SEATTLE Oct 27, 2015 (Thomson StreetEvents) -- Edited Transcript of Plum Creek Timber Company Inc earnings conference call or presentation Monday, October 26, 2015 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John Hobbs Plum Creek Timber Company Inc. - VP of IR * Rick Holley Plum Creek Timber Company Inc. - CEO * David Lambert Plum Creek Timber Company Inc. - SVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Tyler Langton JPMorgan - Analyst * Collin Mings Raymond James & Associates, Inc. - Analyst * Paul Quinn RBC Capital Markets - Analyst * Gail Glazerman UBS - Analyst * Mark Weintraub Buckingham Research Group - Analyst * Chip Dillon Vertical Research Partners - Analyst * Anthony Pettinari Citigroup - Analyst * Alex Ovshey Goldman Sachs - Analyst * George Staphos BofA Merrill Lynch - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Welcome to the Plum Creek third quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to introduce your host of today's conference, Mr. John Hobbs, Vice President of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- John Hobbs, Plum Creek Timber Company Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, Amanda. Good afternoon, Ladies and Gentlemen, and welcome to the third quarter 2015 conference call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the Company. Today we have on the line Rick Holley, Chief Executive Officer and David Lambert, Senior Vice President and Chief Financial Officer. This call is open to all investors and members of the media. However, the Q & A portion of the call is intended for the professional investment community only. We ask that other participants please follow-up with any questions by calling me at 1-800-858-5347. I encourage you to visit our website plumcreek.com. There you will find our Press Release, supplemental financial statements and any reconciliations to non-GAAP financial measures for the third quarter of 2015. Before we begin today, I'd like to take this time to remind everyone that certain of our statements today will be forward-looking involving known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ from those expressed or implied. These risks and factors are routinely detailed in our filings with the Securities and Exchange Commission. Following today's prepared remarks, we'll open up the call for your questions. Rick? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [3] -------------------------------------------------------------------------------- Good afternoon. Today we reported third quarter earnings of $0.58 per share on revenue of $414 million. This is a bit above our guidance range on generally good performance across our businesses. While performance was good this quarter, we are being conservative with our fourth quarter harvest plans based on near-term production expectations and lumber markets. Of course that could change if markets continue to pick up. 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. We estimate that North American lumber demand increased about 4% so far this year, while the supply of lumber in North America grew by about 5%. This additional supply, combined with the uncertainty surrounding exploration of the softwood lumber agreement in October, encouraged lumber buyers to be cautious, only buying to satisfy their short-term needs. The latest data available shows the primary drivers of the increase in North American lumber supply which have been first, increased Canadian lumber production. 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 province into east of the Rockies, primarily there in Alberta. This increased North American supply at about 3% during the first three months of this year -- seven months of this year. Second, increased US lumber production. Most of the increased production in the US came from the low cost Southern region. This increased Northern American lumber supply by about 1%. And finally, a decline in export lumber demand compared to a year ago. Through the first seven months of 2015, offshore exports, principally to China, have declined approximately 200 million board feet or about 5%, increasing North American lumber supply by about 0.75% of a percent. 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 prices have improved and are trending up. We think that underscores the delicate balance in lumber markets. It just doesn't take much to move the market right now. Given the back drop of lower lumber production in near-term, we are operating conservatively. We've 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 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. We view the recent lumber price trends as encouraging and we see no change in longer-term demand trends. Our Southern lumber customers recognize these market forces as temporary and remain committed to their long-term mill investment plans that will ultimately increase future production and sawlog demand in that region. We continue to see new capital announcements and further acquisition interest especially by long-term, well-capitalized industry players. The latest housing data shows residential construction has grown to a rate of about 1.2 million annualized starts. Single family construction activity in the third quarter averaged about 745,000 annualized starts, up about 14% over the same period last year. Improving job market, stronger household formation data, good housing affordability and builder sentiment are all pointing towards continued recovery in residential construction markets. In pulpwood markets, three new pellet plants in the Gulf South region continue to increase their production and are expected to reach their rated production capacities in the early part of 2016 and several more mills are under construction. The incremental demand is reintroducing some competition for pulpwood in these local markets as pellet production expands. Overall, our businesses are performing well on the ground. The size and diversity of the portfolio we've built provides the operational flexibility needed to navigate this slow and sometimes uneven recovery. This allows our foresters to make adjustments to near-term harvest plans when and where market conditions warrant. David will now review our past quarter's performance and discuss our expectations for the fourth quarter. David? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [4] -------------------------------------------------------------------------------- Thank you, Rick. Operating profit in the Northern Resources segment was $6 million, $3 million higher than the second quarter due to seasonally higher harvest volumes, especially in our hardwood regions. Northern Resources harvest volumes for the third quarter were just over 850,000 tons, about 10% lower than our initial expectations. The decrease was primarily driven by fire restrictions in the Northwest. Fortunately, actual resource loss on Plum Creek lands was minimal as we only had 350 acres damaged during the 2015 fire season. Our average Northern sawlog prices increased approximately $3 per ton or about 4% from the second quarter as we saw short-term market tightening for softwood logs in response to the fire restrictions in the Northwest. The stronger prices in the Northwest were somewhat offset by lower hardwood sawlog prices due to reduced demand for hardwood lumber. Overall, as fire restrictions ease, we expect Northern sawlog prices to decline a couple of dollars and