02/07/2014 10:29 EST | Updated 04/09/2014 05:59 EDT

Domtar says direct mail advertising will survive end of home delivery

MONTREAL - North America's largest producer of paper used for letters, envelopes and office equipment says the end of Canada Post home delivery won't mean the death of direct mail from advertisers.

Direct mail advertising remains effective and should withstand the challenges from Canada Post's decision to move to community boxes, Domtar chief executive John Williams said Friday.

Williams acknowledged that interest in direct mail could "soften" if deliveries are less frequent or more difficult for consumers but told analysts that "I still think it has a pretty good future."

Like all paper producers, Domtar is struggling with ongoing reductions in demand as consumers use less paper, partially due to the increasing use of technology such as digital or electronic documents.

Analyst Paul Quinn of RBC Capital Markets said he agrees with Williams' observations but notes that in any case the impact would not be great since Canada is a small part of Domtar's paper sales.

Domtar is a leading producer of uncoated, free sheet paper — the type used to make the common white paper used in desktop printers, office copiers and many types of stationery, including envelopes and bills.

The Montreal-based company is trying to offset decreased demand for such paper by becoming a leading producer of diapers and adult incontinence products that use fluff pulp.

Domtar's personal care business remains a small part of its overall revenue. However, the segment grew 42 per cent last year as its share of overall company revenues increased to 10.5 per cent in 2013 from 7.2 per cent in 2012.

The company has made a string of acquisitions in Europe and North America that are putting it on the path to earning more than US$300 million before taxes and other items by 2017, the low end of its prior forecast of US$300 million to US$500 million.

Domtar (TSX:UFS) is also preparing to add several new machines to facilities in Sweden and the United States later this year and has recently tested new products in Canada that Williams said have received "rave reviews."

However, the chief executive said Domtar's efforts are six to nine months behind schedule because it decided to develop a more global platform after adding Attends Europe, while looking for more deals.

"Undoubtedly we feel pretty strongly that there's more merger and acquisitions to be done," Williams told analysts, adding that to be globally competitive "we need a certain critical mass."

About 62 per cent of Domtar's personal care business is with institutions such as hospitals and home-care facilities that are sold through distributors. Growth in retail, however, will likely come from co-branded and private labels for baby diapers and adult incontinence products.

The company handily beat expectations in the fourth quarter ended Dec. 31 as its net income more than tripled to US$65 million, due to less scheduled maintenance and improved pulp markets.

Reporting in U.S. dollars, Domtar earned US$2 per dilute share for the period ended Dec. 31. That compared to 54 cents per share or $19 million a year earlier.

On an adjusted basis, it earned US$68 million or $2.09 per share — well above analyst estimates of $1.53 per share. In the prior year, adjusted profits were $46 million or $1.31, including $41 million in closure and impairment costs.

Domtar's overall sales grew to US$1.36 billion from $1.33 billion, but the mix changed.

Revenue from personal care products rose 55 per cent to US$172 million while revenue from its main pulp and paper business declined two per cent to $1.19 billion.

"We had a milestone quarter for Domtar in our quest to become a strong business that creates sustainable value for our customers and shareholders," Williams told analysts.

Domtar's operating income increased due to higher average selling prices for paper and pulp, favourable exchange rates, higher productivity in pulp, and higher paper shipments. That was partially offset by higher raw material costs and an unfavourable product mix.

For the full-year, Domtar's results were less stellar. It earned US$91 million, or $2.72 per share, compared with $172 million or $4.76 per share in 2012. Adjusted profits were $158 million or $4.73 per share, down from $233 million or $6.45 per share a year earlier. Revenues fell to $5.4 billion from nearly $5.5 billion.

The company said it expects paper shipments in 2014 will be in line with last year despite a continued decrease in demand for uncoated free-sheet.

While softwood pulp markets should maintain "positive momentum," new scheduled hardwood capacity makes the end of the year more uncertain, Domtar said.

On the Toronto Stock Exchange, Domtar's shares closed at C$115.03, down $3.99 or 3.35 per cent on Friday. The shares recently hit a multi-year high of $121.45 and remain more than 50 per cent higher than they were at this time last year.

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