July 28, 2011 / 11:49 AM / 7 years ago

UPDATE 3-Weak pulp prices, higher input costs to squeeze Domtar

* Q2 adj EPS $2.37 vs est $2.73/shr

* Q2 net profit up 74 pct at $54 mln

* Q2 rev down 9 pct at $1.4 bln

* Shares down as much as 6 percent (Adds analyst comment, conf call details; updates share movement)

By Gowri Jayakumar

BANGALORE, July 28 (Reuters) - Paper and pulp producer Domtar Corp expects a decline in selling prices of pulp and costlier inputs to offset gains from higher paper prices in the second half of the year, sending its shares down as much as 6 percent.

One of North America’s largest producers of uncoated freesheet paper used for office and commercial printing, Domtar also cut its capital budget for the year by about 20 percent to $140-$160 million.

There would be inflation pressures from rising costs of freight, fiber and chemicals, Chief Executive John Williams said in a conference call.

The company expects demand for fluff pulp — used mainly for diapers and other personal hygiene products — and northern bleached softwood kraft (NBSK) pulp to pick up in August and September.

Demand has started softening in China, which is among the major consumers of fluff pulp.

“The Chinese economy is weak, so people are waiting to see if there will be a seasonal recovery,” Stephen Atkinson, an analyst with BMO Capital Markets, told Reuters.

The Montreal-based company earned $2.37 a share, excluding items, below analysts’ forecast of $2.73 a share, according to Thomson Reuters I/B/E/S.

The results come on the heels of larger rival International Paper’s market-topping showing on Thursday, on higher prices in packaging and paper.

Domtar’s revenue fell 9 percent to $1.4 billion, as a seasonally high level of maintenance at its mills hampered overall production.

The company expects maintenance costs — up 25 percent sequentially at $125 million — to reduce by about $7 million in the third quarter.

“There will be higher production in the coming quarter because there is less maintenance, and Domtar should get better pricing in paper,” analyst Atkinson said.

He expects these factors to offset weak prices of NBSK pulp, the paper industry’s benchmark pulp.

Shares of Montreal-based Domtar were trading down more than 5 percent at $84.22 on Thursday afternoon on the New York Stock Exchange. Its shares touched a low of C$79.14 on the Toronto Stock Exchange. (Reporting by Gowri Jayakumar in Bangalore; Editing by Prem Udaybhanu and Joyjeet Das)

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