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Domtar (UFS)Stock (Consumer Products Industry, Paper & Paper Products Industry)
 Domtar Corp. (NYSE:UFS) is the largest manufacturer of uncoated freesheet paper in North America and second largest in the world based on production capacity.[1] Focusing primarily on the production of paper and paper-grade wood pulp, the company also operates the Domtar Distribution Group, a purchasing, warehousing, and distribution network which sells both Domtar's and other producers' paper products. Domtar also sells some lumber and wood products, which it produces at its Canadian mills. Unlike most of its closest competitors, Domtar focuses mainly on only one type of forest product, paper (specifically, the uncoated freesheet grade - most commonly used as office and/or basic copier paper, but also used in the newpaper and specialty publication industries). This could leave revenues particularly susceptible to fluctuations in demand for that specific grade of paper. One key trend to watch that affects demand for Domtar's products is the progress of digital documentation and data storage in the workplace; greater use of such electronic resources usually encroaches on roles previously filled by paper usage. Since 2000, Domtar has acquired and integrated additional distribution and paper production capacity through three major purchases. The largest of these was the March 2007 merger with the former Fine Paper segment of Weyerhaeuser Company. These acquisitions have not yet been fully integrated as of mid-2008, with the company expecting additional costs in the future related to the integration.
[edit] Corporate OverviewThe new Domtar Corp. was formed on March 7, 2007, by the merger of the old Domtar Inc. and Weyerhaeuser Company's fine papers business. This merger led to Domtar immediately becoming the largest producer of uncoated freesheet paper in North America.[2]  Currently, Domtar Corp. organizes its business segments into three divisions: Paper, Paper Merchants, and Wood. [edit] PapersThe core business of the company, Domtar focuses almost exclusively on producing uncoated grades of paper, with this division accounting for 82% of 2007 sales. Within this segment, main customers include:
Current company estimates peg uncoated freesheet production capacity at 4.6 million tons per year, making it the North American leader and the second largest worldwide producer of such grades.[4] 81% of Domtar's paper production is concentrated in the U.S., with Canadian mills responsible for the remaining 19%.[5] In addition to finished paper products, the company produces more paper-grade wood pulp and fluff than it needs, and it sells this excess to third parties. In 2007, Domtar sold approximately 1 million tons of surplus wood pulp and fluff. Most such extraneous pulp is produced by the company's Canadian mills.[6]  [edit] Paper MerchantsDomtar Corp. operates an integrated subsidiary warehousing and distribution system under the name Domtar Distribution Group. Beginning with the acquisition of Canadian fine paper company Buntin Reid in the 1970s, the company slowly acquired more expansive distribution and marketing capacity. Today, the Domtar Distribution Group controls the company's strategically-located distributional and marketing capacity in North America:[7]
The Domtar Distribution Group does not exclusively distribute and sell Domtar products; it also purchases directly from competing producers for resale. In 2007, 39% of this segment's revenue came from selling Domtar-produced goods.[8] The majority of Domtar Distributon Group's 2007 total paper sales (0.8 million tons) are through RIS Paper in the U.S. (69%).[9] [edit] WoodDomtar owns or directly licenses approximately 28 millions acres of forestland in Canada, as well as public land logging licenses (subject to periodic review by relevant provincial authorities). While most wood fiber harvested from logging operations is devoted to internal pulp and fluff production, a portion is earmarked for the sale of lumber and specialty woods, as well as wood-based products such as construction I-joists and dimensioned studs for construction purposes. The company directly owns eleven sawmills (all in Canada), with five in operation as of December 31, 2007. [10] Also, the company has investments in five independent logging companies. One lumber remanufacturing facility is also currently in operation.[11] 70% of total 2007 sales through the Wood division were in the United States, with Canadian purchases accounting for the remaining 30%.[12] [edit] Business Financials
[edit] Industry Trends and Performance Factors[edit] Input Prices Affect Operating Margins Like most pulp and paper producers, Domtar's operating margins are sensitive to fluctuations in crucial commodity input prices. The largest input to Domtar's production process, wood fiber, is not fully supplied by company-sponsored logging activity, and substantial quantities must be purchased in the open market. Wood fiber represented 19% of aggregate cost of sales in 2007, thus making shifts in supply and prices a significant and sensitive cost factor of production.[15]. Other major inputs sensitive to shifts in commodity prices include:
