Weak Lumber Prices Hurt Timber Industry’s 2Q Earnings, Rebound Expected In Second Half

Any hope for the timber industry to rebound in the first half of 2015 has been doused by poor second quarter earnings and a recent downturn in lumber prices. Still, Arkansas-based timber companies and publicly traded REITs are upbeat that the second half of the year will bring better fortunes.

However, second quarter earnings performances by publicly-traded Deltic Timber, Potlatch Corp. and Plum Creek, will likely give pause to some nervous investors who are already spooked by the recent Greek crisis and the potential for the Federal Reserve to raise interest rates later this year.

On Tuesday, after seeing its earnings slide 97% to only $711,000, or two cents per share, Seattle-based Potlatch Corp. Chairman and CEO Mike Covey said the industry recovery is taking longer than expected.

“Our earnings were pressured in the second quarter as a result of the slide in lumber prices over the first five months of the year and seasonally light harvest volumes,” said Mike Covey. “While it took a bit longer than expected, we were pleased to see the sharp recovery in lumber prices late in the quarter. In the second half of the year, we expect higher lumber prices, along with seasonally higher harvest levels and continued strength in the Minnesota rural recreation real estate market to result in much stronger earnings.”

A day earlier, Potlatch rival and fellow Washington State-based REIT, Plum Creek Timber, also reported that its second quarter profits were well off from a year ago. For the three month period ended June 30, the Spokane, Wash.-based timberland owner reported second quarter earnings of $21 million, or 12 cents per share, on revenues of $302 million. Although those quarterly results beat Wall Street expectations, there were still down 62% from year ago results of $55 million, or 31 cents per share, on revenues of $356 million.

During today’s (Tuesday, July 28) conference call with Wall Street analysts, Plum Creek Vice President of Investor Relations John Hobbs said the current downturn was a temporary setback. He noted the improvements in consumer confidence and U.S. employment figures, but also cited that builder sentiment in July was at the highest level seen in 10 years.

“We are encouraged by the trends and what they say about future lumber and log demand,” Hobbs said. “While the positive long-term trends are in place, 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.”

But, Hobbs added, “Our customers recognize these market forces as temporary and remain committed to their investment plans that will increase future production and log demand. We expect modest growth in the second half of the year, as domestic lumber production volumes gradually increase, as some capital projects wrap up and new production capacity comes on line.”

Currently, Potlatch owns more than 400,000 acres of forestland in Arkansas, mainly consisting of southern yellow pine, with a mix of red oak, white oak, and other hardwoods that grow in the South Arkansas bottomlands. Much of that timber is harvested at Potlatch’s mill operations in Warren.

Plum Creek is also among the largest private landowners in Arkansas, with 711,000 acres of forestland in 22 counties. The company entered Arkansas in 1996 and currently employs some 45 employees and works with numerous contractors and customers in Arkansas, company officials said.

This week’s earnings reports by Potlatch and Plum Creek comes nearly a week after El Dorado-based timberland owner Deltic Timber disclosed its second quarter results. For the period ended June 30, Deltic reported net income of seven cents per share, or $831,000, down 53% from net income of 42 cents per share, or $5.3 million, a year ago.

Unlike Potlatch and Plum Creek executives, Deltic Chairman and CEO Ray Dillon was more cautious about the second half of the year. While putting out estimates on potential sales volume for lumber and medium density fiberboard, Dillon said it would all be “dependent upon market conditions.”

HOUSING PRICES ON THE RISE, SAYS DOW JONES
Meanwhile, the S&P Dow Jones Indices on Tuesday released a report that should brighten the fortunes of the timber industry.

According to the latest results for the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, data released shows that home prices continued their rise across the country over the last 12 months.

The 10-City Composite and National indices showed slightly higher year-over-year gains while the 20-City Composite had marginally lower year-over-year gains when compared to last month. The 10-City Composite gained 4.7% year-over-year, while the 20-City Composite gained 4.9% year-over-year. The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a 4.4% annual increase in May 2015 versus a 4.3% increase in April 2015.

“As home prices continue rising, they are sending more upbeat signals than other housing market indicators,” said David Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Nationally, single family home price increases have settled into a steady 4%-5% annual pace following the double-digit bubbly pattern of 2013.”

Blitzer added that over the next two years or so, the rate of home price increases is more likely to slow than to accelerate. “Prices are increasing about twice as fast as inflation or wages. Moreover, other housing measures are less robust,” he said. “Housing starts are only at about 1.2 million units annually, and only about half of total starts are single family homes. Sales of new homes are low compared to sales of existing homes.”