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Domtar Corp (UFS) Q4 2018 Earnings Conference Call Transcript

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Domtar Corp  (NYSE: UFS)
Q4 2018 Earnings Conference Call
Feb. 05, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation Quarter Four 2018 Earnings Conference Call with financial analysts. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and answer-session. (Operator Instructions) As a reminder, this call is being recorded.

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

Nicholas Estrela -- Director of Investor Relations

Good morning, and welcome to our fourth quarter and full year 2018 earnings call.

Our speakers today will be John Williams, President and Chief Executive Officer; and Daniel Buron, Senior Vice President and Chief Financial Officer. They will be supported by Michael Garcia from our pulp and paper division and Michael Fagan from the personal care division. John and Daniel will begin with prepared remarks, after which, they will take questions. During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of the website.

As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements subject to a number of risks and uncertainties, many of which are outside our control. I invite you to review Domtar's filings with the securities commissions for a listing of those.

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

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

John D. Williams -- President and Chief Executive Officer

Thank you, Nick, and good morning, everyone.

This morning, we announced a great quarter to cap off a solid year for Domtar. In terms of financial performance, we delivered EBITDA before items of $725 million and free cash flow of $359 million, a significant improvement versus last year.

In communication papers, the market reached an inflection point and we were well positioned to support the increased demand from our customers, while in market pulp the business proved to be a significant contributor to our results.

From a strategic standpoint 2018 was a pivotal year, we provided investors with a viable and actionable road map for how Domtar can continue to create meaningful long-term shareholder value as demand for communication papers declines. We ended 2018 with a sense of achievement with where Domtar sits today and in our positioning for the long term, with good visibility on short-term performance, the best paper assets in the business, great optionality and flexibility in the timing of future conversions.

Looking at our performance in 2018, we improved our pricing, expanded margins and grew volume in our paper business. As competitor shut capacity, we grew our business with our strategic customers, improved our customer mix and also capitalized on opportunities to grow in specialty papers. In light of the announced capacity that will be removed from the market, we will maximize paper production to supply our customers and remain their partner of choice for the long term. Making and selling uncoated freesheet in the current market environment is highly attractive and our absolute commitment is to serve our customers.

In pulp, we more than doubled our EBITDA in 2018 compared to prior year. Our average selling prices trended higher as we benefited from robust global demand with tissue, hygiene and packaging markets driving strong global growth. Our market pulp business has grown significantly in recent years, becoming a vital part of our portfolio as we position Domtar for the future in growing markets.

Given the favorable outlook in the business, we've initiative in place to further enhance our customer value proposition and drive growth in high margin product segments. This is supported by a disciplined investment and operational plan over the next three years on high return projects to optimize and improve efficiencies with the objective of driving cost performance.

Operationally, teams across our mill network were agile in adjusting to market changes and executing on things under our control. This was particularly the case with extracting costs and driving efficiencies through our continuous improvement and reliability programs. These efforts helped drive annual production records at several mills, resulting in lower costs and margin expansion.

For personal care, 2018 was a transition year. Long-term growth trends for adult incontinence and infant products remain favorable and we continue to focus on building a more profitable business. However, adverse market conditions, including price pressure and some raw material headwinds made for a difficult year in 2018. We've responded with an aggressive plan to drive margin improvement and enhance our competitive position. Our actions have included streamlining SG&A, cost reduction across our operations, SKU rationalization and the optimization of our manufacturing footprint.

We also exited 2018 with sales momentum as new customer ramp-up accelerates and we realize some benefits of our commercial initiatives. We're confident in our ability to generate cash and we will maintain a balanced and disciplined approach to deploying resources by investing to fuel growth in our core businesses and returning capital to shareholders.

As I noted at the beginning of my remarks, the opportunities of our world-class paper assets provide us with an important lever for further positioning Domtar in growing markets. We believe our repurposing road map represents a significant de-risking of our business by clearly identifying generating alternatives for our mills when they are no longer needed. We will greenlight the conversion of individual assets to produce containerboard and/or softwood pulp only when necessary to balance our paper production with our customers' demands.

Moving to health and safety. Domtar's consolidated frequency rate improved by 5% versus last year. This establishes new record lows for event frequency for Domtar. All in all, we're very pleased with what we were able to accomplish in 2018 and look forward to even better results in 2019.

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

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

Thank you, John, and good morning, everyone.

Let's start by going over the financial highlights of the quarter on slide four. We reported this morning net earnings of $1.38 per share for the fourth quarter compared to net earnings of $1.57 per share for the third quarter of 2018. Adjusting for items, our earnings were $1.63 in per share in the fourth quarter compared to $1.46 per share for the prior quarter. EBITDA before items amounted to $228 million compared to $193 million in the third quarter.

Turning to the sequential variation in earnings on slide five. Consolidated sales were $23 million higher than the third quarter due to higher sales in our pulp and personal care businesses.

Depreciation and amortization was flat when compared to the third quarter while SG&A was $15 million lower than the third quarter due mostly to the mark to market of stock based compensation. In the fourth quarter, we recorded an income tax expense of $35 million or a tax rate of 28%, higher than our forecasted tax rate due to the finalization of the repatriation tax under the new US tax reform.

Now turning to the cash flow statement on slide six. Cash flows provided from operating activities amounted to $217, while capital expenditure amounted to $84 million. This resulted in free cash flow of $133 million in the fourth quarter. For full year, cash flow from operating activities amounted to $554 million, and capital expenditures amounted to $195 million. This resulted in free cash flow of $359 million in 2018.

