Domtar Corporation
Q4 2007 Earnings Call Transcript

Published: 15 Feb 2008

[Operator:]

Good day ladies and gentlemen. Welcome to the Domtar Fourth Quarter 2007 Financial Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the meeting over to Pascal Bossé. Please go ahead, sir.

[Pascal Bossé:]

Thank you, Michelle, and good morning, everyone. Welcome to Domtar's fourth quarter 2007 financial results. Joining me on the call today, I have President and CEO, Raymond Royer; Executive Vice President and COO, Marvin D. Cooper, Senor Vice President and CFO, Daniel Buron; and Senior Vice President of Sales, Mr. Dick Thomas. We will start-off this morning with brief remarks on the result and then we will open-up the call as usual for questions from the investment community. People from the media and others stakeholders will be placed in a listen-only mode. As a reminder, our speakers will make references to supporting slides and you can find those in the Investor section of the website to the right hand side, under reports and documents. I wish to remind you that this call will contain forward-looking statements based upon the number of estimates and assumptions that are subject to risks and uncertainties. I invite you to review those within the company's filings filed with the Securities Commissions. Finally, Domtar Corporation reports according to U.S. GAAP and dollar figures discussed are all U.S. dollars, unless specified otherwise. And with that, I'll the turn the call over to Daniel. Daniel?

[Daniel Buron:]

Thank you, Pascal. Good morning, everyone. Domtar reported today a net loss per share of $0.05 in the fourth quarter, compared to a net income of $0.07 per share in the third quarter. Starting up with the summary on slide 4, as you are seeing for non-recurring items, that's cover in a minutes, our earnings before items was $0.06 per share in the fourth quarter. This compares to $0.09 per share recorded in the third quarter. It is worth mentioning that the stronger gains in the dollar reduced our net earnings by approximately $0.02 per share in the fourth quarter, when compared to the third. Cash flow from operating activity further increased from the third quarter and reached a $182 million in the fourth quarter. This translated into a sequential improvement in free cash flow to $131 million for the fourth quarter, quite a solid performance in what has typically been a slower period in the year. Net debt has been reduced by $92 million in the quarter. We also streamlined our capital structure, which in turn allowed us to optimize our tax structures and eliminate the drilled financial reporting being a large subsidiary, Domtar Inc. Turning to slide 5, I'd like to draw your attention to a few items. Sales were just slightly- off from the third quarter with price offsetting the lower shipments. Cost of sales increased $27 million or little more than 2% in the quarter, with the stronger Canadian dollar explaining about 70% of this increase. SG&A increased $15 million for the third quarter. 9 million of this increase is related to additional synergy, integration, and optimization cost incurred in the fourth quarter, as well as a number of small year end adjustments. In conjunction with the restructuring announced in December, we took a charge-off $92 million related to the write-off of the book value of paper machine at our Dryden mill. We also took $4 million goodwill impairment related to the wood segment of the Weyerhaeuser Fine Paper business. We recorded in the fourth quarter, $51 million gain related to the settlement of a lawsuit and an insurance claim. Included in interest expense line, our cost related to the bond exchange on our U.S. dollar note and the tender offered on our Canadian dollar debenture that insulated our interest charge by $25 million in the quarter. Finally, the effective tax rate was 55% in the quarter and far due to sector income tax rate changes. That explained $11 million of the $32 million recovery. On slide 6, we have well understand our earnings, we adjust for a number of items that impact the comparability of our earnings. When excluding these items, earnings per share in the fourth quarters goes from the loss of $0.05 to a profit of $0.06. Turning to our cash flow on slide 7, in the fourth quarter cash flow from operating activities amounted to $182 million including cash taxes of $16 million. As its typically that case in the last quarter of the year, capital expenditures increased from Q3 to $51 million representing a little less than 40% of D&A. Moving to financing, we did a lot of work on our capital structure in the fourth quarter. First, we successfully completed a bond exchange on our U.S. dollar note. We redeemed two series of preferred share that we're up pending in Domtar, Inc. for $24 million. Finally, we did a tender for two coupons in Canadian dollar debentures with the combined face value of $153 million. Moving on to slide 8, the sequential decrease in EBITDA from Q3 is due to lower shipment impacting EBITDA by $30 million. Higher fiber, chemical and energy costs were $21 million unfavorable change in the value of the Canadian dollar impacting cost of our Canadian mills by $19 million and higher overall cost by $6 million. These item were mitigated by $26 million from higher selling pricing in paper and pulp. Now turning to our segmented review starting with that paper on slide 9. The segment posted an operating income including the $92 million write-off of $25 million in the fourth quarter on D&A of $124 million the other item specifically is related to our paper business where the gain on lawsuit settlement of $39 million, integration related cost of $21 million, and closure and restructuring cost of $7 million. At the operation level paper shipments were 8% lower than the third quarter, while pulp shipments were 23%. I would like to mention here that the absolute pulp volume in the fourth quarter were a little bit higher than normal partly because of delays in shipments at the end of the third quarter due to transportation availability for the export market. On price salutation production prices for paper and for pulp were strong and continued their up to trend while the announced price increases and the second half of the year only covered commercial print rate our price realization were up for both copy paper $8 per ton and offset $33 ton in the fourth quarter when compared to the third quarter. On pulp we've continued to see strength in the hardwood rates with price realization increasing $3 ton while softwood pulp was up about $12 per ton on average. The lower results before the items mentioned before were due to lower paper shipment higher cost for fiber, chemicals and energy and foreign exchange. These were mitigated by higher paper and pulp prices and higher shipment for pulp. Turning to slide 10, lack of orders downtime in our paper operation was reduced in the fourth quarter 26,000 tons and this resulted in a shipment of production capacity, production ratio of 98% compared 106% in the third quarter. To conclude on our paper segment on slide 12, the increase in paper inventory was minor in the fourth quarter with a data of only 17,000 tons with both well going into the first quarter. Turning to our paper merchant segment on slide 13, this segment posted an operating income of $1million in the fourth quarter. The $5 million decrease in operating income when compared to the third quarter is due to $2 million decrease in provision for doubtful account that was reported in the third quarter. A D&A charge of $1 million reported in Q4 and foreign exchange. These were mitigated by 5% increase in paper delivery on the third quarter, that's were already higher since the first quarter of 2006. I'd like to mention here that with price going up distributors' margin are squeezed short-term as they pass the price increases through. Now wood business on slide 14. The segment posted an operating loss of $26 million in the quarter compared to an operating loss of $13 million in the third quarter. The EBITDA loss grew from $7 million to $14 million in the quarter, and this is due to lower selling prices, foreign exchange and higher freight cost. At the operational level lumber shipment were 13% lower than the third quarter while price for stud and random length were up $42 and $35 per unit respectively. Finally, you will find on slide 15, some key financial assumption for fiscal 2008 based on information we have available at this time. I intend to provide you with an update on a quarterly basis. Worth mentioning on that slide is the capital spending for 2008 that has been reduced from $300 million to a range of $240 to $270 million. With that, I will turn the call over to Raymond for the review of the year. Raymond?

