DOMTAR CORPORATION SECOND QUARTER 2020 EARNINGS CALL August 7 th , - - PowerPoint PPT Presentation

Q2 2020 EARNINGS CALL | August 7th, 2020

(All financial information is in U.S. dollars, and all earnings per share results are diluted, unless otherwise noted.)

DOMTAR CORPORATION

SECOND QUARTER 2020 EARNINGS CALL

August 7th, 2020

Q2 2020 EARNINGS CALL | August 7th, 2020

SAFE HARBOR

All statements in this presentation about our plans, expectations and future performance, including the statements under “Outlook” and under “Strategic Initiatives,” are “forward-looking statements.” Actual results may differ materially from those suggested by these statements for a number of reasons, including the COVID-19 pandemic and the resulting decrease in paper sales and the challenges we face in maintaining manufacturing operations, changes in customer demand and pricing, changes in manufacturing costs, future acquisitions and divestitures, including facility closings, the failure to achieve our cost containment goals, costs of conversion in excess of our expectations, demand for linerboard, and the other reasons identified under “Risk Factors” in our Form 10-K for 2019 as filed with the SEC and as updated by subsequently filed Form 10-Qs. Except to the extent required by law, we expressly disclaim any obligation to update or revise these forward-looking statements to reflect new events or circumstances or otherwise. . For a summary of the risk factors, please refer to Domtar’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission and as updated by subsequently filed Form 10-Q’s. This presentation refers to non-GAAP financial information. For a reconciliation to GAAP financial measures, please refer to the investors section of the company’s website at http://www.domtar.com (Refer to Earnings in the Investor Relations section of the website).

Forward-Looking Statements Risk Factors Non-GAAP Financial Measures

Q2 2020 EARNINGS CALL | August 7th, 2020

 Implemented various actions to maintain financial flexibility and reduce

costs

 Announced several key strategic initiatives that will help best position

Domtar for the future

 Paper business impacted by significantly lower demand and

market-related downtime costs

 Strong demand in certain pulp end-use markets including tissue, towel

and hygiene

 Solid EBITDA margin quarter in Personal Care

OVERVIEW

Second Quarter 2020 Highlights

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Q2 2020 EARNINGS CALL | August 7th, 2020

2020 OUTLOOK

 Expect the overall environment to continue to be challenging  Paper demand expected to remain weak, with some recovery expected

in the third quarter and towards year-end

 Near-term pulp markets will be impacted by seasonal softness,

elevated global inventories, and weak demand trends from paper end- markets

 Personal Care will continue to benefit from the impact of new customer

wins and productivity gains

 Overall raw material costs are expected to remain stable

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Q2 2020 EARNINGS CALL | August 7th, 2020

 Net earnings of $0.34 per share, earnings before items* of $0.36  EBITDA before items* of $91 million  Cash flow from operating activities of $67 million  Capital expenditures of $40 million  Free cash flow* of $27 million  Net debt-to-total capitalization ratio* at 30% as of June 30, 2020  Total liquidity of $906 million at quarter-end

FINANCIAL HIGHLIGHTS

Second Quarter 2020

*Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website)

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Q2 2020 EARNINGS CALL | August 7th, 2020

1Q’20 2Q’20 Sales 1,278 1,012 Cost of sales 1,083 837 Depreciation and amortization 72 71 SG&A 102 93 Closure and restructuring costs

• 1

Other operating (income) loss, net 2 (4) Operating income 19 14 Interest expense, net 14 15 Non-service components of net periodic benefit cost (4) (5) Income tax expense (benefit) 3 (15) Equity loss, net of taxes 1

• Net earnings

5 19

EARNINGS STATEMENT

2Q’20 vs. 1Q’20 (in millions of dollars)

6

Lower Paper and Personal Care sales Mix of earnings, additional tax credits and CARES Act

Q2 2020 EARNINGS CALL | August 7th, 2020

CASH FLOW STATEMENT

2Q’20 vs. 2Q’19 (in millions of dollars)

2Q’19 2Q’20 Net earnings 18 19 Depreciation and amortization 74 71 Deferred income taxes and tax uncertainties 2 (13) Impairment of long-lived assets 15

• Changes in assets and liabilities

Changes in working capital 7 (9) Other 3 (1) Cash flows from operating activities 119 67 Additions to PP&E (55) (40) Proceeds from disposal of PP&E 1

• Acquisition of business, net of cash acquired
• (30)

Cash flows used for investing activities (54) (70) Dividend payments and stock repurchases (36) (25) Changes in borrowings (31)

• Other
• (1)

Cash flows used for financing activities (67) (26)

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Q2 2020 EARNINGS CALL | August 7th, 2020

EBITDA BEFORE ITEMS*

2Q’20 vs. 1Q’20 (in millions of dollars)

95 41 32 16 5 5 2 (61) (43) (1) 91

1Q'20 Maintenance Other Fixed costs Raw materials SG&A FX Volume/ mix Productivity Selling prices 2Q'20 8

*Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website) Energy: 5 Personal Care: 1 Fiber: (1) Paper: (49) Personal Care: (8) Pulp: (4) Wage subsidy: 25 Non-production agreement: 7