Turning to the quarterly waterfall on slide seven. When compared to the third quarter, EBITDA before items increased by $35 million due to lower SG&A costs for $15 million, lower maintenance costs for $14 million, higher selling prices for $12 million, lower other costs for $5 million, higher productivity for $5 million, higher volume and mix for $2 million and a favorable exchange rate of $1 million. These were partially offset by higher raw metal cost for $19 million.

Now the review of our business segments, starting on slide eight. In the pulp and paper segment, sales were 1% higher when compared to the third quarter and 6% higher when compared to the same period last year. EBITDA before items was $211 million compared to $197 million in the third quarter of 2018.

Our paper business on slide nine. Sales were flat versus last quarter and were 9% higher versus the same quarter last year, while estimated EBITDA before items was $129 million or 16% larger. Manufactured paper shipment were 1% lower compared to the third quarter and also 1% lower versus the same period last year. Average transaction prices for all our paper grades were $11 per ton higher than the last quarter.

Let's turn to the pulp business on slide 10. Sales increased 3% versus last quarter and were 2% lower versus the same quarter last year. Estimated EBITDA before item was $82 million or a 24% margin. Pulp shipment were 1% higher versus the third quarter and down 15% when compared to the same period last year. Average pulp prices increased $8 per metric ton versus the third quarter.

Our paper inventory increased by 34,000 ton when compared to the last quarter, while pulp inventory decreased by 7,000 metric ton.

Our personal care business on slide 12. Sales increased 7% when compared to last quarter and were 2% lower versus the same period last year. EBITDA before items was $20 million, $6 million higher than the third quarter.

Finally, consistent with our practice at this time of the year, you'll find on slide 13 through 15 our estimates for some key financial items for the coming year. With respect to maintenance, our total costs for the year are expected to increase slightly but our quarterly audit schedule will change from last year with Q2 being the most active quarter. Capital spending is expected to be between $220 million and $240 million while depreciation and amortization is expected to be between $290 million and $300 million.

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

John D. Williams -- President and Chief Executive Officer

So let's take a closer look at the fourth quarter. We ended the year on a strong note, with quarter four EBITDA before items of $228 million, one of our best quarters in several years. We also generated over $130 million of free cash flow in a high capital spending quarter.

Our results were driven by solid performances by our paper and market pulp businesses. I'm especially pleased with our cost performance, despite some fiber availability issues which impacted wood costs at several of our facilities.

In our paper business, favorable market conditions and strong productivity underpinned a very good quarter. Our average paper prices were higher following the implementation of our announced price increases, partially offset by the seasonally unfavorable product and customer mix. We do expect additional price momentum in the first quarter and a slightly improved mix.

Despite the usual seasonal slowdown in the quarter, communication paper volumes remain steady and backlogs remain strong. Our sales momentum continued in January and we expect a good first quarter in volumes. We had fewer maintenance outages while total production tonnage reached record levels at some of our communication paper mills. We did take a marginal amount of tactical downtime in order to manage some of our wood supply at several facilities.

In pulp, our prices were higher when compared to quarter three as prices increased in most regions and more than offset year-end price reductions in China. We had solid demand for NBSK in North America while fluff pulp markets continued to see good end use growth dynamics. While we have seen some segments of the softwood market soften, the tissue and specialty sectors remain robust and the Chinese market is already showing signs of stabilization. Our expectation is for demand to remain stable through the Chinese New Year and we're optimistic for a return to volume growth and some price recovery by quarter two.

In personal care, results improved from the third quarter. Sales in Europe increased 7% year-on-year while new customer volume began to ramp up in North America. Higher volume and cost improvements also drove operational efficiencies and resulted in lower overall unit costs. Although markets remain challenged with raw material cost inflation, we do see the underlying fundamentals beginning to improve. Our near-term focus is on the execution of our margin improvement plan and building value for our customers.

The Waco closure, which includes the relocation of infant and adult lines to our Delaware and Greenville facilities, is expected to begin during the first half of the year. These initial steps will optimize infant diaper production, which will reduce fixed costs and improve cost absorption.

Overall in 2018, we had a strong finish and a great year. We're confident that the positive momentum in the paper and pulp markets will continue, driven by healthy demand and solid fundamentals across our portfolio. Our teams across the system continue to do great work in improving mill efficiency and reliability, supported by targeted capital spending.

Looking ahead, our paper shipments will increase as we respond to demand from our customers following the announced capacity closures. Our paper prices will continue to improve in the wake of our recently announced price increases across the majority of our grades. We expect that softwood and fluff pulp markets will remain balanced through the year due to continued steady demand growth and expected limited new supply. We anticipate the costs of freight, labor and raw materials will marginally increase. Wood cost and availability issues will likely persist into early 2019 at several sites.

Personal care is expected to benefit from our margin improvement plan and new customer wins, partially offset by further raw material cost inflation.

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

Nicholas Estrela -- Director of Investor Relations

Thanks, 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.

Carolyn, you can open the lines for questions.

Questions and Answers:

Operator

Certainly. (Operator Instructions) And we'll go first to George Staphos with Bank of America Merrill Lynch.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks, operator. Hi everyone, good morning. Thanks for the...

