UPDATE 3-Domtar Q4 lags mkt; sees N.America paper demand weak

Fri Feb 4, 2011 10:36am EST

* Q4 adj EPS $2.41 vs est $3.02

* Q4 sales fall to $1.42 bln from $1.46 bln last yr

* Sees N.American paper demand declining in long term

* Shares fall 6 pct (Recasts; adds analyst comment, shares)

By Isheeta Sanghi

BANGALORE, Feb 4 (Reuters) - Domtar Corp (UFS.TO) (UFS.N) posted quarterly results below market estimates, and said it expects North American paper demand to continue to decline in the long term, sending its shares down 6 percent.

The Montreal-based company's bleak outlook comes a day after its U.S.-based rival International Paper Co (IP.N) forecast strong earnings improvement this year. [ID:nN03243479]

Domtar, which operates across paper and pulp segments, said it expects the gradual return of employment in the United States, closer to pre-recession levels, to partially offset waning paper demand.

U.S. employment probably shifted into a higher gear in January to post a fourth straight month of gains, offering more evidence of a broadening economic recovery. [ID:nN0366997]

"I think (Domtar is) just being cautious ... I think things are going to be better than that," RBC Capital Markets analyst Paul Quinn said.

Domtar said its papers segment is benefiting from a more favorable pulp product mix that should result in reduced pricing volatility, but that rising commodity prices should put pressure on input costs this year.

"They also pointed out cost increases on fiber and energy, and I could see the energy and I could see chemicals, but fiber does not seem to be moving up for anybody, so I am a bit surprised about that," analyst Quinn said.

INVESTING FOR GROWTH

Domtar, one of the largest producers of uncoated freesheet paper in North America, has been focusing on paper and specialty pulp businesses. Last year, the company sold its forestry unit to Eacom Timber Corp ETR.V.

"We have also made strategic investments in growth markets that bode well for the future, notably in fluff pulp and nanocrystalline cellulose," Chief Executive John Williams said in a statement.

Fluff pulp is bleached softwood cellulose fiber used in baby diapers, feminine hygiene products and adult incontinence products.

Domtar's October-December net profit rose to $325 million, or $7.59 a share, from $124 million, or $2.86 a share, a year earlier.

The company benefited from an income tax credit of $127 million and $100 million in reversal of Canadian deferred income tax allowance.

Excluding one-time items, Domtar, with a market value of C$3.76 billion, earned $2.41 a share.

Analysts, on average, had expected earnings of $3.02 a share, excluding items, on revenue of $1.46 billion, according to Thomson Reuters I/B/E/S.

Shares of the company, which have gained 56 percent over the past year, were down 5 percent at C$83.85 on Friday on the Toronto Stock Exchange. They touched a low of $82.51 earlier. (Reporting by Isheeta Sanghi; Editing by Maju Samuel, Unnikrishnan Nair)

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