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The sharp rise of the Canadian dollar affects Domtar's operating profit

Tuesday, February 01, 2005

Press release from the issuing company

Montreal, January 26, 2005 – Domtar Inc. announced today a net loss of $42 million ($0.19 per common share) in 2004 compared to a net loss of $193 million ($0.86 per common share) in 2003. When excluding specified items, net loss in 2004 was $33 million ($0.15 per common share) compared to a net loss of $10 million ($0.05 per common share) in 2003. “These are trying times for companies with a large manufacturing base in Canada whose products are sold in US dollars. Although Domtar has grown its U.S. presence to approximately 50% of its asset base over the last five years, the Company has nonetheless suffered from the sharp increase in the value of the Canadian dollar, leading it to post a loss for 2004. Domtar has also faced unprecedented cost increases for purchased wood and freight, as well as more duties on softwood lumber exports to the U.S. The combined effect of all these factors represents a reduction of $262 million in operating profit when compared to 2003. In fact, these headwinds were so strong that they more than offset benefits from improved market conditions and restructuring initiatives, including an announced reduction of 8% of our workforce,” stated Raymond Royer, President and Chief Executive Officer of Domtar. The $131 million decrease in operating profit excluding specified items in the Papers segment was mainly attributable to the negative impact of a weaker US dollar and higher costs, particularly for purchased wood and freight. These factors were partially offset by higher shipments for both paper and pulp, higher average selling prices for pulp, the realization of savings from restructuring activities and lower depreciation expense. The $1 million increase in operating profit excluding specified items in the Paper Merchants segment was primarily due to higher shipments, partially offset by the negative impact of a weaker U.S. dollar. The $53 million improvement in operating profit excluding specified items in the Wood segment was mainly attributable to significantly higher selling prices for lumber. Partially mitigating the rise in operating profit were the negative impact of a weaker US dollar, higher countervailing and antidumping duties imposed on our softwood lumber exports to the U.S. (at a stable rate of 27%), higher road construction and maintenance costs, as well as higher depreciation expense. Since May 22, 2002, Domtar has made and expensed cash deposits of $145 million for export duties. The $4 million increase in operating profit excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was attributable to higher average selling prices for both containerboard and corrugated boxes as well as lower chemical and energy costs, partially offset by the negative impact of a weaker US dollar and higher freight costs. Liquidity and capital – 2004 compared to 2003 Cash flows provided from operating activities in 2004 amounted to $122 million compared to $348 million in 2003. Additions to property, plant and equipment amounted to $204 million in 2004 compared to $236 million in 2003. Free cash flow in 2004 was negative $41 million compared to positive $123 million in 2003. Domtar’s total long-term debt decreased by $25 million, largely due to the $127 million positive impact of a weaker US dollar on its US dollar denominated debt, partially offset by additional net borrowings of $102 million. Domtar’s net debt-to-total capitalization ratio as at December 31, 2004 stood at 49.5% compared to 48.4% as at December 31, 2003. The decrease in results when compared to the third quarter of 2004 is mainly due to lower shipments for the majority of our products except for pulp, the negative impact of a weaker US dollar, lower selling prices for pulp and lumber as well as higher costs for fiber and energy usage. These factors were partially offset by higher average selling prices for paper, higher shipments for pulp and lower softwood lumber duties on exports to the U.S. Outlook “The year 2005 may be just as challenging as 2004, especially given that no cost cutting program can compensate for the rapid rise seen in the value of the Canadian dollar. That being said, Domtar will focus on delivering targeted savings of $100 million stemming from announced restructuring initiatives and will continue to review the viability of each of its Canadian operations as well as investment plans for each of its mills. Finally, Domtar will continue to optimize the use of its assets with initiatives aimed at improving its value proposition to customers such as the development of a full line of papers for environmentally sensitive companies and the deployment of an integrated supply chain, which will allow Domtar to develop customer specific supply programs,” added Domtar’s President and CEO.

 

 

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