Domtar Corporation (UFS)

UFS 
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Domtar Corp (USA) (UFS)

Q2 2013 Earnings Call

July 25, 2013 10:00 am ET

Executives

Pascal Bossé - Vice President of Corporate Communications and Investor Relations

John D. Williams - Chief Executive Officer, President and Director

Daniel Buron - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Mark W. Connelly - CLSA Limited, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Sean Steuart - TD Securities Equity Research

Stephen Atkinson - BMO Capital Markets Canada

Albert T. Kabili - Macquarie Research

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Domtar Corporation's Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today is July 25, 2013. I would now like to turn the meeting over to Pascal Bossé.

Pascal Bossé

Great. Thank you, Samantha. And good morning, everyone, and welcome to our second quarter 2013 earnings call. Our speakers for the day will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. So John and Daniel will begin with prepared remarks after which we will take questions.

During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of our 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 of our control. I invite you to review Domtar's filings to 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 that, I will turn the call over to Mr. John Williams.

John D. Williams

Thank you, Pascal. This morning, we reported second quarter EBITDA before items of $135 million on sales of $1.3 billion, consistent with our business update that we issued on July 12. Our results in the Pulp and Paper business fell meaningfully short of our expectations in a quarter that had the busiest maintenance on record, with 10 out of our 12 pulp mills taking shutdowns.

We didn't operate up to our usual standards, particularly around the start-up phase following the planned outages at several of our facilities, resulting in lower pulp productivity. Nonetheless, we made very good progress on addressing and fixing the production issues towards quarter end. Our pulp mills were back to the normal operating levels, and we are confident that the issues are behind us. Temporary operational issues aside, the fundamentals of this business are strong, and we look forward to a much better second half in pulp profitability.

In paper, our operations improved with higher paper production quarter-over-quarter. In fact, some of our mills exceeded planned production, and, overall, we're able to build some much needed inventory.

In Personal Care, higher raw material costs had a slightly negative impact on our earnings, but we performed according to plan and continue to build out the segment with the acquisition of Associated Hygienic Products. I'm pleased with the progress we're making on integrating the new business, and we're also on track with our Attends growth plans, which we expect to bear fruit early in 2014.

Free cash flow in the quarter, even after a $49 million litigation settlement, was $58 million. And we continue to aggressively execute on the share repurchase program, buying back over $100 million worth of our equity in the quarter.

To summarize, productivity in the second quarter was clearly not to our normalized levels in pulp, but we're very focused on improving results and continuing to execute on our growth strategies. With these brief remarks, I'll turn the call over to Daniel for the financial review, and I'll come back with our outlook. Daniel?

Daniel Buron

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the quarter on Slide 4. We reported this morning a net loss of $1.38 per share for the second quarter compared to net earnings of $1.29 per share for the first quarter of 2013. Adjusting for items, our earnings were $0.48 per share in the second quarter compared to earnings of $0.95 per share for the first quarter. EBITDA before items amounted to $135 million compared to $170 million in the first quarter. Free cash flow totaled $58 million compared to $7 million in the first quarter.

Turning to the sequential variation in earnings on Slide 5. Consolidated sales were $33 million, lower than the first quarter, primarily driven by lower pulp and paper shipments and partially offset by higher pulp prices. SG&A was $95 million, $4 million higher than the first quarter, partially due to higher sales and marketing activities and some additional costs related to the integration of the Xerox paper business.

During the quarter, we recorded a charge of $5 million related to the impairment of fixed assets of Ariva U.S. operations. The $18 million you see under the closure and restructuring charges is the combination of the following elements. First, we incurred a noncash charge of $13 million related to the windup of 2 pension plans linked to previously announced closures. Additionally, we've decided to withdraw from one multiemployer pension plan and recorded a charge of $3 million. And finally, the remaining $2 million is due to the organization costs related to the integration of businesses in our Personal Care group.

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