July 31, 2009 / 1:10 PM / 9 years ago

RPT-PREVIEW-Domtar likely to post Q2 loss, but U.S. law may help

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* What: Domtar Q2 Results

* When: Tuesday, Aug. 4

* Street sees Q2 loss, benefits from U.S. tax credits By Isheeta Sanghi

BANGALORE, July 31 (Reuters) - Domtar Corp (UFS.TO) (UFS.N) is expected to continue reporting losses next week, but analysts are hoping that the forestry firm will reap rewards from a U.S. tax break.

A loophole in a federal law, intended to encourage the use of biofuels blended with fossil fuels, has helped the forestry industry fill its coffers with large tax rebates, and Domtar is accordingly expected to show improvements in its results. [ID:nN24434222]

Analysts on average are expecting Domtar, which mainly sells office paper, to post a loss of 74 Canadian cents a share, excluding items, in the second quarter, according to Reuters Estimates.

“I think there is a chance our number is too pessimistic, it would not surprise me if they beat our numbers,” Credit Suisse analyst Chip Dillon said by phone.

“From a cash flow perspective, debt will come down,” BMO Capital Markets Analyst Stephen Atkinson said by phone, adding that it will be a result of the alternative fuel tax credit.

As of March 31, Domtar had a total long-term debt of C$2.19 billion.

However, analysts said Domtar will be stung by exchange rates, since it has a large presence in the United States and the Canadian dollar has steadily been gaining in value against the U.S. dollar.

Out of the 11 pulp mills the company owns, 9 are located in the U.S, while the other two are in Canada.


In May, Chief Executive John Williams said he expected “pulp prices to stabilize in the second quarter, while some improvements on the softwood side (were expected as well).”

“While volumes remain weak, pricing in Domtar’s largest business, uncoated free sheet appears to be bottoming,” Deutsche Bank analyst Mark Wilde wrote in a note to clients dated July 28.

Domtar’s number two commodity, market pulp, has seen a pick up in global demand as well as prices, Wilde added.

Pressures for Domtar, including lower volumes, higher input costs and lower pulp and paper prices, seem to be abating, the analyst said.

“I don’t think Domtar will do too badly, they’ll continue to have GAAP losses, but they should remain cash flow positive, and that’s what really matters,” Credit Suisse’s Dillon said.


The company, which operates across three segments segments — paper, pulp and wood — saw overall sales drop 22 percent in the first quarter, compared with the same period last year as a result of lower shipments in pulp and paper.

Pulp shipments fell nearly 10 percent to 314,000 air dried metric tons — a unit of weight used for pulp pricing — in the first quarter resulting from weak global demand, and lower selling prices.

The recent increase in pulp prices in June, however, was driven by strong demand in China, and was further supported by currency fluctuations, Soleil Securities analyst Anna Torma said.

“China has historically stepped into the market and been an aggressive buyer when prices have been low and then stepped down as it rebuilds its inventory, so at this point I think we need to see some sustained improvement in demand to see pulp pricing momentum,” Torma added.

Torma remains cautious regarding the sustainability of Chinese demand over the summer and expects the announced July price increase to be more challenging. “I don’t think prices in pulp are going to continue to go up, I think they’re going to roll over a little bit because demand we’ve seen (from China) is unsustainable in the very near-term,” Credit Suisse analyst Dillon added.

Shares of the Montreal-based company, which have gained more than 5 percent in value over the last one month, closed at C$20.79 Thursday on the Toronto Stock Exchange. (Editing by Jarshad Kakkrakandy)

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