10/24/2013 02:05 EDT | Updated 01/23/2014 06:58 EST

Domtar willing to spend more on diaper acquisitions to reach earnings target

MONTREAL - Domtar is looking to expand its personal care business and is prepared to consider larger acquisitions than it is used to if that means adding to earnings growth promised for the division by 2017, the company's chief executive said Thursday.

The Montreal-based producer of pulp and paper as well as adult incontinence and other personal care products has so far limited individual acquisitions to about $300 million. In July, it completed a US$272 million purchase of Associated Hygienic Products, a U.S. maker of store brand infant diapers.

"We're not going to blow our brains out, but certainly (we're interested in) something of a slightly larger scale," CEO John Williams said Thursday during a conference call to discuss third-quarter results.

Domtar (TSX:UFS) beat expectations even though net income decreased dramatically from a year ago to US$27 million.

The company, which reports in U.S. dollars, earned 82 cents per share for the period ended Sept. 30, compared with US$66 million, or $1.84 per share, in the third quarter of 2012.

Excluding one-time items such as a loss on the sale of a business, adjusted earnings were US$41 million or $1.25 per share, a penny better than estimates, but down from US$67 million or $1.87 per share in the prior year.

Revenues decreased slightly to US$1.375 billion from $1.39 billion a year ago.

The personal care business earned US$22 million in pre-tax operating income (EBITDA) on US$175 million of revenues in the third quarter, including the contribution from its latest acquisition. Over nine months, the division has earned US$59 million in EBITDA on US$394 million of revenues.

Williams said the company is on track to deliver US$200 million in EBITDA by 2017 from the personal care assets it currently owns. However, Domtar is hoping acquisitions in the Americas and Europe will allow it to boost that contribution to between US$300 million and US$500 million.

Domtar hasn't confirmed published reports that it has bid for Spain's top diaper maker, Indas, from Spanish buyout firms Portobello and Santander's Vista Capital. The firms bought Indas in 2007 for about 350 million euros.

Williams told analysts that Domtar anticipates improving margins by spending money to re-engineer its product range and increase volumes in Europe by expanding its retail business.

"Certainly we are now knocking on the doors of major retailers who have a pan-European footprint. I think that's kind of where we have been looking at this point."

Since entering the adult incontinence business in 2011 with the acquisition of Attends HealthCare, Domtar has added the European Attends business and U.S.-based EAM Corp., which develops and supplies the core material used in feminine hygiene products, baby diapers and puppy pads.

Domtar is increasing its personal care business and converting some facilities to make fluff as it diversifies from traditional pulp and paper manufacturing that has been suffering amid decreasing annual demand. For example, demand for copier paper is down 2.9 per cent this year.

The global incontinence business is forecasted to grow by five to seven per cent annually from its base of nearly US$9 billion. In particular, demand for the adult products is growing in pockets of the U.S. southeast which have large populations of seniors.

Paul Quinn of RBC Capital Markets said the company is making the right choices by focusing on growing the personal care business instead of expansions into other lines such as tissue.

"They're cautious, they're a smart team," he said in an interview from Vancouver. "They've done well with the things that they've done, measured steps and kept their promises."

The analyst said many of the potential acquisition targets are privately held companies that can diversify Domtar's geographic footprint and derive cost savings by adding production lines into existing facilities.

Quinn added that Domtar has been able to increase paper prices following International Paper's decision to close an Alabama mill that produces 765,000 tons of uncoated freesheet.

Domtar said its pulp business should also benefit from accelerating momentum in global demand, notably in China.

On the Toronto Stock Exchange, Domtar's shares hit a 52-week high in intraday trading, gaining $1.78 to C$90.66 by early afternoon.