John D. Williams -- President and Chief Executive Officer

Good morning, George.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Good morning. John, could you give us a bit -- and, Michael, some commentary, maybe a little bit more color in terms of how the volatility that we saw and I guess continue to see in Chinese fundamentals obviously from more commodity grades filter back to your operations and your business and what gives you some comfort -- recognizing there are no guarantees in life, why you think we should remain more or less in balance in the markets through the first quarter.

John D. Williams -- President and Chief Executive Officer

Sure. So -- I mean, I think if the premise, George, is that pulp that was bought for the paper grades was not used to some extent because the paper grades was soft in China so there was pulp available to be sold, if you like, to our customers and our customers of course are mostly tissue customers and those kind of grades and of course are fluff pulp customers and absorbent products. So there was a sort of slight buyers' strike. We think agents were adjusting their inventory based on having bought perhaps some expensive inventory. As you know, we don't use agents. We have a direct sales organization in China. So we're very happy that we have real visibility of what's going on. And as you can see, Chinese prices have moved slightly up from the bottom. So our view is there's nothing inherent -- I mean, this is still an economy obviously that's growing at, say, 5% if you can believe the statistics. So to our mind there's nothing inherently wrong with the demand of end use products into which pulp is going. And certainly we see the mid-term post Chinese New Year that will settle down. So there's nothing inherently problematic with end use demand.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Okay. I appreciate that. And one related question to pulp and then one for tissue and I'll turn it over. Recognizing again things are going to move around a bit and there are no guarantees, the run rate that we are seeing in pulp shipments right now, should we more or less consider that as a relatively good rate into the first and second quarter, maintenance adjusted, and where do you see fluff winding up as part of your mix for this year? Are you going to be materially above the low-40s as a percentage of your overall production? And then in tissue, it sounds like sequentially we should see some improvement. Could you give us, if not quantify, maybe some qualitative waterfall in terms of how volume, inflation and productivity and mix should benefit you 1Q and 2Q? Thank you.

John D. Williams -- President and Chief Executive Officer

So if I could -- if I can answer the last bit first because I think you meant personal care.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Yes, that's what I meant to say...

John D. Williams -- President and Chief Executive Officer

Rather than, I mean, tissue?

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thank you. Yeah.

John D. Williams -- President and Chief Executive Officer

So I think on personal care, we see improvement. May not be linear, but certainly -- in 2018, we had a really choppy sales line even though the top line, it looks fairly stable. Customers came, customers went. So now we're much more stable. So I think we're going to see the benefit of that stability. We obviously had a lot of tailwind on raw materials last year. We think that will lessen. So yes, we see improvement in personal care moving through. On the pulp side, I think the volumes are probably about right in terms of quarter-to-quarter, the numbers you're now seeing. There was one very large quarter where we were actually selling out of inventory. That's not the number to use. I think it's more the numbers you see today. And yes, on fluff pulp, I think we're largely at the run rate we're going to be at. There might be a little bit of an increase, but I think it's going to carry on very much as it is now. Does that help?

George Staphos -- Bank of America Merrill Lynch -- Analyst

It does. Thank you, John.

John D. Williams -- President and Chief Executive Officer

You're welcome.

Operator

And we'll go next to Anthony Pettinari with Citi.

Anthony Pettinari -- Citi -- Analyst

Good morning.

John D. Williams -- President and Chief Executive Officer

Anthony, good morning.

Anthony Pettinari -- Citi -- Analyst

Good morning. John, you outlined your road map late last year to convert four white paper mills. And given the GP closure, maybe it's safe to assume the timeline probably gets pushed back a bit. So just given a more attractive freesheet market and your debt to EBITDA is down to 1 turn, just wondering how you think about capital allocation here. Are you getting to a point where maybe the balance sheet is inefficient? Or any kind of broad thoughts you have?

John D. Williams -- President and Chief Executive Officer

Yeah, certainly. So I mean, just to remind ourselves, I think in the last 10 years we've given back about 66% of free cash to shareholders. So we wish to continue to reward shareholders. I think our promise is still very much that more than 50% will go back to shareholders. So that's why there's an attractive dividend. There's no question though, you see...

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

(multiple speakers) CapEx (inaudible).

John D. Williams -- President and Chief Executive Officer

Yeah, sorry -- I mean, there's no doubt that you see an increase in CapEx this year, and there are reasons behind that. So we now have a really great plan by individual mill and our pulp business as to how we're going to drive both cost and productivity in our pulp business. As you recall, I've said -- historically, in a way, we were sort of a reluctant pulp supplier. Now we've got I think one of our best leaders running it. We have a very clear plan. That does not mean for one minute that capital is going to sort of blow out of the water in terms of historical behavior, but you'll see we've slightly increased CapEx in '19 in order to really drive that plan forward.

Anthony Pettinari -- Citi -- Analyst

Okay. That's helpful. And then you called out tactical downtime due to wood cost in 4Q but it seems like paper inventories increased more than they typically do in 4Q. So just wondered if you can explain that dynamic.

John D. Williams -- President and Chief Executive Officer

Yeah, that's sort of partly mix, to be honest. So sometimes we've got more of some grades than other grades than we need, but on the woods side, if anything we were a bit tight on wood here and there, so we had to take a bit of downtime just so our wood inventory increase to reasonable levels. So that was what we were involved in there. Wasn't that meaningful, to be honest.

Anthony Pettinari -- Citi -- Analyst

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

John D. Williams -- President and Chief Executive Officer

Thanks.

