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Domtar results stung by conversion costs of U.S. mill

Domtar CEO John Williams

SHAUN BEST/REUTERS

Reconfiguration of a Domtar Corp. paper mill in the U.S. to produce lighter speciality grades was the right move despite challenges at the mill that marred first-quarter results, chief executive officer John Williams said Thursday.

"We knew that there were risks to our production as we completed the largest conversion of a commodity mill to specialty paper grades," Mr. Williams said during a conference call.

"As we move up the learning curve and the mill is receiving new grades, we pave the way for better uptime for the balance of the year," he said of the mill in Marlboro, S.C.

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Domtar said Thursday that its adjusted earnings were $33-million (U.S.), or 95 cents per share, down from $61-million, or $1.65 a share, a year earlier.

The weak results caused shares of Domtar to fall more than 9 per cent, or $7.07 (Canadian), to $69.21 in afternoon trading Thursday on the Toronto Stock Exchange.

The adjusted profit was 47 cents (U.S.) short of a consensus estimate of $1.42 per share. Net income before adjustments, which is less closely watched by analysts, was also below the consensus estimate of $1.33 per share.

Domtar's net income for the quarter was $45-million, or $1.29 per share, about 60 per cent above the year-earlier profit of $28-million, or 76 cents per share. Both quarters in each year had several unusual items.

Sales for the three months ended March 31 were $1.345-billion, which was slightly better than estimates.

Conversion problems cost the forest products company $9-million as it lost 16,000 tonnes of production.

"It was substantial and disappointing," Mr. Williams told analysts, adding that output should return to normal in coming quarters.

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Domtar is spending about $30-million to convert the Marlboro mill after winning a large contract last year to supply specialty producer Appleton Papers.

The change removes up to 350,000 tonnes of annual commodity paper production from the market. Demand for this paper is declining three to four per cent annually, in part due to a shift to digital communications.

Meanwhile, Domtar's outlook calls for moderate improvements in pricing for pulp and steady shipments. Paper volumes are expected to be similar to the first quarter in the near term.

Domtar shipped 828,000 tons of paper in the first quarter, down from 870,000 tons a year earlier. Pulp shipments fell to 372,000 air-dried metric tons from 389,000.

Paul Quinn of RBC Capital Markets agreed the results were disappointing.

"While management expects North American paper demand to continue to decline, Domtar should fair better than the industry average," he wrote in a research note.

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Adjusted pre-tax earnings (EBITDA) was $170-million, down from $210-million a year ago and $20-million short of analyst forecasts.

Domtar's pulp and paper segment's EBITDA decreased 25 per cent to $153-million, from $203-million a year earlier.

The segment was affected by higher use of energy and chemicals, and fibre, along with lower average paper prices.

The personal care business earned $19-million on $111-million of sales, compared with $12-million on $470-million of sales a year earlier.

Domtar's net debt was $612-million.

Meanwhile, the company said it will remain "aggressive" in repurchasing its own shares.

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