It has been about a month since the last earnings report for Domtar (UFS - Free Report) . Shares have added about 27.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Domtar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Domtar's Earnings Beat, Sales Miss Estimates in Q2
Domtar reported second-quarter 2020 adjusted earnings of 36 cents per share, as against the Zacks Consensus Estimate of a loss of 42 cents. However, the bottom-line figure plunged 36.8% from the prior-year quarter.
Including one-time items, Domtar reported net earnings per share of 34 cents in the quarter compared with the 28 cents per share recorded in the prior-year quarter.
Consolidated sales declined 23.2% year over year to $1,012 million, missing the Zacks Consensus Estimate of $1,068 million.
Consolidated adjusted operating income came in at $15 million in the June-end quarter compared with the year-ago quarter’s $57 million. This downside resulted from lower volume and unfavorable productivity.
Quarterly revenues of the Pulp and Paper segment came in at $802 million, down 27.5% year over year. Adjusted operating income for the segment was $4 million in the second quarter, down from the year-earlier reported figure of $62 million.
Sales in the Personal Care segment inched up 0.4% year over year to $229 million. The adjusted operating income for the segment came in at $18 million, up from the $5 million reported in the comparable period last year.
Balance Sheet & Cash Flow
The company had cash and cash equivalents of $124 million as of Jun 30, 2020, up from $61 million as of Dec 31, 2019. Net debt-to-total capitalization ratio was 30% as of Jun 30, 2020, up from the 22% witnessed in the comparable period last year.
Domtar generated $67 million of cash from operating activities in the second quarter compared with the $119 million reported in the year-ago quarter.
As of Jun 30, Domtar had total liquidity of approximately $906 million, consisting of $124 million of cash and $782 million available in credit facilities. The company has no near-term debt maturities.
The company is implementing a cost-reduction program to enhance cost efficiency, improve operating margin as well as maximize productivity and cash flow. Domtar targets annual run-rate cost savings of $200 million, which will be realized by the end of 2021. The cost-saving initiatives include capacity reduction and asset closures, mill-level cost savings and rightsizing support functions.
As part of the cost-saving program, Domtar will permanently close the uncoated freesheet manufacturing at the Kingsport, TN and Port Huron, MI mills, the remaining paper machine at the Ashdown, AR mill and the converting center in Ridgefields, TN. These actions will reduce the company’s annual uncoated freesheet paper capacity by approximately 721,000 short tons, and will reduce workforce of approximately 780 employees. The Kingsport and Ashdown paper machines, which have been idled since April this year, will not recommence operations. The Port Huron and Ridgefields mills are expected to shut down by the end of the first quarter of 2021.
The impact of the coronavirus pandemic on the company’s business operations is uncertain. Domtar expects bleak paper demand through the remaining of this year. Pulp markets are likely to be affected by seasonal softness, elevated global inventories and weak demand trends in the paper markets. However, Personal Care will continue to benefit from productivity gains and new customer wins. Overall raw material costs will likely be stable in the current year.
Updates Related to Mill Conversions
The company plans to enter the linerboard market with the conversion of the Kingsport, TN paper machine. Once fully operational, the mill will produce and market approximately 600,000 tons of high-quality recycled linerboard annually. The mill is expected to be a low-cost, first quartile recycled linerboard mill in North America.
Apart from this, Domtar will complete the conversion of the Ashdown, AR mill to 100% softwood and fluff pulp. The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. Following the fiberline conversion, Ashdown will be a world-class market pulp mill with annual production capacity of 775,000 tons of fluff and softwood pulp.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted 6.03% due to these changes.
Currently, Domtar has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Domtar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.