Domtar Corporation (UFS)

UFS 
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Domtar Corp. (UFS)

Q1 2009 Earnings Call

May 01, 2009 10:00 AM ET

Executives

Pascal Bossé - Director, Investor Relations

John D. Williams - President and Chief Executive Officer

Daniel Buron - Senior Vice-President and Chief Financial Officer

Richard L. Thomas - Senior Vice-President, Sales and Marketing

Michael Edwards - Senior Vice-President, Pulp and Paper Manufacturing

Analysts

George Staphos - Bank of America/ Merrill Lynch

Mark Connelly - Sterne Agee

Rick Skidmore - Goldman Sachs

Mark Wilde - Deutsche Bank

Claudia Shank Hueston - JPMorgan

Chip Dillon - Credit Suisse

Stephen Atkinson - BMO Capital Markets

Steven Chercover - D.A. Davidson

Jonathan Lethbridge - CIBC World Markets

Dax Vlassis - Gates Capital Management

Paul Quinn - RBC Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Domtar's First Quarter 2009 Financial Results Conference Call. 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, note that this conference is being recorded today May 1, 2009. At this time, I would like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, sir.

Pascal Bossé

Thank you, Silvia, and good morning, everyone and welcome to our first quarter 2009 earnings call. Joining me today are President and CEO, John Williams, and Chief Financial Officer, Daniel Buron.

Management will begin with formal remarks, after which we'll 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 number of risks and uncertainties. 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 to the closest GAAP measures in the appendix of this morning's release, as well as on our website.

So, with no further adieu, I'll turn the call over to our CEO. John?

John D. Williams

Thank you, Pascal, and good morning to everyone. As we discussed on our February earnings call, the first quarter was shaping up to be just as demanding as the fourth quarter '08. And things turned out to be as challenging as expected.

The recession, both here and abroad, has precipitated demand declines in most of our end use markets, with a severe impact on Domtar's profitability.

However, our people responded well, with a sense of urgency, to act upon three specific areas to quickly improve cash flow generation.

One, reduce discretionary spending. Two, reduce procurement costs. And three, continue the balancing of production with demand.

The measures taken in these three areas to extract costs and improve manufacturing processes to run our assets more efficiently, have helped us churn out some free cash flow in this quarter in a weak demand environment.

I will discuss this and the priorities of the months ahead in a minute. But, time now for the financial review of the quarter. And for that, I'll turn the call over to our CFO, Daniel.

Daniel Buron

Thank you, John, and good morning, everyone. Let's start with the highlights on slide four.

Domtar reported today a net loss of $0.09 per share for the first quarter, compared to a net loss of $1.31 per share in the fourth quarter. And net earnings of $0.07 per share in the first quarter of 2008.

Adjusting for impairment charges and other item, our loss was $0.07 per share in the first quarter, compared to a loss of $0.04 per share in the fourth quarter.

Cash flow from operating activities amounted to $57 million and capital expenditures to $24 million.

Therefore, free cash flow amounted to $33 million this quarter. Our results were negatively affected by a further decline in pulp prices of over $100 per metric ton, and inventory write-down in pulp amounting to $15 million. And lower volumes of paper and pulp that led to lack of order downtime slowdown of 185,000 tons in paper, and 75,000 metric tons in pulp.

Given current hardwood pulp prices and high inventory levels, we've announced the infinite closure of the Woodland pulp mill in Maine, effective May 5.

To further reduce our pulp inventory, we've also announced a 10 week shut at our Dryden pulp mill starting in April.

Finally, in this difficult domain (ph) environment, we successfully reduced paper inventories by 43,000 tons from the year-end levels.

Turning to sequential variation in earnings on slide five. Sales were $163 million lower than fourth quarter, mostly due to lower volumes of papers and pulp, and a decline in prices for pulp.

Cost of sales was reduced by $131 million due to lower production and input cost, favorable foreign exchange, and lower maintenance costs.

Depreciation and amortization decreased by $11 million, mostly due to the asset impairments taken in the fourth quarter last year.

SG&A decreased $7 million compared to Q4, mostly as a result of our effort to reduce discretionary spending.

Following the permanent closure of our number five paper machine at Plymouth, North Carolina in late February, we recorded a charge of $35 million in the quarter related to asset write-downs.

The closure and restructuring costs of $24 million in the quarter are related to the Plymouth and Dryden organization.

Interest expense was $31 million, $3 million lower than the fourth quarter, when factoring in the gain related to the debt repurchase recorded in the fourth quarter.

Finally, our operation in Canada generated a pre-tax book loss. And there was no income tax recovery recorded due to a valuation allowance taken on Canadian deferred income tax assets. This valuation allowance negatively impacted our results by $0.02 in the quarter.

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