Lower maintenance and strong price momentum drive improved results

(All financial information is in U.S. dollars, and all earnings per share results are diluted, unless otherwise noted).

• First quarter 2018 net earnings of $0.86 per share; earnings before items1 of $0.87 per share
• Announced a $50 per ton price increase on the majority of communication grades to be implemented in May 2018
• $90 million of cash flow from operating activities

Fort Mill, S.C. – Domtar Corporation today reported net earnings of $54 million ($0.86 per share) for the first quarter of 2018 compared to a net loss of $386 million ($6.16 per share) for the fourth quarter of 2017 and net earnings of $20 million ($0.32 per share) for the first quarter of 2017. Sales for the first quarter of 2018 were $1.3 billion.

Excluding items listed below, the Company had earnings before items1 of $55 million ($0.87 per share) for the first quarter of 2018 compared to earnings before items1 of $40 million ($0.64 per share) for the fourth quarter of 2017 and earnings before items1 of $20 million ($0.32 per share) for the first quarter of 2017.

First quarter 2018 items:

• Litigation settlement of $2 million ($2 million after tax); and
• Gain on disposal of property, plant & equipment of $1 million ($1 million after tax).

Fourth quarter 2017 items:

• Non-cash goodwill impairment charge associated with Personal Care of $578 million ($573 million after tax);
• Closure and restructuring costs of $2 million ($1 million after tax);
• Net tax benefit of $140 million related to the U.S. Tax Cuts and Jobs Act of 2017 (U.S. Tax Reform); and
• Net gain on disposal of property, plant & equipment of $9 million ($8 million after tax).

First quarter 2017 items:

• None.

QUARTERLY REVIEW

"We continued to see strong price momentum for our products in the first quarter with higher price realizations in both of our pulp and paper businesses," said John D. Williams, President and Chief Executive Officer. "Despite improved results, some of our operations were adversely affected by severe weather, notably in our pulp business, which impacted production and costs. Constrained availability of trucking options also contributed to higher than expected freight costs in the first quarter. Nevertheless, the short-term outlook for pulp and paper markets continues to be favorable."

Commenting on Personal Care, Mr. Williams added, "Our results in Personal Care were in line with our expectations. While our margins were impacted by higher raw material prices and lower selling prices, we are taking actions to reduce costs in order to improve performance. We continue to mitigate headwinds, with a focus on continued cost savings and converting our sales pipeline into new wins."

Operating income was $77 million in the first quarter of 2018 compared to an operating loss of $513 million in the fourth quarter of 2017. Depreciation and amortization totaled $79 million in the first quarter of 2018.

Operating income before items1 was $78 million in the first quarter of 2018 compared to an operating income before items1 of $58 million in the fourth quarter of 2017.

(In millions of dollars) 1Q 2018 4Q 2017

Sales $ 1,345 $ 1,335
Operating income (loss)
Pulp and Paper segment 76 56
Personal Care segment 8 (564 )
Corporate (7 ) (5 )
Total operating income (loss) 77 (513 )
Operating income before items1 78 58
Depreciation and amortization 79 82

The operating income in the first quarter of 2018 was primarily the result of higher average selling prices and lower maintenance costs, selling, general and administrative expenses and other costs, when compared to the operating loss in the fourth quarter of 2017, which included a goodwill impairment charge. These factors were partially offset by higher raw material and freight costs, lower volume in pulp, unfavorable exchange rates and lower productivity.

When compared to the fourth quarter of 2017, manufactured paper shipments were up 6% and pulp shipments decreased 19%. The shipments-to-production ratio for paper was 104% in the first quarter of 2018, compared to 100% in the fourth quarter of 2017. Paper inventories decreased by 28,000 tons, and pulp inventories increased by 17,000 metric tons when compared to the fourth quarter of 2017.

LIQUIDITY AND CAPITAL

Cash flow from operating activities amounted to $90 million, and capital expenditures were $25 million, resulting in free cash flow1 of $65 million for the first quarter of 2018. Domtar's net debt-to-total capitalization ratio1 stood at 28% at March 31, 2018 compared to 29% at December 31, 2017.

OUTLOOK

For the remainder of the year, our paper shipments should benefit from the announced industry capacity closures, and we expect to benefit from recently announced pulp and paper price increases. The second quarter will be affected by seasonally higher maintenance activity in our Pulp and Paper business as we move into the annual shutdowns at some of our major facilities. Personal Care is expected to be negatively impacted by higher raw material costs and an unfavorable tender balance.

EARNINGS CONFERENCE CALL

The Company will hold a conference call today at 10:00 a.m. (ET) to discuss its first quarter 2018 financial results. Financial analysts are invited to participate in the call by dialing 1 (800) 499-4035 (toll free - North America) or 1 (416) 204-9269 (International) at least 10 minutes before start time, while media and other interested individuals are invited to listen to the live webcast on the Domtar Corporation website at www.domtar.com. 

The Company will release its second quarter 2018 earnings results on August 2, 2018 before markets open, followed by a conference call at 10:00 a.m. (ET) to discuss results. The date is tentative and will be confirmed approximately three weeks prior to the official earnings release date.