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Domtar Rides on Softwood & Fluff Pulp Demand Amid Cost Woes

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Zacks Equity Research
·5 min read
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On May 26, we issued an updated research report on Domtar Corporation UFS. The company’s performance will be driven by healthy demand for softwood and fluff pulp, customer wins, cost savings and margin-improvement plan. However, its performance might be affected by lower pulp and paper prices, weak paper demand and rising raw-material prices.

Domtar reported first-quarter 2020 adjusted earnings of 9 cents per share, faring better than the Zacks Consensus Estimate of a loss of 26 cents. However, the bottom-line figure tanked 93.7% from the prior-year quarter figure of $1.44 per share. The company’s revenues were down 7% year over year to $1,278 million, surpassing the Zacks Consensus Estimate of $1,240 million.

Margin-Improvement Plan to Aid Personal Care Segment

Domtar continues to deliver on its margin-improvement plan in the Personal Care Division. As part of this, the company’s board of directors approved the permanent closure of its Waco, TX Personal Care manufacturing and distribution facility, the relocation of certain of Domtar’s manufacturing assets, and a workforce reduction of approximately 214 employees across the division.

In May 2019, the Waco facility permanently ceased its operations. In the second quarter, the Personal Care segment is anticipated to benefit from the higher usage of personal care products and new customer wins. The company is also ramping up new business in the segment and looking forward for volume growth in the days ahead.

Solid Demand Drives Softwood & Fluff Pulp Markets

Domtar has witnessed favorable demand from North American tissue customers and thus, expects overall strong demand for pulp in the second quarter, particularly in China as the country continues to recover from the coronavirus crisis and reopen the economy. Also, pulp volumes are likely to climb on higher pulp productivity at the Espanola and Ashdown mills. Demand for softwood and fluff pulp will remain strong in the near term on solid growth in tissue and towel. In response to the coronavirus pandemic, the company is seeing higher infant diaper demand and fluff pulp is a key component in infant diapers and adult incontinence products. The Pulp market is poised to grow on strategic investments, the restart of Espanola mill and additional pulp production from Ashdown following the paper-machine closure.

Acquisition to Drive Growth

Recently, Domtar completed the acquisition of the Point of Sale (POS) paper business from Appvion. The buyout includes the coater and related equipment located exclusively in the West Carrollton, OH facility, and a license for all corresponding intellectual property. Domtar's world-class paper-making capabilities, together with the West Carrollton coater's substantial scale, will create a globally-competitive POS paper business, while providing new alternatives for the company’s growth. The company will be able to expand in the global specialty papers market through this buyout.

Poised to Gain From Cost-Reduction Actions

Domtar is well placed to gain from its focus on cost savings, reduced overhead spending and new customer wins. Also, the company is focused on maintaining the flexibility to pursue its growth strategy and investment in repurposing opportunity. Furthermore, Domtar’s recently-announced capacity-reduction plan will improve its inventory-levels in the near term. The company is also implementing cost-control actions to further strengthen its balance sheet, liquidity and cash-flow position. The company has reduced the ongoing-year capital expenditure forecast and projects the same between $140 million and $150 million. Maintenance cost for the year is also expected to be lower by $40 million.

Few Headwinds to Counter

Lower Paper Demand to Hurt

Domtar has witnessed a significant reduction of paper orders due to the lockdown of schools, offices, retailers and other business sectors on the coronavirus pandemic. The company has taken temporary actions to reduce its paper capacity, in line with current and expected demand levels given the duration of the pandemic. Consequently, Domtar expects lower paper demand in second-quarter 2020. The impact of the pandemic on the company’s business operations remains uncertain. Further, containment measures to curb the spread of the virus across Europe and North America are expected to hurt certain end-use markets. The temporary shutdown of paper mill and paper machine operations at the Kingsport and Ashdown facilities might thwart the pulp and paper business.

Cost Woes

Raw-material cost continues to surge and the company expects these conditions to prevail, which will strain margins. Furthermore, given its international presence, Domtar often faces unfavorable foreign-currency movements, hurting the company’s top-line growth.

Share Price Performance

Shares of Domtar have depreciated 48.7% over the past year compared with the industry’s loss of 27.1%.



Zacks Rank & Stocks to Consider

Domtar currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the basic materials space are Newmont Corporation NEM, Barrick Gold Corporation GOLD and Wheaton Precious Metals Corp. WPM, each currently carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Newmont has an expected earnings growth rate of 90.2% for 2020. The company’s shares have surged 103.6% in the past year.

Barrick Gold has an estimated earnings growth rate of 60.8% for the ongoing year. Its shares have soared 112.7% over the past year.

Wheaton has a projected earnings growth rate of 62.5% for the current year. The company’s shares have appreciated 120.7% in a year’s time.

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