MONTREAL — Domtar Corp., which owns a pulp mill in Kamloops, handily beat expectations even though the pulp and paper giant reported Thursday a large year-over-year drop in profits on a 1.9 per cent decrease in net sales.
The Montreal-based company said net earnings in the three months ended Sept. 30 fell to US$66 million or $1.84 per diluted share from US$117 million or $2.95 per share in the same 2011 period.
Reporting in U.S. dollars, sales revenue fell to just under $1.4 billion from $1.42 billion in the same year-earlier period.
Adjusted earnings were $67 million or $1.87 per share, compared with adjusted earnings of $123 million or $3.10 per share in the year-earlier period.
Analysts polled by Thomson Reuters had expected adjusted earnings of $1.62 per share on $1.4 billion of revenues in the quarter. Including one-time charges, it was expected to earn $1.59 per share, down from $2.95 last year.
“The third quarter was marked by weak paper demand and by cyclically low pulp prices,” president and CEO John Williams said in remarks accompanying the earnings report.
“Nevertheless, shipments for our pulp were sequentially higher, our paper pricing remained firm and paper inventories decreased by 10 per cent.”
Williams said that given the economic environment the company is continuing to manage the business “prudently,” adjusting production to customer demand through market-related downtime.
For the fourth quarter, the company said it expects paper shipment to decrease compared with the most recent period due to the normal seasonal slowdown.
“In pulp, we anticipate that prices will begin to gradually increase in the medium term due to favourable market dynamics and low softwood inventory levels,” it said in a release, adding that input costs, notably energy and chemicals, are expected to increase slightly in the fourth quarter.
Domtar (TSX:UFS) had warned last quarter that paper shipments would continue to decline with market demand and pulp markets were expected to remain challenging.
But Domtar said its personal care products business, including adult diapers, has been growing following last May’s acquisition of U.S.-based EAM Corp., which develops and supplies the core material used in feminine hygiene products, baby diapers and puppy pads.
Domtar also bought adult diaper producer Attends HealthCare last year and added the European Attends business early in 2012 in a deal worth $264 million.
That segment earned $19 million in adjusted EBITDA on $111 million of sales, compared to $18 million of profits in the prior period and $2 million of profits on just $17 million of revenues a year earlier.
Paul Quinn of RBC Capital Markets said Domtar’s results were a “bit better than expected” as the pulp and paper segment’s adjusted EBITDA increased to $193 million during the quarter, up from $184 in the second quarter, but still down from $285 million a year earlier.
“Domtar’s paper segment was impacted by higher paper and pulp shipments, lower maintenance and raw material costs. Offsetting these positives were higher lack of order downtime in papers and lower prices in both papers and pulp,” he wrote in a research note.
Domtar’s net debt at the end of the third quarter was $625 million and free cash flow was $85 million. It repurchased about 44 million shares at an average price of $75.42.
Quinn said North American uncoated freesheet markets have weakened lately, resulting in pricing declines over the last two months, ahead of a typical slowdown of activity in the fourth quarter.
“Global pulp markets appear to be strengthening, with North American NBSK list prices moved up $20 per tonne in October to $850 per tonne and producers are out with a further $20 per tonne hike for November.”
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.
It also manufactures papergrade, fluff and specialty pulp and employs 8,700 people.
Domtar earned $365 million on $5.6 billion of revenues last year.
On the Toronto Stock Exchange, Domtar’s shares rose $1.34 or 1.75 per cent at C$78.05 in morning trading.