, Adam, my only argument to that would be, if anybody had this in their forecast for 2020, they have my deepest respect, right? Because I don’t think any of us saw anything like this coming. So to my mind, as I said, I think earlier, we’ve always said more than 50% or more of free cash flow return to shareholders. We absolutely hold to that.

In the current environment, however, we feel very strongly that it’s the prudent thing to do to kind of pull in our homes across everything that impacts cash to make certain we’re strong on liquidity, but to make certainly come out of this as healthy as we possibly can be and with sufficient firepower to take advantage of any opportunities we see. So we certainly haven’t lost that commitment on free cash going back to shareholders. The challenge right now is what’s that level of free cash going to be in a very uncertain world.

Adam Josephson — KeyBanc — Analyst

Understood. Thanks so much and best of luck.

John D. Williams — President and Chief Executive Officer

All right. I’m Thank you.

Operator

Our next question from Paul Quinn from RBC Capital Markets. Please go ahead.

Paul Quinn — RBC Capital Markets — Analyst

Yeah, thanks very much. I just had one question. Just you’ve taken quite a bit of downtime on the paper side. And you’ve had three quarters of negative EBITDA on the pulp side. Is there anything that you can do downtime related on the pulp side to lower that loss?

John D. Williams — President and Chief Executive Officer

I think the answer to that is probably no, Paul. That may sound a pathetic answer. But really, those markets, they’re a commodity market. There is I think we’ve moved our mix pretty aggressively over the last few years to be in places where there is solid demand. So to my mind, if I look at what’s happening in our pulp business and I look at certain mills, I think one thing must remember in the pulp business, Espanola obviously cost us a lot of money last year as we had it shut, and it wasn’t generating overhead recovery.

So this year, I think we’re going to do better operationally in Espanola. But no, I don’t see a solution on the pulp side as to take any capacity out from our standpoint. I mean we sell everything we make. I mean that’s how it works. And we have major contracts, obviously, in the U.S. where people right now are taking the maximum they can because of what’s happening in the tissue and towel space.

Paul Quinn — RBC Capital Markets — Analyst

Does that imply that the margin is pretty equal among all pulp facilities that you’ve got right now?

John D. Williams — President and Chief Executive Officer

Sorry, Paul. I had trouble hearing that. Can you just say that again?

Paul Quinn — RBC Capital Markets — Analyst

Yes, sure. Does that imply that you’ve got the same margin at each of the pulp facilities that you’ve got?

John D. Williams — President and Chief Executive Officer

No. Some are a bit higher than others, but everything is well above cash costs at this moment in time, so it still makes sense to run.

Paul Quinn — RBC Capital Markets — Analyst

Okay. So let’s look at thank you.

Operator

Next question comes from John Babcock from Bank of America. Please go ahead.

John Babcock — Bank of America — Analyst

Just wanted to ask a couple of questions on behalf of George Staphos. Starting out, I was wondering if you can talk about what you’re seeing on the ground in China. And then also, why were pulp inventories up in the quarter?

John D. Williams — President and Chief Executive Officer

Sure. You’re talking pulp in China, I’m assuming. Is that right?

John Babcock — Bank of America — Analyst

That’s right.

John D. Williams — President and Chief Executive Officer

You’re talking pulp. Okay. Sure. So I mean, good demand, some logistic challenges just because of containers and shipping. So we’ve had to work hard. And I have to say I have to complement our supply chain and transport folks just to make sure we get what we need in terms of our ability to find containers to ship. So strong demand on fluff pulp. NBSK is fine. So again, I think you have to keep thinking about. We don’t really supply into paper grade very much. We’re much more about tissue, towel and baby care diapers and adult diapers. So when I look at our customer base in China, they’re getting volume out.

Now they’re all open. They were all considered essential businesses all the way through this. So feeling pretty good about that. I mean on the inventory side, when you think about that inventory growth, I mean it’s a shipment or 2, maybe a ship didn’t leave. I have no worries about that small increase. And of course, we have got some downtime coming up in the third quarter in terms of some maintenance. So to my mind, it’s in no way reflective that we have a demand challenge in our pulp business.

John Babcock — Bank of America — Analyst

Okay. And then I was wondering if you could also talk a little bit about the demand that you’re seeing in pulp so far in 2Q?

John D. Williams — President and Chief Executive Officer

It’s very good. I mean exactly where we thought it would be.

John Babcock — Bank of America — Analyst

Okay. And then just kind of last question here. I was wondering if you could talk about Personal Care and ultimately, your need to spend and/or reduce spend on marketing, just given kind of where demand is at this juncture.

John D. Williams — President and Chief Executive Officer

Well, so remember, we’re largely private label, major store brand. We obviously have a branded position in retail in Spain, where we’re very much the market leader. The demand is very, very strong. So when demand is off the charts, of course, you’re not going to throw marketing dollars at everything. I think one business that doesn’t have much visibility in our Personal Care business is our direct-to-consumer business. HDIS, which is based in St. Louis and Missouri.

There, actually, we do market through TV, then we follow-up with phone calls and have a kind of trusted advisory service for people who need these products delivered at home. That business is now showing double-digit growth as people are looking for alternatives to retail. We have a brand in that business called Reassure, which is doing quite nicely, albeit still relatively small, but still pretty solid. So I feel good actually about what’s driving that business over time.

John Babcock — Bank of America — Analyst

Okay. And if you don’t mind, just one last question here. One of the large paper distributors mentioned yesterday that they were seeing print demand down as much as 50% or so in April. Are you seeing numbers anywhere near that? Is that something that might be a bit beyond kind of the demand decline you’re seeing so far?

John D. Williams — President and Chief Executive Officer

Well, I mean, I think what we’re seeing, as we said, we’ve taken about 30% capacity out across our obviously, we have a very broad range of paper grades going to all kinds of different places, 30% to 35% in terms of what that means to the sales line is reasonably is a pretty good rule of thumb, I think, in terms of what we’re experiencing, but not 50%, to your point.

Operator

Next question comes from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

John Tumazos — John Tumazos Very Independent Research — Analyst

Thank you very much for taking my question. You’ve described your operational adjustments to the unprecedented crisis. And maybe it’s too early to think about the big picture. Your share price is significantly below what appears to be the value of either of your two business segments, maybe not quite the value maybe each business isn’t worth the market cap plus debt. But you appear undervalued. Do you think a practical alternative is to split the company into two publicly traded entities for the two segments or even 3, if pulp can split up from paper?

John D. Williams — President and Chief Executive Officer

Obviously, John, I wouldn’t speculate on an open line on that subject. But I think we are always thinking about what where the best value is for the shareholder and where the best value is for the entity. I think on pulp and paper, obviously, they’re so technically intertwined. You could debate that. Obviously, Personal Care sits as a very different, to some extent, time of business, although strong forward integration in terms of our fluff pulp sales. So 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 very short term here, it’s just batten down the hatches, minimize your costs, do sensible things and see where you get to at the other end of this. So quite frankly, that’s where we’re focused at the moment.

John Tumazos — John Tumazos Very Independent Research — Analyst

Thank you.

John D. Williams — President and Chief Executive Officer

Thank you.

Operator

That concludes today’s questions. I would now like to turn the call back for any additional or closing remarks.

Nicholas Estrela — Director, Investor Relations

Thank you, Margaret. We will release our second quarter 2020 results on Thursday, July 30, 2020. Thank you for listening, and have a great day.

Operator

[Operator Closing Remarks]