How Does the Business Generate Profit

(i) How does the business generate profit?

The business generates profit by manufacturing and selling pulp used in a wide range of end products including newsprint, tissue, high-grade coated and uncoated paper, specialty products such as fiber cement siding for residential applications and non-woven fabric for surgical gowns.

Also, this business manufactures and sells standardized and specialty lumber for use in new residential and light construction and in residential repair and remodeling; produces machine stress rated (MSR), long-length, wide-width or premium pine appearance grade lumber, which are value-added products that command premium pricing to standard lumber; sells residual wood chips, and other by-products from its lumber mill operations to minimize waste and maximize utilization of raw materials.

(ii) What are the significant sources of macroeconomic risk?

• Exchange rate fluctuations have can continue to harm operating results and cash flows.
• Fluctuations in product prices and demand could harm our operating results and cash flows. The financial performance depends primarily on the prices company receive for products. Changes in regional economies can cause fluctuation in prices and sales volumes and, as a result, directly affect the profitability and cash flows.
• Markets are highly competitive, the traditional basis for competition has been price.
• Export taxes
• The availability and pricing of the raw materials we use are subject to fluctuations, which could increase our expenses. A decrease in the supply of logs, wood chips and sawdust can cause higher raw material costs and, as a result, material fluctuations in our results of operations and cash flows.
• Business requires substantial capital, the situation of the capital market will cause the companies to not have adequate capital resources to meet all of capital requirements.
• Extensive environmental regulation.
• Environmental liabilities that could require substantial expenditures.
• Regional forest management policies and regulations that could harm supply and cost of logs.
• Relationships with union employees. Companies could be faced with labor shortages, disruptions or stoppages, which could adversely affect business and reduce operating margins and income.

(iii) As a new owner how would you mitigate these risks? Please confine each of your answers to 250 words or less.

• Non-designated Forward Foreign Exchange Contracts. Uses derivatives to manage overall exposure levels for specific currencies. The Company records all related forward foreign exchange contracts on the balance sheet at fair value. Forward foreign exchange contracts receivable are included in prepaid expenses while forward foreign exchange contracts payable are included in other accrued liabilities in the consolidated balance sheet. Changes in the fair value of these instruments are included in earnings as part of cost of sales offsetting the effect of remeasurement of monetary assets and liabilities.
• Cash Flow Hedges. The cash flow hedges are carried on the Company’s balance sheet at fair value with the effective portion of the gains or losses of the derivatives included in accumulated other comprehensive income (loss). Forward foreign exchange contracts receivable are included in prepaid expenses while forward foreign exchange contracts payable are included in other accrued liabilities in the consolidated balance sheet.
• Balance Sheet Hedges. The Company also enters into forward rate contracts to hedge non-functional currency assets and liabilities, primarily certain of the Company’s U.S. dollar-denominated receivables and outstanding debt obligations of its Canadian subsidiaries, to reduce the risk that earnings will be adversely affected by changes in foreign currency exchange rates.
• Use well-defined financial contracts as a means to manage certain commodity price risks.