Domtar Q1 Results: Efficiency Gains Help Offset High Energy Costs, Weak Demand
Press release from the issuing company
MONTREAL, May 1 - Domtar Inc. today announced net earnings of $27 million, or $0.12 per common share, and an operating profit of $78 million on net sales of $1.3 billion during the first quarter of 2003.
Highlights of the first quarter 2003
- Net earnings of $27 million or $0.12 per common share in Q1 2003 compared to a net loss of $11 million or net loss of $0.05 per common share ($19 million or $0.08 per common share before closure costs) in Q1 2002
- Quality and profitability improvement programs combined with reduced financing expenses allowed Domtar to offset higher energy costs of $20 million, lower paper shipments, the negative effect of a stronger Canadian dollar and lumber production disruptions
- Market-related downtime amounted to 18,600 tons of paper, 21,600 tons of pulp and 24 million board feet of lumber
- Net debt-to-total-capitalization ratio was 48.8% as at March 31, 2003
- Domtar launched its newest "Domtar Microprint(R)" product, a laser coated printing paper
- Domtar's Vancouver mill certified FSC (Forest Stewardships Council) chain-of-custody
"Our quality and profitability improvement programs allowed Domtar to mitigate the impact of high energy costs, weak demand, and a strong Canadian dollar during the first quarter of 2003 and to post better results than at the same time in 2002," said Raymond Royer, President and Chief Executive Officer of Domtar. "During the last twelve months, Domtar was able to reduce its debt and its financing expenses, as well as to provide its shareholders with a return on equity of 7% even though selling prices were 7% below trend prices for a business cycle. We believe that this performance makes us an attractive investment in basic materials," added Mr. Royer.
Operating profit in the Papers segment reached $81 million in the first quarter of 2003 compared to $18 million, or $63 million when excluding closure costs, for the same period in 2002. This increase in earnings is mostly due to the benefits stemming from our quality and profitability improvement programs as well as higher selling prices especially for pulp and some papers. However, these gains were partially offset by higher energy costs, lower paper shipments and the negative effect of a stronger Canadian dollar. Domtar also balanced production with customer demand, notably by taking pulp and paper market-related downtime.
Operating profit in the Paper Merchants segment amounted to $7 million in the first quarter of 2003, an amount equivalent to the one posted in the corresponding period of 2002. Despite soft market conditions for paper, volumes remained constant compared to the first quarter of 2002. This performance stems from our Merchants' ability to offset increases for fuel with further cost reductions, and by their ability to maintain operating margins.
Operating loss in the Wood segment amounted to $21 million in the first quarter of 2003, compared to $10 million in the first quarter of 2002. Although housing starts, both in the United States and in Canada, remained high during the quarter, over supply and offshore imports into the U.S. continued to put pressure on pricing in the North American lumber market. As a result, the segment experienced very low prices, which largely accounts for the year over year deterioration. In addition, market-related downtime and harsh weather conditions in the early part of the year affected production and the financial performance of the Wood segment.
Cash deposits of $8 million for countervailing and antidumping duties on exports of softwood lumber to the U.S. were made and expensed during the first quarter of 2003 compared to a $9 million provision recorded to cover antidumping duties in the corresponding period of 2002. Since May 2002, cash deposits of $39 million for countervailing and antidumping duties were made and expensed by Domtar.
In the Packaging segment, Domtar's first quarter share of the operating profit of Norampac Inc. stood at $11 million compared to $17 million in the same quarter of 2002. This reduction is mainly attributable to an increase in costs for recycled fiber and energy, partially offset by higher shipments of both containerboard and corrugated products.
Liquidity and capital
Cash flows used for operations in the first quarter 2003 amounted to $24 million compared to cash flows provided from operations of $1 million in the same quarter of 2002. The first quarter of the year is typically impacted by seasonally high requirements for working capital. Net capital expenditures amounted to $41 million in the first quarter 2003 compared to $38 million at the same time in 2002.
Domtar's net debt-to-total capitalization ratio as at March 31, 2003 was 48.8%, a slight decrease from the 49.4% at December 31, 2002. Borrowings related to capital expenditures and working capital increased by $69 million during the quarter, which were more than offset by the $159 million positive impact of a stronger Canadian dollar on our U.S. dollar denominated debt. Domtar intends to reduce its net debt-to-total-capitalization ratio to 45% by year-end, absent the impact of any growth-related initiatives.
While our current environment is filled with factors beyond our control, such as soft economic conditions, high energy costs and currency fluctuations, we remain confident that our financial rigor and business approach will help us mitigate these risks. We believe that over time our quality and profitability improvement programs as well as our customer focus should allow us to achieve our objective of providing shareholders with superior returns even in difficult market conditions and also enable us to take full advantage of any improvement in the economy. Finally, Domtar remains confident in the long-term fundamentals of the uncoated freesheet market.
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