Domtar Corporation (UFS)

UFS 
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Domtar (UFS)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Pascal Bossé - Vice President of Corporate Communications and Investor Relations

Richard Thomas - Senior Vice President of Sales & Marketing

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

John Williams - Chief Executive Officer, President and Director

Analysts

Chip Dillon - Citigroup

Phil Gresh - JP Morgan Chase & Co

Sean Steuart - TD Newcrest Capital Inc.

Benoit Laprade - Scotia Capital Inc.

Bill Hoffman - RBC Capital Markets, LLC

Mark Connelly - Credit Agricole Securities (USA) Inc.

Paul Quinn - RBC Capital Markets, LLC

Stephen Atkinson - BMO Capital Markets Canada

Mark Wilde - Deutsche Bank AG

George Staphos

Unknown Analyst -

Leon Cooperman - Omega Advisors, Inc.

Anthony Pettinari - Citigroup Inc

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Domtar Corporation's Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Shelley, and good morning. And welcome to our second quarter 2011 earnings calls. Our speakers today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. As usual 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 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.

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 press release, as well as on our website.

So with that, I will turn the call over to John.

John Williams

Thank you, Pascal. Good morning, everyone. This morning, Domtar reported another solid quarter with a sales performance that showed both good volumes and prices, and we also had our strongest-ever free cash flow. EBITDA before items was $260 million in the second quarter for an EBITDA margin of 19%. This is a 2 percentage point margin improvement over last year's second quarter EBITDA margin of 17%. So a very solid performance.

We had higher selling prices in both Pulp and Paper but the benefits were offset by costs stemming from a seasonally high level of scheduled maintenance in our mills. Daniel will talk to that in a moment, but maintenance costs are expected to come down in the third quarter with fewer scheduled outages in our mills. We did incur higher input costs, as we indicated in our last quarter outlook, and this was the result of higher commodity prices affecting freight, fiber and chemicals.

Specifically on our volumes, we're seeing good demand for some packaging paper grades and also healthy demand for our papers on the export market. Worth noting is that we continue to be successful in servicing our customers while keeping paper inventories fairly tight in our manufacturing system.

The focus on the three Cs, customers, costs and cash remains. And as a result, working capital was a source of cash at $77 million in quarter 2. Speaking of cash flow, as I mentioned early on, free cash flow was a record $286 million. We made a commitment at this year's annual shareholders meeting to return a majority of this free cash flow to shareholders, and we executed on our commitment. In quarter 2, we repurchased close to 1.7 million shares, that, coupled with our dividend, yielded a free cash flow payout of over 61% to Domtar shareholders. Since its inception some 15 months ago, we've repurchased more than 3.2 million shares of common stock under our $600 million share repurchase program. Altogether, these buybacks represent 7.4% of the share count that we had outstanding at the end of March last year. We're firmly committed to returning a majority of future free cash flow to shareholders. And as indicated before, share repurchases remain our preferred means to do this.

With these brief remarks, I'll turn the call over to Daniel for the financial review, and I'll come back with a outlook. Daniel?

Daniel Buron

Thank you, John, and good morning, everyone. Let's first start by going over the financial highlights of the quarter on Slide 4.

This morning, we reported net earnings of $1.30 per share for the second quarter compared to net earnings of $3.14 per share in the first quarter. Adjusting for items, we had earnings of $2.37 per share for the second quarter compared to $3.25 per share in the first quarter. EBITDA before items amounted to $260 million compared to $311 million in the first quarter. Cash flow provided from operating activities amounted to $306 million. Capital expenditures were $20 million, therefore free cash flow totaled $286 million.

Turning to earnings reconciliation on Slide 5. Our second quarter earnings included the following after-tax items: charge of $38 million for impairment and write-downs related to the announced closure of the Ashdown paper machine #61; losses on the sales of property, plant and equipment and businesses of $5 million; and closure in restructuring costs of $1 million. Therefore, excluding these items, we had earnings of $98 million or $2.37 per share.

Turning to the sequential variation in earnings on Slide 6. Sales were down $20 million lower than in the first quarter, due to lower paper shipment, mostly in our Paper Merchants business and lower pulp shipments. We wrote down $62 million of fixed assets due to the closure of the Ashdown paper machine 61 and incurred closure and restructuring costs of $2 million in the quarter. We expect to recur a further $9 million of write-down related to our Ashdown paper machine closure in the third quarter. Interest expense was $21 million, the same amount as in the last quarter. We recorded a tax provision of $20 million or 27% in the quarter. This compares to a tax rate of 30% in the previous quarter.

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