Operator

And our next question comes from Brian Maguire with Goldman Sachs.

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good morning.

John D. Williams -- President and Chief Executive Officer

Brian, good morning.

Brian Maguire -- Goldman Sachs -- Analyst

John, you used to target something in the neighborhood I think it was around $200 million of EBITDA from growth businesses, personal care, fluff pulp. Just wondering, in light of the Georgia Pacific news and the repurposing road map that seems like it might not kick in in the next couple of years. Is that target still in place? And do you have any sort of updated thoughts on the timeline for it?

John D. Williams -- President and Chief Executive Officer

Yes, sure. But let me to help. So I mean, certainly you know if you look at now the size of our fluff pulp business -- obviously, we don't really give you the earnings by fluff pulp. But when I look at what we're making on fluff pulp, what we're making in personal care, I mean, we're not far away from that objective. And I think over time we'll get closer. I mean, certainly, on the conversion, the containerboard plan over time we're going to see strong earnings. Now of course, we're already earning money from those assets but one has to remember that if we're not making paper you have to compare it, if you like our containerboard earnings to nothing in the next few years when we make those conversions. So to my mind, over time, the shift of the -- the business will shift in terms of its earnings profile, which it already has to some extent. But of course, we now find ourselves with runway I guess one might say on white paper that is slightly longer perhaps than we were thinking a few months ago.

Brian Maguire -- Goldman Sachs -- Analyst

Okay, great. And then just sort of a question on the pricing dynamics. You mentioned in the fourth quarter they were up in most of the markets, offsetting the declines in China. But just wondered how you think about those declines in China impacting the other markets. We've already seen a little bit of weakness here in the US and Europe. Just wondering how you think about where prices in those markets go and if they just lag movements in China. Or do you think that they're discrete markets and so you're not expecting any additional price declines from here?

John D. Williams -- President and Chief Executive Officer

Yeah, I mean, I never like to speculate about pricing. So if you don't mind, I won't. But I'll certainly give you the facts. I mean, the facts are quite straightforward. A lot of our pulp business that we sell domestically and if you like in the US and Canada it is contract based with very specific pricing mechanisms which kick in or don't kick in, and very often there's a lag one way or the other. So I don't really perceive the Chinese weakness as something that will dramatically impact North American pricing.

Brian Maguire -- Goldman Sachs -- Analyst

Okay, thanks very much.

John D. Williams -- President and Chief Executive Officer

You're welcome.

Operator

And next, we'll go to Steve Chercover with Davidson.

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

Thanks, and good morning, everyone.

John D. Williams -- President and Chief Executive Officer

Hey, good morning.

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

My first question -- forgive me if I missed it. Are there any brands that were associated with the GP product that you might be available to make?

John D. Williams -- President and Chief Executive Officer

No to my knowledge. There was one brand they used but most of it would have been private label, and most of it would be -- a lot of it would be cut size.

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

Okay. But it's safe to say that you have had inquiries from the former companies, clients, say (multiple speakers).

John D. Williams -- President and Chief Executive Officer

Well, so you know -- well -- so I mean, obviously that is such a shock to the customer base. 60 days is not very much time. So those customers have clearly been looking for volume. To be absolutely frank, what we've really been doing is making certain we supply those customers that we've had over the long term who've been loyal to us and to make sure we keep supplying them. Now there are some moves we can make perhaps of reducing our export business slightly. And, how would I put it -- increasing productivity in some of our mills to generate some more volume. But our number one priority is actually to maintain our supply chain to our current customer base.

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

And that certainly seems appropriate. And then on the pulp side, if there's not much growth currently, do you foresee any shortages on the fluff side that perhaps you can fill down the line?

John D. Williams -- President and Chief Executive Officer

Well, I mean, look at that -- if you look at the demand -- I think you'll have to go to -- see the end use demand of fluff pulp -- so, you know, this is obviously driven by absorbent hygiene products, so fem hy, baby diapers and adult diapers. Unquestionably, particularly on the adult diaper side and the feminine hygiene side, those are fast growth, 5%, 6% growth markets in volume as people adopt these products more. So our view on fluff pulp is that the runway on fluff pulp remains very strong.

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

And one of your competitors in fluff acknowledges that they made a mistake so to speak. Did that have any impact on you?

John D. Williams -- President and Chief Executive Officer

I have no idea what the mistake was.

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

Okay. Thank you.

Operator

Next, we'll go to Sean Stewart (ph) with TD Securities.

Sean Stewart -- TD Securities -- Analyst

Thanks. Good morning.

John D. Williams -- President and Chief Executive Officer

Good morning.

Sean Stewart -- TD Securities -- Analyst

Couple questions following on Steve's point with filling the GP gap. Your guiding to hire 2019 shipments, it looks like you ran more or less full load in 2018 based on your stated capacity. Can you give us a sense of incremental volume you're expecting this year in terms of paper shipments?

John D. Williams -- President and Chief Executive Officer

Well, certainly -- I mean, I wouldn't give you the exact number because the world moves around on us. But our plan is to bring back some of the export volume that we're shipping into Europe where we know there's a margin enhancement opportunity for us, not all of it but some of it, and to squeeze the system we think for sort of 40,000 to 50,000 tons.

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

And we'll dry furnish.

John D. Williams -- President and Chief Executive Officer

And we'll dry furnish a bit.

