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Domtar's (UFS) Earnings Beat, Sales Miss Estimates in Q2

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Zacks Equity Research
·5 min read
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Domtar Corporation UFS reported second-quarter 2020 adjusted earnings of 36 cents per share, as against the Zacks Consensus Estimate of a loss of 42 cents. However, the bottom-line figure plunged 36.8% from the prior-year quarter.

Including one-time items, Domtar reported net earnings per share of 34 cents in the quarter compared with the 28 cents per share recorded in the prior-year quarter.

Consolidated sales declined 23.2% year over year to $1,012 million, missing the Zacks Consensus Estimate of $1,068 million.

Operational Highlight

Consolidated adjusted operating income came in at $15 million in the June-end quarter compared with the year-ago quarter’s $57 million. This downside resulted from lower volume and unfavorable productivity.

Domtar Corporation Price, Consensus and EPS Surprise

Domtar Corporation Price, Consensus and EPS Surprise
Domtar Corporation Price, Consensus and EPS Surprise

Domtar Corporation price-consensus-eps-surprise-chart | Domtar Corporation Quote

Segmental Performance

Quarterly revenues of the Pulp and Paper segment came in at $802 million, down 27.5% year over year. Adjusted operating income for the segment was $4 million in the second quarter, down from the year-earlier reported figure of $62 million.

Sales in the Personal Care segment inched up 0.4% year over year to $229 million. The adjusted operating income for the segment came in at $18 million, up from the $5 million reported in the comparable period last year.

Balance Sheet & Cash Flow

The company had cash and cash equivalents of $124 million as of Jun 30, 2020, up from $61 million as of Dec 31, 2019. Net debt-to-total capitalization ratio was 30% as of Jun 30, 2020, up from the 22% witnessed in the comparable period last year.

Domtar generated $67 million of cash from operating activities in the second quarter compared with the $119 million reported in the year-ago quarter.

As of Jun 30, Domtar had total liquidity of approximately $906 million, consisting of $124 million of cash and $782 million available in credit facilities. The company has no near-term debt maturities.

Cost-Reduction Plan

The company is implementing a cost-reduction program to enhance cost efficiency, improve operating margin as well as maximize productivity and cash flow. Domtar targets annual run-rate cost savings of $200 million, which will be realized by the end of 2021. The cost-saving initiatives include capacity reduction and asset closures, mill-level cost savings and rightsizing support functions.

As part of the cost-saving program, Domtar will permanently close the uncoated freesheet manufacturing at the Kingsport, TN and Port Huron, MI mills, the remaining paper machine at the Ashdown, AR mill and the converting center in Ridgefields, TN. These actions will reduce the company’s annual uncoated freesheet paper capacity by approximately 721,000 short tons, and will reduce workforce of approximately 780 employees. The Kingsport and Ashdown paper machines, which have been idled since April this year, will not recommence operations. The Port Huron and Ridgefields mills are expected to shut down by the end of the first quarter of 2021.

Outlook

The impact of the coronavirus pandemic on the company’s business operations is uncertain. Domtar expects bleak paper demand through the remaining of this year. Pulp markets are likely to be affected by seasonal softness, elevated global inventories and weak demand trends in the paper markets. However, Personal Care will continue to benefit from productivity gains and new customer wins. Overall raw material costs will likely be stable in the current year.

Updates Related to Mill Conversions

The company plans to enter the linerboard market with the conversion of the Kingsport, TN paper machine. Once fully operational, the mill will produce and market approximately 600,000 tons of high-quality recycled linerboard annually. The mill is expected to be a low-cost, first quartile recycled linerboard mill in North America.

Apart from this, Domtar will complete the conversion of the Ashdown, AR mill to 100% softwood and fluff pulp. The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. Following the fiberline conversion, Ashdown will be a world-class market pulp mill with annual production capacity of 775,000 tons of fluff and softwood pulp.

Price Performance

The stock has appreciated 32.8% in the past three months, outperforming the industry’s growth 10.1%.

Zacks Rank & Key Picks

Domtar currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Coeur Mining Inc. CDE, Commercial Metals Company CMC and The Scotts MiracleGro Company SMG, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Coeur Mining has an expected earnings growth rate of a whopping 138.7% for 2020. The company’s shares have surged 70% over the past year.

Commercial Metals has a projected earnings growth rate of 15% for the current year. The company’s shares have gained 34% in a year’s time.

Scotts MiracleGro has an estimated earnings growth rate of 44.5% for the ongoing year. Its shares have appreciated 43% in the past year.

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