return to second quarter 2015 levels, absent an increase in export log demand. In the Northeast, average hardwood pulpwood prices remain strong, increasing $3 per ton or about 6% from the second quarter levels as we shifted our mix back to the higher price Northeast and Lake States wood baskets following the spring breakup. We expect average Northern pulpwood prices will decline slightly as markets adjust to is supply and demand balances related to recent capacity closure announcements in the Northeast. Fourth quarter harvest volumes and mix are expected to be similar to third quarter's level and we expect northern harvest volumes to be about 3.5 million tons for the whole year of 2015. The Southern Resources $33 million operating profit was just higher than the second quarter's $32 million result. Third quarter harvest volumes were about 4 million tons or 5% higher than the second quarter with a similar sawlog to pulpwood harvest mix. Both sawlog and pulpwood prices were unchanged during the third quarter. Customers went into the third quarter with full log decks. Very favorable harvesting conditions allowed our customers to easily maintain their log supplies during the quarter. We expect sawlog and pulpwood prices will remain flat in the fourth quarter as mills enter the year with adequate log inventories and good timber land access in most regions. Pellet Mills in the Gulf South region are continuing to work through their start up phases and are expected to add incremental demand in the fourth quarter. Fourth quarter harvest volumes for the Southern Resources segment are expected to be about 3.8 million tons with a 40% sawlog and 60% pulpwood harvest mix which is similar to the third quarter. Our full-year Southern harvest is now expected to be slightly over 15 million tons lower than our initial expectations as we plan to maintain a conservative harvesting approach, absent a meaningful price improvement in sawlogs. Our initial plan anticipated a greater second half ramp up in demand. Third quarter Real Estate segment sales came in at $129 million in line with our initial expectations for the quarter. Operating income for the quarter was $84 million. As previously discussed, we sold approximately 98,000 acres of timberlands in Florida to the Hancock Group at an average price of $1,230 per acre, a fair price considering the characteristics of the land. Specifically, these timberlands had a significantly higher component of hardwood than Plum Creek's overall Southern portfolio and were further from markets. Third quarter results also included the sale of about 3,700 acres of recreational lands at an average sales price of $2,015 per acre as well as the sale of 1,060 acres, a small non-strategic timberlands for $650 per acre. Fourth quarter Real Estate sales are expected to be between $35 million and $40 million and we expect the land bases for the fourth quarter will approximate 35% of sales. Our Manufacturing segment reported operating income of $8 million, down from $14 million reported in the second quarter of 2015. The second quarter's results included the benefit of a $3 million adjustment that reflected lower worker's compensation expense. After adjusting for this non-recurring benefit, the balance of the decrease was primarily driven by lower profits in our lumber business. Plum Creek's average lumber price decreased 6% compared to the second quarter while our panel prices remained relatively unchanged. The closure of the remanufacturing plant in Meridian, Idaho, in March of 2015, resulted in a lower average year-over-year lumber price as the lumber products from the Meridian plant sold at a higher average sales price than the Company's other lumber products. Sales volumes in all three of our wood products businesses were similar to second quarter levels. Going into the fourth quarter, lumber pricing is rebounding from the third quarter lows and we expect pricing for our specialty MDF and plywood products to be similar to third quarter levels. Sales volumes for our lumber and MDF businesses are also expected to be similar to the third quarter. For plywood, we expect to see decreased sales volumes during the fourth quarter with production about 15% lower to match expected customer demand. In summary, our Manufacturing segment is expected to complete another profitable year generating $45 million to $50 million of EBITDA in 2015. Third quarter operating income in the Energy and Natural Resource segment was $5 million, similar to the second quarter result as energy prices remain challenged on excess global supply. We continue to see strong performance from our construction materials assets which offset some of the weakness in our energy royalty streams. For the fourth quarter, we expect operating income to be similar to the third quarter. Moving below the line, tax expenses expected to be $2 million in the fourth quarter. Third party interest expense for the fourth quarter is expected to be $24 million, about $3 million lower than the third quarter reflecting lower debt costs. Between our revolver and cash on hand, we ended the third quarter with $738 million of liquidity. We expect to draw on the revolver to pay off $439 million of higher rate senior notes that mature in mid-November. This is a temporary measure as we plan to utilize a portion of the $420 million of cash proceeds from our joint venture formation to retire debt early in the first quarter. Total CapEx expenditures during the third quarter were $23 million. We continue to expect ongoing capital expenditures for all business segments to approach $90 million in 2015, so our fourth quarter CapEx is expected to be about $25 million. We expect our fourth quarter results to be between $0.13 and $0.18 per share so our full-year earnings expectations are now $1.06 to $1.11 per share. Rick? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [5] -------------------------------------------------------------------------------- Last month, we announced an exciting new opportunity in which Plum Creek is partnering with several institutional investors to own and sustainably manage a growing portfolio of US timberlands. By partnering with Plum Creek these investors are investing in a well diversified portfolio of high-quality industrial timberlands as well as Plum Creek's timberland management team. We've structured the venture to align the interest of both the institutional investor partners and Plum Creek. The venture's initial portfolio will consist of 260,000 acres of Plum Creek timberlands in five Southern states valued at $560 million or $2,150 per acre. The characteristics of these timberlands are representative of Plum Creek's broad Southern timberland portfolio, with age classes, site indexes and a softwood plantation percentage similar to Plum Creek's overall Southern timberlands. At closing in January of 2016, Plum Creek will sell timberlands valued at approximately $420 million into the joint venture, Twin Creeks, for cash and contribute additional timberlands valued at $140 million for a 25% equity interest in the joint venture. The venture is expected to begin operations in January of 2016. The transaction sets a clear value benchmark, confirmed by third party appraisals and due diligence, for the value of our Southern timberland portfolio. The venture preserves are market presence and economies of scale in local timber markets across the South and because the