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

Some maintenance downtime that were not in the past.

John D. Williams -- President and Chief Executive Officer

So maybe 100,000 to 150,000 tons.

Sean Stewart -- TD Securities -- Analyst

Okay. And the second question, the incremental CapEx this year that you're spending, I gather some of it's going to go into the pulp optimization initiatives. Maybe just go into a bit more detail there on expected returns on the discretionary -- the incremental discretionary capital you're going to be spending.

John D. Williams -- President and Chief Executive Officer

Let me -- if I may give you the macro around the micro just because we don't really talk about it mil-to-mil but obviously our market pulp mills have done some great work in setting out probably a three to four year roadmap on what they need to do to really be more cost effective and to enable us to drive the productivity we want. So you know, not all of these projects would give us a return within sort of five years and drive our cost position in what are already very competitive mills to an even better place really to make certain -- I mean, we all know pulp is a volatile market to make certain that we're making all the money we can make regardless of the state of the marketplace. So that's where that increase in CapEX is going. So of course, you know those market pulp mills. So it's going to be Plymouth; it's going to be Kamloops; it's going to be Dryden to make certain -- and of course Ashdown -- to make certain that we can really drive productivity in those mills.

Sean Stewart -- TD Securities -- Analyst

Okay. That's useful context. Thank you.

John D. Williams -- President and Chief Executive Officer

You're more than welcome.

Operator

And we'll take our next question from Mark Connelly with Stephens.

Ashish Gupta -- Stephens -- Analyst

Hi, good morning.

John D. Williams -- President and Chief Executive Officer

Hello, morning.

Ashish Gupta -- Stephens -- Analyst

This is Ashish for Mark.

John D. Williams -- President and Chief Executive Officer

Hello, Ashish.

Ashish Gupta -- Stephens -- Analyst

Hey, how are you? Just wanted to dig a little bit further on the white paper pricing. Daniel, I think you had said -- on the third quarter call you exited with pricing in September at $20 higher than the average for the quarter and then you came in around $11 higher. I'm just wondering how much of that is mix? And then if you could also just give us a sense for where we were with the September 1st hike, the $50 hike? I think you had said that was expected to all be in by December, but it seems like that hike is kind of dead and just wanted to kind of get a sense for how to think about things in that regard.

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

Okay. So let's answer the first part of the question. You're right, that makes it the explanation in Q4. You may remember that we used to have a significant mix impact in Q4 this year. We've been able to manage that to a smaller amount. So we've improved our mix significantly or improved the price of the poor mix if you will in 2018. So we had a mix impact in Q4 but very limited versus prior year, so very pleased with the mix improvement we've seen. And when we made the comment on the price increase, the last one -- the last one last year, it was a three month implementation and when we spoke, so there was a portion that was actually in Q1. And we're still expecting that to happen in Q1. So we're without that price increase that just was announced, we were expecting a price improvement in Q1, and the new price increase will give us a little bit of further benefit probably late in the quarter and mostly in Q2.

Ashish Gupta -- Stephens -- Analyst

Okay, great. That's really helpful. That's more than we thought. And then just kind of thinking about -- you made some comments about your contracts in pulp and the lag there and the mechanisms. And just trying to -- still focused on price. Pulp ended up coming in a little bit better on pricing than we expected and there's been this kind of historical difference in where we've seen list and spot versus your realizations. Can you get a -- just give us a little bit more clarity in kind of how to think about 2019 in terms of when those contracts are rolling off or where you might see some volatility if at all?

John D. Williams -- President and Chief Executive Officer

Yeah. So I mean, the short answer is no, not because I don't want to just because of how events unfold. But essentially, I think the thing to think about major accounts in North America will have mechanisms that protect them on the way up and protect to some extent the supplier base on the way down in terms of the lag and delay in those pricing mechanisms. So typically what you're inclined to see is at the point that maybe prices erode very slightly that actually the major accounts in the United States, their prices continue to increase versus prior quarters because the supplier is getting paid if you like for some of the margin that wasn't available to them based on the contract in the quarter where the prices were going up. And I think that's probably an impact. You might well see in quarter one versus quarter four. Now -- so in rough and ready terms you could almost think of a three, four month -- these are quite complicated formulas. You could think about three or four month delay up or down with some of the major accounts. Now, because they don't contract all their volume, so if there's a spot opportunity they'll take it. But of course, they want to stay with their major suppliers because they know they get security of supply. So when you put all that together, it's kind of everything moves slightly more slowly than one anticipates because of those contracts driving the pricing mechanism. Does that help?

Ashish Gupta -- Stephens -- Analyst

It does. Thanks so much for all the color. Appreciate it.

John D. Williams -- President and Chief Executive Officer

You're welcome.

Operator

And for our next question, we'll go to Mark Wilde with BMO Capital Markets.

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning, John. Good morning, Daniel.

John D. Williams -- President and Chief Executive Officer

Mark, good morning.

Mark Wilde -- BMO Capital Markets -- Analyst

John, I'd like to come back to the -- couple of questions on this pending closure. The first is about five years ago we had another big closure in the industry and everybody got very bullish. And then within about six to 12 months, everybody had to get more cautious. Are there any lessons learned from the last time we had a big slug of capacity drop out of the market and like this?

