Domtar's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Domtar Corporation (UFS)

Q2 2012 Earnings Conference Call

July 27, 2012 11:00 ET

Executives

Pascal Bossé – Vice President, Investor Relations and Corporate Communications

John Williams – President and Chief Executive Officer

Daniel Buron – Chief Financial Officer

Analysts

Alex Ovshey – Goldman Sachs

Anthony Pettinari – Citi

George Staphos – Bank of America-Merrill Lynch

Phil Gresh – JPMorgan

Chip Dillon – Vertical Research Partners

Mark Connelly – CLSA

Mark Wilde – Deutsche Bank

Dax Vlassis – Gates Capital

Al Kabili – Credit Suisse

Presentation

Operator

Good day, ladies and gentlemen. Welcome to Domtar Corporation’s Second Quarter 2012 Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this call is being recorded today, Friday, July 27, 2012.

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

Pascal Bossé – Vice President, Investor Relations and Corporate Communications

Great, thank you, (Nigel). Good morning everyone and welcome to our second quarter 2012 earnings call. Our speakers for today are John Williams, President and CEO as well as 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 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 release, as well as on our website.

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

John Williams – President and Chief Executive Officer

Thank you, Pascal. Good morning, everyone. This morning, we reported earnings per share of $1.61 and EBITDA before items of $202 million for our second quarter. Given weaker business activity in our anticipated and softer demand for some of our Paper products, this is a good financial performance. As a result, we took the necessary steps to manage our capacity and took 23,000 tons of lack of order downtime in our paper system.

The ramp up of a volume of the 15-year apples and paper supply agreement will help reduce the amount of potential downtime for the back half of 2012. We expect to reach the full run-rates of an incremental 160,000 tons by the middle of next year. On that, the conversion of the Marlboro, South Carolina mill to lightweight specialty and packaging grades will remove high volume paper capacity from our system and Daniel will discuss the Marlboro conversion project in more detail in a moment. We also continue to see a beneficial impact from our growing position in specialty and packaging grades with year-to-date shipments increasing 12%.

In Pulp, profitability improved from the first quarter mostly driven by price, but we remain cautious on the second half outlook for the business. On Personal Care, profitability was on target at $18 million in quarter two and the business continues its growth, reaching an annualized sales rate of over $425 million.

We recently announced the acquisition of EAM Corporation, a strategic move that will add expertise and high quality absorbent core providing with search capabilities and technology to our business. So, we’re on track to more than double EBITDA by the end of 2016 through organic growth and we continue to scan the horizon for opportunities.

Moving on to free cash flow it was robust at nearly $100 million for the quarter. And we’ve returned a significant portion of this cash back to shareholders buying back $69 million worth of our equity. So, in summary the business environment remains challenging, growth and employment remains slow and we face some uncertainties stemming from issues such as Postal Reform in the U.S.

So, with these brief remarks I’ll turn the call over to Daniel and I’ll come back with the outlook. Daniel?

Daniel Buron – Chief Financial Officer

Thank you, John and good morning everyone. Let’s start with the financial highlights on the quarter on slide four. We reported this morning net earnings of $1.61 per share for the second quarter compared to net earnings of $0.76 per share for the first quarter of 2012. Adjusting for items our earnings were $1.61 per share in the second quarter compared to earnings of $1.65 per share for the first quarter. EBITDA before items amounted to $202 million compared to $210 million in the first quarter. Cash flow provided from operating activities amounted to $175 million. Capital expenditures were $76 million therefore free cash flow totaled $99 million.

Turning to the sequential valuation in earnings on slide five, consolidated sales were $30 million lower than the first quarter due to lower shipments for paper and pulp partially offset by the increased business in our personal care segment. SG&A was $10 million lower in Q2 mostly due to the positive impact of a mark-to-market on stock-based compensation and some transaction costs incurred in the first quarter. This was partially offset by the addition of a full quarter of our new European business. Interest expense was $18 million in the quarter, $53 million lower than last quarter due to charges related to the tender offer completed in Q1. In the second quarter we reported a tax expense of $27 million or 31%.

Read the rest of this transcript for free on seekingalpha.com