May 1, 2009 / 12:46 PM / 8 years ago

UPDATE 3-Domtar posts Q1 loss, to close pulp mill in Maine

* Says to close Woodland pulp mill indefinitely

* To idle Dryden, Ontario mill for 10 weeks

* Q1 loss before items C$0.07 vs loss view C$0.05

* Q1 results hurt by charges

* Revenue falls 22 percent to C$1.30 bln (Recasts, adds conference call details, share movement)

By Isheeta Sanghi

BANGALORE, May 1 (Reuters) - Canadian paper maker Domtar Corp UFS.TO (UFS.N) posted a first-quarter loss that was wider than market estimates, hurt by one-time charges, and said it would close a U.S. plant and idle another to cut costs and reduce inventories.

The company posted a net loss of C$45 million, or 9 Canadian cents a share, compared with earnings of C$36 million, or 7 Canadian cents a share, in the year-ago period.

“We continue to face a very hostile environment in pulp with prices reaching cyclical lows. To bring our system back in balance, we have announced the indefinite closure of our Woodland pulp mill and idled our Dryden pulp mill for 10 weeks,” Chief Executive John Williams said in a statement.

“We expect pulp prices to stabilize in the second quarter, while some improvements on the softwood side (are expected),” the company’s Chief Financial officer Daniel Buron said in a conference call with analysts.

While pulp consumption remains week, China may play a “key role” as Domtar sees signs of stabilizing prices in certain Asian markets Chief Executive John Williams said.

Annual pulp production capacity at Woodland is 398,000 tons, and production at Dryden is 319,000 tonnes, according to Domtar’s website.

“The reason why they’re shutting it (Woodland) down is because they were losing money, that’s going to help their performance, because they don’t have this money losing mill,” BMO Capital Markets analyst Stephen Atkinson said in an interview with Reuters.

Domtar said its results were hampered by a C$35 million tax related to the writedown of property, plant and equipment at its North Carolina mill, and restructuring charges of C$24 million.

“The recession both here and abroad has precipitated demand declines in most of our end-use markets with a severe impact on Domtar’s profitability,” CEO Williams said.

Williams added, however, that cash flow generation was improved by reduced discretionary spending and procurement costs, and the company’s continuing balancing of production and demand.

WEAK PAPER MARKET

“The market for paper has been week, which is why they had a loss, people are using less paper people in North America, there has been a big drop in advertising... and that’s why there was a loss but at the same time the company is generating good free cash flow,” Atkinson added.

Domtar, which currently has C$145 million cash on hand, reported cash flow of C$57 million, which represents a two-fold increase from C$27 million reported in the year-ago period.

Williams also said he sees capital expenditure in the lower end of his previous guidance, and now expects capital expenditure for the year between C$140 million and C$150 million.

Consolidated sales fell 22 percent to C$1.30 billion, the supplier of uncoated freesheet paper in North America said.

“The problem in Canada is that we have this softwood lumber agreement which keeps our wood costs pretty high, so either the Canadian dollar comes down or the wood supply has to improve in the region, for the mill to be viable,” Atkinson, who has a “outperform” rating on Domtar’s stock said.

“So it (the deal) has left Canada disadvantaged,” he added

The bulk of Domtar’s assets are now in the U.S., which is where they are making the money, said the analyst.

The tax break, which has been intended to encourage the use of biofuels, has been a big help to paper makers, who generally burn a biofuel called “black liquor” to power mills. It is a by-product obtained while processing wood to get pulp for making paper.

Domtar reported a refundable excise tax credit for the production and use of alternative biofuel mixtures of C$46 million, which is about 40 percent of the estimated future eligible alternative fuel tax credits available each quarter.

Domtar shares, which have risen more than three-fold from their year-low of C$0.65 on March 4, touched a low of C$2.00 before recouping to trade up 13 Canadian cents at C$2.28 Friday afternoon on the Toronto Stock Exchange.

For related alerts, double-click [ID:nWNAB1855] (Editing by Gopakumar Warrier, Jarshad Kakkrakandy)

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