John D. Williams -- President and Chief Executive Officer

Well, I think one is don't apply the revenge theory of customer management. So I think you have to be balanced in your approach. I think you have to remain loyal to your customers. I also think, Mark, the difference here is that I think the duties make a difference this time around. So certainly some of those people who flooded in the previous time can't flood in this time. And I think we just have to take a balanced approach. Now there's no doubt versus historical numbers, there's no way paper prices are ludicrously high at this point. But at the same time I think we have to be measured in our approach and watchful and careful, and that's exactly what we're going to be.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And then the other question I have, John, and I don't want you to speak for this Atlanta based company. But if we look at the mill that's going down, it's a large and from what I can tell a low cost asset and the current owner is a big existing player in both pulp and containerboard, and yet they're opting to close this mill down and start buying pulp from their tissue operation. So does that tell us anything about the economics or the attractiveness of your own conversion plans in the pulp and containerboard? I mean, they've got a big mill. They could be doing it and they're not.

John D. Williams -- President and Chief Executive Officer

Right. I mean, I guess, if you think about Domtar, we are in the pulp and paper business. If you think about Coke Industries, they're in a whole raft of different businesses. I'm assuming, and I -- as you say, I cannot speak for them. They make their own capital allocation decisions and here is a decision they've made saying, well, this is the decision we're going to make in these terms. I have no idea of the detail. We all know I think, Mark, that mill has had its challenges for a while and it just looks like they've decided they just weren't going to invest. I think the implications for us are, when I look at the returns we would realize over time by moving into containerboard, there are attractive returns. So I don't think it impacts particularly our numbers.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. But you see what I'm saying? I mean, they seem to have kind of a built in runway, John, into both of those end markets...

John D. Williams -- President and Chief Executive Officer

I agree.

Mark Wilde -- BMO Capital Markets -- Analyst

Because they're a huge fluff pulp player and they're a 4 million ton containerboard guy.

John D. Williams -- President and Chief Executive Officer

I agree. I think, I mean, to be honest with you, Mark, I just don't know, to be frank. I mean, my view is they've made that choice. I can't imagine why they made that choice. I think I can absolutely understand from an uncoated freesheet standpoint, but to your point, I don't really understand from a conversion standpoint.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. All right. Last question I had, John, just on the pulp market, we've kind of walked around China and everything, but it does seem like there's a lot of pulp inventory sitting out there globally, including over the European ports. Can you just help us kind of understand how you're thinking about that element in the equation?

John D. Williams -- President and Chief Executive Officer

Yeah, certainly. I mean, I think about our supply chain to our customers and I think about our ability to know the inventory in those accounts because we're actually calling them on ourselves as opposed to through agents. We don't do that much business in Europe, truth to tell. I think about the stock in our system, and I feel -- I think Chinese New Year, we'll have to get past that to really get clarity. But I certainly don't sit here and think -- and I'm really talking about 2019 in its entirety. I think we may have -- there's a potential for a little shock or two at the beginning. But the underlying demand is still very strong. So this stuff will work its way through that. And we always start the year assuming no one is going to have any capacity issues and every year there's 1 million tons to 1.5 million tons of stock that goes wrong. So I think that inventory will work through that pretty straightforwardly.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And are these Chinese tariffs, are they having any effect?

John D. Williams -- President and Chief Executive Officer

Actually not. No. I mean, the one -- obviously, it's fluff pulp largely. It's -- I think it's 5% if I recall and 87% -- nearly 90% of global fluff pulp comes from the Southeast in the United States, so not so far.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. Sounds good. Good luck this year, John.

John D. Williams -- President and Chief Executive Officer

Thank you so much.

Operator

And we'll go next to Adam Josephson with KeyBanc Capital Markets.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

John, Daniel and Nick, good morning.

John D. Williams -- President and Chief Executive Officer

Adam, good morning.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks for taking my questions. Daniel, just one for you on the stock based comp. That was a $19 million sequential benefit, just given the move in the stock in the fourth quarter. The stock has obviously reversed course through the first month of 2019. Should we expect the opposite to happen in 1Q sequentially or not necessarily?

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

I think you should expect something similar in the first quarter. I mean, a rough rule is $1 per share is $1 million in impact. So whatever is the closure price of the stock on March 31st, you'll be able to assess what you believe is the impact for Q1.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thank you for that. On freesheet prices, you're asked earlier about how the last increase is still flowing through and Daniel you said you've got one more quarter of that. Can you just help me with kind of what your exit prices were versus your quarterly average price? And then if we were to factor in the remainder of that fall increase, what the exit price would have been, just to help us for modeling purposes?

John D. Williams -- President and Chief Executive Officer

Quarter-end versus average was very similar. And I'll have to do the calculation, but I think there's probably -- I mean, less than $10 (ph) a ton left if you look at the full portfolio. Probably -- I mean, the $6, $7 per ton improvement in Q1 because of last year increase.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Okay. So that would be the sequential increase. Okay. And then, on -- John, on containerboard for a moment I'm sure you've seen there's been -- John, that there's been in containerboard flattening domestic demand, there has been deteriorating export markets, falling export prices, bloated inventories. Does that affect your thinking at all about the medium or long-term attractiveness of the North American containerboard market, particularly given the seeming profound weakness in export markets that's developing?