[Raymond Royer:]

Thank you Daniel. Good morning to all our listeners. What I would like to do this morning is to briefly review some key financial results for 2007. I would like to talk a little bit about some of the accomplishments made in 2007. Some initiatives launched recently and finally provide an outlook for 2008. On slide 17, reported sales for 2007 were $5.9 billion and EBITDA before items was $830 million in '07, excluding the results of Domtar Inc. prior to the transaction closed March 7. I would like to mention here that the pro-forma financial results will be included in Domtar 10-K to be filed by the end of March. Turning to slide 18, with free cash flow increasing to $131 million, this brings the yearly total to close to half a billion dollars at $490 million. This is impressive and again still missing little more then too much of Domtar Inc. With the priority on debt, net investments has been reduced by $355 million, since March 30, and net debt to total capitalization by 600 basis point to 41%. Turning the synergies on slide 20. Our run-rate target of $80 million was surpassed at December end with an estimated run-rate of $130 million. As it is typically the case the easier projects are faster to capture. But I am confident that we can achieve the $200 million target, by the end of this year. I am proud of what we have done so far as an organization. Our positioning in the paper market is unique because of all the benefits we can bring to customers doing business with us. And I want to thank them for their support. As I take a step back to look at the accomplishments. It is a source of price for all employee thinking that Domtar Corp. still hasn't celebrated its first year anniversary. Yet, we have executed on several fronts, on top managing our day-to-day work. Our teams came together quickly to establish the synergy activity and this early work has paid-up, through a quick acceleration in the run-rate achievements. We also announce in December, within 100 days after the closing of the transaction, some permanent paper making capacity reduction. As Daniel mentioned, we have successfully completed a bond exchange in the U.S. Tender offers with two Canadian debentures and we have redeemed preferred shares of Domtar Inc., hence eliminating the dual reporting requirements. This will have a huge benefit on our financials reporting and it will eliminate some confusion regarding our financial results. We have made additional announcements on manufacturing capacities in December and it is expected that this will result in reduced... lack of audit down time in the coming quarters. The one key performance indicator I track is our internal supply-demand dashboard. Firstly money turning to business activity in our customer service centers our booking levels, paper inventories, trend in our input cost and production capabilities. On this, I can say that our sales organization is doing a fine job of communicating market dynamics internally, so we can work on reaching an optimal supply-demand balance in our system for the purpose of not building inventories. We were tightly balanced in Q4, with low downtimes and shipments close to production. Turning to some initiatives on slide 22. On the manufacturing side our operations continue to run well and opportunities are being captured. The latest decision taken is to transfer our colors to Hawesville, Kentucky which will add meaningful mix impact at this specialty. These opportunities of improving the mix at large, efficient mills makes Domtar a fierce competitor in value-added products where the potential for organic growth is tremendously high, given the fragmented nature of products in those markets. We are in the process of rationalization of stock keeping units towards single lines of product with consistency in shape and quality. Our analysis of brand names, product categories and market positioning was completed in the fall and we are currently working to ensure that our internal systems are aligned for the launch in the next week. We expect the urbanization of products will extend over a period of approximately six months. On environmental papers several announcements have been made starting with our Cougar brand. Cougar is the best-in-class 98 bright hold bake in North America and is now certified with the FSC chain of custody spender. Again we are demonstrating our intention to stay ahead of the curve by moving FSC. This enables us to have product features that our customers demand. With pressure on cost and availability of recycled fiber that more and more is displayed outside of North America. FSC-certified growth of virgin fiber becomes a natural for customers seeking environmental products and Domtar has the most expensive offering of FSC products in the world. Moving onto service, we've had the full year shooting capacity at our Dallas replenishment center to better service our customers in the U.S. South from Texas to Louisiana. Also we are moving according to plan our Chicago folio sheeter with an early May start off for quick ramp up to full operation within months. Turning over to our wood business, we announced early January that the agreement for the sale of our Canadian operations Conifex had expired and the fact that the deal did not go through does not change our view wood is a non-core to our fine paper business and it is my objective to move on this matter by the end of 2008. For 2008 we anticipate inflation on energy related costs to stay high. But, price realization are also expected to increase given price increases announced for the first quarter, and given paper availability we expect the increase to grow quickly. Paper volumes are expected to stay relatively steady to slightly down and so far in 2008 even with an economy that shows weakness our market has been strong according to the spectrum and this increases management's confidence for the future. This confidence come from the fact that the investment phases in Domtar has more then held up so far with industry consolidation equilibrium between supply and demand and realization of synergies. By keeping the same rigger and discipline around the use of our free cash flow I believe this success we have had so far gives us the opportunity to consider various options for the use of cash. In closing this has been a historic year for Domtar and I am proud of all the accomplishments made by out team. As we grade our success thus far some of our projects have not yet made it to the finish line but this does not change our result to seek alternatives and continuously work to improve our performance. But, by effectively managing our business and with customers supporting Domtar in its commitment. Things have played out extremely well for us so far. Our financial performance will continue to improve and with such an outstanding potential to generate cash flows, we are and will continue to create a lot shareholders value. I am enthusiastic about the prospect for our organization in the future and so regardless of how or when and if ever the economy was to impact our business. Things look favorable for 2008, and we pursue on the same pattern with the focus on balancing our system and generating free cash flow. Thank you for your time, we appreciate your support and I will turn over to Pascal.