venture is intends to grow its land base, it creates a new platform for future growth. Importantly, it sources $420 million that can be used to benefit our long-term shareholders. We expect the proceeds from the joint venture to be used for both permanently paying down debt and opportunistically repurchasing our shares. During the third quarter of 2015, the Company repurchased $50 million of common stock, approximately 1.3 million shares at an average price of $39.20 per share. That brings our total share repurchases to $100 million during the first nine months of this year. In total, that represents nearly 2.5 million shares purchased in an average price of $40.30 per share, certainly well below our view of the Company's intrinsic value. Over the last 10 years, the Company has opportunistically repurchased over $1 billion of our shares, retiring over 28 million shares of common stock. As of September 30, 2015, we had $200 million remaining on our current share repurchase authorization. As we have said before, disciplined capital allocation is our most important strategic task. We will continually review all of our capital allocation alternatives, including share repurchase and debt pay down, with the goal of growing the per share value of the Company. Now we will open it up to your questions. Amanda? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Tyler Langton of JPMorgan. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- Yes, good afternoon. Thanks for taking my question. Rick, if housing starts hit your forecast of the 1.25 million next year, do you have a rough sense of what the harvest volumes of the Company could look like? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [3] -------------------------------------------------------------------------------- Yes, as we look at this year, we thought we would be harvesting 19 million to 20 million tons this year. It's been a little softer than expected. That would be our expected outcome for next year, that we would bump it up from roughly the 18.5 million tons that Rick alluded to for this year and move back in that range. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- Got you. And then just thinking Northern Resources, the sort of the mix of sawlog is fine. It was in the mid to high 50s. Do you have a sense of what's driving the decrease down to the 50% and what it could look like next quarter and then going into 2016? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [5] -------------------------------------------------------------------------------- Seasonally it varies. I think for the year as a whole, we think Northern sawlog percentage will be about 55% this year. Harvest levels in our Oregon timberlands are lower in 2015 than they were in 2014. Some of it represents the market conditions and the fire seasons but we have had some divestitures that lowered that overall curve. Typically in the Western region, sawlogs comprise 90% of the harvest. So that little smaller contribution explains a portion of that decline in the mix. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- Okay, great. And then just finally, with Twin Creek Timber, I know you mentioned you're looking to potentially grow it to $1 billion through acquisitions. Can you just talk a little bit -- and I guess what geographies you'd be interested in? And then going forward, just in general when you look at acquisitions, what would Plum Creek potentially do on a standalone basis and what might you acquire through Twin Creek? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [7] -------------------------------------------------------------------------------- Well the agreement we have with our partners in Twin Creeks is that anything that we find in the marketplace that's $200 million or more, Plum Creek will do on its own account. Anything under $200 million, we would take to the joint venture to our partners. As far as geographic preference, there is none. We're looking for high quality industrial timberlands. We want a very diverse portfolio. That's what our partners want as well. It's likely we will be in areas where we operate currently to get some of the synergies associated with our current timberland management expertise in those regions; the customers we know, the contractors and that sort of thing. But it could be in Alaska, it could be clearly in the South, where we're starting. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [8] -------------------------------------------------------------------------------- Got it. Thanks so much. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Thank you. Our next question comes from Collin Mings of Raymond James. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [10] -------------------------------------------------------------------------------- Hi, good afternoon, guys. First, just for David. You mentioned just your plan to fund some of the debt coming through next month with JV related proceeds next year, but how should we think about the timing about either future debt and what that cost might look like? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [11] -------------------------------------------------------------------------------- I think currently if we were to go to market, long-term debt for us would cost about 4.25%. After this maturity, we really don't have anything for a couple of years. So we're in a very attractive window from that perspective. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [12] -------------------------------------------------------------------------------- As far as the mix of what might go as far as the proceeds to pay that down versus what you might look to term out longer-term? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [13] -------------------------------------------------------------------------------- Initially, it will be applied to pay down our bank revolver that will bump up on a temporary base. But we're going to be opportunistic continuing to look at both debt repayment on a long-term basis and the mix of taking advantage of what we still perceive as below value on our equity price. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [14] -------------------------------------------------------------------------------- Okay, and then just as far as on the terms of the JV, can you provide us just a little bit more detail on the management fee you plan to receive? Is there a structure of what's going to be a base management fee versus what's going to get collected as timber's harvested? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [15] -------------------------------------------------------------------------------- Our structure is a little bit different than some of the other asset managers. We don't have the classic AUM fee. We have some fees that are originated around the percent of revenues that we're generating from the property. So in this way, I think we're kind of shoulder to shoulder with our partners to the extent that we're able to generate greater revenues through pricing advantages. We get those benefits and share them jointly. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [16] -------------------------------------------------------------------------------- Okay, any initial thoughts on what that could maybe look like as we go into 2016 as far as either a run rate or a percentage? