07/12/2013 10:59 EDT | Updated 09/11/2013 05:12 EDT

Domtar says results will improve after first operating loss in 4 years

MONTREAL - Domtar is warning that it will record its first operating loss in more than four years due to productivity issues caused by heavy maintenance repairs, a legal settlement and other one-time costs.

The pulp and paper producer said Friday that it expects to post an operating loss of between US$30 million and US$35 million when it reports its second-quarter results July 25.

The factors contributing to the loss include a litigation settlement charge of US$49 million, closure and restructuring costs of US$18 million and a charge of $5 million related to the impairment and writedown of property, plant and equipment.

The Montreal-based producer of pulp and fibre-based products, including various papers and adult incontinence products, also faces depreciation and amortization charges of $93 million.

"We had sub-optimal pulp productivity and unusually high costs due to significant planned maintenance and delayed restarts in our pulp mills," president and CEO John Williams said in a statement.

However, he said that by the end of the quarter, the company had made "very good progress on addressing production issues" in the pulp and paper business.

"We remain confident that we will return to more normalized productivity levels across the business by the end of the third quarter."

Domtar (TSX:UFS) said it expects sales will be US$1.312 billion, down four per cent from last year and below analyst forecasts.

It shipped 801,000 tons of paper and 344,000 metric tonnes of pulp during the quarter.

Prior to the warning, Domtar had been expected to earn 89 cents per share in adjusted profits, down from $1.61 per share a year earlier.

Domtar said adjusted EBIDTA (earnings before interest, depreciation, taxes and amortization) would be between US$130 million and US$135 million. That's down more than one-third from the US$202 million recorded a year ago and off the US$158.5 million predicted by analysts, according to those polled by Thomson Reuters.

The company's last operating loss was in the first quarter of 2009. Spokesman Pascal Bosse said this year's results are impacted by one-time factors that will reverse themselves in future quarters.

"When we report the second quarter in two weeks, I think the markets will witness the progress that we've made on addressing those productivity issues," he said.

Bosse said the company's costs increased by between $10 million and $15 million in the quarter, in part due to higher freight charge.

Paul Quinn of RBC Capital Markets said the operating loss is "disappointing" but labelled it an anomaly caused mainly by unusual challenges during the year's peak maintenance period.

"Long-term, it doesn't affect the story at all," he said from Vancouver.

Quinn noted that the results should also be helped in the coming quarters by the $272 million acquisition of Associated Hygienic Products, a U.S. maker of store-brand infant diapers.

Domtar estimates that its personal care division will see $10 million in annual savings within two years of the deal, benefiting from lower purchasing costs, lower general and administrative costs and a sharing of best practices.

Domtar also paid a $49 million legal settlement to end a dispute with George Weston Ltd. after it bought E.B. Eddy in 1998.

George Weston launched a lawsuit in 2007 seeking $110 million plus interest, or $140 million because of a mechanism in the agreement that allowed it to get compensation if Domtar was part of a subsequent transaction.

Its claim was filed soon after the US$3.3 billion merger between Domtar and Weyerhaeuser's fine paper business.

On the Toronto Stock Exchange, Domtar's shares decreased $2.17 or 3.55 per cent, at C$73.54 in Friday afternoon trading.