[Pascal Bossé:]

Well thank you Raymond. Michelle we're now ready to take questions from the investment community. Question And Answer

[Operator:]

Thank you, [Operator Instructions]. Your first question comes from Mark Connelly of Credit Suisse. Please go ahead.

[Mark Connelly:]

Well thank you. Just two things, your inventories were up only in little but the industry inventories took a pretty big jump in the last couple of months and when we look at the correlations between prices hikes and inventory movement, it can be pretty high. Do you have a view on whether you think the industry as whole is in good shape to get this increase or do we need to see more downtime to get this done? And my second question you said that you expected to take less downtime going forward... the way I was looking at it, it was okay 26,000 tons annualizes to 100... so maybe there is a small machine that should come out. So can you help me how... help me understand what you're thinking in terms of that downtime balances as well?

[Raymond Royer:]

Mark, Dick will answer that first question and Daniel the second.

[Mark Connelly:]

Thank you.

[Richard L. Thomas:]

Thanks. Mark, we feel the inventory picture both at the mill level and the customer level is very sound right now. Certainly our merchant inventories have been declining for 18 straight months and down in total by 20%. So I don't, I'm not concerned about a little bit of an up-tick in fourth quarter... I think the good news about the fourth quarter certainly, is that we managed through that without any slippage increasing and speaking for Domtar we worked hard on inventories in the third quarter made significant progress there and I'd say at this moment we're... we at Domtar are still trying to find the optimum level of inventory. So we are focusing on that point and in fact a little bit of an inventory we built in to fourth quarter was really intentional, to make sure that our internal supply chain was allowing us to ship product at the lowest possible cost. So we feel very good about supply demand balance in the industry and inventories as well.

[Daniel Buron:]

Mark, on your... second part of your question the downtime in the fourth quarter. We've announced in December the restructuring of the Dryden operation so that's going to remove going forward 170,000 ton of capacity in Domtar and there is also the closure of the Port Edwards mills that going to happen in the second quarter that's when remove an additional let's say 160,000 tons. So we believe that our system is a little bit tight, well done for 2008.

[Mark Connelly:]

Okay, so that was incorporated into your comments, Okay. I just want to make sure. Thank you very much.

[Daniel Buron:]

Welcome.

[Operator:]

Thank you. Your next question comes from Christopher Chun [Deutsche Bank]. Please go ahead.

[Christopher Chun:]

Hello, can you hear me.

[Raymond Royer:]

Yes.

[Unidentified Company Representative:]

Yes, good morning Chris.

[Christopher Chun:]

Okay. The first of all I just wanted to ask you about the outlook on per ton [ph] it seems that Q4 saw quite a bit of an impact from that. Can you tell us what you're expecting in 08?

[Daniel Buron:]

Yes, that's definitely significant impact on us. We... that industry went through a couple of year of high inflation and we have seen that accelerating things. We are seeing about at the $100, earlier in 2007. So when you are going to look at average of '07 and average '08, we are going to continue to see some pressure in our energy related cost. Fiber is one item that... I think it's a coming thing in the industry where fiber availability been reduced because of the downturn of the housing market. So definitely fiber cost are increasing partially in the south of the U.S. whereas down here there been impact service. So we believe that we going to continue to see pressure on our cost structure, but we're also confident that the balance between supply and demand, as we've seen, with price up run in the January, that will took effect in February and March that the industry is now in such we should be able to pass those costs on to our customer overtime.

[Raymond Royer:]

Marvin do you have anything to add on that. No, I don't think so,

[Marvin D. Cooper:]

No I don't think Raymond, a lot of our input cost directly or indirectly tied to energy cost, chemicals and logging and all of those things are effected by energy cost. So that's what I consider the biggest cost pressures is energy.

[Raymond Royer:]

Thank you.

[Christopher Chun:]

Okay, thank you. And then in terms of the outlook for paper volume, Raymond you mentioned the company is expecting volumes to be flat or slightly down but if we look at what happened in '07, they were actually down fairly significantly and can you talk about whether there is any reason to believe that '07 was down more than what we should expect for future for years?

[Raymond Royer:]

Dick will take that question.

[Richard L. Thomas:]

Pardon me, you're asking about Chris about industry not Domtar?

[Christopher Chun:]

Correct.

[Richard L. Thomas:]

Okay, I just want to make sure. We believe that the long-term trend... the pattern we have seen around that in the past six to seven years has been a bit of variation quick wide area [ph] variation around that trend. So last year was a below trend year. We think there were lot factors involved, starting with continued substitution to electronic media as we all know and some substitution of ground wood and coated. Because the prices points of coated and uncoated have gotten relatively close. But we also believe that the economics, the economic impact in the confusion around the postal rate increase had an effect as well. So another reasons last year was a below trend year and again history shown that it's typically followed by years that's above trend. So we believe there is good reason optimism going into this year.

[Christopher Chun:]

Okay I will go ahead and turn it over. Thanks guys.

