Domtar pounded in the fourth quarter; forestry company posts $676-million loss

TORONTO - Domtar Corp. (TSX:UFS) had a $676-million net loss in its latest quarter, mostly due to various accounting provisions to reflect the diminished value of its forestry businesses, the company said Thursday as it announced the closure of one of its paper mills.

The permanent closure of a fine paper mill in Plymouth, N.C., will cut 185 jobs, adding to nearly 2,000 positions cut last year as the Montreal-based company attempts to bring costs in line with reduced demand for its products.

Total sales from all segments in the fourth quarter dropped 11 per cent from a year earlier, to $1.5 billion, dragging down annual revenue to $6.39 billion for the year ended Dec. 31 - a 7.5 per cent increase from 2007.

Chief financial officer Daniel Buron said a number of factors hit the company particularly hard in the final quarter of 2008.

"The decline was due to lower shipments for paper, higher unit costs related to downtime, lower pulp prices, higher energy usage, and higher costs related to chemicals and fibre," Buron said in a conference call Thursday.

The Canadian forestry industry was battered by a high dollar in the last half of 2007 and early 2008 and by slumping demand for lumber and newsprint from the U.S. housing and newspaper industries.

John Williams, who has been president and CEO of Domtar for just over a month, said the company eliminated a total of 1,900 jobs in 2008, or about 15 per cent of its workforce, in an attempt to rationalize costs.

Early in 2008, Domtar said it would close its Port Edwards, Wis., mill. This announcement was followed by the permanent closure of a paper machine and converting operating in Dryden, Ont., and a pulp mill and sawmill in Lebel-sur-Quevillon, Que.

And Buron said the company is considering further closures in 2009.

"You can be sure that we're really striving to reduce our costs per ton, and one way of doing it would be having less downtime or to fully run fewer mills, so that's definitely high on our list," he said.

Buron said Domtar will first need to determine what part of the slump in demand is cyclical and what is a deeper, structural shift in the industry. But temporary downtime at its mills did hurt its unit costs in the fourth quarter, Buron acknowledged.

"There's no doubt the amount of downtime we took in the fourth quarter in both pulp and paper ended up increasing our costs, but we still believe this was the right decision," Buron said.

"There's no demand out there, so even if we were to try to sell paper, the only impact would be price erosion ... that's a part of the game in this tough economic environment."

Williams described 2008 as "a year of great contrast" that started off with rising prices and moderate demand decline and ended with a sharp slump in both prices and demand.

He said he expects the weak economy to continue to impact Domtar's operating environment but said the company's management will work to minimize this impact as much as possible.

"Operationally, as we work through the downturn, I'm determined to run our assets the best we possibly can to reduce the costs of balancing our production to customer demand," Williams said.

"Financially, Domtar's priority will remain on cash-flow generation with an immediate focus on reducing discretionary spending, reviewing procurement costs and inventory control."

The fourth quarter loss amounted to $1.31 a share, compared with a net loss of $26 million or five cents per share for the same 2007 quarter.

Domtar said the cuts at its Plymouth mill will reduce 293,000 tons of uncoated freesheet paper production. That's the kind of paper used in fax machines, copiers and for other business uses.

The Plymouth mill will continue to operate two pulp lines, one pulp dryer and one paper machine.

The closure will result in pre-tax charges to earnings of about $51 million.

In its financial report, the company said sales fell to just over $1.5 billion for the quarter from $1.7 billion for the same period last year.

In the quarter, Domtar also took charges of:

-$387 million before tax related to the impairment and writedown of property, plant, equipment and intangible assets.

-$321 million to reduce the value of goodwill, an accounting charge that reflects the value of the company's assets acquired in past acquisitions.

-$52 million on the valuation allowance on Canadian deferred income tax assets.

-$28 million for closure and restructuring costs.

Excluding one-time items, Domtar said it lost $20 million or four cents per share in the quarter compared to earnings of $29 million or six cents per share a year earlier.

For the full year, Domtar's net loss amounted to $573 million, compared with net profits of $70 million in 2007. Annual sales rose to $6.4 billion from $5.9 billion.

Investors were disappointed in Domtar's results, which failed to meet analyst expectations. In Thursday trading on the Toronto Stock Exchange, Domtar shares dropped eight cents to $1.52, a decline of five per cent.

Domtar is the largest integrated manufacturer and marketer of uncoated freesheet paper in North America and the second largest in the world based on production capacity. The company employs 11,500 people and also produces lumber and other specialty and industrial wood products.