Domtar Q1 2009 Earnings Call Transcript

May. 1.09 | About: Domtar Corporation (UFS)

Domtar Corp. (NYSE:UFS)

Q1 2009 Earnings Call

May 01, 2009 10:00 AM ET

Executives

Pascal Bossé - Director, Investor Relations

John D. Williams - President and Chief Executive Officer

Daniel Buron - Senior Vice-President and Chief Financial Officer

Richard L. Thomas - Senior Vice-President, Sales and Marketing

Michael Edwards - Senior Vice-President, Pulp and Paper Manufacturing

Analysts

George Staphos - Bank of America/ Merrill Lynch

Mark Connelly - Sterne Agee

Rick Skidmore - Goldman Sachs

Mark Wilde - Deutsche Bank

Claudia Shank Hueston - JPMorgan

Chip Dillon - Credit Suisse

Stephen Atkinson - BMO Capital Markets

Steven Chercover - D.A. Davidson

Jonathan Lethbridge - CIBC World Markets

Dax Vlassis - Gates Capital Management

Paul Quinn - RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to Domtar's First Quarter 2009 Financial Results 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).

As a reminder, note that this conference is being recorded today May 1, 2009. At this time, I would like to turn the meeting over to Mr. Pascal Bossé. Please go ahead, sir.

Pascal Bossé

Thank you, Silvia, and good morning, everyone and welcome to our first quarter 2009 earnings call. Joining me today are President and CEO, John Williams, and Chief Financial Officer, Daniel Buron.

Management will begin with formal remarks, after which we'll take questions. During the call, references will be made to supporting slides, and you can find this presentation in the Investors section of the website.

As a reminder, all statements made during the call that are not based on historical facts, are forward-looking statements, subject to number of risks and uncertainties. I invite you to review Domtar's filings with the Securities Commissions for a listing of those.

And finally, certain non-U.S. GAAP financial measures will be presented and discussed. And you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release, as well as on our website.

So, with no further adieu, I'll turn the call over to our CEO. John?

John D. Williams

Thank you, Pascal, and good morning to everyone. As we discussed on our February earnings call, the first quarter was shaping up to be just as demanding as the fourth quarter '08. And things turned out to be as challenging as expected.

The recession, both here and abroad, has precipitated demand declines in most of our end use markets, with a severe impact on Domtar's profitability.

However, our people responded well, with a sense of urgency, to act upon three specific areas to quickly improve cash flow generation.

One, reduce discretionary spending. Two, reduce procurement costs. And three, continue the balancing of production with demand.

The measures taken in these three areas to extract costs and improve manufacturing processes to run our assets more efficiently, have helped us churn out some free cash flow in this quarter in a weak demand environment.

I will discuss this and the priorities of the months ahead in a minute. But, time now for the financial review of the quarter. And for that, I'll turn the call over to our CFO, Daniel.

Daniel Buron

Thank you, John, and good morning, everyone. Let's start with the highlights on slide four.

Domtar reported today a net loss of $0.09 per share for the first quarter, compared to a net loss of $1.31 per share in the fourth quarter. And net earnings of $0.07 per share in the first quarter of 2008.

Adjusting for impairment charges and other item, our loss was $0.07 per share in the first quarter, compared to a loss of $0.04 per share in the fourth quarter.

Cash flow from operating activities amounted to $57 million and capital expenditures to $24 million.

Therefore, free cash flow amounted to $33 million this quarter. Our results were negatively affected by a further decline in pulp prices of over $100 per metric ton, and inventory write-down in pulp amounting to $15 million. And lower volumes of paper and pulp that led to lack of order downtime slowdown of 185,000 tons in paper, and 75,000 metric tons in pulp.

Given current hardwood pulp prices and high inventory levels, we've announced the infinite closure of the Woodland pulp mill in Maine, effective May 5.

To further reduce our pulp inventory, we've also announced a 10 week shut at our Dryden pulp mill starting in April.

Finally, in this difficult domain (ph) environment, we successfully reduced paper inventories by 43,000 tons from the year-end levels.

Turning to sequential variation in earnings on slide five. Sales were $163 million lower than fourth quarter, mostly due to lower volumes of papers and pulp, and a decline in prices for pulp.

Cost of sales was reduced by $131 million due to lower production and input cost, favorable foreign exchange, and lower maintenance costs.

Depreciation and amortization decreased by $11 million, mostly due to the asset impairments taken in the fourth quarter last year.

SG&A decreased $7 million compared to Q4, mostly as a result of our effort to reduce discretionary spending.

Following the permanent closure of our number five paper machine at Plymouth, North Carolina in late February, we recorded a charge of $35 million in the quarter related to asset write-downs.

The closure and restructuring costs of $24 million in the quarter are related to the Plymouth and Dryden organization.

Interest expense was $31 million, $3 million lower than the fourth quarter, when factoring in the gain related to the debt repurchase recorded in the fourth quarter.

Finally, our operation in Canada generated a pre-tax book loss. And there was no income tax recovery recorded due to a valuation allowance taken on Canadian deferred income tax assets. This valuation allowance negatively impacted our results by $0.02 in the quarter.

Turning to our earnings reconciliation. We reported a net loss of $45 million or $0.09 per share. This includes the following after-tax items. A refundable excise tax credit for the production and use of alternative bio fuel mixture of $28 million. Write-down of fixed assets of $21 million. And closure and restructuring costs of $14 million. Therefore, excluding these items, we had a loss of $38 million or $0.07 per share.

Cash flow statement on slide seven. Cash flows provided from operating activities amounted to $57 million in the first quarter and capital expenditure amounted to $24 million or 24% of depreciation.

Turning the sequential waterfall on slide eight. When compared to the fourth quarter, EBITDA was reduced by lower prices totaling $47 million, $45 million of which was for pulp, including the inventory reevaluation.

Lower shipments for paper and pulp of $19 million and higher energy, fiber, and chemical usage of $15 million, mostly due to seasonality. These sectors were partially offset by favorable input costs of $19 million, favorable other costs of $12 million, mostly due to lower plant maintenance costs in the quarter, and favorable foreign exchange rate of $11 million, including a $7 million favorable variation in net income.

