Domtar Corporation (UFS)

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Domtar Corporation (UFS)

Q4 2011 Earnings Conference Call

February 3, 2012 11:00 AM EST

Executives

Pascal Bossé – VP, Corporate Communications and IR

John Williams – President and CEO

Daniel Buron – CFO

Mike Edwards – SVP, Pulp and Paper Manufacturing

Analysts

Anthony Pettinari – Citi

George Staphos – Bank of America Merrill Lynch

Chip Dillon – Vertical Research Partners

Phil Gresh – JP Morgan

Marks Connelly – CLSA

Bill Hoffman – RBC Capital Markets

Mark Wilde – Deutsche Bank

Steve Chercover – D.A. Davidson

Ali Kabili – Credit Suisse

Robert Howard – Prospector Partners

Sean Steuart – TD

Paul Quinn – RBC Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Domtar Corporation fourth quarter 2011 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, this call is being recorded. Today is Friday, Friday 3rd, 2012.

I would now like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, Mr. Bossé.

Pascal Bossé

Great, thank you very much, Valerie. Good morning, everyone, and welcome to our fourth quarter 2011 earnings call.

So our speakers for today will be John Williams, President and CEO; and Daniel Buron, Chief Financial Officer. So John and Daniel as usual 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 number of risks and uncertainties, many of which are outside of 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 the reconciliation to the closest GAAP measures in the appendix of this morning's earnings release, as well as on our website.

So with that, we'll turn the call over to John.

John Williams

Thank you, Pascal, and good morning, everyone. Our results in the fourth quarter rounded off a very successful 2011. Looking back, we delivered a strong performance with record EBITDA and solid free cash flow generation. Our teams were able to deliver and kept the focus on the 3Cs, customers, costs, and cash, while moving forward on our strategic growth plan.

Pulp markets softened in the second half, but demand remained steady, and we maintained our volumes in most of the geographies in which we sell. In paper, we delivered strong returns, and it continues to be an important platform to support our growth. We operated our facilities at levels consistent with our customer orders and announced a closure of a 125,000-ton paper machine at our Ashdown Mill.

Let me take a moment to discuss the fourth quarter results. We delivered a strong finish to a great year. In papers, we recorded another quarter of strong EBITDA margins above the 20% mark, despite the seasonal slowdown. The current price pressure in global pulp markets led to further down the price adjustments, but we do believe that a bottom is in sight. Finally, the Personal Care segment benefited from a full quarter of earnings from the recently acquired Attends North America business. The integration process has been very successful and its performance in the quarter was well up to expectations. On the cash front, despite a planned increase in CapEx during the quarter, we still generated healthy free cash flow and announced the increase of our buyback program to $1 billion. Since the program’s inception, we’ve repurchased approximately $539 million of our common stock. In summary, our businesses are continuing to execute well and all delivering strong results.

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

Daniel Buron

Thank you, John, and good morning, everyone. Let's start by going over the financial highlights of the year on slide five. We reported net earnings of $9.08 per share in 2011, compared to net earnings of $14 per share in 2010. Adjusting for items, our earnings were $11.24 per share in 2011, compared to earnings of $10.90 per share in 2010. EBITDA before items amounted to $1.1 billion compared to $1.083 billion in 2010. Cash flow provided from operating activities amounted to $883 million. Capital expenditures were $144 million. Therefore, free cash flow totaled $739 million.

Let’s now turn to the financial highlights of the quarter on slide six. Domtar reported today net earnings of $1.63 per share for the fourth quarter, compared to net earnings of $2.95 per share in the third quarter. Adjusting for items, our earnings were $2.49 per share in the fourth quarter compared to earnings of $3.10 per share in the third quarter. EBITDA before items amounted to $243 million in the quarter. Cash flow provided from operating activities amounted to $172 million. Capital expenditures were $80 million. Therefore, free cash flow in the quarter totaled $92 million.

Turning to the earnings reconciliation on slide seven. Our fourth quarter earnings includes the following after-tax items, closure and restructuring cost of $23 million; and charge of $9 million related to the impairment and write-down of property, plant and equipment.

Let me take a moment to provide further detail on the restructure cost and the impairment charge of the quarter. This past December, we signed a four-year master agreement with the United Steelworkers that covers approximately 3,000, or all the employees at nine different locations in the United States. As part of the agreement, we will restructure the pension plans covering these negotiated employees. This will result in the withdrawal from a multi-employer plan at our Ashdown Mill and the transition of all covered employees not grandfathered under the existing defined-benefit pension plans to a defined-contribution pension plan for future service. As a result of this restructuring, we incur the charge recorded as a component of closure and restructuring cost. Finally, the impairment and write-down charge was the result of the write-up of the remaining assets of our former pulp mills in Lebel-sur-Quévillon, Quebec.

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