Domtar Business Analysis - Research Paper Example

?Domtar Business Analysis Introduction Domtar, which is a paper manufacturing and marketing in addition to other fiber-based products such as communication papers, sells most of its products within North America. Domtar has established itself well in North America and its economic returns from shareholders demonstrate this. The financial statements show relatively low volatility in the stock market. The returns on the invested capital have also increased by about 11% over the last three years. In the year 2011, Domtar made approximately US$5.6 billion in about 50 countries. The management bases its forward-looking statements on its future expectations. Domtar has exhibited excellent cash flow over the last few years. The cash flow is anticipated to rise to an average of 9% in the next one year. Domtar’s income have been declining considerably though is still considered to be performing well as compared to other companies in the same industry. This paper focuses on the financial analysis of Domtar by examining its financial statements. Additionally the paper compares Domtar’s performance to that of its competitors. Domtar Products Domtar specializes in a wide range of fiber-based products. The products include digital printing papers, specialty papers, EarthChoice papers, publishing papers, commercial printing papers, Business papers, as well as office papers. It is currently planning to start manufacturing packaging papers. Additionally, Domtar engages in manufacture of papergrade, lumber, wood products, in addition to specialty pulp. Domtar sells its products to a wide range of customers such as merchants, retailers, printers, converters, publishers, as well as end users. Domtar sells its product within Canada, North America and exports to other regions of the world such as United State, which is one of the main customers (Ivara, 2012) Domtar’s Financial Health Financially, Domtar has been performing considerably well. It is considered the second largest paper industry in the world in terms of financial standings. In financial statement issued on July 27, 2012, which showed the financial performance for the second quarter of 2012, the report showed considerable decline from that of previous year. The company reported an operating income of $106 million. Although this was excellent compared to other companies in the same industry, it was however a decline from $ 109 million reported in the first quarter for the year 2012. The decline was attributed to increased maintenance costs in addition to reduced shipments for pulp as well as paper. However, the market prices had increased considerably which helped offset the losses, which could have been higher. However, Domtar is anticipating for worse times in the third quarter due to the challenges facing the pulp markets such as the declining demand for both paper and pulp shipments. Domtar management is planning to counteract the anticipated losses by converting the less needed communication paper to Specialty as well as packaging papers, which are still in higher demands. Additionally, Domtar hopes to increase the prices of pulp (Domtar, 2012). The cash flow from functioning activities amounted to about $30 million in the first quarter of 2011. The capital expenditures were approximately $29 million. By March 31, 2012, which marked the end of the first quarter of 2012, Domtar paid $47 million for outstanding premiums and recorded a free cash flow amounting to $48 million. This demonstrates strong cash flow. Additionally, Domtar’s cash flow is expected to average improve further in the future. Domtar’s stock price has outdone the benchmark in the first quarter of 2012. Investors are expected to increase their share holdings. Additionally, the shares are expected to continue exchanging at bargain basement levels (Domtar, 2012). Any company has the main goal of increasing the value for the shareholders. This is usually by ensuring the profits are increased and the shares trade at apposite prices in the stock market. The shareholders’ value can be measured by making a comparison of return on invested capital (ROIC) with the weighted average of capital (WACC). The variation between the ROIC and WACC, which is referred to as the economic profit spread, is used to measure how well a company is doing. Domtar’s (ROIC) on invested capital for the last three years is approximated to be 11.5%, which is higher than the average cost of capital that is about 10.2% (Domtar, 2012). The Information Interested me was on Cash flow Any company capable of generating a cash flow above 5% is considered strong financially. The cash flow margin is determined by dividing the free cash flow with the total revenue. Domtar is thus a very strong company since it has a cash flow of approximately 10%, which was calculated for the last three years. The free cash flow is measured by considering the cash flow obtained from all the operations minus the capital expenditure. The cash flow for Domtar’s operations augmented by approximately 492% for the year 2011 as compared to that in the years 2009 and 2010. Additionally, the capital expenditures for Domtar, calculated for the last three years decreased by about 6%. The strong cash flow resulted in increased value of the shares, which are worth between $80 and $148 per share. This is a considerably high price which demonstrates that Domtar is achieving the goal of increasing the shareholders’ value (How to Generate Extra Cash in an Instant , 2012 ; Domtar, 2012). How the Management Can Use Financial Statement Information Increased maintenance cost, the Domtar management has decided on some measures to ensure that they offset such costs. One of the measures is sale of old machineries and replacing them with new ones. Examples include the sale of Lebel-sur-qu villion assets to Fortless Global Cellulose Ltd. Additionally. Domtar sold their hydro assets in Ottawa, Ontario and Gatineau, Quebec. After selling the above assets, Domtar acquired finance to purchase EAM corporation, which is a popular manufacturer and marketer of absorbent solutions (How to Generate Extra Cash in an Instant , 2012). Domtar management can analyze the financial statements to identify the areas that require to be changed to enable maximization of their profits. Additionally, the financial statements are reflective of how well the company is doing. By examining the statements, Domtar Corporation can decide on the products to maximize on. In addition, they can decide if there is need to expand their range of products and the products that they can include. Another aspect that the financial statements reflect is whether the company is utilizing its available resources excellently. By knowing how well the company is utilizing its products, the management can decide on the changes to make which may include replacing machineries that could be non-functional (Domtar, 2012; Ivara, 2012). How Domtar Compare To Other Companies in the Paper Industry Domtar should focus on the expenditure particularly on maintenance, which account for the highest costs. They should thus reconsider implementing new maintenance