Turning to our segment of Papers on slide nine. Sales declined 11% from the fourth quarter to $1.1 billion.

Operating income before item was $5 million on the D&A charge of $94 million. EBITDA before item was $99 million, compared to a $133 million in Q4. The sequential decline in EBITDA was due to lower selling prices for pulp, lower paper and pulp shipments, higher energy, fiber and chemical usage, and higher costs related to chemicals.

These were mitigated by lower costs related to maintenance, lower unit costs for freight, energy and fiber, and a favorable exchange rate including hedging.

Slide 11. Shipments for both paper and pulp were lower sequentially, 72,000 ton or 7% lower for paper, and 39,000 metric tons or 11% lower for pulp.

We continue to pursue our strategy with regards to matching our production and customer demand by taking a 185,000 tons of downtime and slowdown in paper, and 75,000 metric tons in pulp.

As I mentioned earlier, while inventory levels in paper were significantly reduced, inventory levels in pulp increased by 49,000 metric tons from the fourth quarter, which was the third consecutive quarter with pulp inventory increases.

This trend will begin to reverse in the second quarter, following the 10 week closure for our Dryden mill, and the infinite closure of our Woodland mill.

Our transactions prices for copy were essentially flat from the fourth quarter, while asset prices were $33 lower.

Continued weakness in pulp markets, led to further decreases in prices with sequential declines of between $91 per metric ton for softwood, and $132 per metric ton for hardwood pulp.

We expect pulp prices to stabilize in the second quarter, while some improvements on the softwood side. Average prices in Q2 should nevertheless be lower than average prices experienced in Q1.

Turning to our maintenance schedule for 2009. Our planned maintenance costs are expected to increase sequentially to approximately $22 million, yet a bit lower than last year, due to factors including mill closures.

Moving to our Merchants business on slide 15. Sales declined 5% from the fourth quarter, mostly due to lower deliveries.

The segment had an operating income of $2 million, unchanged from the fourth quarter on a D&A charge of $1 million.

The Wood business on slide 16. Sales declined 27% from the fourth quarter. Profitability deteriorated by $7 million from the fourth quarter, due to lower selling prices and increase in bad debt expense, and higher energy costs due to seasonality. This was partially offset by a favorable exchange rate.

A few words on liquidity and capital, before ending the call back to John. We continue to have a solid liquidity position, with over $550 million available on our revolver, $55 million on our securitization program, and cash on hand at the end of quarter that stood at $145 million.

Finally, with regards to excise tax rate that's related to the production and use of alternative bio fuels in our mill. Domtar was notified by the IRS in late March that its registration as an alternative fuel mixture has been approved.

We began mixing and consuming alternative fuels midway in the quarter, at one of our mills before rolling the program to all of our U.S. kraft mills.

The $46 million recorded in our financial statement in Q1, represent approximately 40% of our best estimates of what the potential quarterly run rate could be. This amount was in our receivables at the end of the question, and we received the payment since then.

So, this concludes the financial review. And with that, I will turn the call back to John.

John D. Williams

Thank you, Daniel. Like several of our peers, we encountered an unprecedented decline this quarter in market activity and demand for our products.

The steep fallout in pulp prices of the past months, and the severe demand decline in fine papers, have significantly altered our profitability. And we have to find opportunities to improve our earnings profile.

We announced further measures in the quarter that will lead to cost structure improvements in cash savings, to deal with the impact of the economic contraction.

On discretionary spending, in addition to measures such as the salary and hiring freeze we announced early in the year, we announced changes to our management structure, intended to streamline the organization, reduce costs, and most important to me, assure accountability.

I am confident with this downsized management team that will allow us to quickly fix any current issues we face, whilst we can also seize development opportunities.

The work on reducing procurement costs is underway, with some early signs of success. But, much more is needed. And I have asked our teams to look for further input cost reductions over the next months.

On the balancing of our production with customer demand, this quarter's been very busy and we've announced measures to help reduce fixed costs.

Better order entry levels, significantly reduced inventories, and the closure of paper machine number five at Plymouth in late February, will contribute to further reducing downtime costs for the second quarter.

In pulp, we took a total of 75,000 metric tons of downtime and slowdowns in the quarter. And to reduce this number, we are indefinitely closing our mill in Woodland, Maine, and taking 10 weeks of downtime at our Dryden, Ontario mill.

All these actions, and the ones to come, are supported by our new incentive plan recently put in place, to compensate for accomplishments on the near term objectives.

Indeed to better align the compensation and mobilize our troops, we made adjustments to the short-term incentive plan for '09 that will now be based on our EBITDA target, SG&A, and a CapEx reduction.

And as in 2008, a targeted health and safety incident rate reduction, as the business remained very committed to health and safety.

We also have an opportunity to realize the hidden value of some non-core assets. But, we have to set ourselves clear objectives, with regards to their monetization, in order to build for the future.

We own several sites, including forestlands, hydro assets, lumber operations and former idle mills that are critical to the core business going forward.

It's not my intention to provide a precise listing of those. But, our objective is to generate a $150 from asset sales within a 12 month timeframe.

So to summarize, we're pulling the right levers to manage the short-term uncertainty, while keeping long-term value creation in our minds.

Our EBITDA margin has slipped to another 200 basis points this quarter, which I find disappointing and obviously, unacceptable.

Our efforts to right size our system are not translating at an improved financial performance. But, pricing for our papers is holding. It is essential that we retain the benefits of our efforts to reduce discretionary spending and procurement costs, in order to retain margins and to improve our earnings' profile.

Now, moving on to our outlook, we expect the business environment to remain weak in all our markets.

Global demand for bleached pulp further declined in the quarter, with our prices bearing the impact of global oversupply and a record days of inventory.

The outlook for market pulp consumption remains weak, and China may play a key role as we have seen signs of stabilizing prices in certain Asian markets.

For Papers, the rapid decline of the past months in volumes has been abating. And we will continue to manage inventory and keep the same strategy of balancing production to meet the customer demand.