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [17] -------------------------------------------------------------------------------- Not at this point. What we've said is, we don't expect the fee generation from this investment is going to be the primary driver. What we've done has been able to highlight the value, generate attractive capital and then grow jointly with our partners. The fees that we will earn will make it so when we look at returns on invested capital on our 25% share, we're going to be in a better off position than we would had just investing straightaway. So it's attractive but it's not one that's going to change per se, our P&L at this point. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [18] -------------------------------------------------------------------------------- Okay, and then just switching gears a little bit. I know Rick, in the prepared remarks, you talked a little bit about just the uptick in lumber shipments out of Eastern Canada. How are you guys thinking about the sustainability of that and what's your customer saying right now as far as that incremental supply source that you talked about? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [19] -------------------------------------------------------------------------------- Well, I don't think our customer's concerned about the incremental supply source. They are more concerned about where lumber prices went because of the additional supply. Clearly, the lumber or the additional lumber coming out of Alberta, we believe is sustainable. British Columbia is kind of tapped out. As many of you know, as they would say today, they've got 15% more iron than they have log supply so there's probably not a lot more coming out of British Columbia. But clearly Alberta, I think they could sustain this additional wood that's coming out of their mills there. And again just logistically, most of that will come in the United States as opposed to go to China or somewhere else. But there's not -- I think the good news here is the softwood agreement, lumber agreement, went off and there's no wall of wood at the Canadian border waiting to come across. I think supply and demand will be balanced, lumber prices will go up a bit and hopefully we'll see some strength in the log markets that we're in. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [20] -------------------------------------------------------------------------------- Okay, so it sounds like you're pretty optimistic this uptick in lumber pricing that we've seen recently is going to be sustained? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [21] -------------------------------------------------------------------------------- I think it will, yes. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [22] -------------------------------------------------------------------------------- Okay, then just one last one for me and I'll turn it over. Just there's at least one news report out here over the last week or so out of Gainesville just as it relates to your development plans in the area. Just the latest update? I know you guys went back and revised some of your plans just the latest feedback on that front? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [23] -------------------------------------------------------------------------------- Yes, we revised our plan and so that's in for review now by the County and we would expect to have conversations with them over the coming months and hopefully get something out of there by early next year and have something that we can start working on by the middle part of 2016. But it's an evolving process. What we did is we changed the plan and we're trying to annex the portion of the property into the town of Hawthorn and Hawthorn is very favorable to that. Once we get that done, at least that portion of the plan I think will be on a faster track than it would have been otherwise. The most important thing here is sit down with the people involved, all of the stakeholders, and do the right thing and that's why we adjusted the plan and made the revisions that we did. But we still feel very good about it. It's a great piece of property and it's in a place that clearly needs some economic development. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [24] -------------------------------------------------------------------------------- I'll turn it over. Thanks, guys. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Thank you. Our next question comes from Paul Quinn of RBC Capital Markets. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [26] -------------------------------------------------------------------------------- Yes, thanks very much and good afternoon, guys. Just wanted to get to overall thoughts on current timberland markets? I know you had lined the sale to Hancock, but what else are you seeing out there that closed in the quarter and what are you expecting on future closings? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [27] -------------------------------------------------------------------------------- Well, the only thing that we're certainly aware of Paul, is the Foley timberland, which I heard even though it's not public information I guess, I heard that it did in fact close. I don't know what the values are because it's I think to a private buyer. And then we have the Calpers property or the Campbell property in the Southern part of the United States, which I hear is under contract but has not closed. As you know, both of those properties had some issues with them. The Foley property being lower quality, not particularly great markets. And then the supply agreement with respect to that Southern property and just the amount of harvest that's already been taken off there made that less attractive. I'm not aware of any other large properties that are on the market today. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [28] -------------------------------------------------------------------------------- Okay, and then just back to your comment. It sounds like you're reasonably optimistic on the lumber price recovery here and I'm just trying to understand the timing on your harvest rate reduction where it looks like you're lowering your guidance overall for the year and that's primarily coming back in lower harvest in Q4. Why wouldn't you have taken that reduction in Q3 when prices are recovering in Q4? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [29] -------------------------------------------------------------------------------- Well, some of these commitments we have to customers and their supply agreements and other things, are kind of ahead of ourselves. We are hopeful that pricing will recover in Q3 and it didn't. We see it's still flat. As I made in the comment that I mentioned, if things change and we see some up lift in pricing in the fourth quarter, we will bring that harvest back. We're again, we're trying to be shareholder focused and maximize the value of every tree we cut. And in some of those markets, prices just haven't bounced back and we're just going to be very prudent about when and if we go to market with that wood. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [30] -------------------------------------------------------------------------------- I think some of our customers were running at four days a week for the month of October instead of five days. As we see lumber prices move up, there was no pent-up supply on the Canadian border. Mills are sold out now in early November. Pricing is improving. I think we'd expect some firming trends. I think it was a little bit of a classic inventory cycle. People were afraid of the SLA expiration and buying patterns were very muted going into that. It caused the weakness and now people are replenishing their purchases. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [31] -------------------------------------------------------------------------------- Okay and just last question, at the top of your comments you were talking about lumber demand up 4% and supply up 5%. I can see the supply. I can't see the 4% demand. Where is that coming from? I would have thought that would be over 6%? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [32] -------------------------------------------------------------------------------- I think that's spread across all of the sectors. We know the housing space is improving but that only accounts for 40% of lumber demand. And you have slower growth occurring in the industrial and even in the R&R markets. So our best guess is the demand was growing just a little bit less than supply. I think Rick alluded to how delicate that balance can be and so even though we've seen weaker prices, we see demand in the future continuing to improve and it's 2016 and 2017 and we would expect this to catch back up and put the markets in a much more fundamentally stronger tone. We had great markets for the last two years in 2013 and 2014, again, with the actual supply/demand balance, we would expect to get back to better markets in the future. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [33] -------------------------------------------------------------------------------- All right, thanks very much. Best of luck guys. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Thank you. Our next question comes from Gail Glazerman of UBS. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [35] -------------------------------------------------------------------------------- Thank you, good afternoon. Maybe just sticking with that. The supply pace, does that really -- that 5% growth, was that even throughout the year because I thought exports really came off probably more in the second half? Is it maybe more of an imbalance as they look at the second half than what we would have seen in the first? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [36] -------------------------------------------------------------------------------- Exports really had a tough third quarter. In the first half of the year, they were hanging in there but in the third quarter, they had declined much more sharply. I think the word that we're getting is 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 we'll feel a little bit better. We've seen prices in the Chinese market firm in the last month or two and turn upwards instead of declining. So that's on better footing. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [37] -------------------------------------------------------------------------------- Okay, and so your view is they've hit that target inventory level for log now? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [38] -------------------------------------------------------------------------------- They're very close now. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [39] -------------------------------------------------------------------------------- Okay, and just as you start to look out to 2016, any visibility in tension in Southern log prices and any sense of is it a year away or something that the 1.25 million starts would be enough to push or do you think we're looking further out? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [40] -------------------------------------------------------------------------------- I guess the consensus for housing next year is about 1.28 million. I think that's a bit high still. We're going to come in about 1.1 million this year. But we still think that it deploys probably 1.3 million. So as you start to see it go past 1.2 million housing starts, we see all this capital that's being invested in the South at over $1.5 billion. We see that kind of in place. I think that you'll start to see some clearly production increases which should result, or we expect to result, in sawlog price increase as well. Could you see that next year? Sure. I guess we've been so optimistic in the past, we're more conservative right now in our outlook. But clearly next year will be a bit better than this year and we hope that results in higher pricing in the Southern markets we operate in. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [41] -------------------------------------------------------------------------------- Okay, and could you talk just a little bit, are you seeing sort of weather impact in the fourth quarter? Particularly the extreme rain in South Carolina and maybe some of what's hitting this week? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [42] -------------------------------------------------------------------------------- We haven't but I suspect you will. I mean as everybody knows, it's such a weather driven industry and there's only so many dry sites. You get a lot of rain and it dries up those inventories really quickly, especially in both the pulp inventories as well as sawlog inventories, and then everybody scrambles around to get wood. So I would suspect, at least in the spot market, you're going to see some opportunities to really to drive some values. And given our locations around the South and our delivered model, we're right there waiting for this to happen. Then we could see some of those spot market opportunities and we'll take full advantage of them. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [43] -------------------------------------------------------------------------------- Okay, and just last question. There were some headlines about drafting over-supplied over and weighing down some of the European pellet market. I'm just wondering if you could give some insights into your specific deliveries there in line with expectations? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [44] -------------------------------------------------------------------------------- Yes, I think there is adequate supplies but production is building here domestically. Several of our customers, as Rick mentioned, are really just running at 60% or 70% of rated capacity. Not because they're holding back, they are just still trying to ramp up on brand new facilities. And so, we still see very favorable demand trends in our wood baskets. Some of the power production facilities over in the UK and such, they're still bringing up additional capacity to burn bioenergy. So we don't see an issue there. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [45] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you. Our next question comes from Mark Weintraub of Buckingham Research. -------------------------------------------------------------------------------- Mark Weintraub, Buckingham Research Group - Analyst [47] -------------------------------------------------------------------------------- Thank you. Just a couple of follow-ons related to the pace of recovery. I had a couple of home builders who have commented on labor issues and how that may be constraining the market somewhat. So curious, I don't know if you have a window into that at all? And also, just with your own business and thinking about some of the infrastructure issues, does labor feel like it's in good shape as things ramp up for you? And also on the transportation side, have things settled down and are they feeling in good shape as we move into hopefully growth in the year ahead? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [48] -------------------------------------------------------------------------------- Well Mark, I think that the headwind that housing still has is the very thing you mentioned is labor. In some markets, labor is challenging for a lot of the home builders. The lack of developed lots they are ready to build on is a challenge in many of these markets, which Seattle is a perfect case. You put a house in the market in Seattle and it's sold in a day. There's not just a lot of land to build additional properties on new homes so it's a challenge. And lending is still not the easiest thing so that's still a bit of a headwind. As far as infrastructure for us, our log and haul contractors we have, our preferred contractor program that we've had in place and we talked about many times before, that serves us very well. So we're in very good stead with respect to the contracted workforce. Moving wood, the trucking part, the transportation part, in some markets is a challenge because of the a lot of those truckers can work somewhere else and driving on logging roads is not the easiest thing in the world to do. So that continues to be a challenge, not just for Plum Creek but for all landowners but we're dealing with that as well. So for us, it's not the contractors other than the hauling side that will probably be a challenge in the future as things pick up. -------------------------------------------------------------------------------- Mark Weintraub, Buckingham Research Group - Analyst [49] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. Our next question comes from Chip Dillon of Vertical Research Partners. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [51] -------------------------------------------------------------------------------- Yes, thank you and good afternoon. First question is, I noticed that -- I guess Timber Mart-South said recently that sawlogs in the Southeast were starting to hit the highest level they've seen since 2008. And I didn't know how -- what you're seeing in general in that regard and what might be causing that given especially that lumber prices until recently haven't been that strong? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [52] -------------------------------------------------------------------------------- I think we've talked about this a little bit on our past calls how we are seeing much stronger markets in the Southeast as opposed to the Gulf South region of our operations. I think in some areas you're just a little bit closer to the end-use markets and just the supply/demand conditions are a little bit tighter. So there is some variability by wood basket. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [53] -------------------------------------------------------------------------------- That said Chip, we've always seen our sawlog price in the Atlantic South much higher than the Gulf South over the last several years but we haven't seen a recent uptick in those prices. So I'm not sure exactly what Timber Mart-South is referring to. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [54] -------------------------------------------------------------------------------- Okay, got you. And then, looking at the Real Estate business and obviously, there's going to be -- the activity I guess early next year with the joint venture, but where does it look like at this point if you had to make a guess? I know this year was looks like it's going to be a little over $300 million and I think that's above your long-term target from what you've said in the past. And do you think all things being equal, you might get back toward -- lower down toward that long-term target or what does it seem like? Or on the other hand, are there more opportunities like we are seeing with the joint venture to really get good values? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [55] -------------------------------------------------------------------------------- I think our longer-term number really over the next 15 years is a run rate of $200 million and we haven't completed our budget yet for 2016, but I think that would be a ballpark number for next year is $200 million the Real Estate business. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [56] -------------------------------------------------------------------------------- Okay, got you. And then last question for David is, could you just let us know what the EBITDA was for both the timber deed as well as for if you could break out within the Natural Resources and Energy segment the amount that was tied to the aggregates? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [57] -------------------------------------------------------------------------------- Yes, income EBITDA from timber deeds was just above $5 million for the quarter. And the aggregate business has been performing really well, good volumetric growth and some price cash flow from the aggregates was about $6 million for the quarter. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [58] -------------------------------------------------------------------------------- Got you and while you're on that, I know you probably had some idea what you thought that aggregates deal with Vulcan would generate when you did it a few years ago. I don't what that number would be, but I certainly would think it's higher today given what we've experienced, although I know it's long-term. Do you care to share with us maybe some rough idea proportionately? Do you think that -- it seems like that has worked out better than you would have thought a few years ago. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [59] -------------------------------------------------------------------------------- It's working out nicely. I think housing came up a little slower than we had expected but we're starting to see the volume gains really improve across all of our acquired CMS. That volume growth is expected to be up about 12% this year. So that's clearly an end-use market that has been improving and we think we'll generate about 8% cash on cash returns this year from that investment. So its been very good. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [60] -------------------------------------------------------------------------------- Got you. Any concern that maybe the lack of a highway bill -- of course that could turn out not to be the lack of a highway bill or you look at Texas for example, and the energy patch and the delays you normally see with State budgets. Any concern on the highway side or at least in terms of that slowing down in general as you look at 2016 and 2017? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [61] -------------------------------------------------------------------------------- No, its been very good in performing without a highway bill. That would just be upside. Where these assets are located or away from the energy patch, these are very localized markets. I think we're in good areas and the decline in the energy space is having no impact on the performance of these mines. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [62] -------------------------------------------------------------------------------- You're mostly Georgia, South Carolina I think now that I think about it? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [63] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [64] -------------------------------------------------------------------------------- Terrific. Thanks very much. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Thank you. Our next question comes from Anthony Pettinari of Citigroup. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [66] -------------------------------------------------------------------------------- Good morning or good afternoon, sorry. Following up on an earlier question, Rick, it seems like your view on the long-term US housing recovery is intact but it also seems like the dollar is going to be a lot stronger versus Canadian dollar, ruble, real, et cetera, maybe next year. If that's true, does that temper your view on the pace of a southern sawlog price recovery? Or maybe to ask the question a different way, is it possible we get back to 1.25 million, 1.3 million starts next year but you don't really see a robust recovery in southern sawlog prices because of currency impacts to lumber prices, et cetera? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [67] -------------------------------------------------------------------------------- Anthony, that's clearly possible. One of the impacts on production, US Southern production recovery more rapidly, is imports. Not imports but the lack of exports. So we had some lumber volume going from the US to China and other places and clearly a lot of lumber volume going from Canada to China. If that were to stop for some reason because of currency swings and all of that lumber back up into the US then at 1.3 million housing starts, we're probably not going to see the pricing recovery we expected before. Now we've looked at what's going on in China to the extent anybody knows there and we think demand there is pretty stable now. The outtakes from the ports are pretty stable. Probably not going to pick up near-term but pretty stable. And hopefully, if we see any energy price recovery, we'll see hopefully the ruble strengthen a bit which will certainly help the competitiveness of Canadian and US exports. So absent everything backing back up into the US, we feel at 1.25 million and 1.3 million housing starts, we'll continue to see production capacity increase in the US south and we'll see higher log prices. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [68] -------------------------------------------------------------------------------- Okay, that's helpful. Then just following up on West Coast log export markets, understanding that it's not the biggest part of your business. Could you talk about what you're seeing in September, October from a price standpoint? Are prices stable there? Have they recovered a little bit or any thoughts there? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [69] -------------------------------------------------------------------------------- Prices have stabilized. In fact as David mentioned, there's been some recovery. You've seen New Zealand logs into China have gone up a bit so we're starting to see a little bit of uplift in pricing for export logs. But still, a very small piece of the business. And what we would expect now that inventories are more in line in China, you'll start to see activity pick up a bit and clearly be stronger in 2016 than it was here in 2015. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [70] -------------------------------------------------------------------------------- Okay, that's helpful. I'll turn it over. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Our next question comes from Alex Ovshey of Goldman Sachs. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [72] -------------------------------------------------------------------------------- Thank you, how are you guys? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [73] -------------------------------------------------------------------------------- Thanks. Good afternoon. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [74] -------------------------------------------------------------------------------- Afternoon. A couple questions. First, just on the wood pellet side. Looking at the ramp up for the key customers. Do you think that the impact of wood pellets on the marketplace is more meaningful in 2015 relative to 2016 or price versa? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [75] -------------------------------------------------------------------------------- I think the fact that we have a ramp up for instance, the Drax facilities are only operating at 60% of capacity. We've got a German pellets plant that's got a second very large line coming on. I think it's going to be more impactful in 2016 than 2015. I think we're going to continue to see the impact of these mills and the demand these mills have for pulpwood in those local markets improve the price of pulpwood. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [76] -------------------------------------------------------------------------------- Got it. And just looking at the spot price for pellets to come down partially because of the currency and stronger dollar, vis-a-vis the Euro, does that have any impact on the customer's ability to be able to pay for the fiber to convert into pellets? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [77] -------------------------------------------------------------------------------- It really hasn't been thus far. And most of the volume that's contracted out of those pellet mills into Europe is already a predetermined price. So the fact that there's been some currency and other changes, I don't think has affected that. We've not had any pushback whatsoever because of the price of the wood fiber. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [78] -------------------------------------------------------------------------------- Okay, very good. That makes sense. Just lastly on plywood. I know you guys are obviously at the higher end. But the imports out of Brazil and Chile, any thoughts around what impact that that's having in the marketplace and how to think about potential incremental imports of plywood from Brazil? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [79] -------------------------------------------------------------------------------- It's clearly having an impact on the market today especially in the commodity grades, but even in some of the higher end grades. Out of Chile for instance, some very high-quality plywood comes from into this market from there. So having an impact. As David mentioned in his comments, our plywood volume is down 15% in the fourth quarter and it's really because of customer demand. We're going to hold price because we have a very high-quality product that customers like but we just got less volume because of competition basically and it's from those countries. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [80] -------------------------------------------------------------------------------- Okay. Thank you, Rick. I'll turn it over. -------------------------------------------------------------------------------- Operator [81] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from George Staphos of Bank of America Merrill Lynch. