Plum Creek 3Q15 Earnings Call Notes

Plum Creek Timber (PCL) Rick R. Holley on Q3 2015 Results

Lumber manufacturers have had a challenging year so far

“Lumber manufacturers have had a challenging year so far. North American lumber prices have been under pressure as mill operators contended with uneven demand growth and the impact of shifting exchange rates on supply. ”

Weaker Canadian dollar has improved position of Canadian producers

“The weaker Canadian dollar has improved the cost position of Canadian producers allowing them to produce more lumber. The production increases came principally from the Canadian provinces of east of the Rockies, primarily there in Alberta. ”

Lumber producers have adjusted their supply as prices have come down

“In response to low lumber prices, we have recently seen softwood lumber producers throughout North America adjust their production schedules to more closely match current supply and demand. As a result, inventories have come down and lumber price have improved and are trending up.”

We have reduced harvest below where we initially expected

“We have reduced harvest in areas where we believe we can realize future pricing uplift. As a result, we now expect our 2015 harvest to be approximately 18.5 million tons. That’s less than our initial plans to harvest between and 19 million and 20 million tons this year. As a result, we expect to be on the lower end of our earnings guidance for the year. While this decision, reducing harvest, impacts our fourth quarter earnings, it’s the right thing to do from a shareholder value perspective.”

Recent price trends are encouraging

“We view the recent lumber price trends as encouraging. We see no change in longer term demand trends.”

The Chinese have destocked their lumber inventory

“just as we went through a little bit of an inventory cycle here with lumber, over in China that same thing has occurred. Their log decks now are down 30% from where they were earlier in the year. I think they’re starting to purchase wood. They really had a slow purchase rate in the third quarter as they were trying to rebalance it. So even though their fundamental demand isn’t picking up, I think their log purchase activity will start picking up and will feel a little bit better. We’ve seen prices in the Chinese markets firm in the last month or two and turn upwards’

Homebuilders are dealing with land and labor shortages

“I think the headwind that housing still has is the very thing you mentioned, is labor. In some markets, labor is challenging for a lot of homebuilders. The lack of lots, developed lots that are ready to build on, is a challenge in many of these markets which – Seattle is a perfect case. Put a house in the market in Seattle and it’s sold in a day. There’s just not a lot of land to build additional properties on new homes, so it’s a challenge.”

Plum Creek 2Q15 Earnings Call Notes

We’re encouraged by homebuilder sentiment

“Builder sentiment in July was at the highest level seen in 10 years. Existing home sales were in an eight-year high in June, and new home sales in June were up 18% year-over-year. The supply-demand balance for housing is relatively tight, contributing to an acceleration in existing home price gains, as reported by the National Association of Homebuilders. We are encouraged by the trends and what they say about future lumber and log demand.”

Stronger dollar has slowed lumber exports. Our customers recognize that these forces are temporary

” lumber markets have experienced some disruption in the first half of the year. The stronger dollar has slowed U.S. lumber and log exports, and more Canadian supply has been directed towards U.S. markets. This, combined with slow demand growth, put pressure on lumber prices. Our customers recognize these market forces as temporary and remain committed to their investment plans that will increase future production and log demand.”

Fire danger in the west may restrict supply of logs

” With extreme fire danger in many parts of the West, logging restrictions may limit the near-term timber supply. While domestic mills were well supplied going into the third quarter, near-term log availability is emerging as a concern for Western sawmillers. We have seen West Coast log prices stabilize the past few weeks, and Douglas fir prices are up a couple dollars per ton from their bottom in June.”

We think we’re acquiring our stock and therefore timberlands at a significant discount to market value

“During the second quarter, we repurchased approximately $31 million of company stock, acquiring more than 750,000 shares at an average price of $41.16 per share. In 2015, we have now repurchased over $50 million of our stock.

We view this as an attractive arbitrage, effectively purchasing our timberlands at a significant discount to their current market value. As we outlined on Investor Day, we believe our Southern timberland portfolio is worth more than $2,100 per acre in today’s market, given its characteristics and productivity.”

We have a preference to buying back shares at these levels

“Clearly, where the shares have been trading, we think we’ll allocate capital to buying shares back as we did in the second quarter and we will in the third quarter as well at these levels. ”

CalPERS has trimmed its lumber holdings but may be driven by different things than other institutions

” I think CalPERS is going through their entire portfolio and try to trim costs and other things. We’ve been more than a bit disappointed in some of their timber investments of-late. And I think they’ve decided with those as they have with many different investments they’ve made that they’re just going to exit. So I think their focus and maybe actions are quite different from what we see amongst any of the other institutions.”

