COVID-19: What it means for forest, paper and packaging companies

The coronavirus (COVID-19) pandemic is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. Manufacturers are facing unique challenges caused by the crisis, and forest, paper and packaging producers are no exception. 

Pulled between soaring demands for some products (like toilet paper and other hygienic products) and an uncertain outlook for others (such as building materials), companies in the sector must also navigate the challenge of simultaneously safeguarding employee well-being, managing potentially disrupted supply chains, and evaluating tumultuous economic and capital markets conditions. 

Typical contingency plans help confirm operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and travel restrictions that are being instituted in countries around the world to help stem the spread of the virus. With some manufacturers shutting down production or shifting to new products that are essential to fight the pandemic, forest, paper and packaging companies need to remain focused and nimble to navigate this crisis.

The pandemic raises a number of unique challenges. In PwC’s latest COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns.

The situation is changing quickly with widespread effects. That’s why we’ve prepared some general guidance on COVID-19: What US business leaders should know, covering the key areas of crisis management and response, workforce, operations and supply chain, finance and liquidity, tax and trade, and strategy and brands.

Issues that the forest, paper and packaging sector might face:

Forest, paper and packaging manufacturers will likely face fluctuations in demand as the COVID-19 pandemic intensifies, with potentially disruptive effects on production and revenues. Stockpiling of certain paper products by consumers seeking to allay their concerns about shortages may cannibalize future demand. Meanwhile, a prolonged period of economic uncertainty could reduce customer appetite for other products, such as construction materials.

At the same time as these forces may upend the demand outlook, the COVID-19 outbreak is also affecting production. Confirming employee well-being should be a top priority for companies, and the steps necessary for manufacturers to achieve that could impact production capacity. Supply chain disruptions could have a similar effect. 

Lastly, capital-markets and commodity-price turmoil could become a challenge for forest, paper and packaging companies — especially those without strong balance sheets.

Steps to consider:

• Prepare for a prolonged recovery. Given the unknown variables of how the COVID-19 pandemic may play out and when containment may be achieved, forest, paper and packaging manufacturers should expect to brace for a trying period and plan for a recovery that may not arrive for at least a year.
• Assess how profitability, loans, revolving credit and cash flow reserves can support ongoing operations in a low-revenue environment — especially in light of current (and forecasted) cash operating expenses, taxes and other cash expense items.
• Review capital and corporate cost budgets to identify not only marginal investments, but also discretionary items that can be cut. 
• Consider divesting non-core or underperforming assets — or assessing M&A prospects — as a potential source of cash.
• Consider refinancing debt.
• Work closely with municipal, state and federal governments to coordinate plans on worker and consumer safety, while keeping mission-critical productions running.
• Take stock of your cybersecurity posture. Note that there could be additional threats and vulnerabilities now, especially with significantly higher levels of remote access to core systems. Help strengthen your perimeter, using security tools to identify and deflect threats before bad actors can intrude. Fortify your endpoint protection, and confirm devices are hardened and patched.

Issues that the forest, paper and packaging sector might face:

Employee well-being should be every company’s top priority right now. Confirming a healthy, productive workforce may require forest, paper and packaging companies — and other manufacturers — to consider changing how their production facilities are run. Many workers in such plants may not be able to do their jobs remotely, so the goal should be to create a strategy that maintains production capacity while safeguarding their health.

Steps to consider:

• Confirm your employees are safe and know how to protect themselves. Institute sanitation rules in the workplace, and assess mobility policies to help encourage remote working, where possible and necessary. Ask employees who are sick to stay home until they are better. Eliminate non-essential travel.
• Discuss change management and flexible work arrangements for employees in finance, human resources and other departments whose presence on-site is not mission-critical. In addition, cybersecurity should be a top priority, along with bolstering system resiliency to better deal with significantly higher levels of remote access to core systems. Be aware that employees and management could be more susceptible to social engineering efforts in the midst of this crisis.
• Assess strategies and plans to retain and deploy the workforce during the slowdown, and establish risk mitigation programs for employees who may need to work on-site. Invest in education campaigns for front-line employees who have to be on-site to confirm they know how to minimize the spread of disease and what to do if they feel ill.
• Gather necessary data on employees (geography, visa, etc.) and consider tracking movements during the crisis.

Issues that the forest, paper and packaging sector might face:

Forest, paper and packaging manufacturers should expect continued weakening links in their supply chain, as some vendors and suppliers may face operational or financial struggles of their own, especially in those regions hardest hit by COVID-19, such as some Asia- and Europe-based supply chain partners.

Steps to consider:

• Develop a real-time situational awareness of your supply chains. Assess links in your supply chain and identify potentially weak ones — especially in places heavily affected by COVID-19.
• Prepare for supply chain pivots that could require identifying alternative suppliers.
• Improve your supply chain visibility and lines of communication to help detect potential problems and remediate early. If you don’t have digital supply chain transparency solutions already in place, create greater transparency through daily self-reporting with critical suppliers. 
• Keep an open and regular dialogue with your suppliers and customers on how they may be impacted by COVID-19 and how their forecast demand could affect your business.
• Seek alternatives that allow you to help preserve relationships, co-create solutions and sustain both businesses. It’s possible that a third-party provider may prove to be a critical point of failure in creating a response to COVID-19.