Long term, we're well-positioned to benefit once markets improves, with our vertically integrated operations, manufacturing footprint and a strong financial position. So, thank you. And I'll turn it back to Pascal.

Pascal Bossé

Thank you, John. So, we were now ready to open up the floor for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question will be from George Staphos of Bank of America/ Merrill Lynch.

George Staphos - Bank of America/ Merrill Lynch

Thanks. Hi, everyone. Good morning.

John Williams

Good morning, George.

Daniel Buron

Good morning, George.

George Staphos - Bank of America/ Merrill Lynch

I guess, first question I had was related to copy paper pricing, which held in well, albeit better than your model, and better than what we've seen out of publication.

If you can remind us is that related to the effect of contracts relative to your mix of business? If so, over time, should we expect contract to follow where the publish -- publication prices are? And then, I had a couple of follow-ons.

John Williams

It's not really contract based at the moment, certainly. And a number of trade classes George, I mean the price is holding. So, we don't have an expectation. But, we're going to see dramatic erosion there, or very much erosion over time. Maybe I just hand over Dick on that. So Dick can you give a bit more color to that question.

Richard Thomas

Sure, happy too John. Thanks George.

George Staphos - Bank of America/ Merrill Lynch

Hi Dick.

Richard Thomas

We touched on this actually in the February call. And I think one of the things we're all trying to deal with here is, how anecdotal some of these third-party published reports are.

And our business is not contractual, certainly not in cut size. It is a transactional. Although, we've got committed volumes and volumes committed back to us in turn. These were not pricing contracts per se.

So, we see the pricing as very stable. There is a lot of discussion out there whether its imports or school bids, or whatever it may be. But, it's a lot more discussion than there is real volume there. So, we see things as steady. They were through the quarter. And honestly, we feel pretty comfortable.

George Staphos - Bank of America/ Merrill Lynch

So Dick, one another question related then. I think I know what your answer would be. In some cases we see prices offshore, about $50 or more of per equivalent ton, lower than what we see in United States, North America. And obviously, shifting gets into play as well here. You would do that as relatively unimportant at this juncture, in terms of what tone will be for pricing going forward?

Richard Thomas

You say offshore prices, you mean pricing...

George Staphos - Bank of America/ Merrill Lynch

For example, prices over in Europe or equivalent cut size, or for that matter to pulp pricing. I sense a little bit of different story.

Richard Thomas

Yeah, I think there are differences certainly around the globe. I think there certainly there is good deal in Europe, about what's happened to the demand picture there, and how the mills are responding that.

So, my sense is that there is an adjustment period going on there, in terms of demand and what's happened there as well as pricing. So, I guess, I'd characterize it is as significantly less stable than what we see here.

George Staphos - Bank of America/ Merrill Lynch

Okay. And the last one and I'll turn it over. If we then -- if we can you can count it on in terms of second quarter bridge. How you're thinking about things. Should we expect that the net of input cost changes into the second quarter relative to the first quarter, netted with pricing trends sounds like cut sizes is flat. Sounds like you might have a lower average price for pulp in 2Q versus 1, if I heard you right. Will that all be flat to positive to earnings for the quarter, do you think or flat to negative sequentially, do you think? Thanks guys.

Daniel Buron

George, Daniel Buron speaking here. There is a lot of moving parts. So, I think you've touched a few. We believe that the price of paper is stable as we speak right now.

Pulp, given the trend in Q1, even if it's more stable in Q2 we should see an average that will be a little bit lower in Q2 versus Q1. And then after that, there is input costs.

We're going to have more maintenance in Q2. You have a slide in the slide data that we've given you, the precise number there. And I think we've reached a peak in terms of chemical and fiber costs, late Q4 early Q1. So, we should see some improvement in the input costs in the coming quarters.

George Staphos - Bank of America/ Merrill Lynch

Okay. Well, I'll turn over.

Operator

Thank you. Our next question will be from Mark Connelly of Sterne Agee. Please go ahead.

l

Mark Connelly - Sterne Agee

Thank you, John.

John Williams

Good morning, Mark.

Mark Connelly - Sterne Agee

Thank you. Good morning. Two questions. First, when we look back over the last couple of years, when pulp prices were rising, your less commodity focused machines were just ripping. And the industry was watching the big companies taking share away from the small companies.

How much has that reversed with pulp prices coming down? Are the smaller, less integrated players that survived taking business back now?

John Williams

Well, we don't -- if you look at market share Mark, if look at what happened in the first quarter, if you take our shipments versus total market shipments, we're right on 34%, which is pretty much where we've been for quite some.

Mark Connelly - Sterne Agee

Yeah.

John Williams

If I'm being truthful with you, there is a lot of noise around. And some of that noise is operating, as Dick said, in certain channels. But, we don't see share erosion in totality at this point.

Mark Connelly - Sterne Agee

But, I guess what I'm trying to get at is whether the commodity grades are holding up better or worse, than the less commodity markets, because you really did see a big benefit when pulp prices were rising against the small non integrateds.

John Williams

Let me have Dick talk about that, if I might.

Richard Thomas

Sure the -- I think the way you, the context in which you asked the question Mark I think is right on target, because really what you've got in some of the specialty market segments is a lot of partially or non-integrated mills competing with one another.

So therefore, you've got the possibility of cost reduction being pushed through. And we do see some of that in these value-added and even a bit in the technical grades.

In the commodities, of course, it's much less of a cut size offset. And your OpEx is much less of a factor.

So I think what you're seeing in results is kind of what you'd expect. There is some cost effect on the very tail-end of the curve, on the quartile, three four (ph) of products, and almost none, in the quartile one and two.

John Williams

That answers your question, Mark?

Mark Connelly - Sterne Agee

Yeah, that's very helpful. And just a question related. Your Merchant segment held up reasonably well. And I'm trying to get a sense of just how important that was to these results and to holding on to whatever volume you were able to hold on to?

John Williams

Let me just try and answer that, if I understand you right. I mean, we took quite a lot of costs out of our Merchant business, in terms of a head count reduction. So, we did reduce our cost base.

