Domtar 2nd Quarter Net Earnings Up Sharply

Domtar Corp today reported net earnings of $24 million ($0.05 per diluted share) for the second quarter of 2008 compared to net earnings of $36 million ($0.07 per diluted share) for the first quarter of 2008 and $11 million ($0.02 per diluted share) for the second quarter of 2007. Sales for the second quarter amounted to $1.6 billion.
Excluding the items listed below, the Company earned $32 million ($0.06 per diluted share) for the second quarter of 2008 compared to $25 million ($0.05 per diluted share) for the first quarter of 2008 and $9 million ($0.02 per diluted share) for the second quarter of 2007.
Second quarter 2008:
Gain of $6 million ($4 million after tax) related to the sale of trademarks;
Closure and restructuring costs of $11 million ($7 million after tax); and
Costs of $9 million ($5 million after tax) related to synergies and integration.
First quarter 2008:
Reversal of a provision for $23 million ($17 million after tax) due to the early termination of an unfavorable contract;
Costs of $8 million ($5 million after tax) related to synergies and integration; and
Closure and restructuring costs of $1 million ($1 million after tax).
Second quarter 2007:
Gains of $10 million ($6 million after tax) related to financial instruments;
Gain of $1 million related to a change in statutory income tax rates;
Costs of $6 million ($4 million after tax) related to synergies and integration; and
Closure and restructuring costs of $2 million ($1 million after tax).
"We had a better quarter when compared to the same period last year with sales up 3.5% and earnings before items increasing $23 million despite a 5.9% dro‌p in paper shipments. Clearly, the synergies are starting to show in our results and the projected benefits from new initiatives have led us to increase our synergy target to $250 million," said Mr. Raymond Royer, President and Chief Executive Officer. "Having said that, the announced price increases for papers in June are necessary to adjust to this new business environment of structurally higher input costs," added Mr. Royer.
SEGMENT REVIEW
Papers
Operating income before items(1) was $106 million in the second quarter of 2008 compared to operating income before items(1) of $100 million in the first quarter of 2008. Depreciation and amortization totaled $110 million in the second quarter. When compared to the first quarter, paper shipments decreased 5.6% while pulp shipments remained flat. The shipments-to-production ratio for papers was 99% in the second quarter compared to 103% in the first quarter. When compared to March 30, 2008 levels, paper inventories were 6,000 tons higher at the end of June.
The increase in operating income before items(1) in the second quarter was the result of higher average selling prices for paper and pulp, lower overall costs including the negative impact of higher costs related to fiber, energy, freight and chemicals, lower usage for energy and a favorable exchange rate. These factors were partially mitigated by higher costs related to planned maintenance shutdowns and lower paper shipments.
Commenting on the current business environment and recent demand statistics for uncoated freesheet, Mr. Royer said, "While trade publications have painted a fairly negative demand picture for the paper industry so far in 2008, Domtar's core business has weathered the storm quite well with no lack-of-order downtime, shipments-to-production close to 100% and paper inventories virtually flat from March-end levels. The closure of the Port Edwards mill in June further tightened our manufacturing system. The U.S. economy remains challenging and we will be closely tracking our order books and will make adjustments to production where needed to respond to customer demand."
Paper Merchants
Operating income was $2 million in the second quarter of 2008 compared to operating income of $3 million in the first quarter of 2008. Depreciation and amortization was $1 million in the second quarter. Deliveries decreased 11% when compared to the first quarter. The decrease in operating income in the second quarter was the result of the depreciation and amortization expense and lower deliveries, partially offset by higher average selling prices.
Wood
Operating loss was $12 million in the second quarter of 2008, compared to an operating loss of $22 million in the first quarter of 2008. Depreciation and amortization totaled $7 million in the second quarter. When compared to the first quarter, lumber shipments increased 13% in the second quarter. The decrease in operating loss in the second quarter was the result of higher average selling prices, higher shipments, lower costs and better productivity at several operations. The results were partially offset by a higher depreciation and amortization expense.
"The financial results in our Wood business improved significantly in the second quarter, better than what we had expected, and this is due to higher prices but also to the concerted efforts made by our employees to reduce costs and improve the efficiency of our operations," said Mr. Royer. "I am pleased with this progress and look forward to making additional improvements going forward."
OUTLOOK
For the second half of the year, we anticipate the demand for uncoated freesheet paper in North America to remain under pressure due to the challenging economic environment although low inventory levels and capacity rationalization within the industry help maintain a supply-demand balance. Domtar's synergy program is well-advanced; profit margin expansion in the Papers segment is expected both from the continued benefits from synergies and from price increases implemented in uncoated freesheet early in the third quarter.