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [82] -------------------------------------------------------------------------------- Hi, everyone. Good afternoon. Thanks for taking my questions, guys. I guess my first question, if we go to Twin Creeks, obviously you got a very nice mark-to-market on your land and you've now gotten significant proceeds which you'll be deploying over the next couple of quarters. But are there any other less obvious benefits from this venture either on an operational basis or capital structure base that you think maybe the street is not paying enough attention to? Or is it really just what it is, you've got very good values that are better than what you think your embedded values are in the public market and you're going to utilize it effectively both to pay down debt and buy stock back? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [83] -------------------------------------------------------------------------------- Well clearly I think that's a benefit, both recognizing the value of Southern timberlands which we demonstrated it now a second time and also the opportunity to do some capital allocation with the proceeds. But I think a benefit that potential comes from this is we've got some institutional investors, some partners in this transaction, very excited about the structure, very excited about working with Plum Creek and having our timberland management expertise at work for them. So the question you have to ask yourself, are there others out there, institutional investors, that own timberland today that think of this as something they might want to do? So I suspect there's going to be opportunities that come our way because of structures in place after its operating awhile that wouldn't have come our way otherwise. That would be to -- and we don't just manage stuff for someone else but maybe to own a piece of somebody else's portfolio and manage that portfolio for them and have access to some additional timberlands in our overall portfolio that might not come to us otherwise. We think there's going to be a lot of interesting opportunities come out of this transaction that aren't necessarily financial driven day one but certainly could be a long-term. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [84] -------------------------------------------------------------------------------- Rick, that's where I was going to go with my next question. Are there any operational constraints or any other financial constraints that will prevent you from doing more of this? Is there a practical limit to how far you'd want to go? Would you be willing to sell up to a third of your Southern timberlands? I don't know if you could frame it that way but that's where I was going with the question. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [85] -------------------------------------------------------------------------------- Well there's some structural considerations, tax and other distribution considerations, but there's no other constraints. We could do the entire portfolio like that way but we don't think that makes sense to do. We think what this is going to be a platform to grow from as opposed to just taking just more Plum Creek lands and contributing into a second joint venture. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [86] -------------------------------------------------------------------------------- Okay. Thank you for that. Switching gears a little bit, you mentioned that the reaction post-SLA has not been as negative perhaps as people had expected. We have our own theories and I think a lot of it from what your vantage point has been as at, there was a natural reduction inventory leading up to it because people were being cautious and now, you're seeing replenishment of inventory which is helping keep prices up. Is there a way to benchmark maybe roughly what you think customers' inventory levels are at right now in terms of lumber? You mentioned the log decks are pretty full but do you have a view on how low relative to normal inventories are on lumber and other wood products within distribution? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [87] -------------------------------------------------------------------------------- Mill-based inventories, at least on the stats we've seen, are not really up. The mill inventory log decks are very adequate, as we indicated. A lot of that was dry weather throughout most of the third quarter. So we don't have the best visibility all the way down into the distribution channels. But everything that we're seeing was people weren't buying and anticipating the prices falling or afraid of that and now that its turned the corner, we do have replenishment taking place and actually people can't get the wood as quickly as they like. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [88] -------------------------------------------------------------------------------- Okay, but in terms of where inventories are, obviously fairly limited visibility we'll -- I guess we'll know when we know when prices stop going up in terms of what we've peaked on that. You mentioned that manufacturing will also comparable to last year's fourth quarter. Now as I recall, there was about a $4 million gain last year in the $14 million reported. So are you saying you'll be close to the $14 million actual or the $10 million true operational result in the fourth quarter for manufacturing? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [89] -------------------------------------------------------------------------------- Closer to the true operational. I think based on the guidance we've given you, we're thinking of EBITDA cash gains of $9 million to $10 million for the quarter. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [90] -------------------------------------------------------------------------------- Okay, thanks for that, Dave. Just wanted to clarify. Just lastly, Western sawlog prices seemed like they were -- Northern sawlog prices seemed like they were better than your expectations for the quarter. Were your operations in the North and particularly in the West, were your profits margins as you expected as well or better than expected? Thank you and good luck in the quarter. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [91] -------------------------------------------------------------------------------- Well I think we saw a price bump due to the severe fire curtailments but as we indicated, our volumes were down. So net-net, we didn't end up in a better position from a margin standpoint. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [92] -------------------------------------------------------------------------------- Thank you, Dave. -------------------------------------------------------------------------------- Operator [93] -------------------------------------------------------------------------------- Thank you. I'm showing no further questions. I would like to turn the call back to Rick Holley for closing remarks. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [94] -------------------------------------------------------------------------------- Thank you, everyone, for joining us today and if we don't see you Happy Holidays and we'll talk to you in the New Year. Thank you, again. -------------------------------------------------------------------------------- Operator [95] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.
|