And that -- our Merchant also helps us, support a number of our key accounts, particularly some of the institutions, where they are the specifier, but the Merchant businesses we like, is the fulfillment piece. And some of that held up reasonably well.

Daniel Buron

And I might just add on that. I think the percentage of paper produced by Domtar sold in our Merchant assets moved from one quarter to the other. So, that's fairly stable.

Mark Connelly - Sterne Agee

Okay. Very good. Thank you.

Operator

Thank you. Our next question will be from Richard Skidmore of Goldman Sachs. Please go ahead.

Rick Skidmore - Goldman Sachs

Good morning, John and Daniel.

John Williams

Richard, good morning.

Daniel Buron

Good morning.

Rick Skidmore - Goldman Sachs

Just a couple of questions John. Just like to follow-up if I might on the -- I think its slide 18, the improved profitability. Can you just talk about the cost reduction efforts, perhaps quantify what you anticipate to see, and maybe what the timing might be, and how much was in the first quarter?

John Williams

Yeah, I can't really quantify. But, I can tell you our objective. We buy about 2.5 to $3 billion worth of stock, of which about a $1 billion is fiber. I think it's only in the procurement piece, certainly not in the divestment piece, sort of the sales piece.

Daniel Buron

Correct.

John Williams

And what we think is that quarter one was a peak, or certainly Jan-Feb was a peak. Maybe some of it came off a bit in March. And we're seeing some fairly solid reductions now in some of our chemical costs. I mean, we're beginning to see quite a dramatic decline.

I am really not happy giving you a number, if you don't mind. But, certainly set an objective across that spend level. We'd like to see, I mean, 3 to 5% maybe coming out of that, if we could achieve it.

I think what we're going to see year-to-year is almost a reversal of what we saw in 2008. So, instead of the second half ramp up in 2008 on the cost side, we may see something slightly different. Does that makes sense?

Rick Skidmore - Goldman Sachs

Sure. And so John, is this more, this reducing procurement costs is just a more of function of just pricing of the underlying commodities, or is there something you're doing differently there?

John Williams

Well, we've got slightly -- I mean, I guess, we're trying to chase it rather than follow it, if that make sense. So, I think we're a bit more aggressive than we've been historically.

Rick Skidmore - Goldman Sachs

Okay.

John Williams

And in addition of course, we've got a lot of work going on at the mill level, which is really about usage.

Rick Skidmore - Goldman Sachs

Okay.

John Williams

Because, of course, it's not just about procurement costs, it's also about usage. So, we have now a plan per mill actually, which we reviewed with the guys, a couple of weeks ago. Looking at how they're going to reduce their cost base, and how are they going to reduce usage. So, we've been quite aggressive about it.

Rick Skidmore - Goldman Sachs

Okay.

Daniel Buron

If I may add, I think you can see also on the Q1 result, the SG&A level that is significantly lower than it was last year.

So that's also a clear target. I think guidance last year was a little bit north of $100 million per quarter. And this quarter it's 83. And I think this is more or less good proxy.

I think times four plus few millions, will most likely be the result of this year on the SG&A line.

Rick Skidmore - Goldman Sachs

Okay. And then, if I might just on the monetization of the non-core assets. Is the generating a 150 million, is that just on assuming that you sell some of those assets in the next 12 months? Or is that what you had expected all of the assets that you're going to sell or generate?

John Williams

No, it's assuming that we sell some. And as you know, we have tail of old facilities that we need to find something to do with. And some of that work is beginning to come to fruition.

And obviously we own about 900,000 acres of forest land. And then, we have some power assets. So, that's a realization value from selling some. Of course, things move around. You're not sure what's going to go when, rather than the total value, if that helps?

Rick Skidmore - Goldman Sachs

Yeah, that's great. And then, maybe just a specific question for Daniel. Can you just talk to why there was a 90 million draw down on the revolver in the quarter?

Daniel Buron

It's just a question of timing, Rick. We -- the cash generation was heavier towards the end of the quarter, and we needed to draw a little bit in the month of January and February. And also in current market environment having some cash in the bank, you're not to afraid of carrying the negative carry, or the difference in interest rate. And you'd like to see your bank giving you a little bit of money, so that's proof that they are still there behind you.

Rick Skidmore - Goldman Sachs

Great. Thank you.

Operator

Thank you. Next question will be from Henry Burn (ph) of Sterne Agee. Please go ahead.

Unidentified Analyst

Hi. Good morning, guys.

John Williams

Good morning.

Daniel Buron

Good morning.

Unidentified Analyst

Thanks. You mentioned that your production in the Paper segment was down sequentially, yet the downtime volume was down as well. Was that all due to the Plymouth shut, or were there some other factors involved in that as well?

Daniel Buron

It's a combination of -- we've closed Dryden in Q4, end of Q4, beginning of December last year. We've closed in NT5 (ph) February. And we also draw inventory of 40,000 ton in the quarter. So, it's a combination of the three factors that explains that difference.

Unidentified Analyst

Okay. And then, given some of the moving parts in terms of the machine and mill shut. Could you give us any estimate on what you think your paper and pulp downtime will be in the second quarter?

Daniel Buron

We're actually adjusting to the demand on the regular basis. So, we've seen that obviously less time in the month of March, because NT5 (ph) was permanently closed. And as demand is evolving a little bit better I think in March and April, than it was in January, February, we're going to seeing a little bit less. But, that's something that we are adjusting based on customer demand on a regular basis.

Unidentified Analyst

Okay. And just lastly, because you mentioned in terms of conserving cash. This last quarter your CapEx budget for the year was 140 to 170 million. Any change in that at this point in time?

John Williams

I would say, the only change there is towards the lower end. It's going to be more around the 140 to 150 margin mark than it is around the 160 to 170 mark. And the reason it's not linear to the first quarter of course, is the timing of CapEx spend in these types of business they are very often at the tail-end of the year.

Unidentified Analyst

Right. And then actually, one last question related to downtime. In the EBITDA bridge, there is a negative $15 million usage variance. Is that mostly the downtime costs of the quarter?