Q2 2020 EARNINGS CALL | August 7th, 2020

2Q’20

• vs. 1Q’20
• vs. 2Q’19

Sales $802 EBITDA before items * $66

 COVID-related restrictions, closures and the resulting impact on consumer mobility

had a significant effect on paper demand

 Made several adjustments to our mill operations to mitigate the impact of lower

paper demand including 297,000 of market downtime

 Reduced paper inventory by 22,000 tons in Q2 and 52,000 tons year-to-date.  Strong pulp demand from end-use markets such as tissue, towel & personal care

(in millions of dollars)

PULP AND PAPER SEGMENT

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*Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website)

$58 27% 22%

Q2 2020 EARNINGS CALL | August 7th, 2020

2Q’20

• vs. 1Q’20
• vs. 2Q’19

Sales $512 EBITDA before items * $59

PULP AND PAPER SEGMENT

2Q’20

• vs. 1Q’20
• vs. 2Q’19

Shipments

(manufactured, in thousands of short tons)

459 Transaction prices

(US$ / ton – net, all regions)

PAPER (in millions of dollars)

10

*Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website)

33% 36% $16 $56 $55 32% $41 34%

Q2 2020 EARNINGS CALL | August 7th, 2020

2Q’20

• vs. 1Q’20
• vs. 2Q’19

Sales

(incl. intersegment sales)

$290 EBITDA before items * $7

PULP AND PAPER SEGMENT

2Q’20

• vs. 1Q’20
• vs. 2Q’19

Shipments

(in thousands of ADMT)

427 Transaction prices

(US$ / ADMT – net, all regions)

PULP (in millions of dollars)

11

* Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website)

4% $2 $126 15%

As a result of changes in our organization structure, we have changed our segment reporting. Starting January 1, 2020, our materials business EAM, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our Personal Care segment is now presented under our Pulp and Paper segment. Prior period segment results have been restated to the new segment presentation with no significant impact on segment results.

10% $17 12% $41

Q2 2020 EARNINGS CALL | August 7th, 2020

PULP AND PAPER SEGMENT

INVENTORIES

PAPER

(Sequential variations in thousands of tons)

PULP

(Sequential variations in thousands of metric tons)

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17 34 22 15 (19) (36) (30) (22) 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19 4Q'19 1Q'20 2Q'20 17 (7) 24 (2) (9) (15) 24 (2) 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19 4Q'19 1Q'20 2Q'20

Q2 2020 EARNINGS CALL | August 7th, 2020

2Q’20

• vs. 1Q’20
• vs. 2Q’19

Sales $229 EBITDA before items* $33 Same Currency Sales (@1Q’20 FX rate) $229

• Same Currency Sales (@2Q’19 FX rate)

$232

•  Lower sequential sales due mostly to pantry loading in Q1’20

 Reduced SG&A spend, good cost control and improved operational efficiencies

supported a solid EBITDA performance

 EBITDA margin of 14.4%, which was nearly a 160 basis point improvement when

compared to Q1’20 and the highest divisional margin since Q4’15

 Good performance in several channels including scale-up of new customer wins

PERSONAL CARE SEGMENT

(in millions of dollars)

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* Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website)

$13 2% $1 14% 14%

Q2 2020 EARNINGS CALL | August 7th, 2020

106 150 124 128 135 94 124 94 1Q 2Q 3Q 4Q

2019 Actual 2020 Actual/ Estimate

(in millions of dollars)

MAINTENANCE COSTS

Total maintenance costs includes planned maintenance, maintenance over $100k outside of planned shutdown period, and day-to-day maintenance expenses in Pulp and Paper

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Q2 2020 EARNINGS CALL | August 7th, 2020

Cost reduction program

Value Drivers

Targeting $200 million in annual run-rate savings to be realized by the end of 2021 Executing on our asset conversion roadmap Personal Care strategic review Conversion of Kingsport, TN mill to high-quality recycled linerboard and medium and Ashdown, AR to 100% fluff and softwood pulp Evaluate a range of value-creating alternatives for Personal Care, including a potential sale of the business

STRATEGIC INITIATIVES

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Q2 2020 EARNINGS CALL | August 7th, 2020

COST REDUCTION HIGHLIGHTS

Improving our performance, creating synergies across our network, and rethinking our support function structures

Targeting $200 million in cost savings by Q4 2021 Expected to improve

• perating margins , free

cash flow and return on invested capital Right-sizing support functions aligned to meet the needs of the business and

• ur customers

Creating a more agile, streamlined, & efficient business that is well-positioned for long-term success Mill-level cost savings Capacity reduction and asset closures

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Q2 2020 EARNINGS CALL | August 7th, 2020