The Chinese are buying more logs from New Zealand and Russia with the currency shifts

“big competitors of both New Zealand and Russia, and given the currency shifts, Russian logs and lumber are much cheaper now than they were, and New Zealand logs are cheaper and they have a transportation advantage. So in this market, I think to the extent they can, the Chinese will buy more from those particular outlets and less from North America. But over the long term, they need to buy from North America, both logs and lumber, be it from the U.S. or Canada.”

Nothing unusual with these institutions selling land in the market

“So you kind of see these 50,000 acre things in the market from time and again, and I think you’re going to continue to see that. And a lot of it has to do with the timing of some of the investments these people made with the TIMOs and they’re coming up for renewal. And it’s just time to take them to market or maybe a client want some current yield or something and so they take some of these lands to market, and we see that all the time. So that’s not unusual. And I think you’ll continue to see that this year and next.”

Analyst comment

” I would suggest that part of the discrepancy between the value of the stock and the realizable value of the company comes from your development lands.”

We’re starting to see the development lights come back on

“So we’re starting to see the development lights come back on. If you look at the Urban Land Institute at their most recent meeting, there were a lot of developers there starting to talk about opportunities, growing their business, capital flows coming into their businesses and that sort of thing. So I think over the next one year to three years to five years, you’re going to see a lot more activity in the development arena, and Plum Creek will participate”

We are frustrated that housing isn’t stronger than its been but the millenials will buy homes

” we’re frustrated and we’ve been frustrated, and three years or four years ago, we would expect it by now to be at 1.4 million starts or 1.5 million starts, and here we’re at 1.1 million starts. So we like many in our business have been a bit frustrated by the anemic, I call it, anemic recovery in housing. That said, if you look at demographics, if you look at interest rates, if you look at even the next generation down, they’re going to buy – the millennials, they’re going to buy homes, it’s going to be delayed a bit.”

The only way to meet US demand for lumber is from the US south

” if you look at that and everything else being equal with what’s going on in Canada and the Chinese market and trade flows, the only place you have production to build all those homes can come from is going to be the U.S. South. And it will – the production capacity will go in place there and sawlog prices certainly will have to go up at that point in time.”

Plum Creek 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Sawlog customers were cautious last year

“During 2014, Southern lumber producers were generally cautious in their production decisions. For some producers, construction activity at their mill and startup challenges with new equipment disrupted their production. We expect these production headwinds to shift to tailwinds in the latter half of 2015, as they work out the kinks in their new equipment.
Other customers are in the midst of their capital projects and we expect this increased capacity will come online over the course of the next two years. All this investment bodes well for southern sawlog demand in the coming years

Packaging customers remained healthy and competitive

“Packaging customers remained healthy and competitive the other customers who bought the bulk of our southern pulpwood production, some new pulp mills began taking deliveries towards the end of 2014 and others are scheduled to begin production over the course of 2015. As these mills move up the start up curve, we expect them to exert healthy competition in their local pulpwood markets.

3.5-3.8m tons of timber for 2015 in Northern Segement

“Looking forward to 2015, we are planning to harvest between 3.5 million tons and 3.8 million tons of timber in the Northern segment, with roughly a 60-40 mix of sawlogs and pulpwood. We expect to see the normal seasonal variation in harvest volume, with the second quarter harvest being the lowest of the year.

15m tons in the south

“For 2015, we are expecting harvest between 15.5 million tons and 16.2 million tons of timber in the South. We expect the mix to be similar to 2014’s harvest, approximately 42% sawlogs, 58% pulpwood.

Timberland selling for 2k per acre in the south

“n the South, where well-managed industrial timberlands are being valued in excess of $2,000 per acre, the price premiums associated with HBU lands have compressed to the point where the current premiums are not as compelling. In these markets, we are inclined to hold these properties off the market for the time being and allow the HBU premiums to bill to the point where the value differential is more substantial.

Maybe some slowing from China but western markets very tight

“As we think about Asia, we are seeing probably slightly slower demand coming from China here early in the year for the first six months. Inventories in Asia have come down significantly from where they were six months ago. I think there is still a little bit of rebalancing there to take place and then we will probably see a better feel for their underlying demand, but our Western markets, they remain very tight.

The Chinese just need to get their inventories in line

“Clearly, we have seen the shiploads in the last few months going from the west coast to China have come down significantly.
I think the inventories were as high as 4.5 million cubic meters. They are down to 3 cubic meter and 3.4 meters 3.5 meters now, still above where they like them and there is a different balance in each port, but I think it’s the next six months, where the Chinese really get their inventories in line and then we will see activities normalize.