Daniel Buron

Not. That's a comparable this is Q4. So naturally, this more the seasonally impact. I mean, the weather related consumption. And there was some issue in one or two mills, in terms of fiber consumption. There was some technical problem, at one or two pulp mills. That explained that use is different.

Unidentified Analyst

Right. Do you have an estimate on how much of the downtime in the Pulp and Paper segments cost the company in the quarter?

John Williams

Daniel, do you want to talk on that?

Daniel Buron

I think the we've that's a difficult answer, because that's a very complex spend movement that's we're doing. It's definitely costly. And one of the target of the organization is to reduce that to the minimum by closing, permanently closing asset, and trying to run full. But, at the same time, we need to keep some sort of flexibility to serve our customer. So, that's the extent of what I can share with you.

Unidentified Analyst

Okay, great. Thank you.

John Williams

Thank you.

Operator

Thank you. Our next question will be from Mark Wilde of Deutsche Bank. Please go ahead.

Mark Wilde - Deutsche Bank

Good morning.

John Williams

Interesting name for your institution, Mark. I thought it (inaudible).

Mark Wilde - Deutsche Bank

Listen, I have few questions. First Daniel, is it possible to give us some sense of the benefits from the Woodland and Plymouth closures, as we move from kind of first quarter to second quarter, and maybe even in the third quarter?

Daniel Buron

I think the Woodland closure will bring more benefit, because that's a hardwood pulp mill. Dryden, it's more an inventory issue. Obviously, with the price of even softwood pulp, Dryden is not positive on an EBIT basis, as we speak right now.

But still, bringing a little bit of cash to the organization. So, the Woodland because of the hardwood pricing, and the fact that we're shipping abroad, the pulp and adding to the transportation costs, it's cash flow negative and EBIT -- and EBITDA negative in the quarter. So, by closing that, we should have a 10 to $15 million improvement in the second and third quarter.

Mark Wilde - Deutsche Bank

Okay. And then, the release also mentioned some benefit from the Plymouth closure, as we moved through the year.

Daniel Buron

Yeah. The Plymouth closure is we're with the same amount of output in the organization. In the Paper business we have one less paper machine. So one less set of fixed costs. So, those fixed costs are disappearing. And then in that paper machine, we think that specifically we'll a let's say, between 12 and $15 million of fixed costs attached to it.

Mark Wilde - Deutsche Bank

That's a per year cost?

John Williams

Yeah.

Daniel Buron

Yeah.

Mark Wilde - Deutsche Bank

Okay. All right, that's fine. Second question, Daniel. The you're taxing the liquor credits. And there just seems to be some confusion about out there, whether these credits are actually going to be taxed. What can you tell us?

Daniel Buron

I think it's still unclear. So when in doubt you take the approach of booking it. And if its end up to be not taxable, you're going to adjust it in the future.

Our tax experts are telling us that the likelihood of it being taxable is significantly higher than not being taxable.

Mark Wilde - Deutsche Bank

Okay. And if it is taxable, what will actually pay in terms of cash taxes?

Daniel Buron

That should minimal, because we're going to use our NOL available in the U.S. to reduce cash tax to the bare minimum there.

Mark Wilde - Deutsche Bank

Okay, all right. That's helpful. It sounds like from the closure of Woodland that the -- these energy cash credits have not really changed how you think about that facility. Is that right?

John Williams

That's right, Mark.

Mark Wilde - Deutsche Bank

Yeah. Kind of related to Woodland. I guess, John I'm kind of curious, it's just kind of talk about kind of alternative uses for kind of wood-based energy. Are you getting any proposals from people who might be interested in doing different things with shutter of pulp mills going forward, whether its buy refineries or whatever?

John Williams

Absolutely. I mean, that's a key part really of finding ways to use some these facilities, where we can generate the income stream or a partnership stream with somebody going forward.

So, at the moment, we probably have three or four, I would say, proposals. They range from everything from the longer term large capital ethanol type production, to pellets to all those kinds of issues.

Mark Wilde - Deutsche Bank

Okay.

John Williams

And working at all of them.

Mark Wilde - Deutsche Bank

Is it possible for Dick Thomas to give us some sense of what you did in the white paper export business during the first quarter. Just sounds like with all that Europe is actually even weaker than North America right now. Prices are more under pressure, yet you've been exporting over to Europe. And I want to know if you're starting to back off of that at all.

Richard Thomas

Hey Mark. The answer really hasn't changed from, gee, I guess it was a couple of quarters ago we talked about this. Our cut size business, we view that as pretty strategic. And we've maintained that despite movement in prices and exchange rates and so forth.

And again, some of that is sold to customers that are customers in the U.S. as well. So, we're committed to that, supporting that volume. On the roll, it's bit of comes and goes. We tended in the last couple of years to ship more roll volume to export in the middle of year. And then less, in the fourth and first quarter. And that's a characteristic here.

We shipped a little bit of roll export in Q1, but not much.

Mark Wilde - Deutsche Bank

Okay, alright. And Dick any thoughts just on this ramp up later in the summer of purchase sal (ph), what they've been saying is that, that might be 100 to 150,000 tons coming into the North American market.

Richard Thomas

Right. In terms of -- I assume you're asking about price impact?

Mark Wilde - Deutsche Bank

Well, I'm just talking about market impact, yeah.

John Williams

Mark, may I just talk to that one briefly, because I...

Mark Wilde - Deutsche Bank

Yeah, sure.

John Williams

I think one of the issues we see is, there is no doubt there is some seeding going on at the minute, in terms of some price offers.

Mark Wilde - Deutsche Bank

Okay.

John Williams

And whether that gets better or worse, I think it's hard to judge. But, there is a judgment that you could make that actually say the prices at the moment for imports are absolutely where they would need to be perhaps, for them to feel they could place some of that tonnage.

I mean, Dick you and I feel the same way about that. And there is no doubt, of course, they would prefer to place those tons in Europe, I think if they could. But, we do have that expectation. But, I think that's at moment they're still positioning those tons to about the levels you've said actually across this marketplace.

