Domtar Q3 net earnings rise to $43M from $36M; sales $1.6B, shares rise (Domtar)

MONTREAL _ Paper and wood products producer Domtar Corp. (TSX:UFS) said Wednesday that it could further cut capacity if a North American economic slowdown continues to hammer demand for coated papers.

``Given adverse economic conditions and the continued softening of demand for fine papers, we continue to take the necessary steps to manage our capacity to be the most efficient uncoated free-sheet producer in North America,'' Raymond Royer said in his last earnings conference call as Domtar's CEO.

Domtar, which is the world's second-largest maker of office paper _ the kind used in fax machines and copiers _ earned $43 million or eight cents per share in the third quarter, compared with a year-ago profit of $36 million, seven cents per share.

Sales for the quarter were $1.6 billion, slightly lower than a year ago.

While it has no plans for additional capacity curtailments, Domtar was one of three major Canadian forestry companies that announced production cuts late Tuesday.

The company is permanently closing a paper machine and converting operation in Dryden, Ont., cutting 195 jobs. That followed the closure earlier this year of its Port Edwards mill, eliminating 500 jobs.

The other announcements were from Tembec Inc. (TSX:TMB), which is temporarily curtailing production at three pulp mills in British Columbia and Quebec, and Canfor Corp. (TSX:CFP), which will cut output at Taylor Pulp mill in British Columbia from Nov. 10 to 18.

``Dryden was the last high-cost operation in our system for high volume grades and we believe we have now the lowest cost position in North America,'' Royer said.

Domtar offered a muted outlook for the current fourth quarter, forecasting flat paper prices and lower lumber prices, with volumes ``down from the third quarter across all businesses due to the weaker economy and typical seasonality.''

However, management also expects a favourable foreign exchange rate, lower energy costs, and savings from its ongoing synergy program.

``We do not expect nor are we planning for any improvement in uncoated freesheet trends in the short-term,'' Royer said told analysts.

For 2009, Royer said, ``the depth and duration of the economic slowdown and the impact this may have on office employment and demand for our products are uncertain.''

Demand has declined about five per cent this year.

Since March 2007, Domtar has reduced capacity by 700,000 tonnes of paper.

Excluding one-time items, Domtar said it earned $51 million or 10 cents per share, in the third quarter up from $32 million a year earlier. That matched analyst expectations, according to Thomson Financial.

BMO Capital Markets analyst Stephen Atkinson said the company has done well generating free cash flow to reduce its debt by being disciplined in cutting production to match customer orders.

It has also managed to introduce price increases despite lower demand.

``They are running their business prudently,'' he said in an interview.

He credited Royer with having a strategic eye that has allowed him to create a paper giant despite the recent surge of the Canadian dollar.

``He hasn't been rewarded in terms of stock price but if he didn't do what he has done then Domtar wouldn't be around.''

John Williams will replace Royer, who retires Dec. 31 after 12 years with the forestry giant.

Shares of the forestry company closed up 10 cents to $2.80, a gain of 3.7 per cent on the Toronto Stock Exchange.

``Our financial position is quite strong,'' Royer added, nothing that it has maintained its financial flexibility by reducing debt by more than 20 per cent in six quarters.

It has made progress in achieving the company's target of reducing its leverage by $400 million to $500 million, he said, adding he is confident Domtar will achieve $250 million in cost synergies from the March 2007 merger with the fine paper assets of Weyerhaeuser by year-end.

The lower value of the Canadian dollar should provide some relief for its wood products business, which posted an operating loss of $11 million in the third quarter, down $2 million as sales fell nearly 14 per cent to $76 million.

The Quebec government's decision to call an election for Dec. 8 will delay obtaining a formal allocation of wood fibre that is required before the wood division can be sold to interested parties, he said.

INDEX: BUSINESS FORESTRY MANUFACTURING