Issues that the forest, paper and packaging sector might face:

COVID-19 isn’t just disrupting operations. It’s also challenging companies’ ability to manage their finances. For some businesses in the hardest-hit regions, it may even threaten their ability to finalize quarterly financial statements in a timely manner. 

Additionally, some companies are becoming increasingly concerned about the possibility that the economic impact of the pandemic may cause triggering events for goodwill and long-lived asset impairments, the recoverability of receivables, restructuring actions and/or liquidity issues. 

What may make matters worse, key finance personnel may be directly affected by the virus or forced to shift their focus to mitigating its impact on the business. The finance team’s potential reduced productivity could make the significant uptick in the volume of work even more daunting in the coming weeks.

Companies may need to carefully consider their cash, liquidity and working capital strategies in light of the outbreak’s impact on the world economy and credit markets. The disruption of the supply chain may trap cash that could otherwise be used to fund operations, provide employee relief or better manage third-party financial commitments. Since this trapped cash may be idle in the market for an extended period of time, other strategies may need to be deployed to help mitigate the downward impact.

Steps to consider:

• As companies update their near- and longer-term forecasts, management should confirm that the requisite analyses (including updated assumptions) are completed and that controls are executed so potential accounting and reporting issues are identified and addressed in a timely manner. This includes developing a work plan that assumes team members are working remotely, while appropriately communicating with those charged with governance, as well as external auditors. 
• Address liquidity challenges by performing rigorous, forward-looking stress-testing and sensitivity analyses of the cash-flow statement and determining whether you have real-time visibility into your access to funding, including from alternative financing sources. 
• Adjust financial hedges based on changes to operations to help mitigate risk. 
• Prioritize establishing a tactical cash and working-capital framework designed to absorb commercial shocks.
• Analyze capital allocation and budgeting programs and assess their impact on cash and liquidity. Deploy targeted analytics to prioritize working-capital levers (such as recalibration of payment run schedules and replenishment of inventory). Consider using cost containment strategies to help manage cash flow.
• Consider broadening disclosures to go beyond what’s required in financial statements. For example, disclose management’s analysis of the current and future impact of liquidity and credit crunch on the business.
• Plan for disclosures about risks, such as how recent events may impact current and future judgments and estimates inherent in financial reporting (e.g., inventory obsolescence, receivables collectibility, debt covenants, impairments).

Issues that the forest, paper and packaging sector might face:

Companies should expect changes to supply chains and workforce global mobility due to COVID-19. Given mounting economic uncertainty arising from efforts to help stem the spread of the disease, some governments are pursuing fiscal stimulus programs or other incentives. These programs could impact forest, paper and packaging firms and may have tax implications that will need to be carefully managed.

Steps to consider:

• Take into account the tax and tariff implications of any changes to the supply chain. Implications could include customs and duties, as well as transfer-pricing considerations if the substitute components or materials are internally sourced.
• Explore how a potential fiscal stimulus could impact your company through tax benefits (e.g., payroll tax reduction, NOL carrybacks, delay of effective date of certain TCJA provisions, add-back of depreciation and amortization for Section 163(j) purposes, and deferring amortization of R&D expenditures).
• Companies with extensive global footprints should consider the tax and transfer-pricing components of restructuring their supply chains.
• Address mobility and immigration issues for employees moving in and out of areas affected by COVID-19. Consider the tax implications of mobility. Depending on where you temporarily host employees, the company — and the employees — may face unintended tax consequences.
• Prepare and plan for the different types of support governments may extend — from emergency funding to state guarantees of new loans to tax incentives or deferrals.
• Plan strategically. Operations in one jurisdiction may be more favorable — both tax-wise and operationally — than another during this crisis.

Issues that the forest, paper and packaging sector might face:

Forest, paper and packaging companies with strong balance sheets may be in a position to pursue mergers and acquisitions, even as economic uncertainty, turmoil in capital markets and operational challenges create hurdles for competitors with less stable financial foundations. 

These opportunities could take the form of transformative transactions or bolt-on deals. They could involve supply chain consolidation or entry into new product or market segments. 

Rather than suspending investments with an eye toward resuming them when the situation stabilizes, companies should reevaluate their strategies and portfolio investments in the context of different potential scenarios for the future. By remaining nimble, forest, paper and packaging companies may navigate uncertainty today, while also preparing for an eventual recovery.

Steps to consider:

• Companies should carefully consider their cash, liquidity and working-capital strategies in light of COVID-19’s potential impact on the world economy and credit markets.
• A key change for companies is to consider evaluating their strategy and capital planning approaches. We recommend moving to an agile dynamic planning mode, a key tenet of which is leveraging the power of analytics to build a virtuous cycle around your core objectives.
• When adjusting plans, we also recommend focusing on core priorities and outcomes, rather than trying to correctly time developments in the global economy and the course of the pandemic.
• Finally, as you build resilience, keep in mind that it is not about creating redundancy, but rather integrating flexibility and agility into your operations.