Mark Wilde - Deutsche Bank

Okay. And finally, John I wondered just you've been in the chair for I guess four months now, four months exactly. If you just kind of step back a bit, what would you say have been the biggest surprises for you?

John Williams

Well obviously, the demand.

Mark Wilde - Deutsche Bank

Yeah, all right.

John Williams

It's alright.

Mark Wilde - Deutsche Bank

That's been all of U.S.

John Williams

Yeah exactly. I mean, there is absolutely no question. I think if you look at the business as distinct from the market, if I may, briefly.

Mark Wilde - Deutsche Bank

Yeah.

John Williams

Yeah. I've mean I've been very positively surprised by our manufacturing our operational skills and our ability to adjust. In a declining market, we have managed to reduce some inventory.

Of course, there's been some cost attached to that. So, our ability to manage our supply chain I think is pretty strong. I've visited now probably, I don't know, 15, 20 customers, maybe more. I was with the group last night, actually.

And there is no doubt the offer that Domtar makes to its customers is very positively viewed. And the relationships are positively viewed. So, I think if we can leverage all that, and a background of some more disciplined procurement and cost management, I still feel that we have a way forward to be frank, Mark.

Mark Wilde - Deutsche Bank

Yeah, okay. And finally, what would the current view be on just sort of the underlying trend in the uncoated freesheet market here in North America, in terms of demand?

John Williams

Yeah, I mean we have a view. I think, if you take where we are year-to-date, we think sort of half of it is because of the economic situation. Maybe 25% of it is various other issues, and 25% of it is as secular decline level.

I mean you can debate. Is it 3%? Is it 4%, secular decline going forward. And then the other debate I think is when we come out of recession, what happens to behavior? Is this the future? We have a view this isn't the future that actually demand will come back a bit.

Again, if you talk to the customer, but when you take the right mail for example, right now, there is just nothing happening. So, we think as we come out, it will change. We see sort of a 4% secular decline in these numbers going forward. That's what we're planning for anyway.

Mark Wilde - Deutsche Bank

Okay. As I think one of the peers out there said this was going to be -- this is going to be newsprint part two?

John Williams

Sure, this is the future. I think one of the differences there is as I see it is, there are a lot of our customers who were spending marketing dollars to drive demands, particularly the big box guys, as they build their retail business and their wholesale business.

In newsprint, and to be honest, newsprint is just a cost. Whereas we too some of big box guys, we're their milk and their six dozen eggs, comparison to the grocery stores. So, I think there are a lot of people who are going to spend money to not have that happen to this industry if that makes sense.

Mark Wilde - Deutsche Bank

All right, I'll turn it over. Thanks John.

John Williams

Thank you.

Operator

Thank you. Our next question will be from Claudia Hueston of J.P. Morgan. Please go ahead.

Claudia Hueston - JPMorgan

Thanks very much. Good morning.

Daniel Buron

Good morning.

John Williams

Good morning, Claudia.

Claudia Hueston - JPMorgan

Daniel, I think you mentioned that March looked a little bit better and April looked a little bit better in terms of uncoated freesheet trends. Could you may be just provide a little bit of color on where you're seeing this trends, and what areas might still be particularly sluggish?

John Williams

Claudia, if I -- sorry if I just may respond that one.

Claudia Hueston - JPMorgan

Yeah, certainly.

John Williams

I mean, certainly on cut size, we see it being a, we saw it a little bit better. I don't think we're wildly enthusiastic though, in terms of that.

Demand is a little more alive. But, it's in no way a rescue. I think that's why we are saying really looking forward, we believe we should be planning for a demand profile that's not that different to the one we see now. Certainly for the next weeks and months anyway.

Claudia Hueston - JPMorgan

Okay.

Unidentified Analyst

Does that answer the...

John Williams

I mean, Dick can happily give you a bit more detail. Dick, if you?

Richard Thomas

No, I think probably. We're of a mind that it certainly isn't getting worse. And there are pockets where it may be getting a bit better. But, it's really early on. So I certainly, I think John's reading it right here.

John Williams

John.

Claudia Hueston - JPMorgan

Okay. And then, just a couple of, two little ones. Could you just remind your hardwood, softwood split is following the Woodland closure.

And then the second sort of tick-tack (ph), you mentioned about debt expense, and what products could you quantify that. Thanks.

John Williams

Certainly, it's about 90, 10 we think now, softwood to hardwood, where we are today, where the assets we're running.

Daniel Buron

And the bad debt has been the lumber business, we had a customer that went bankrupt. And we've lost close to $2 million in the quarter because of that bankruptcy.

Claudia Hueston - JPMorgan

Okay, thank you.

John Williams

It was actually an agent Claudia, between us and one of our major accounts. So, we've actually kept the business, but the agent went bankrupt.

Claudia Hueston - JPMorgan

Okay.

Operator

Thank you. Our next question will be from Chip Dillon of Credit Suisse. Please go ahead.

Chip Dillon - Credit Suisse

Yes. Good morning.

John Williams

Yeah, good morning.

Chip Dillon - Credit Suisse

To make sure we are on the same page on the credit. Did I hear you correctly say that you saw the 46 million in the first quarter pre-tax be about 40% of the quarterly run rate?

Daniel Buron

Yeah.

Chip Dillon - Credit Suisse

Okay. So, we're looking at 115 per quarter, if it stays in place. And I know you talked a little bit about the taxability of it, but do you have carry for, I guess, tax loss carry backs in the U.S. that you can use to effectively not have to pay the cash tax in the near term?

Daniel Buron

We have NOLs available on the legacy downtime system. And we are going to use those to reuse the cash tax on any earnings in the U.S.

Chip Dillon - Credit Suisse

Okay. And then on Woodland, I believe the last time I saw the capacity there was about, what, 395,000 or so metric a year. And when did you actually announce your taking that mill down?

Daniel Buron

We announced in early March I think, with an effective date of May 5th.

Chip Dillon - Credit Suisse

May 5th, okay. Got you. And in terms of the uncoated freesheet closures this year, I think the only one that you've done that's indefinite so far, is Plymouth number five. Is that right?

John Williams

That one is permanent, not indefinite.