John D. Williams -- President and Chief Executive Officer

Well, I don't think it changes my view of the sort of long term. I mean, I still think that's an attractive market. It seems to me inconceivable that it won't continue to grow. I mean, it's -- not only is it driven by sort of GDP growth it's of course driven by commerce growth at this point in time. But it has its highs and its lows, and it always has done. And so I think in -- right now it's softened a bit. That's what that market does, and it will return as it always does. So to my mind it doesn't really change our thinking dramatically. I think as we've said earlier and as I said in my prepared remarks, obviously, we feel very confident right now in our core business with the GP closure and the share dynamics in the market, and quite frankly our ability with our customers to supply them competitively. So, do we feel we have perhaps a little more runway than we felt we had prior to the announcement of that closure? I think the answer to that is obviously yes.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Sure. And just, John, back to Mark's question about comparing the current freesheet situation to what happened five years ago. Can you just help us with the extent to which you think this situation is different because of the existence of the duties? In other words, how important, just based on where the duties are -- how significant are the differences now versus five -- how much different is it precisely because of those duties?

John D. Williams -- President and Chief Executive Officer

I think it's very different. This is -- one, this is a large number although -- I mean, it's the closure is kind of focused on grades that go down particular channels. So it's not like it's a wide market issue. They're actually quite focused in certain channels. I think importers now have a much -- excuse me -- I think people who are producing offshore actually have much better domestic markets. Look at the European market on uncoated freesheet. The market's been consolidated, prices have moved up quite dramatically. That's happening in market after market. So the idea that there's swathes of capacity looking for a home I think is a little bit of a myth. And, obviously in some of those marketplaces where they imported like crazy the last time, actually the duties I think prevent them. So I'm not being naive here. I think you will see an increase in imports, but I don't think it's going to be wildly dramatic. And I also think we will just do what we do best, which is focus on supplying our customers competitively.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks so much, John.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

And next we'll go to Chip Dillon with Vertical Research.

Chip Dillon -- Vertical Research -- Analyst

Yeah. So good morning. Thanks for taking my question.

John D. Williams -- President and Chief Executive Officer

Chip, good morning.

Chip Dillon -- Vertical Research -- Analyst

First one, John -- doing great. You guys had a really good cash experience last year even with a very good dividend. Looks like your net debt went down by about $4 a share and you've got it 1:1 leverage. And it also looks like from the CapEx program that any repurposing would take what happened after '19. Should we expect to see anything like what we saw five or six years ago in terms of buybacks? I mean, is that something that is moving up the chain? Or do you feel you need to still keep a lot of powder dry even though your leverage is down to 1:1?

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

First of all, we like -- we like our leverage. We like the flexibility it's giving us. I mean, we we're -- we're now able or to seize opportunities if one arise. So we like the leverage we're at right now. I think in terms of capital allocation, I mean, we have a healthy dividend and we'll resume discussion with our Board around the Annual Shareholder to look at the dividend and to look at should we resume share buyback or not. But that's definitely part of the tools that we have to return cash to our shareholders and our commitment remains to have a balanced approach and to return more than 50% of our cash flow to our shareholders.

Chip Dillon -- Vertical Research -- Analyst

Okay. And I do know that you've raised it eight out of nine times, so that -- eight -- sorry, eight years out of the last nine, so that's pretty impressive.

John D. Williams -- President and Chief Executive Officer

Yeah.

Chip Dillon -- Vertical Research -- Analyst

And then, John, you mentioned in the beginning that your repurposing again would be containerboard or softwood pulp and you then used the f-word, the one with five letters and I'm just here to make sure that I understood that you all regard fluff as either equal to or greater than SBNK.

John D. Williams -- President and Chief Executive Officer

Yeah, we do.

Chip Dillon -- Vertical Research -- Analyst

As you think about repurposing.

John D. Williams -- President and Chief Executive Officer

We do.

Chip Dillon -- Vertical Research -- Analyst

Okay. And then the last thing on -- I know -- I think and you might have to prep me on the numbers. The pulp mill program is a four year program. I think it's around $120 million or so, all in. Will this year be sort of an average year or an above average year for that, all things being equal?

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

Average.

John D. Williams -- President and Chief Executive Officer

About average, I would say.

Chip Dillon -- Vertical Research -- Analyst

Okay, OK. And this is year three or year two?

John D. Williams -- President and Chief Executive Officer

Year two.

Chip Dillon -- Vertical Research -- Analyst

Okay. Terrific. Thank you.

John D. Williams -- President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Paul Quinn with RBC Capital Markets.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah. Thanks very much. Morning, John and Daniel.

John D. Williams -- President and Chief Executive Officer

Paul, good morning.

Paul Quinn -- RBC Capital Markets -- Analyst

Hey, that -- the $17 million increase in maintenance costs in '19, is it -- is this for the pulp program? Is that the increase to cost?

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

There's a little bit more activity. As you recall that we've moved to an 18 month schedule. So there's a little bit more days of shut if you will, and the rest is inflation. We're expecting a little bit of inflation. I mean, steel is more expensive. Labor will be a bit more expensive as always. So we've been able to beat inflation over the last five, six years. I think we'll have a little bit of inflation on our maintenance next year.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. And that breakdown on a quarterly basis of the maintenance costs, that's really helpful. Is there any way that you can give us some color on how it's going to affect both paper and pulp through the quarters?

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

For Q1, I can give you a small -- a small update. Actually, a bit more maintenance certainly you see here. It's a bit more maintenance, $6 million more maintenance in pulp and $3 million less maintenance in paper. And I'll have to look at the -- so I guess at Q1 result, I'll give you the breakdown between pulp and paper for Q2.