[Richard L. Thomas:]

Thank you.

[Raymond Royer:]

Thank you.

[Operator:]

Thank you. You next question comes from Steve Chercover of D. A. Davidson. Please go ahead.

[Steven Chercover:]

Thank you, good morning.

[Raymond Royer:]

Good morning.

[Steven Chercover:]

I was hoping you could perhaps and sorry if I missed this, quantify what is still pending in terms of price increases in the various grades on uncoated freesheet?

[Richard L. Thomas:]

This is Dick again thank you. See if the we've announced increases of $60 a ton for cut size to take effect in mid February basically now today and then we've announced commercial print increase pretty much across the board printing and publishing grades, most of these are in a range of $60 there are few exceptions for that but they only take effect early march. So again a couple of exceptions, but essentially to $60 increase.

[Steven Chercover:]

And was there anything unrealized still to be crystallized from 2007?

[Richard L. Thomas:]

In terms of increase is announced at that time.

[Steven Chercover:]

Correct.

[Richard L. Thomas:]

No we did see a bit of an uptick in cut size in the fourth quarter, which I think suggests that the May 7th increase on cut size because of some big business that shipped over in the summer there was a little bit of catch up on that, but that's all for you in place.

[Steven Chercover:]

Okay.

[Raymond Royer:]

And the offset increase of September was impacted positively $33 per ton in the fourth quarter I think its all in the report and we'll see the benefit of the new announced price increases in late first and in the second quarter.

[Steven Chercover:]

Yes thanks that's what I was trying to get out it one of that $8 and $33 had any thing left. So that's the end of that. Okay switching gears any updates what so ever on Saskatchewan or is that one pretty much on ice for the time being?

[Raymond Royer:]

No the Saskatchewan for the time being, we have made our decision and nothing is happening there, except that if you recall through the agreement we had the province, we could take out the sheeter which is already being implemented in United States and we have similar agreements to take out that paper machine, which right now is being much bought and these are very good assets for us, but nothing more on Saskatchewan.

[Steven Chercover:]

Final quick question than you guys are making tremendous progress on balance sheet, free cash flow looks great, I don't think you can buyback shares until the second anniversary of the deal. So is the board discussing a dividend at all?

[Raymond Royer:]

Well, if you recall one of our goals when we created the Domtar Corp. was to deleverage our balance sheet, while delivering at the same time on synergies and on integration. And we are very proud of our results; we now stand in net debt capitalization ratio at about 41%. And in 2008, we believe that we'll generate also healthy cash flow. So I can tell you that I am reviewing what right now with my team, various options with the best use of that cash going forward.

[Steven Chercover:]

Thank you very much.

[Raymond Royer:]

Thank you.

[Operator:]

Thank you. Your next question comes from Chip Dillon, Citi Investment Research, please go ahead.

[Chip Dillon:]

Yes, good morning. Daniel and Raymond. First question is on the that I am sorry, I must have missed and I know you have talked about this, but what is the capacity that's coming out specifically in the second quarter?

[Daniel Buron:]

The impact we are going to see is the reorganization of Dryden mill, sorry so that's going to remove in our capacity 170,000 ton that's net one machine is closing and another one is restarting and there is also the reported where flexibility that will close more in the second quarter that's representing 165,000 tons.

[Chip Dillon:]

So together what our visibility is as we look out is that you're actually taking out a total of 335,000?

[Daniel Buron:]

In 08, yes.

[Chip Dillon:]

In 08, okay.

[Unidentified Company Representative:]

Thus Chip there is just one thing to mention here is that if you look in the appendix we're showing the production numbers just keep in mind that there was quite a bit of downtime that was taken at Dryden in the fourth quarter. The reorganization at the mill is not going to specifically from Dryden is not going to impact significantly the production figures on an historical basis.

[Daniel Buron:]

The 26,000 kind of downtime that we took in the fourth was almost all at Dryden so we thanks for it a little bit more to 100 so the impact in terms of capacity total capacity in the first quarter will be 70,000 tons that's more than that.

[Chip Dillon:]

Okay and then one thing is as you take out capacity Dryden and for Edwards I know that in 07 a lot of your reduced unquoted capacity what was really still alive with you as market pulp where the margins are probably pretty good as well. I call it port Edwards, I don't think is integrated and so is it fair to say that there'll be there could be some offset with the loss tonnage at Dryden but not at Port Edwards?

[Daniel Buron:]

The Port Edwards as it took five pulp mill so it was naturally integrated, but it was high degree of pulp sufficiency in pulp. So there will not be a lot of offset its going to be a little bit like Dryden.

[Chip Dillon:]

Okay. So your, in other words you are not expecting it to sell more pulp this year than you did, like at the fourth quarter rate times for?

[Daniel Buron:]

No, fourth quarter was... as I mentioned in my note, higher than normal because of delay in shipment. I mean at the end of the third quarter we have some bulk [ph] that didn't show up. So we have higher shipment but our net market proposition should be pretty similar in next year at 1.2 million ton more or less.

[Chip Dillon:]

Okay and then another question as you look at the marketplace and I just don't know how this can crossover but we're seeing some pretty quick and actually dramatic changes in some of the groundwood areas. I notice that even in euro you see a SE Paper going up and in coated groundwood. Has that shown-up in your market in the sense that may be some of the groundwood offset grade that your competing with are been withdrawn and put in the more traditional groundwood markets or have you not seen that?

[Richard L. Thomas:]

This is Dick. See we're looking for that, we're watching that, I can't tell you that, that we have seen that impact as yet, but certainly we're watching it closely. The announcements that we've seen about capacity reductions in refers some reduced capacity in hybrid ground wood. But we haven't seen the effect yet.

