Domtar touts 'transformed' balance sheet, sees no urgency on maturing debt following tender offer

By Paul Deckelman

New York, June 23 - Domtar Corp. is in "a dramatically improving financial and liquidity position," the company's president and chief executive officer declared on Wednesday.

John D. Williams also told investors and other participants at a Deutsche Bank conference that compared with what the company's financial position looked like in early 2009, about the time that Williams assumed the leadership of Domtar, "I think you can see that we have a transformed - I think [that] is the only word - balance sheet versus where we were."

Williams cited operating improvements, which he said allowed the Montreal-based paper producer to "dramatically" bring down its input cost position.

"And through that, we've generated very strong cash and continue to generate very strong cash," as the company hopes to generate real value "and, obviously, pay down debt," he added.

He noted that net debt has been brought down to 33% of the company's total capitalization.

At the start of 2009, that figure had stood at 50%, but Domtar was able to reduce debt by more than $400 million last year to a year-end level of some $1.7 billion.

The chief method was a successful tender offer a year ago that took out $400 million of its previously outstanding $540 million of 7 7/8% notes due 2011.

Earlier this year, company executives said during their conference call after the release of fourth-quarter earnings that they hope to eventually whittle that $1.7 billion debt load down to between $1 billion and $1.2 billion, including via reductions in its term loan B credit facility. That facility, maturing in 2014, had a $234 million outstanding balance as of the end of the first quarter on March 31.

During Wednesday's Deutsche Bank industrials conference presentation, Williams pointed out that Domtar just recently had bought back some of its bonds, "so looking forward, there's no real 'wall of debt' that needs repayment, until our 2017 bonds."

The company announced on Monday that it had accepted for purchase:

• $238.271 million of its 5 3/8% notes due 2013, or 76.75% of the $310.431 million outstanding amount; and

• $186.922 million of its 7 1/8% notes due 2015, or 62.39%, of the $399.723 million outstanding amount.

Domtar had originally announced when it began its tender offer in mid-May that it would accept up to $350 million of those two series of bonds and the remaining 7 7/8% notes due 2011 in that order of priority.

The total outstanding amount of the three tranches was $844.906 million. The company had also said it would be accepting up to $75 million of its $400 million of outstanding 10¾% notes due 2017. Domtar later upped the total tender amount to up to $450 million for the four series of notes, according to their priority ranking. It ultimately elected not to accept for purchase any of the remaining 2011 notes or the 2017 notes.

Williams said that one of Domtar's goals going forward is "obviously [...] to maintain financial flexibility [...] When I first joined the business, that was not something we had."

Now, he said, besides a reduced debt burden, Domtar has $750 million of unused revolving credit availability under a facility due in 2012.

Williams told the conference attendees that Domtar - the largest integrated producer of uncoated freesheet paper in North America and the second-largest in the world based on production capacity, as well as a major manufacturer of paper-grade pulp - intends to continue leveraging its "strong leadership position and first-class assets," helped along by recently announced price increases and the continuing recovery in its markets.

Williams downplayed the notion of Domtar looking to pick up more assets; if anything, he noted, the company is "an avowed seller" of its lumber business, a non-core asset that accounts for perhaps 3% of its total revenues. It has a deal pending to sell that business to Eacom Timber Corp. for C$80 million.

Earlier this year, Domtar was looking to rationalize its asset base in response to market conditions by closing its coated-paper plant in Columbus, Miss. and selling the trademarks, inventories and order books to rival NewPage Corp., thus getting completely out of that non-core business as well.

The CEO said that while Domtar would "like an increasing stream of revenue from growth markets, and we'd like to find a way to provide more predictable cash flows, of course, over time, it has to be accreted to shareholders - so we're not going to go on an industry adventure and throw our money away."

Besides seeking to continue to cut debt, Domtar wants to also reward its shareholders. To that end, it announced in early May that it will begin paying a quarterly dividend of 25 cents per share on July 15 to shareholders of record as of June 15.

The company also announced plans for the buyback of up to $150 million of the company's more than $2.38 billion of outstanding common or exchangeable stock. The share repurchases will take place on no set schedule, instead being carried out from time to time, depending upon market conditions.

Williams estimated during his presentation that the total share buyback will likely be completed in 18 to 24 months.

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