KINGSPORT, TN

Uncoated freesheet capacity: 426,000 tons

~ 600,000 tons of recycled linerboard and medium

HAWESVILLE, KY

Uncoated freesheet capacity: 596,000 tons

~ 580,000 tons of kraft linerboard

~ 320,000 tons of recycled medium

MARLBORO, SC

Uncoated freesheet capacity: 274,000 tons

~ 600,000 tons of kraft linerboard ~ 315,000 ADMT of fluff pulp

1

Option

2

Option

BUILDING A NEW BUSINESS THROUGH VALUE-CREATING INVESTMENTS

ASHDOWN, AR

Uncoated freesheet capacity: 200,000 tons

~ 775,000 tons of fluff and softwood pulp

The repurposing roadmap will continue to be implemented in response to the evolution of paper demand in North America

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Q2 2020 EARNINGS CALL | August 7th, 2020

KINGSPORT, TN ASHDOWN, AR

 600,000 tons annually of high-quality

recycled linerboard and medium

 Conversion will be completed by Q1 2023

at a cost of $300-350 million

 Strategic entry point into a growing

market with a very competitive, low-cost asset

 Less than a day’s drive from over 60

customers representing nearly 4 million tons of annual containerboard demand

 184,000 tons of additional market

softwood pulp

 Fiberline conversion to 100% softwood

will require $15-20 million of capital investments and 12-14 months to implement

 Following conversion, the mill will have

annual production capacity of 775,000 tons of fluff and softwood pulp

 Fiberline conversion necessary for an

eventual expansion into containerboard  Domtar continues to deliver

• n its commitment to make

value-creating investments in its world-class facilities

 Asset roadmap creates

significant optionality

 Potential of 2.5 million tons

• f containerboard and/or

570,000 ADMT of additional market softwood and fluff pulp

Q2 2020 EARNINGS CALL I August 7th, 2020

ASSET REPURPOSING

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Q2 2020 EARNINGS CALL | August 7th, 2020

KINGSPORT WILL BE A TOP-DECILE RECYCLED FACILITY

Manufacturing Costs K1 K1

Cumulative capacity

Thousand metric tonne per year

Kingsport as a recycled linerboard mill: Capacity: 600,000 tons, 330” width, 19 to 42 lbs Scale: The 3rd largest recycled mill and the 7th largest recycled supplier in NA Conversion CAPEX: $300M to $350M

North American linerboard 35lbs cost curve

$/ton, based on 2019/Q3 costs

Source: Afry

Q3 2019 Prices Sensitivity Prices

$/ton OCC Mixed Paper Q3 2019 Prices 54 29 Sensitivity Prices 129 84

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Q2 2020 EARNINGS CALL | August 7th, 2020 Q2 2020 EARNINGS CALL I August 7th, 2020

UNIQUE AND COMPELLING VALUE PROPOSITION FOR CUSTOMERS

 We will be a premier producer of high strength linerboard, corrugated medium, and packaging grades in North America  Offering lightweight containerboard (18#-31#) as well as have the capability to provide industry standard grades (31#-42#)  Leveraging a high-quality paper machine; originally built in 2002 with a speed of 4,500 fpm and 346” width  Targeting a diversified portfolio of independent packaging companies with a focus on end-use customers serving food, beverage and e-commerce as target markets

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Q2 2020 EARNINGS CALL | August 7th, 2020

STRATEGIC REVIEW TO DRIVE SHAREHOLDER VALUE

• Company has commenced a strategic

review process to explore a range of value- creating alternatives for its Personal Care division, which may include a sale of the business

• Review is meant to build on positive

momentum and our ongoing commitment to profitable growth and maximizing the value

• f our assets

21

Appendix

Q2 2020 EARNINGS CALL | August 7th, 2020

SUPPLEMENTAL SEGMENTED INFORMATION

PULP & PAPER SEGMENT

(In millions of dollars)

1Q’19 2Q’19 3Q’19 4Q’19 1Q’20 2Q’20 Paper 854 805 794 755

773 512 Pulp 303 301 285 272 258 290

SALES 1,157 1,106 1,079 1,027 1,031 802

Paper 156 115 139 95 100 59 Pulp 49 9 (12) (30) (34) 7

EBITDA before items* 205 124 127 65 66 66

Paper Shipments – Manufactured 736 681 672 656 679 459 Paper Shipments – Sourced from 3rd parties 23 21 25 24 22 12

Paper Shipments 759 702 697 680 701 471 Pulp Shipments 349 370 416 404 389 427

PERSONAL CARE SEGMENT

(In millions of dollars)

1Q’19 2Q’19 3Q’19 4Q’19 1Q’20 2Q’20 SALES 239 228 219 234 266 229 EBITDA before items* 21 20 24 27 34 33

CORPORATE

(In millions of dollars)

1Q’19 2Q’19 3Q’19 4Q’19 1Q’20 2Q’20 EBITDA before items* (21) (11) (4) (14) (5) (8)

23

* Non-GAAP financial measure. Refer to reconciliation available at www.domtar.com (refer to Earnings in the Investor Relations section of the website)

EBITDA between the Pulp and Paper businesses has been restated to reflect the intrasegment pulp transfer at cost within the segment. As a result of changes in our organization structure, we have changed our segment reporting. Starting January 1, 2020, our materials business EAM, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our Personal Care segment is now presented under our Pulp and Paper segment. Prior period segment results have been restated to the new segment presentation with no significant impact on segment results.