Domtar has high hopes for 2012 as pulp markets are expected to stabilize

MONTREAL - Domtar has high hopes for 2012 as pulp markets stabilize and revenue from adult incontinence products and specialty papers help to offset a continued drop in demand for copier paper — historically its main product.

North American demand for uncoated freesheet paper — typically used for desktop printers, fax machines and copiers — is expected to fall by two to four per cent industrywide this year.

Domtar was able to mitigate all but 0.7 per cent of last year's decline and higher employment could minimize demand cuts in 2012, president and CEO John Williams said in a conference call.

"Prices for pulp are expected to continue to come under pressure in certain geographies, while market dynamics in Asia are stabilizing," Williams said.

Domtar (TSX:UFS) beat expectations in the fourth quarter even though lower prices for pulp and paper trimmed its core profits compared to last year when it recorded large tax gains.

The Montreal-based forestry company, reporting in U.S. dollars, said Friday that its net income dropped to $61 million, or $1.63 per share in the three month period ended Dec. 31. That compared to a profit $325 million, or $7.59 per share a year earlier.

The comparable quarter in 2010 benefited from one-time gains including a $127-million biofuel tax credit and a $100-million tax reversal.

Charges this year included $23 million in after-tax restructuring costs for pension plan changes in the U.S. and $9 million in impairment charges for the Lebel-sur-Quevillon mill to be sold to Fortress Paper (TSX:FTP).

Excluding items, Domtar earned $93 million or $2.49 per share, compared to $103 million or $2.41 per share.

Domtar had been expected to earn $2.11 per share in adjusted earnings in the fourth quarter, according to analysts polled by Thomson Reuters

Sales were flat at $1.37 billion.

"We delivered a strong finish to a great year," Williams told analysts.

He said the paper segment recorded another quarter of strong EBITDA margins above the 20 per cent mark, despite a seasonal slowdown.

"The current price pressure in global pulp markets led to further downward price adjustments but we do believe that a bottom is in sight."

The quarter included $10 million of pre-tax operating profit from the personal care products business, the first full period since the acquisition of Attends North America.

Domtar recently announced plans to acquire the European operations of adult incontinence product company Attends for $264 million.

The company hopes to earn $300 million to $500 million in five years from non-traditional operations including Attends.

For the full year, the company earned $365 million or $9.08 cents per share, compared to $605 million or $14 per share in 2010.

Excluding one-time items, profits fell four per cent to $452 million or $11.24 per share. That was down from $471 million or $10.90 per share last year.

It generated $1.1 billion of adjusted EBITDA and about $739 million in free cash flow.

"Pulp markets softened in the second half but demand remained steady and we retained our volume in most of the geography in which we sell. In paper we delivered strong returns and it continues to be an important portfolio to support our growth."

Domtar returned more than 73 per cent of its total free cash flow to shareholders in dividends and share buyback last year.

It repurchased $494 million worth of shares, reducing the share count by 14 per cent since 2010.

Williams said the company remains committed to rewarding its shareholders.

Paul Quinn of RBC Capital Markets said the period marked "another solid quarter for Domtar."

"Lower overall costs and higher pulp shipments more than offset by lower pulp pricing and the decline in paper shipments," he wrote in a report.

The pulp and paper producer increased its share-buyback program by $400 million to about $1 billion in December.

Domtar is the largest integrated manufacturer of uncoated freesheet paper in North America and the second largest in the world based on production capacity. It operates 10 pulp and paper mills in North America, including two in Canada, with annual production capacity of 3.9 million tonnes of uncoated freesheet paper.

It also manufactures papergrade, fluff and specialty pulp and employs 8,700 people.

On the Toronto Stock Exchange, its shares closed up 65 cents at C$90.10 in Friday trading.