[Chip Dillon:]

Okay, and then last question, it seems to me that in Canada. I'm really talking specifically in Canada, that a lot of the lumbers that is being produced is obviously to get at woodchips. Is it again, can you just review for us is it just simply impossible or illegal or just still impractical to take trees down and ship them off like you see in the U.S. as apposed to go through the step of making lumber that you still have to pay people to take?

[Daniel Buron:]

Your right... as in Quebec and Ontario, we cannot... our investment [ph] in shipping we have to go through saw mill to get the chip so where the saw milling operation are necessary to get the chips but again I think it's important to know that we're our paper is made mostly of hardwood and saw mills are more softwood.

[Chip Dillon:]

Okay, got you. Thank you very much.

[Raymond Royer:]

You are welcome.

[Operator:]

Thank you. Your next question comes from Steven Atkinson of BMO. Please go ahead.

[Stephen Atkinson:]

Thanks very much. In terms of the synergies when you mentioned that you had a run rate of a $130 million by the... at the end of the year. Are you able to tell us what you had in the fourth quarter?

[Daniel Buron:]

This issue if you allow me I will answer the question for the entire year. It's difficult to answer the question on quarterly quarter-by-quarter basis. That run rate is kind of at curved as you start it from zero and you get your run rate at the end of the year. So, I think it's fair to say that in our case close-to-half to that $130 million. So, $60 to $65 million is our P&L in terms of benefits. That was... as you can see in our results definitely the reduced by the impact on the inflation that we have in our cost. You have to recall that 30% to 50% of cost are energy related, fiber it is chemicals, transportation is definitely energy related. I don't like to make the link between synergies and cost but they are both in the cost side of our P&L. So it's a link that we have no choice we are really tracking that separately. We look at the... at the synergies in one bucket and we make sure that its really a thing to P&L in terms of benefit and we are also analyzing the inflation in our cost. I prefer to make the link between inflation in our cost and selling price because given the state of the industry and tight relation between supply and demand, and again referring to the price increases that were announced for implementation in Q1. I do believe that the cost increase or the inflation that we are having in our cost will be passed on to our customers.

[Stephen Atkinson:]

So really what I trying to get at was when you look at the first quarter how much carryover would that be from the fourth?

[Daniel Buron:]

I think we should. We should see, I mean as the time pass we should see more and more benefit from the synergies in the P&L of that business.

[Stephen Atkinson:]

And so the other thing that's happened of course is the transition from the Weyerhaeuser shall we say head office system to the Domtar will there be any impact in the first quarter from that?

[Daniel Buron:]

See in fact we are quite proud of what we have been able to accomplish in 2007. There was a... there is a kind of three big transition service agreement the outsourcing agreement that we have with Weyerhaeuser one was on HR, so we are out of those services from Weyerhaeuser. So we should see a decrease in the first quarter, their finance process also was a quite an undertaking to move from Weyerhaeuser to Domtar. So we have been able there to complete that by year end as planned. So we should see a decrease there. There are still a lot of IT work that need to be done. The infrastructure is not yet complete and Weyerhaeuser is still housing a multi-lower our legacy Weyerhaeuser to stand on their on own network. So there is still a lot of work so we should see some decrease may be nothing deferred because we are going to start the IT or the IT phase for IT in the first quarter but definitely toward the second-half of the year, we are going to see a significant increase in those integration costs.

[Stephen Atkinson:]

Okay. And so that if we look at the fourth quarter where there other non-recurring items like if we take the sixth sense EPS after the which was at the adjusted $0.06. Were there any other non-recurring items in the fourth quarter?

[Daniel Buron:]

I think you can qualify the $5 million to $6 million that I referred to in the SG&A line that were more a year end adjustments as non-recurring in normal quarter. Out of that I am going to give an example of something that happen this year that we'll try to avoid in the future, but there is always a little bit of timing and where we you approve for compensation expense. Incentive compensation expense, so we have the negative impact in the fourth so we'll try to improve our forecast in 2008 and then for that more over the four quarters and there is an always annual true up of first employment benefit that is has also an impact some time is the positive impact some time its negative impact. Couple of million in the fourth quarter and I think there is probably $5 million or $6 million that you would, you could consider kind of non-recurring in one quarter, that's its still cause that we are going to have in the future but normally, it only throughout the year.

[Stephen Atkinson:]

And would that include then for instance any overlap on moving to the transition, switching in the transition?

[Daniel Buron:]

That's a overlapping part of this when you $21 million integration costs that we're explaining in the press release.

[Stephen Atkinson:]

Okay and finally on the lumber. Is there anything you can do to reduce losses like I know that the Quebec Government actually announced that they are going to take another look at their policies, but is there anything you can to do to see run lumber mills less and sill keep your tenure?

[Raymond Royer:]

Yes, we are reviewing the entire business as we speak. First you have to understand that even if the first deal that we had negotiated in 2000 sales for the disposal of that business which is non-core. Even if it does not materialize that it does not change our goal to find a home for this division outside Domtar and it is one of my 2008 priorities. But at the same time we're reviewing all elements of cost in that operation to reduce to a minimum to losses that we incur right now.

[Stephen Atkinson:]

Okay. Thank you.

[Daniel Buron:]

Thank you.

[Operator:]

Thank you. Your next person is Heather Macphearson of Troy [ph]. Please go ahead.

[Unidentified Analyst:]

Hi, can you guys give me some... what the tax rate was during the quarter and then just remind me again what the CapEx and depreciation is going to be in 2008?

[Daniel Buron:]

Yes, the tax rate in the quarter was 55% if I recall visitors we have that dig right up on the Dryden mill the that 55% included $11 million of change in effect or benefit because of changes in interest rate income tax rate in gold, some state in the U.S. and in Canada in the fourth quarter. The normal tax rate for that business should be in the low 40 until we occurring the Canadian operation in to taxable income because they are generating EBITDA, but when you go to the taxable line it's a negative but it's a negative at 31% in the U.S. its positive at 40, so that's giving kind of a rate going forward little bit higher then 40%. There is a slide and the slide 15 that is giving you some financial assumptions for 2008 and you have an assumption on D&A. We believe D&A will be... not that we have completed the fair markets value for some of these Domtar assets. As usual to put our finger on the numbers we believe that depreciation will be between $400 million and 500... $480 million and $500 million in 2008.

