Domtar Corporation (UFS)

UFS 
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Domtar Corporation (UFS)

Q3 2008 Earnings Call

November 4, 2008 10:00 a.m. ET

Executives

Pascal Bossé - Director of Investor Relations

Daniel Buron - Senior Vice President and Chief Financial Officer

Raymond Royer - President and Chief Executive Officer

Richard Thomas - Senior Vice President, Sales

Michael Edwards - Senior VP, Pulp and Paper Manufacturing

Analysts

Mark Connelly – Credit Suisse

Christopher Chun – Deutsche Bank

Steven Chercover – D.A. Davidson & Co.

George Staphos – Banc of America Securities

Claudia Shank Hueston – JP Morgan

Robert Howard – Prospector Partners

Steven Atkinson – BMO Capital Markets

Benoit LaPlante – Scotia Capital

Sean Stewart – TD Newcrest

Mark Wild – Deutsche Bank

Presentation

Operator

Good day. Ladies and gentlemen and welcome to Domtar third quarter 2008 financial results conference call. At this time, all participants are in a listen-only mode. But following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

And now I would now like to turn the meeting over to Pascal Bossé.

Pascal Bossé

Thank you, Sylvie. Good morning, everyone. Welcome to our third quarter 2008 earnings call. Joining me today are President and CEO, Raymond Royer; Senior VP and CFO, Daniel Buron; Senior VP of Sales, Dick Thomas, and Senior VP Pulp and Paper Manufacturing, Mike Edwards.

Raymond and Daniel will start the brief remarks on the results and then we will open up the call to questions from the investment community. Just as a reminder, our speakers will make references to supporting slides and you can find those in the investor section over the website.

I wish to remind you that our listeners on this call, we will make references with forward-looking statements based upon the number of estimates and assumptions that are subject to risks and uncertainties that could cause results to materially differ. I invite you to review Domtar's filings with the Securities Commissions for a listing of those. And finally, certain non-U.S. GAAP financial measures will be presented and discussed and you can find the reconciliation for the closest GAAP measures in the appendix of this morning's release and on our website.

So with that, I'll turn the call over to CEO Raymond Royer. Remo?

Raymond Royer

Thank you Pascal, and good morning to all our listeners. Domtar posted earnings before items of $51 million on sales of $1.6 billion. EBITDA before items was $250 million or 15% of total sales. I am encouraged by the results achieved despite economic turmoil, continued in wood cost increases and softer demand that marked the quarter. Again, we continued to focus on free cash flow and we generated $82 million in this quarter.

Our net debt was further reduced and it is now $176 million below December levels bringing the net debt to total capitalization to 39%, so, again, a solid performance in the wake of the weakening economic environment.

I will now turn the call over to Daniel for the financial review and I will come back with more comments in the outlook. Daniel?

Daniel Buron

Thank you, Remo, and good morning, everyone. Starting with the sequential review of our results on slide four, sales were down $14 million with lower overall volume offsetting higher prices for paper and lumber. Cost of goods sold were favorable $43 million and that despite higher cost for chemical, freight, fiber, and energy of $24 million.

The major improvement in the cost of sales line is mostly due to t the continued benefit from our synergy program as well as the impact of the Port Edwards mill closure in June.

SG&A increased $8 million primarily due to the fact that the second quarter included a non-recurring gain of $6 million for the sale of trademark. Finally interest expense was $2 million lower and the effective tax rate was in the low 40% as expected.

Turning to slide five; reported net earnings were $43 million or $0.08 per share. This includes two after item, synergies and integration cost of $6 million and closure and (inaudible 00:04:19) cost of $2 million. So, excluding these items, earnings were $51 million or $0.10 per share.

Now, turning to cash flow on slide six, cash flow from operating activities amounted to $131 million in the second quarter, an increase of $18 million when compared to the second quarter. This increase occurred despite that finished goods and (inaudible 00:04:46) inventories were up in the third quarter resulting in the use of cash of $68 million.

Capital expenditures amounted to $36 million in Q3 or 41% of D&A. And, finally, we spent $2 million of the term loan B and increased cash to $127 million on the balance sheet. This led to a net debt reduction of $72 million in the third quarter for net debt to total capital integration ratio of 39%.

Now, turning to the EBITDA with the following on slide seven. When compared to the second quarter, we benefited from higher selling prices in the amount of $35 million, energy and chemical usage was reduced by $10 million. Major maintenance was favorable $10 million, a strong U.S. dollar against the Canadian dollar contributed $ 7 million net averages and cost reduction including synergies were a favorable $6 million in this quarter. The negative were continued inflation on material and freight for $24 million and lower volume that net for $16 million.

Just to circle back to input cost increase, inflation on chemical, freight, fiber, and energy since the same quarter last year has not reached more than $400 million on an annualized basis. You can see the detail of that on slide 20.

Read the rest of this transcript for free on seekingalpha.com