Domtar Q1 results stung by conversion of U.S. mill to specialty paper grades

MONTREAL – Reconfiguration of a Domtar 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, CEO 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,” 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.

Domtar, which reports in U.S. dollars, said Thursday that its adjusted earnings were US$33 million or 95 cents per share — down from US$61 million or $1.65 a share a year earlier.

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

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

Domtar’s net income for the quarter was US$45 million or $1.29 per share, about 60 per cent above the year-earlier profit of US$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 US$1.345 billion, which was slightly better than estimates.

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

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

Domtar is spending about US$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.

Adjusted pre-tax earnings (EBITDA) was US$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 US$153 million, from $203 million a year earlier.

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

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

Domtar’s net debt was US$612 million.

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