[Unidentified Analyst:]

Okay I'm sorry. I will go at the CapEx I guess you have the CapEx on that?

[Daniel Buron:]

Yes, the CapEx will be between 240 and 270.

[Unidentified Analyst:]

Okay. And then where did CapEx end up for 2007?

[Daniel Buron:]

Just a bit lower $116 million.

[Unidentified Analyst:]

116, Okay. And let me just make sure I understand on the tax rate what's the cash tax rate going to be from next year and what was it this year?

[Daniel Buron:]

The cash tax rate is difficult to assume we are still optimizing our capital structure. We've done quite a lot of things this year by doing debt restructuring if we can use that expression. Now moving all the U.S. assets under the same group. So there is a some NOL as a level in the former Domtar U.S. assets that we have to work to try use quickly offsetting legacy Weyerhaeuser profitability or legacy Weyerhaeuser profitability. As the transaction with Weyerhaeuser was a reverse more through up of that transaction and was set in that way to make factory or factoring any deal for Weyerhaeuser. We have very, very low at business coming from the Weyerhaeuser so that the tax, the cash tax rate on the U.S. asset will be high until we can use the well of Domtar, Inc..

[Unidentified Analyst:]

Okay, and then just to make sure you understand on the $0.06 excluding restructuring charges. Was the effective tax rate on that $0.55, 55%?

[Daniel Buron:]

No, I think on the marginal I mean... most of those items are in Canada. So the tax rate in Canada is more in the 35% rate and there is couple of items that are I think both side of the borders so it's more on the $0.38, $0.39 on those items.

[Unidentified Analyst:]

Okay, I might have to follow up on that. Can you give me also what that pension liability looks like it is gong to be at the end of the year and what happens to pension next year?

[Daniel Buron:]

Pension expense next year will increase a little bit and that's significantly the evaluation overall of the pension asset and pension liability at the end of the year resulted in an increase of $40 million more or less of liability. So that will be a more size over. 12 years, which is the remaining life of the participants to the pension plan, asset is going to be $3 million to $4 million more expense next year.

[Unidentified Analyst:]

I think that's it thanks.

[Unidentified Company Representative:]

Thank you.

[Daniel Buron:]

You're welcome.

[Operator:]

Thank you. Your next question comes from Alex Oshea of Goldman Sachs [ph]. Please go ahead.

[Unidentified Analyst:]

Good morning, following big tax disclosures announced in 07. And as you look across your mail system are there still facilities that you would crush by as being perhaps at the bottom of the second quarter or in the third quarter in terms of cost. Is that you'll be willing to close a demand were took them below expectations in 2008 or do you perhaps see yourself taking more maintenance downtime versus taking off capacity. To better balance supply of demand if the demand was we wouldn't expect in 2008?

[Daniel Buron:]

Alex, the commitment of that business to the marketplace is to balance supply with demand so we have been a complete very high to attract volume in our business but we are willing to sacrifice volume for price. So that we have the best bottom line possible so we would always adjust our production to the demand of our customer. We believe that we have and in fact we had in the fourth quarter good balance between supply and demand would be enough to we believe that we are going to have a better balance between supply and demand even may be some tightness and just is going to for. So we don't foresee any additional closure but if for any reason as I cannot find out demand is declining more then we expect and we have to take downtime we will to make sure that the balance is tight and that we can continue to deliver profit to our shareholders.

[Unidentified Analyst:]

As you look across your mail system would you say most of your capacity is probably in the first or second quarter in terms of cost?

[Daniel Buron:]

In terms of product mix because we have to look at the what's the mill is producing I think we... it's probably fair to see that on there part as line we are first or second.

[Unidentified Analyst:]

Okay. And my next question is as you look to implement higher cut size pressures here in February and you compare your efforts this time around versus May 2007 when you are quite successful and we are able to I think rates prices essentially twice I mean quicker than what would normally be expected. How would you describe uncoated freesheet markets today relative to May 2007?

[Richard L. Thomas:]

This is Dick. I would say the circumstances the environment we are in is probably at least as good it was in the second quarter of last year. I think customers have a better escrow what we are facing on the costs side, and certainly that the continued exchange rate makes it more difficult for somebody wants to reach overseas perhaps and bring in product. So I think the environments that [ph] good rate now to implement as it was there.

[Unidentified Analyst:]

Right. And my last question and then I'll turn it over. Just remind us what you think ballpark figure for your cost related synergy optimization and integration will be in 2008 and again an incremental, you can provide that how you see those trending throughout the fourth quarter in 08 would be very helpful as well, thank you?

[Richard L. Thomas:]

Well, will come to the market with the more information in our first quarter earnings call. We are reviewing our plan of we seek right now. I think were would successfully have in the last year to a exist again those transition or segment with Weyerhaeuser in terms of delivery, but we are the point to review, what we going to do in 2008 and characterize items. Will come back in the first quarter earnings call with what to believe the expense will be for the rest of the year.

[Unidentified Analyst:]

Thank you.

[Richard L. Thomas:]

You're welcome.

[Operator:]

Thank you. Your next question comes from George Staphos of Banc of America Securities. Please go ahead.

[Unidentified Analyst:]

Good morning. Hi, it's actually Mike for George who is traveling.

[Unidentified Company Representative:]

Good morning, Mike.

[Unidentified Company Representative:]

Good morning, Mike.