Chip Dillon - Credit Suisse

Okay, got you. Okay, thank you.

Daniel Buron

Thank you.

Operator

Thank you. Our next question will be from Stephen Atkinson of BMO. Please go ahead.

Stephen Atkinson - BMO Capital Markets

Thank you. Good morning.

John Williams

Good morning, Stephen.

Daniel Buron

Good morning.

Stephen Atkinson - BMO Capital Markets

Good morning. First one, one of the things I was reading about was the lot of the initiatives you've done at Kamloops to knock down the costs. Can you talk about that?

John Williams

Mike, do you want to cover this.

Michael Edwards

This is Mike Edwards here. What we've done there is that we renegotiated the contract with the unions. So, we've out of that we have a significant savings and manpower reductions and manpower efficiency.

Other area that we've been into is the energy savings, whereby we are moving power and taking advantage of some power opportunity and power sales opportunity in British Columbia.

Stephen Atkinson - BMO Capital Markets

And so, do you have more projects on the power side?

Michael Edwards

Not at the moment. We don't have any more projects. We are exploring other opportunities at Kamloops.

Stephen Atkinson - BMO Capital Markets

Okay. And in terms of, John you mentioned the power assets. Are you able to give us idea of ones you were talking about is...

John Williams

Not indeed Steve. But certainly, I think we have got about 65 megawatts of generation that we would talking about potentially. And obviously, it's where it's not critical if you like going forward. I mean, that's the way we see it. Does that make sense?

Stephen Atkinson - BMO Capital Markets

No, no. That's great. That quantifies it. So I appreciate it. Are you able to talk about the overall strategy on the lumber, given that -- should we say it's not being very profitable over the last couple of years?

John Williams

I think if I may, I agree to what I said in the first quarter, which is we don't see ourselves as a long-term owner. We're running the business on a, if we make a little bit, if we lose a little bit less I guess I should say, when we're running versus whether we shot, we take that choice really every month. So, we're watching it very carefully. But, we are not a long-term owner and I think we've stated that for sometime.

Stephen Atkinson - BMO Capital Markets

Yeah.

John Williams

But while we own it, we're going to run that business sensibly, not let it with the wrong Levine (ph).

Stephen Atkinson - BMO Capital Markets

Okay. And with these I know you get this question all time, with these credits coming, and how to call it, fuel tax credits. At some point would you -- will the firm consider either buying back stock, or going back to buying back debt?

Daniel Buron

I think the focus of the organization is cash flow and debt reduction. And we're going to continue to have that focus with the credits.

Stephen Atkinson - BMO Capital Markets

Okay. So, it would be more directed towards the debt for the time being?

Daniel Buron

Well, I think it's going to be more, kept on the balance sheet for the time being. And as we see the recovery in the economy, we'll decide what we're going to do with it.

Stephen Atkinson - BMO Capital Markets

Okay. And there was a $13 million what you, I feel in the front of the speech Daniel. The difference between employer pension and other post retirement expense and contribution of 13 million, can you give me some color on that one?

Daniel Buron

That's the difference between the accounting expense for pension and the contribution that we've made in the first quarter that is the amount that you're referring to.

Stephen Atkinson - BMO Capital Markets

Yeah.

Daniel Buron

You may recall that we've made some pension contributions late last year.

Stephen Atkinson - BMO Capital Markets

Yes.

Daniel Buron

And I've mentioned that some of that, or part of that will be beneficial through 2009. So, we are starting to see a little bit of that benefit.

Stephen Atkinson - BMO Capital Markets

Is it just a one-time item, or could I assume it's going to continue?

Daniel Buron

There is a pension evaluation that are being done as we speak. And also, we may have to increase our contribution. There is also a seasonality, some 4,000 pension contribution. In the U.S. side, there is a payments are due more on April and September. In Canada, it's a little bit more flatter in the entire year. So, we should see some ups and downs. But this year, we don't expect to contribute more than our pension expense in total.

Stephen Atkinson - BMO Capital Markets

Okay, okay. That's great. Thanks a lot.

Daniel Buron

Thank you.

Operator

Thank you. Our next question will be from Steven Chercover of D.A. Davidson.

Steven Chercover - D.A. Davidson

Thanks. Good morning.

John Williams

Good morning, Steve.

Steven Chercover - D.A. Davidson

Here is the first question. Given the fuel credits, would it make sense, or would it have made sense to shut Dryden instead of Woodland?

John Williams

Dryden is in the softwood side of the business, Woodland is in the hardwood side. So, that decision was made in fact, prior to our discussion were target tarts, our knowledge of the fuel tax credit. And even with the fuel tax credit, given current pricing that Dryden, the Woodland sorry, is still the right decision.

Steven Chercover - D.A. Davidson

Okay. And I guess at the end of the day if you're in the pulp business, you've got to let that driver decisions not the bio fuel. Although, I'm sure that's having an impact.

John Williams

Can I just talk to that, because I think that's a very important point. I mean, there is no doubt you even with this fuel tax credit you have to make the right market based decisions going forward, because of course, even in the most positive world at this point it ends at the end of this year. So, we will make sensible market-based decisions on those kind of asset issues.

Steven Chercover - D.A. Davidson

Yeah. All right. I hope all the participants in the paper industry, ultimately are looking at what their real long-term business is. And just following up on Mark Wilde's concern that freesheet might be newsprint version 2.0.

If one believes that basically, all print media is doomed. Do you think that direct mail might ultimately come back with a vengeance?

John Williams

Well, I mean, we were talking to -- in fact, listening to some customers yesterday on this very issue. I think at the moment, they, like a lot of people, are in lockdown mode, because certainly, the big financial institutions historically, have used direct mail for new subscribers, as opposed to communicating with that current customer base. And at the moment, financial institutions seem to be focused on the current customer base and are thinking about how they market to them.

There seems to be no doubt, if they're after new subscribers, then they still see direct mail as a very powerful tool. And if you take some aspects of this, if you take couponing, for example. Actually coupon redemptions are dramatically in the current environment.

