Resolute Forest Products is stepping up efforts to counter dwindling demand for paper by accelerating its entry into the North American tissue business.
The Montreal-based company expects to become the continent’s 10th largest tissue maker — joining Canadian rivals Cascades and KP Tissue — with the acquisition of Florida-based Atlas Paper and investing in one of its own factories, which is due to start production in 2017.
Tissue sales from Atlas will immediately generate six per cent of Resolute’s overall pre-tax operating earnings, while the addition of production from the company’s plant in Calhoun, Tenn., will raise that even further.
Newsprint, specialty paper, pulp and lumber are expected to contribute a smaller share of earnings going forward.
“We still believe we can make money from paper for a while, but eventually we need to look to other opportunities to use this solid wood and pulp base for other products,” chief financial officer JoAnn Longworth said Tuesday in an interview.
Resolute (TSX:RFP) has been investing in the past few years to expand its pulp and wood operations while also looking at entering the tissue business.
It purchased pulp producer Fibrek in 2012 and invested US$270 million in the Calhoun facility, while restarting idled sawmills in Ignace, Ont. It has also built new sawmill operations in Atikokan in northwestern Ontario and increased capacity at several other operations in Ontario and Quebec.
Excess pulp will be used internally instead of selling in the open market.
“We think this is a real turning point for Resolute,” Longworth said, a day after the company announced the acquisition of Atlas for US$156 million, including US$12 million in working capital.
Atlas supplies private label towel and toilet paper and makes branded products sold to institutional buyers.
Longworth said there are no plans to add a Resolute retail brand as Cascades has done.
Quebec-based Cascades (TSX:CAS) says it is North America’s fourth-largest tissue producer after Georgia-Pacific, Procter & Gamble Co. and Kimberly-Clark.
Spokesman Hugo D’Amours declined to comment on the potential impact of Resolute’s Tennessee plant, but noted that Atlas is already a competitor producing about 59,000 tonnes per year.
“A change of (owner) does not add a new competitor,” he wrote in an email.
Resolute CEO Richard Garneau said the capability and expertise of the 360 Atlas employees ease the entry of the company into the 8.5 million tonne per year tissue market, which is growing by more than one per cent a year.
“We have been exploring opportunities to diversify into the tissue business for quite some time and we will continue to look at prospects to expand our presence in this growing market,” Garneau said during a conference call with analysts.
Analyst Paul Quinn of RBC Capital Markets said that, combined with Resolute’s ongoing initiatives to expand its pulp and lumber capacity, “management has now further articulated a strategy to diversify away from declining paper businesses.”