Selective Cuttings

Wood products operating margins soar

July 4, 2013

In our previous articles, we discussed trends of the net income of the 10 largest Canada based publicly traded companies. While net income is a very important financial indicator as it represents the total financial income for the company after accounting for all the expenses, it is also important to look at operating income, which is the income that the company reports from its core business before other items (such as stock market investment, property transaction) are accounted. Particularly by looking at the operating income margin, the ratio of operating income against total sales, we are able to better understand the evolving of companies’ profitability in their core businesses over time.

Operating income margins of the 10 largest Canadian publicly traded companies

This chart shows the improvement of the financial results of Canadian forest companies, with average operating income margin more than doubled year over year, jumping to 5.3% in Q1 2013 from 2.5% in Q1 2012. In Q1 2012, companies with more exposure to pulp and paper products recorded a 4.4% of operating income margin, much higher than the negative operating income margin (-0.6%) of companies with more exposure to solid wood products. However, in Q1 2013, companies with more exposure to solid wood products recorded an average 14.4% of operating income margin. Meanwhile the operating income margin of companies with more exposure to pulp and paper products declined in Q1 2013, with an average at 0.6%.

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The chart above shows the average operating income margin of the 10 largest Canada based publicly traded companies in both Q1 2012 and Q1 2013. It clearly shows the improvement of the financial results of Canadian forest companies, with average operating income margin more than doubling year over year, jumping to 5.3% in Q1 2013 form 2.5% in Q1 2012.

It also illustrates the changes of financial performance of Canadian forest companies. In Q1 2012, companies with more exposure to pulp and paper products recorded a 4.4% of operating income margin, much higher than the negative operating income margin (-0.6%) of companies with more exposure to solid wood products. However, in Q1 2013, this completely turned around, and companies with more exposure to solid wood products recorded an impressive 14.4% of operating income margin, a significant improvement from last year. Meanwhile the operating income margin of companies with more exposure to pulp and paper products declined in Q1 2013, with an average at 0.6%.

The swing of financial performance, on the one hand, reflects the volatility of forest commodity markets. On the other hand, it also highlights the strategic importance of diversity and transformation for forest product companies.