[Unidentified Analyst:]

Good morning. Understanding that 4Q obviously so much difficult to analyze given that the company as it is currently constructed did not exits at that point. It was clear based on initial calculation that uncoated freesheet volumes for Domtar were down somewhere between... anywhere 5% or 10%. First question would you agree with that and really what is the outlook for demand declines moderating in the future. I know you mentioned that 2007 was tough year and that 2008 should be some what better given historical performance, but if you could just a little bit more color on moderating demand decline.

[Richard L. Thomas:]

Mike, this is Dick. I guess what I would say is we still believe that long term trends is somewhere between 1% and 2% that and in fact if you measure it over the past 6 years that's the case we have seen a wide variability around that and again we've typically seen a good year following bad year so for that reason we are optimistic... and honestly even enthusiastic about the prospects this year. We still believe the long term trend is between 1% and 2%.

[Unidentified Analyst:]

And would you agree with my first question that the... based on our initial calculations that volumes for Domtar... uncoated freesheet volume for Domtar were down anywhere between 5% and 10% in 07 relative to 06?

[Richard L. Thomas:]

Yes, just over 5% in fact, compared to 06. Our total shipments as a corporation were actually down a bit more than that. But, the difference is products that we no longer manufacture and sell primarily coated paper so. If you just look at uncoated freesheet we were tracking with the industry at just over 5%.

[Daniel Buron:]

I think if you look clearly at the... the number that we've published there was also one week more in 2006. So you have to do the math to remove week. And last year was a 53 weeks year, this year is a 52. But overall we are kind of following that market that's more or less 5% on the uncoated freesheet in 2007.

[Unidentified Analyst:]

Got it. And then just second question relates to the sequential pick-up in interest expenses in 4Q. The pick-up seem to... just related to the as you pointed out the bond exchange in the early retirement of debt but going forward it seems that interest expense in clearly benefited be somewhere around 37, 38 million. Is that correct?

[Daniel Buron:]

You have on the page 17 of the slide best assumption as we speak right now. The low... the higher range is 150, sorry the low range 150 per year so that's very close to your assumption. So the depending on where interest rates and I think we relating 125 basis points reduction late January. So I believe that we probably be closure to a 160 million and 160 in 2008.

[Unidentified Analyst:]

I think that... and fourth quarter again related to just those one-time items related to the?

[Daniel Buron:]

Yes, you are absolutely right there is $25 million impact of the restructuring of the debt.

[Unidentified Analyst:]

Great. Thanks very much. Good luck in the quarter.

[Daniel Buron:]

Thank you.

[Richard L. Thomas:]

Thank you.

[Operator:]

Thank you your next question comes from Michael Sherraden of Global Capital. Please go ahead.

[Unidentified Analyst:]

Good morning. How are you?

[Unidentified Company Representative:]

Good morning.

[Unidentified Analyst:]

Couple of quick questions. Can you just give us an idea of what percent of production was exported for instance to Europe during the quarter. And are the economics, do they work at this point can you get capacity to ship the paper there etcetera?

[Raymond Royer:]

Michael, Dick will answer that question.

[Richard L. Thomas:]

Yes, we shipped really our busiest month in terms of exporting product was third quarter. We came in third quarter realizing that our inventories were higher then we wanted them to be. So, one other steps we took was to export roll product. That we did not carry forward in the fourth quarter to any great degree, so fourth quarter exports were very small on the roll side. Cut size is a different story. We continue to export some cut size and we believe that this does some important things for us it gives us if you will, more global knowledge of our competitors and what customers want, on a global basis. And more importantly it allows us to be a better supplier to some of our North American customers who had operations overseas. So we look at rolls and cut size some what differently and maybe it's fair to describe the cut size as a bit, as a strategic positioning where as the rolls is more tactical. In terms of the returns, we do quite well on cut size very close to our net backs in North America with our export business and we carefully choose the customers in the geographies. On the roll side the net backs are below North American levels so for that reason if we don't need to export significant product we don't on the roll side.

[Unidentified Analyst:]

Thank you.

[Richard L. Thomas:]

Is that help?

[Unidentified Analyst:]

It does. And pro forma I am a little bit confused about the tax rate perhaps I misunderstood it. I thought that you had said 27% for the quarter, on kind of the clean numbers. Can you give us an idea of what... looking out a year from now, what kind of the tax rate should look like with the tax end which is fix etcetera?

[Daniel Buron:]

The, if we remove all the, I would use non-recurring item that you typically find in tax rate like the change in statutory rate. This year we had some non-conventional sealed tax credit, the tax rate in... on our U.S. earnings should be a little below 40%, tax rate on our Canadian earnings should be 31%. What's confusing and I'm confused too, what confusing when you look at that is your kind of having a negative earnings or taxable earnings in Canada at 31% with positive earnings at 40% in the U.S. So that kind of... changing the rate above 40%. Technically or practically I think in '08 we are going to the see the rates would in the low 40, 42, 43.5 depending on... in fact I think the biggest variable on that trade will be the exchange rate. So if the Canadian dollar continues to raise lots in Canada will increase and we would be a tax rate higher if to the country it goes on the other side, we may even become positive or taxable earnings in Canada and then the rate will be although where it should be in a long-term.

[Unidentified Analyst:]

One other quick question, LLC [ph] which should never is, but pro forma for the closures that you've announced, how would we think about the Delta if your cash cost per ton in production, you know taking out the higher cost stuff that you guys are going to close and kind of looking what you will do to your cost basis, on today's pricing obviously?

[Daniel Buron:]

We're closing the mills that we believe our debt are actually the highest cut for the grade that we want to remove from the market, or cash structure and everything being the global reduced, for instance the Port Edward Mill that we're going to close in the second quarter. We've been successful to find room in more efficient mill and for the majority of the grave that used to produced in that mill. So that's going to significantly reduce the cash structure in terms of those... so that again we know that we're in a high inflation business as we speak out because of energy but everything being equal our cash cost are reducing because of the gesture or -- the decisions we are making.

