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Domtar Q2 results: Plans to restructure some U.S. mills, review of personal care

Domtar announced a restructuring that affects 780 jobs at of some of its U.S. mills upon the release of its Q2 2020 financial results last week, which bested expectations for the quarter.

The restructuring involves the closure of two mills and the conversion of two others as Domtar prepares to enter the linerboard and containerboard markets.

The company also said it would conduct a strategic review of its personal care division, which may include a sale of the business.

Domtar reported net earnings of $19 million ($0.34 per share) for the second quarter of 2020 compared to net earnings of $5 million ($0.09 per share) for the first quarter of 2020, and net earnings of $18 million ($0.28 per share) for the second quarter of 2019.

Sales for the second quarter of 2020 were $1.0 billion.

Closures and conversions

The company will target $200 million in cost reduction as it closes the uncoated freesheet manufacturing at its Kingsport, Tennessee, and Port Huron, Michigan mills, as well as the remaining paper machine at the Ashdown, Arkansas mill, and the converting centre in Ridgefields, Tennessee.

This will reduce the company’s annual uncoated freesheet paper capacity by approximately 721,000 short tons and will result in a workforce reduction of approximately 780 employees.

The Kingsport and Ashdown paper machines, which have been idled since April 2020, will not recommence operations, but be converted to new purposes. The Port Huron and Ridgefields mills are expected to shut down by the end of the first quarter of 2021.

“We remain disciplined in our efforts to manage our costs to improve profitability and further strengthen our balance sheet. In line with these goals and current market conditions, we are implementing a significant cost-savings program to streamline operations, maximize productivity and improve margins,” says John D. Williams, president and chief executive officer of Domtar, in a statement.

“This program will create a stronger, leaner organization aligned to meet the needs of the business and our customers in a post COVID-19 era,” says Williams.

Entering the linerboard market

Domtar will enter the linerboard market with the conversion of the Kingsport paper machine.

Once in full operation, the mill will produce and market approximately 600,000 tons annually of high-quality recycled linerboard and medium, providing the company with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the first quarter of 2023.

Domtar estimates the conversion cost to be between $300 and $350 million. Once fully operational, the mill is expected to be a very low-cost, first quartile recycled linerboard mill in North America. The converted mill is expected to directly employ approximately 160 employees.

Preparing for containerboard production

The company will complete the conversion of the Ashdown mill to 100 per cent softwood and fluff pulp, which will require $15 to $20 million of capital investments and will take 12 to 14 months to implement.

The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. The conversion of the fiberline to 100 per cent softwood is also necessary for an eventual expansion into containerboard. Following the fiberline conversion, Ashdown will be a world-class market pulp mill with annual capacity of 775,000 tons of fluff and softwood pulp.

Quarterly review

“Despite the significant challenges we faced in pulp and paper markets, we have been able to manage costs while initiating cash and cost conservation initiatives across the network,” says Williams.

“In personal care, second-quarter revenues were lower following a record first quarter, which was driven partly by consumer pantry loading. While revenues were lower than in the prior quarter, good cost control and improved operational efficiencies supported a solid EBITDA performance. The second quarter ended with an EBITDA margin of 14.4 per cent, which was a 160 basis point improvement when compared to the first quarter and the highest divisional margin since the fourth quarter of 2015.”

Operating income was $14 million in the second quarter of 2020 compared to operating income of $19 million in the first quarter of 2020. Depreciation and amortization totalled $71 million in the second quarter of 2020.

The decrease in operating income in the second quarter of 2020 was the result of lower volume and unfavourable productivity, according to the company.

These factors were partially offset by lower maintenance costs and lower salaries and wages, mostly due to wage subsidies; lower selling, general and administrative expenses; lower raw material costs; favourable exchange rates; and lower fixed and other costs.

When compared to the first quarter of 2020, manufactured paper shipments were down 32 per cent, and pulp shipments increased 10 per cent. The shipment-to-production ratio for paper was 105 per cent in the second and the first quarters of 2020.

Paper inventories decreased by 22,000 tons, and pulp inventories decreased by 2,000 metric tons when compared to the first quarter of 2020.

Review of personal care

The strategic review process will be conducted with the assistance of Domtar’s independent financial and legal advisors.

“Over the past year, we have significantly improved the operating structure and cost profile of our personal care division due in large part to the hard work and perseverance of our teams. In addition, the scale-up of new customer and sales pipeline gives us confidence in the long-term prospects for the business,” Williams says. “With this positive momentum, we believe now is the right time to initiate a strategic review.”

The company has not set a deadline for the conclusion of its review of strategic alternatives and does not intend to comment further unless and until the board of directors has approved a specific course of action or the company has otherwise determined that further disclosure is appropriate or necessary.

Outlook

The company expects the overall environment to continue to remain challenging. In paper, Domtar expects demand to remain weak, with some incremental recovery expected in Q3 and towards year-end.

The company expects near-term pulp markets to be impacted by seasonal softness, elevated global inventories and weak demand trends from paper markets. Overall raw material costs are expected to remain stable.

Read the full Q2 2020 financial report from Domtar.