So, I think in the end these tools will still be used. I think the debate is about the kind of level at which they'll be used, and the volume that the industry incurs. But, I don't think they're going to go away from what one hears at this point.

Steven Chercover - D.A. Davidson

Okay. Thanks very much.

Operator

Thank you. Our next question will be from Jonathan Lethbridge of CIBC World Markets.

Jonathan Lethbridge - CIBC World Markets

Good morning.

Daniel Buron

Good morning.

John Williams

Jonathan, hello.

Jonathan Lethbridge - CIBC World Markets

I just had a couple of follow-up questions on the alternative fuel tax credit. I was wondering, what's the implied operating rate of the pulp mills, given your estimate of the credits for the current year?

Daniel Buron

Not sure, I'm getting your question.

John Williams

You mean how we calculated it, based on an assumed operating rate?

Jonathan Lethbridge - CIBC World Markets

Yes. What would it imply? And maybe this question you an answer as well or make it more obvious. I'm wondering, what it does to your net market pulp position as well?

Daniel Buron

It won't change, a bit like John mentioned earlier. I think we were making sensible decisions from a market standpoint, when we were looking at pulp.

We took a lack of order downtime or slowdown in the Pulp business in the first quarter, to balance our production with customer demand. We'll do the same thing. So, we've assumed in the numbers that we've shared with you, a stable pulp environment, just as what we had witnessed in Q1. And again we'll adjust. So, that's where it is. We'll move up or down, depending on our pulp production, based on customer demand.

Jonathan Lethbridge - CIBC World Markets

Okay, fair enough. Thanks.

Operator

Thank you. Our next question will be Dax Vlassis Bank of America-Merrill Lynch. No, I'm sorry, from Gates Capital Management.

Dax Vlassis - Gates Capital Management

On the wood business, if I look at it -- the EBITDA was negative more in this quarter than the fourth quarter. And I'm just wondering, as you look ahead, is there some seasonality to that business, or would you expect -- I guess I'm wondering, would you expect losses to be more contained in the coming quarters than it was in this quarter.

John Williams

There is a bit of seasonality. One or two of the prices have furned up a bit. But demand is still quite weak. So, it might be a bit better. But, I don't think it would be step change better in the current environment, into quarter two and quarter three.

Jonathan Lethbridge - CIBC World Markets

Okay. And then, if I could just over to the tax credit for a minute. If I look at this quarter, you're saying it was 46 million pre-tax, and that was for about 40% of the quarter. The first question is why was it only 40% of the quarter.

Did you have to get it approved first and then -- or can you recoup that other 60% from the first quarter. Can you explain that?

Daniel Buron

You can claim the credit from the time you start measuring what you're doing. So, it's a question of time to get ready at the mill level. So, what we explained is that everything that could be claimed for the first quarter. And in the future, as long as the credit is still in place, we're going to be able to claim for all bio fuel we're burning in our U.S. kraft mills.

Jonathan Lethbridge - CIBC World Markets

Okay. And then if I look at, if I look at the rest of the quarter, your rates been kind of (ph) 115 million pre-tax, like somebody else mentioned. And I guess, the 46 million you did not receive, the cash I think the cash refund correct?

Daniel Buron

As of the end of the quarter, it was not received. Subsequently to quarter-end, we have received it.

Jonathan Lethbridge - CIBC World Markets

Okay. And that's the cash, that's all cash that comes into the company, the cash refund?

Daniel Buron

Yeah.

Jonathan Lethbridge - CIBC World Markets

Okay. And how does the timing of the 150 work with that pretty ratably over the quarter, from now on? Or is it after the end of the quarter you claim it?

Daniel Buron

It's relatively stable towards the entire quarter.

Jonathan Lethbridge - CIBC World Markets

Okay. And then, is this -- can you explain -- most of people are saying that you expect the credit to end after 2009. Can you explain the dynamics about that the changes as you understand in the comments that would lead you to believe that the credit will be eliminated after 2009?

Daniel Buron

There is second yellow (ph) that is December 31, 2009. So, that's why people are referring that as there is a drop that end of these year.

Jonathan Lethbridge - CIBC World Markets

Okay.

John Williams

So, it was always going to end in December 2009.

Jonathan Lethbridge - CIBC World Markets

Okay. And then, this, the 115 million, you are basically saying that the amount on net operating losses will basically allow you to realize the full benefit, even though you are accruing taxes for this, you'll be able to realize the full benefit of the 115 million for the remaining three quarters, and the 46 million for the first quarter?

Daniel Buron

The lion share of that will be -- we'll able to use NOL. Not entirely, but I mean, a big portion will be cash tax will be avoided by using NOL.

Jonathan Lethbridge - CIBC World Markets

Okay. Thank you very much.

John Williams

Thank you.

Pascal Bossé

So we are running close to an hour. So, we'll take the last question.

Operator

Certainly, sir. Our last question will come from Paul Quinn of RBC Capital Markets.

Paul Quinn - RBC Capital Markets

Hi thanks. Just two quick ones. The big portion for the NOL offset is that like greater than 75%?

Daniel Buron

I think it's, yes, I think it's going be around 75 to 80%.

Paul Quinn - RBC Capital Markets

Okay. And just on non-core asset sales, you have got 150 million just on that lumber operations, you almost had a deal going at 235 Canadian for that business back in 2007. And is that significant hydro and force land?

John Williams

Correct.

Paul Quinn - RBC Capital Markets

But, so it looks like it's only, I don't know, a third or a quarter of the, these non-core assets May close?

John Williams

I think what we're learning is, when you start doing some of this, there are a lot of twists and turns, and the timing can move on you. So, this isn't the kind of number that says, this is the realization. This is really a number that says this is what we could probably do in a 12 month period. If we can do more, we obviously would.

Paul Quinn - RBC Capital Markets

Great, thanks guys.

John Williams

Okay.

Pascal Bossé

Great. Thank you very much. Thank you to all of our participants. This concludes this call. And we will speak to you at the end of July for the second quarter results. Thank you. You all have a very good day.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for participating. And at this time we do ask that you please disconnect your lines. Have yourself a good weekend.

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