[Unidentified Analyst:]

Okay. I'll start monopolizing. But you talked about rigor as far as using... user free cash flow and with the 12% to 15% free cash flow yield and $7 stock I would think that... I guess I am curious to know what you guys think the proper retention of free cash flow is... I mean it seems to me that you could pay out a dividend of 40% of free cash flow... the stock probably goes up 30% and you can buyback stock eventually I mean how do you think about that?

[Raymond Royer:]

This is what I said previously the goal was really to deliver our balance sheet and we are doing very well in that and we're working on both on the synergies and integration and we are also doing very well in that. So we know that in 2008 we'll generate good free cash flow and believe me my team and I are really looking at the issue to find the best options. But the cash used going forward, but I can not at this point add more that this.

[Unidentified Analyst:]

Can you help me understand the timing of the dividend issue because I guess the re-through I would get with $0.5 billion of free cash and you seem to be fairly confident that... that will be there structurally. I wonder why something is not ready to be announced. Can you help me understand the mechanics of perhaps how you guys internally work that?

[Raymond Royer:]

Well first we have to finalize our own decision and once our own decision is being finalized it will be fully discussed with the board. So this is a normal process.

[Unidentified Analyst:]

Great. Thank you very much for your time.

[Raymond Royer:]

Thank you.

[Operator:]

Thank you, your next question comes form Mark Connelly of Credit Suisse. Please go ahead.

[Mark Connelly:]

Thank you, I'll be quick. Just one question I'm looking at your tried about shipments being in sync with production and I'm curious form your perspective whether you think the other major players in the industry are behaving the same way. We certainly heard some talk that at least one producer is taking a free riding approach which one would if you think about it might argue would be a rational behavior. But we don't actually see any evidence that is actually taking place in the market. So I'm curious what your perspective is, do you see the other major producers actually behaving more or less the way you are and then just a comment I do appreciate the increased disclosure but I had one question about on the very last slide it looks like maintenance costs are actually higher in 08?

[Raymond Royer:]

So Mark, Dick will take the first question.

[Richard L. Thomas:]

I'll answer as best I can.

[Mark Connelly:]

He gives the tough ones to you.

[Richard L. Thomas:]

Yes. Thank you. It's a tough question to answer because I think it honestly it depends on the individual competitor certainly we observe this and we try to anticipate real competition is going to do what I say that the goals would behaviors of all of them are similar, I'm not sure I will do that for but we're the leader in the business and what we want to do is ensure that we want to do is I am sure that we run to the think that as we're sized today we're good shape to do that going forward over the course of this year, we're not going to run orders that our customers don't have to give us. But, increasingly we are finding other ways to compete and will talk about that as the year progress, but we are improving our supply chains, we are consolidating our brands, we're working on network optimization and various supply chain initiatives. So there are other variable here besides costs and we continue to seek and find way to differentiate yourselves from our competition.

[Daniel Buron:]

Okay, Mark the second leg of your question, you are right, looking at that Page 25 there's an increase. What are currently redoing that, those plants where or maintenance shut down plant. I think the Q1 number is probably not far from what going happen, there is cold shut down that will be, that will take place at our Quévillon [ph] mill. Cold shut down is a total shutdown of the mill with more work, something that you do every 4 to 5 years and so that going happen in Q1, with Camaro's [ph] mill that will make its annual shut down in Q1. So I think the message for the time being in the that slide is Q1 will be higher maintenance costs than the Q4 was. But we are with Marvin and the team reviewing the rest of the year and will come back with a revised schedule as always at Q1 earning call.

[Unidentified Analyst:]

Okay, that's helpful, again may not like the increase in the maintenance costs. I do appreciate the disclosures.

[Unidentified Company Representative:]

Thank you.

[Pascal Bossé:]

Michelle we are running little more than an hour. So maybe we have time for our last question.

[Operator:]

Thank you. Your last question will come from Don Roberts of CIBC World Markets. Please go ahead.

[Don Roberts:]

Thank you, real quick. Could you just clarify to the uncoated freesheet long-term growth of 1% to 2% you have for North American and global there?

[Unidentified Company Representative:]

I'm sorry it's 1% to 2% decline.

[Don Roberts:]

Yes. Okay. But, North America, that's okay, so that's totally North America, 2% to 3% global growth.

[Unidentified Company Representative:]

Sorry.

[Don Roberts:]

2% to 3% global growth.

[Unidentified Company Representative:]

What I am seeing is closer to 2.

[Don Roberts:]

Okay. And if can just one last one, how much pressure you folks seeing on the fiber cost side specially from the Bio-Energy sector end competition end, especially with regard to your southern mills?

[Unidentified Company Representative:]

Okay, Marvin will take that question.

[Marvin D. Cooper:]

No, I don't think that a factor at all the Bio-mass energy thing hasn't cranked up in a significantly degree.

[Unidentified Analyst:]

Okay, great.

[Unidentified Company Representative:]

In the south the issues are more related to availability of residual chips on the markets rate.

[Unidentified Analyst:]

Okay, perhaps I miss it but, yesterday we had seen releasing a green papers any direct implication do you see for your investments in the province?

[Raymond Royer:]

No if you would recall the announcement that was made is really to take effect in about five years and my goal is really to address the issue of the lumbar sector this year. So I am not too much concerned about this announcement.

[Unidentified Analyst:]

Okay. Thanks very much.

[Pascal Bossé:]

Thank you. Well thank you all for joining us today, and we will look forward to report first quarter result on the 6th and we look forward to talking with you then. Have good day.

[Unidentified Company Representative:]

Thank You.

[Unidentified Company Representative:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your lines, and have a great day.