Our preliminary Q1 2020 financial report is here. Highlights from this Domtar financial report include improved first-quarter results and an accelerating COVID-19 response plan:
- First-quarter 2020 net earnings of $0.09 per share
- Record quarter sales and EBITDA in Personal Care
- Several measures taken in response to COVID-19
- Suspension of quarterly dividends and share repurchase program
In its Q1 2020 financial report, Domtar reported net earnings of $5 million ($0.09 per share) compared to a net loss of $34 million ($0.59 per share) for the fourth quarter of 2019 and net earnings of $80 million ($1.27 per share) for the first quarter of 2019. Sales for the first quarter of 2020 were $1.3 billion.
“As the global community reacts to COVID-19 and the large-scale effort to contain it continues, we remain focused on navigating the crisis, keeping our employees and their families safe, serving our customers as an essential business and protecting our financial stability. We are taking steps to reduce spending to further strengthen our balance sheet, liquidity and cash flow while seeking to ensure we are well positioned when the economy starts moving again,” said John D. Williams, president and chief executive officer.
“Despite our paper volumes increasing in Q1, we experienced a significant reduction of orders in April due to the COVID crisis and the resulting lockdown of schools, offices, retailers and other business sectors. As a result, we are taking the appropriate steps to optimize our operations and to remain an agile, reliable partner to our customers. We continue to closely monitor customer orders and backlogs and will adjust capacity accordingly, but we anticipate inventory to be at appropriate levels as a result of our recently announced capacity reduction plan,” said Williams. “Our pulp shipments were stable in Q1 despite some logistical challenges and a major shutdown of operations in China due to COVID-19. We did see good demand from our North American tissue customers, and we expect overall demand for pulp in the second quarter to remain strong, particularly in China as they continue to reopen their economy.”
Commenting on Personal Care, Mr. Williams added, “We had a record sales and EBITDA quarter. Our sales line in Q1 benefited from consumer pantry loading in preparation for in-home quarantine and the scale-up of new customer wins. We continue to increase operating rates, and we have established rapid response teams to maximize productivity to support an uptick in demand, inventory replenishment and portfolio simplification.”
Operating income was $19 million in the first quarter of 2020 compared to an operating loss of $15 million in the fourth quarter of 2019. Depreciation and amortization totaled $72 million in the first quarter of 2020.
The increase in operating income in the first quarter of 2020 was the result of favorable productivity; higher volume; lower selling, general and administrative expenses; lower raw material and freight costs; and favorable exchange rates. These factors were partially offset by lower average selling prices in pulp and paper and higher maintenance, fixed and other costs.
When compared to the fourth quarter of 2019, manufactured paper shipments were up 4 percent and pulp shipments decreased 4 percent. The shipment-to-production ratio for paper was 105 percent in the first quarter of 2020, compared to 106 percent in the fourth quarter of 2019. Paper inventories decreased by 30,000 tons and pulp inventories increased by 24,000 metric tons when compared to the fourth quarter of 2019.
Government authorities across the globe have recognized the importance of the forest products sector based on the products we manufacture and their end uses. Accordingly, Domtar anticipates continuing to operate in all of its business segments, but the company has taken and may take further temporary steps to reduce its current paper capacity to be in line with current and expected demand levels for the duration of the crisis.
Domtar has implemented COVID-19 response and business continuity plans to protect its employees and their families, to safeguard the continuity of Domtar’s operations and to ensure full support of its customers and partners.
Domtar is taking further actions to strengthen cash flow and improve liquidity. Cost-control actions, capital deferment, closely managing working capital and a reduction of operating costs and selling, general and administrative expenses will generate cash savings, providing us flexibility to take advantage of opportunities as the market rebounds.
Suspension of Capital Return Program
Due to the unprecedented market conditions and uncertainty caused by COVID-19, the company has suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment. The board of directors will continue to evaluate the company’s capital return program based upon customary considerations, including market conditions.
The high degree of uncertainty and volatility day to day and the longer-term potential impact of the economic lockdown remain unclear. In Paper, we expect significantly lower demand in the second quarter. We expect demand for softwood and fluff pulp to remain strong in the near term driven by accelerated growth in tissue and towel, while containment measures across Europe and North America are expected to weigh on certain end-use markets. Personal Care will continue to benefit from higher usage and the impact from new customer wins, but we expect a portion of the demand increase from consumer stock-up may reverse later in the year. Raw material costs are expected to remain stable.