Paul Quinn -- RBC Capital Markets -- Analyst

Okay. That's great. And then just on 2019 CapEx budget, that $220 million, $240 million that you guided. Is there anything in there for conversions?

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

No.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. That's all I have. Best of luck. Thanks, guys.

John D. Williams -- President and Chief Executive Officer

Thanks.

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

Thank you.

Operator

We'll go next to John Tumazos with John Tumazos Very Independent Research.

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

Thank you very much.

John D. Williams -- President and Chief Executive Officer

John, hi.

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

With the $301 million of debt repaid and the prospects for very nice earnings gains in 2019, you have a lot of walking around money if you wanted to embark on a project. With the shares rising, do you think you've missed the boat for buybacks? Or could there be a special dividend or could there be easily a $0.5 billion or larger project to integrate something in personal care or for that containerboard option two, four or six years down the road?

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

I think I'll echo what we've said earlier. I mean, we like the flexibility that we have on our balance sheet. Domtar is still in its journey to move from declining businesses to grow businesses. So having that flexibility on the balance sheet is making sure that if an opportunity is available we can actually seize. Investors just looking at it and say, too bad we don't have the ability to seize upon that opportunity. And for the rest, I mean, the tools we have for returning cash to our shareholders are healthy dividends. We'll look at it. We can buy back. And we can do special dividend, and that's part of the discussion we'll have as we're having on a yearly basis with our Board around the May time frame.

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

Thank you very much.

John D. Williams -- President and Chief Executive Officer

Thanks, John.

Operator

(Operator Instructions) And we'll go to George Staphos with Bank of America Merrill Lynch.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my follow-on. I guess the first question is just around maintenance CapEx specifically within the pulp business. So, John, I thought I heard you say that -- obviously, you like the pulp business and the investments that are being made are to assure as much as possible that no matter the cycle you're not leaving any money on the table, that you're making as much as you can.

John D. Williams -- President and Chief Executive Officer

Yeah.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Are the projects -- and this one may be splitting hairs. Are the projects more aimed at reliability and improving reliability on a going forward basis? Or is it -- there are areas where you can take variable cost and fixed costs out of the mills by which to not leave that money on the table. That's my phrase and not yours. And then relatively, the little bit larger than normal spike in 2Q maintenance, is there anything specific project-wise driving that or is it just the way the counters (ph) coming together in terms of the projects alignments and the 18 month schedule?

John D. Williams -- President and Chief Executive Officer

Sure. So on the pulp plan, let me -- let me talk to that. So you've got some debottlenecking going on, so obviously there's a benefit there in terms of balancing the mill and output and some reliability issues. We've -- challenges is the wrong word, but we've had some issues I think where -- with the right targeted investment we can -- we can just run the place more reliability -- with more reliability, and we have some energy projects which always pay well. So those are kind of the three focuses of that one. The maintenance is just the way it pulls (ph) to be frank. So if a large mill falls in the second quarter versus the third quarter you'll see maintenance move around. But I'm not sitting here thinking there are large maintenance type projects that are disproportionate to what we usually do.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Okay. And my last question and to some degree I almost hate to ask it because again it's hard ultimately to answer and to know with any certainty what the future looks like. You said earlier toward the -- to the conversion question that always comes up on the calls for pulp or for containerboard that -- you'll probably have some more runway here before you have to make that decision because of what's been happening in terms of supply/demand in uncoated freesheet. How do you assess the risks and then what do you do as a result of pushing out perhaps the counter here but it being later in the cycle which would mean that potentially, the next time you really get a window for that conversion might be pushed out even further because we really don't know what the macro cycle is going to look like a couple, three years from now. Thanks and good luck on the quarter, guys.

John D. Williams -- President and Chief Executive Officer

Yeah. So, I mean, I think what we have to do is kind of remain agile in our thinking and keep an eye on the horizon. To be honest, what is a cycle these days? Is it three years? Is it five years? Is it 15 years? Are we in a super cycle? I mean, we can debate that till we were blue in the face. I think the thing for us is if we look at our asset base and we look how competitive they are, we look at our ability to convert in a market where there's a reasonable earnings potential from the -- from being in the containerboard space, we can be competitive in that space. So I think that's our going in premise. Then there's the how do we approach the market question. And then of course there's the technical question, can we do it and be competitive. I think we've answered most of those questions. So to my mind, I come away feeling pretty confident that we know what we need to do. However, events keep conspiring which I'm not unhappy about, that say actually we get more runway in our core business as things start to happen. And that allows us quite frankly to make certain that we keep that balance sheet flexible and gives us choices.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Fair enough. Thank you, John.

John D. Williams -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) And it appears we have no further questions. I'll turn things back over to our speakers for any additional or closing remarks.

Nicholas Estrela -- Director of Investor Relations

Thank you, Carolyn. We will release our first quarter 2019 results on Wednesday, May the 1st, 2019. Thank you for listening and have a great day.

Operator

And that will conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect.

Duration: 57 minutes

Call participants:

Nicholas Estrela -- Director of Investor Relations

John D. Williams -- President and Chief Executive Officer

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

George Staphos -- Bank of America Merrill Lynch -- Analyst

Anthony Pettinari -- Citi -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

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

Sean Stewart -- TD Securities -- Analyst

Ashish Gupta -- Stephens -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Chip Dillon -- Vertical Research -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

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

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