procedures. Additionally, they can focus on how they can prevent asset failure other than having to incur too high maintenance costs. Other management changes should include minimizing Paper Mill Mechanical Downtime in addition to refining the pulp mill uptime (How to Generate Extra Cash in an Instant , 2012). Unlike her competitors who focus on wide range of products, Domtar mainly focuses on paper products. This is advantageour in that it enables domtar to work on the quality. hOwever, this is also risky since deteroriation in prices of paper products can easily affect the financial performance of Domtar. Some of the main competitior of Domtar in the North American region include International Paper (IP), Temple-Inland ( TIN) and MeadWestvaco (MWV). Temple-Inland mainly deals with woods as well as construction products. The main copetition arises when obtaining the raw materials. The competitiors are at an advantage because they deal with a wide range of products and are thus affected less by decrease in prices of paper prices that have been witnessed with the ongoing digitization in most companies (Dunham, 2011). International Paper mainly forcuses paper packaging products as well as printing paper. The copany manufuctures Uncoated papers, industrial packaging as well as consumer packaging papers. It is thus a chief competitor of Domtar in the uncoated and printing papers. However, IP has not established its market appropriately compared to Domtar and is becoming less of a threat due to the great popularity that Domtar products have gained in the recent past. Additionally, Domtar outperforms its competitors due to its advanced technology that enables it minimize wastage of raw materials. Additionally, Domtars commitment to carry out sustainable tree harvesting in addition to its supportive projects in institutions has made it popular and more acceptable. Furthemore, Domtar has formed partnerships with many enviromenta organizations hence more support from stakeholders as opposed to its competitors that are less involved in enviroment improving projects (Dunham, 2011). Domtar’s Technological Advantages Having up to date machineries has enabled Domtar to utilize the raw materials. This has enabled it carry out sustainable tree harvesting which is crucial for maintenance of Canadian forests. Additionally Domtar has come up with ways to recycle most of its products to manufacture EarthChoice50 Recycled Office Paper, which can be used for various purposes and is highly biodegradable. Many companies thus prefer it. Additionally, Domtar purchased EAM core technology which will enable it to carry out research on their products hence improve them. EAM produces laminated absorbents, which have a wide market. Furthermore, Domtar is undertaking a project to develop fast pyrolysis technology. This technology will enable Domtar transform wood to liquid fuels, which it can use in its operations as a source of energy. This will help in reducing its products. Additionally, Domtar is focusing on updating its machineries to make them more efficient and reduce on maintenance costs. How Globalization Has Affected Domtar’s Business Strategies Like many companies, Domtar has expanded its operations globally by exporting it products to other regions other that in North America. Globalization results in increased pressure due to the desire to succeed in the competitive market. Domtar sells most of its exports in United States. Sale of Domtar’s products to United States has resulted in increased profits due to the increased value of Canadian dollar as compared to the US dollar. However, the increased cost of fuel as well as lumber and other raw materials has negatively affected profits of Domtar. Globalization has enabled Domtar make use of foreign technologies in some regions of the world such as North America without having to import the technologies into Canada. Additionally, Domtar has been able to benefit from expert workforce in the foreign country. This is important since it has enable Domtar acquire up to date machineries that are unavailable in Canada. Additionally, globalization has enabled Domtar expand its market and is currently the main paper provider in the North America region. Additionally, United States purchases numerous products from Domtar, which has been made possible by globalization (How to Generate Extra Cash in an Instant , 2012). Operational Processes and Procedures The reason why Domtar has managed to lead in the paper industry is due to its advanced technology in addition to its habit of actively seeking to improve its business operations. Additionally, Domtar seeks to reduce maintenance costs by ensuring that they purchase qualitative machineries hence increasing mill productivities. Another way that Domtar has managed to reduce maintenance cost is by forming collaboration with Ivara, which assists them in maintaining their mills. Additionally, Ivala assisting in coaching of Domtar’s employees to make them more productive hence increasing the overall performance of the company (Dunham, 2011). Domtar operations mainly involve harvesting of trees in its forest plantations located in Canada. The harvested logs are transported into the factory where they are processed into different products. The waste produced are often recycled while the remains are sold to manure manufacturing companies while others are dumped. Conclusion The paper industry has become increasingly competitive with more companies venturing into this industry. Additionally, the raw materials are becoming increasingly reduced hence expensive. It is thus crucial for companies such as Domtar to focus on improving on asset performance in addition to reducing operational cost. Domtar is currently trying to reduce its maintenance costs that are relatively high but at the same time increase the shareholders’ value. One of the ways that Domtar is planning to improve on its operations is by collaborating with Ivara, which offers advice on business improvement. Domtar is currently performing well as characterized by its financial statements. This is irrespective of the reduced demand for paper products and the high maintenance costs. The improved performance is mainly due to good quality of its products as well as the high market prices. Domtar depends on its high technology to produce high quality products. References Domtar. (2012). Domtar Corporation Reports Preliminary First Quarter 2012 Financial Results. Retrieved Sep 19, 2012, from http://www.domtar.com/files/investors/2012-xx_1Q12_Press_Release_ENG_vFinal.pdf Dunham, A. (2011, May 4). Domtar Fares Well in Wood Supply Competition. Retrieved Sep 19, 2012, from http://thedrydenobserver.ca/2011/05/domtar-fares-well-in-wood-supply-competition/ How to Generate Extra Cash in an Instant (2012, Sep 2). Domtar is Significantly Undervalued; Fair Value is $114. Retrieved Sep 18, 2012, from http://www.distocks.us/domtar-is-significantly-undervalued-fair-value-is-114/ Ivara. (2012). Domtar Espanola Increases Pulp Mill Efficiency By 5% With Ivara EXP Enterprise Software. Retrieved Sep 19, 2012, from http://www.ivara.com/content/pdfs/Domtar_Espanola_Case_Study.pdf Read More