Domtar hoping to achieve synergies of $250 million this year

By Donald Mckenzie, The Canadian Press

MONTREAL - Paper manufacturer Domtar Corp. (TSX: UFS.TO) has increased its cost-saving targets for the year to $250 million as it continues to battle the weakening North American economy.

President and CEO Raymond Royer said the Montreal-based company has recently closed five replenishment centres across North America, a facility in Terrebonne, Que., and finalized the closure of the Port Edwards mill in Wisconsin.

"The progress we've made with the various synergies has been tremendous," Royer told a conference call on Friday after Domtar reported higher profits in the second quarter.

Domtar merged its paper business with that of U.S. forestry giant Weyerhaeuser Co. (NYSE: WY) more than a year ago in a bid to bulk up and become more efficient in an increasingly competitive market.

"In light of the progress made to date, we have raised our run-rate target to $250 million worth of synergies by the end of this year. I have the firm belief that we can meet this revised target."

Royer said lower lumber prices may have a negative impact on results in the coming quarters but he added they would be offset by significant cost savings and productivity improvements.

He said he is looking ahead to continued margin expansion in three main areas: higher prices for uncoated free-sheet paper; further benefits from synergies; and a stronger U.S. dollar against the loonie.

Royer cautioned that demand for fine paper will continue to come under pressure because of the weak economy and that paper shipments are not expected to increase in the second half of the year.

Domtar spokesman Michel Rathier announced later in the day Royer will soon step down from the position he has held since 1996 and that a replacement will be named by the end of the year.

Domtar's profit in the quarter ended June 29 more than doubled to $24 million, or five cents per diluted share, from $11 million or two cents per share a year earlier.

Excluding one-time items, Domtar earned $32 million, or six cents per share, compared with $9 million or two cents a share.

Sales edged up to $1.6 billion.

Investors welcomed the Montreal company's financial improvement, pushing up Domtar shares more than 10 per cent on the Toronto Stock Exchange.

"This performance is quite impressive because the volume impact on sales was a negative $69 million, year over year, so all the top-line growth came through prices." Royer said.

He also said the company has reduced its net debt by $104 million since December.

"Our commitment to paying down debt and improving our credit profile is slowing bearing fruit, with S&P raising our long-term corporate credit rating, as well as our senior secured and unsecured debt ratings, in late July."

Domtar is the largest integrated producer of uncoated free-sheet paper in North America and the second largest in the world based on production capacity. The company, which employs 14,000 people, also produces paper-grade pulp, lumber and other specialty and industrial wood products.

In trading on the Toronto Stock Exchange on Friday, Domtar shares rose 70 cents to $6.35, a gain of 12.4 per cent.