[edit] Environmental Regulation and ComplianceA substantial portion of Canadian logging takes place on Quebec and Ontario public lands, official license for logging rights and allowable harvesting volume being subject to frequent review.[17] Regulatory changes can have substantial effects on logging volume, as evidenced by a 2005 action by the Quebec provincial government reducing allowable harvesting volume on public land by 20% for the foreseeable future. Further, the company reports that pending regulatory changes through the Quebec Ministry of Natural Resources and Wildlife present a significant danger to the future viability of operating two Domtar-owned sawmills in Quebec.[18] [edit] Electronic Media EncroachmentThe Internet, e-mail, and scanning technology have been encroaching on traditional media and informational roles for paper ever since their introduction. Since businesses and the publishing industry are the major consumers of Domtar's products, a decline in demand for these industries' products can hurt Domtar as a result. Pulp and Paper Online, an industry news publication, reports a widespread industry consensus on the declining use of paper in the newspaper and specialty publications businesses (representing approximately half of Domtar's paper products consumers), but an increase in the use of cut-size office papers in business environments (representing the other half of Domtar's paper customers).[19].The magnitude of these shifts relative to each other will be a factor in Domtar's future paper division revenues. [edit] Rapid Expansion/Acquisition and Post-Merger Integration IssuesFrom 2000 on, the Domtar entered a period of rapid expansion through acquisition and merger, with three major purchases accounting for most of the company's productive and distributional capacity growth[20]. These include the July 2000 acquisition of the RIS Paper Company (greatly expanding US distributional capacity), the August 2001 purchase of four paper mills and associated businesses from rival Georgia-Pacific, and the March 2007 formation of the new Domtar Corporation through merger of former Domtar Inc. operation with the mills and distribution system of Weyerhaeuser Co.'s fine paper business. Most of the recent growth in Domtar's production capacity has thus been the result of major acquisitions and mergers with former rival producers; it is hard to gauge the level of organic growth in Domtar's business since the beginning of the new millennium. Further, the company reports that integration of the former Weyerhaeuser businesses is still in progress and that the associated costs are expected to continue into the future.[21] Even after the businesses are fully integrated, the expected synergies may be smaller than expected. The rapid expansion has also led to the company assuming more long-term debt, totaling approximately $2.2 billion at the end of 2007.[23] [edit] Weak US dollar hurts Domtar's revenuePurchases in the U.S. accounted for 70% of all wood sales and 69% of Domtar Distribution Group sales in 2007. These transactions are denominated in US dollars, but Domtar, as a Canadian company, reports its revenue and profit in Canadian dollars. In the twelve months from June 25, 2007 to June 25, 2008, the US dollar weakened relative to the Canadian dollar by 5.56%, meaning that any U.S. sales converted to CAD during that time yielded that much less recorded revenue for Domtar.[24] 44% of Domtar's employees work in Canada, the exchange rate affecting the relative cost of paying salaries, overhead and taxes.[25] Further, with the majority of Domtar's manufacturing plants located in the US, selling finished products in Canada (accounting for 30% of all wood sales and 31% of "Domtar Distribution Group" sales in 2007), comes with the cost of related tariffs and duties involved with importing the goods into Canada. The weaker the US dollar relative to the Canadian dollar, the larger the chunk such tariffs will take out of operating margins, and vice versa. Generally, a weakening US dollar and thus a strengthening Canadian dollar adversely impact Domtar. [edit] CompetitionDomtar Corp's major competitors in the North American market include paper and forestry product firms International Paper (IP), MeadWestvaco (MWV), Temple-Inland (TIN) (in the woods and construction products sector), Stora Enso Oyj (SEO), and Georgia-Pacific (formerly GP, brought private by Koch Industries in 2005). While Domtar is the largest producer of uncoated freesheet (UFS) paper in North America (second largest in the world), its major competitors have a more diversified product line, ranging from containerboard packaging to various other paper grade and forestry offerings.
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