Domtar Posts Rise in Fourth Quarter Earnings

Feb. 4, 2011 - Domtar today reported net earnings of $325 million ($7.59 per share) for the fourth quarter of 2010 compared to net earnings of $191 million ($4.44 per share) for the third quarter of 2010 and net earnings of $124 million ($2.86 per share) for the fourth quarter of 2009.

Sales for the fourth quarter of 2010 amounted to $1.4 billion. Excluding items listed below, the Company had earnings before items1 of $103 million ($2.41 per share) for the fourth quarter of 2010 compared to earnings before items1 of $183 million ($4.26 per share) for the third quarter of 2010 and earnings before items1 of $60 million ($1.39 per share) for the fourth quarter of 2009.

Fourth quarter 2010 items:

  • Benefit from cellulosic biofuel producer income tax credit of $127 million;
  • Benefit from reversal of a valuation allowance on Canadian deferred income tax assets of $100 million;
  • Costs for debt repurchase of $7 million ($4 million after tax); and
  • Closure and restructuring costs of $1 million ($1 million after tax).

Third quarter 2010 items:

  • Charge of $14 million ($9 million after tax) related to the impairment and write-down of property, plant and equipment;
  • Closure and restructuring costs of $1 million ($1 million after tax); and
  • Gain on sale of property, plant and equipment, and business of $14 million ($18 million after tax).

Fourth quarter 2009 items:

  • Refundable excise tax credit for the production and use of alternative bio fuel mixtures of $162 million ($113 million after tax);
  • Closure and restructuring costs of $29 million ($24 million after tax);
  • Charge of $27 million ($22 million after tax) related to the impairment and write-down of property, plant and equipment; and
  • Loss on sale of property, plant and equipment of $5 million ($3 million after tax).

"Fourth quarter paper shipments were weaker partly due to seasonal factors, but our average pricing held up well. We were able to post best ever fourth quarter profit before items even though production related issues resulted in higher than expected maintenance costs. Higher pulp shipments, net of the impact of the sale of the Woodland hardwood pulp facility, helped offset seasonal weakness. In addition, we redeemed all of our 2011 notes, effectively completing our systematic debt reduction program," said John D. Williams, President and Chief Executive Officer.

FISCAL YEAR 2010 HIGHLIGHTS

For fiscal year 2010, net earnings amounted to $605 million ($14.00 per share) compared to net earnings of $310 million ($7.18 per share) for fiscal year 2009. The Company had earnings before items1 of $471 million ($10.90 per share) for fiscal 2010 compared to earnings before items1 of $46 million ($1.06 per share) for fiscal 2009. Sales amounted to $5.9 billion for fiscal year 2010.

Commenting on the 2010 performance, Mr. Williams said, "We continued to aggressively execute on our "Perform, Grow, Break out" strategic journey, thanks to excellent cost management and decisive actions that realigned our asset portfolio and reduced our exposure to challenging businesses. We have also made strategic investments in growth markets that bode well for the future, notably in fluff pulp and nanocrystalline cellulose, and built a flexible balance sheet that provides us with the ability to seize opportunities. We are well positioned for the year to come."

SEGMENT REVIEW

Papers
Operating income before items1 was $161 million in the fourth quarter of 2010 compared to operating income before items1 of $238 million in the third quarter of 2010. Depreciation and amortization totaled $94 million in the fourth quarter of 2010. When compared to the third quarter of 2010, paper and pulp shipments decreased 5% and 9%, respectively. The shipments-to-production ratio for paper was 97% in the fourth quarter of 2010, compared to 99% in the third quarter of 2010. Paper inventories increased by 23,000 tons while pulp inventories declined by 7,000 metric tons as at the end of December versus end of September levels.

The decrease in operating income before items1 in the fourth quarter of 2010 was the result of lower paper and pulp shipments, lower average selling prices for pulp, unfavorable exchange rate including hedging, higher usage and unit costs for energy and chemicals, higher maintenance costs, and higher freight costs. These factors were partially offset by lower wood fiber costs.

Paper Merchants
Operating loss before items1 was $2 million in the fourth quarter of 2010 compared to operating income before items1 of nil in the third quarter of 2010. Depreciation and amortization was $1 million in the fourth quarter of 2010. Deliveries decreased 11% when compared to the third quarter of 2010. The decrease in operating income in the fourth quarter of 2010 was primarily due to lower deliveries.

LIQUIDITY AND CAPITAL

Cash flow provided from operating activities amounted to $166 million and capital expenditures amounted to $41 million, resulting in free cash flow1 of $125 million in the fourth quarter of 2010. Domtar's net debt-to-total capitalization ratio1 stood at 9% at December 31, 2010 compared to 35% at December 31, 2009.

OUTLOOK

We expect North American paper demand to continue declining long-term, partially offset by a gradual return of employment in the U.S. closer to pre-recession levels. Our Papers segment is benefiting from a more favorable pulp product mix that should result in reduced pricing volatility. Rising commodity pricing should also put pressure on some of our input costs in 2011.

While the economy appears to be stabilizing, employment remains slow to recover. Though we are entering 2011 with a strong position, we will continue to manage our business conservatively, looking to grow profitably and to create shareholder value.

1 Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures in the appendix.

SOURCE: Domtar Corp.