MONTREAL – Domtar says its diaper business is about to reach a turning point where cost savings from new production lines will begin to drive higher earnings.
Chief executive John Williams said he’s disappointed that it has taken longer than expected to ramp-up five new production lines at three locations. But he anticipates costs will fall and margins will begin to improve in the second quarter as it shifts from outsourcing production to making more of its own adult incontinent products.
“We’ve built the base, we’re getting more stability, our product offering is resonating with the customer so, going forward, I ‘m feeling pretty good about it actually,” he said Friday during a conference call to discuss Domtar’s 2014 results.
The Montreal-based pulp and paper company said its adjusted profits surged 34 per cent to US$91 million in the fourth quarter, beating analyst estimates by a wide margin.
On the Toronto Stock Exchange, Domtar shares (TSX:UFS) surged more than 7.3 per cent, gaining $3.51 at C$51.30 in afternoon trading.
Domtar, which reports in U.S. dollars, earned $1.41 per share of adjusted earnings, up from $1.05 or $68 million a year earlier.
Analysts had estimated 92 cents per share of adjusted earnings, according to Thomson Reuters data.
Williams said the company underestimated the learning curve involved in installing new machines, but says lessons learned will ensure a smoother integration from three more machines to be added this year.
He said its personal care business — which makes incontinence products for adults — will eventually generate more than $200 million in pre-tax operating earnings, partway to a goal of $300 million to $500 million from growth businesses by 2017.
Domtar’s net income including closure costs and writedown grew 9.2 per cent to $71 million or $1.10 per share from $65 million or $1 per share. Overall sales increased by $20 million to $1.38 billion, in line with analyst estimates.
An increase in sales of personal care products during the quarter offset decline in sales of pulp and paper, which accounted for $1.16 billion of sales — down about three per cent from the fourth quarter of 2013.
For the full year, Domtar earned $431 million or $6.64 per diluted share, up from $91 million or $1.36 per share in 2013. The increase was largely due to large income tax benefits in the third quarter. Adjusted profits were $234 million or $3.61 per share, compared to $158 million or $2.37 per share a year earlier. Revenue was up 3.1 per cent to $5.56 billion.