netrashetty
Netra Shetty
Plum Creek Timber Company (NYSE
CL), the largest non-government landowner in the U.S., is a major timber producer in the U.S. The company's motto is "maximize the value of every acre", and it achieves this through logging, as well as through the acquisition and resale of property that is not useful for timber production. Plum Creek sells its timber to the lumber, plywood, and strandboard industries, as well as to the pulp/paper industry. It also has its own manufacturing business, making products like plywood and fiberboards. Plum Creek also stands to gain from the advent of cellulosic ethanol, a technology that, if commercially viable, would turn Plum Creek's timber into a fuel source for cars. For FY2009, the company earned $236 million dollars on revenues of $1.294 billion.[1]
As a timber dealer and landowner, Plum Creek uses sustainable forest management practices and a price differentiating scheme called "log merchandising" in order to offset some cyclical volatility and create competitive prices. Plum Creek also resells land that is not useful for timber-harvesting purposes in order to reap as much profit as possible from all its holdings. Because timber is usually pretty similar regardless of who harvested it, much of the competition in the timber industry comes in the form of pricing battles between competing companies. This can decrease profits as companies cut prices to boost sales volume and revenue. Like any other commodity, timber prices tend to fluctuate cyclically in response to general market conditions, which can lead to cyclical revenues for Plum Creek.
Contents
1 Company Overview
1.1 Timber and Manufactured Goods
1.1.1 Sustainable Forest Management
1.1.2 Log Merchandising
1.2 Real Estate
1.2.1 Large Land Holdings
1.2.2 Property Resale
1.3 Q3 FY2009 Summary
1.4 Q4 FY2009 Summary
1.5 Q1 FY2010 Earnings Summary
1.6 Q2 FY2010 Earnings Summary
1.7 Q3 FY2010 Earnings Summary
1.8 Q4 FY2010 Earnings Summary
2 Key Trends and Forces
2.1 Plum Creek's Profitability is Highly Dependent upon the Timber Market Cycle
2.2 Plum Creek depends on the Success of the U.S. Paper Publishing Industry
2.3 Because PCL is Largest Private Land Owner in USA, Real Estate Demand affects PCL's Gains
2.4 Cellulosic Ethanol Offers a New Source of Revenues Derived from PCL's Waste Materials
3 Competition
4 References
Company Overview
Plum Creek Timber Company earns its revenues primarily through the sale of timber and manufactured timber products, though (as the largest landholder in the U.S.) it does gain sizable profit through the sale of land. Over the past three years, Plum Creek has seen increasing revenues and increasing harvest sizes; however, it has also seen decreasing profits, indicating shrinking profit margins. This trend is most likely attributed to the commodity nature of timber, the declining success of the publishing industry, and an oversupply of paper on the world market - all of which would lead to lower prices and, thus, lower profit margins.
Annual income data, in millions[2] 2004 2005 2006 2007 2008 2009
Net Sales $1,528 $1,576 $1,627 $1,675 $1,614 $1,294
Net Income $362 $354 $317 $282 $233 $236
Profit Margin (%) 23.7% 22,5% 19.5% 16.8% 14.4% 18.2%
Timber Harvest Volume (millions of tons) 18.6 19.2 21 20.4 19.6 15.8
Timber and Manufactured Goods
Plum Creek harvests timber for resale to lumber mills, pulp/paper mills, and cellulosic ethanol refineries. The company also manufactures products like logs, lumber, plywood, etc., in its own factories. Though manufacturing brings in sizable revenue, it is one of the least profitable parts of Plum Creek's business; timber resale is far more profitable. Because timber is a commodity resource, Plum Creek uses forest management and log merchandising to maximize profitability.
Sustainable Forest Management
Plum Creek practices sustainable forest harvesting in line with the 2001 Sustainable Forestry Initiative. Sustainable forestry involves either harvesting only what will grow back before the next harvest, or replanting trees after they have been harvested. Plum Creek plants about 85 million seedlings a year, allowing the company to maintain a renewable stock of product without expanding land holdings at high cost.
Log Merchandising
When trees grow in volume, they grow in value -- larger trees can be put to more valuable uses such as lumber for construction. Plum Creek is able to maximize its revenue by cutting trees into various-sized pieces and selling them to different customers, a process known as "log merchandising". For example, the larger portions of a tree are cut off and sent to sawmills or plywood mills, smaller portions go to lumberyards, and the smallest chunks go to pulp and paper mills. If cellulosic ethanol becomes a commercially viable technology, Plum Creek will be able to sell its waste products, like sawdust, to cellulosic ethanol refineries, monetizing what was once discarded.
Real Estate
Plum Creek, aside from being a timber producer, is a real estate investment trust (REIT). This means that its securities are invested directly in real estate, even though they sell like stocks. REITs pay very little income tax and are required by law to redistribute 90% of their profits to shareholders every year. As investments, REITs can be considered as mutual funds for real estate; they provide a way for the public to invest in real estate without actually purchasing land. Plum Creek has REIT status because of its very large land holdings, which it sells and leases to real estate developers and other companies that can use the land more efficiently. Plum Creek's real estate practices are highly profitable.
Large Land Holdings
Plum Creek takes advantage of its large land holdings in three ways. First, it cuts its costs by capitalizing on economies of scale for timber production. Second, because Plum Creek holds land all over the U.S., natural disasters in one region pose less of a threat to the overall success of the company. Additionally, certain wood end products require different types of trees. Plum Creek's diverse land holdings enables it to sell timber to a variety of secondary industries, providing some protection from fluctuations in demand for any one end product.
Property Resale
Plum Creek classifies its lands in three ways: timberlands, higher and better use (HBU) lands, and non-strategic use lands.
Timberlands: self-explanatory, these lands are used for their ability to grow trees to be harvested for timber; besides this, there are no better economic uses for the land.
Higher and Better Use Lands: HBU lands are valued for their timber, but also have other uses past their abilities to produce wood. These uses range from residential development to recreational uses to environmental conservation and future use. Plum Creek harvests wood, but eventually sells the land in a way that maximizes its higher use. For example, the company's development lands are especially valuable; with proper management, the value of Plum Creek's real estate sector has tripled in the past five years.
Non-Strategic Use Lands: These are acquired lands with no timber value that are sold off to the highest bidder.
Q3 FY2009 Summary
Plum Creek beat analyst expectations of $0.08 earnings per share when it reported $0.12 earnings per share for the third reporting quarter of FY2009.[3] Plum Creek's revenue for the three months ended Sept. 30, 2009 dropped 29% to $294 million compared from $414 million in the third quarter of FY2008.[4] Plum Creek's net profit declined by 73% to $19 million compared to FY2008 third quarter. Plum Creek attributes these decreased earnings to a prolonged slump in the construction sector and its own downsizing costs. As for the fourth quarter and near future, CEO Rick Holley stated that "timber markets appear to have stabilized in most cases, and we have experienced some modest log price improvement in some regions."[5]
Q4 FY2009 Summary
Plum Creek reported earnings above analyst estimates in the fourth quarter FY2009 of $28 million, which was down 71% compared to the fourth quarter FY2008.[6] Likewise, revenues from this reporting quarter was down 44% to $258 million, and was worse than analyst estimates of $263 million.[7] The decrease in both top and bottom line was attributed to all of the three company's major business segments; however, business segment "real estate" took the biggest hit with declines in earnings of 81% and decline in revenues of 69% compared to fiscal 2008's fourth quarter.[8] Despite a gloomy year-over-year drop in growth, PCL's outlook for FY2010 was positive, partly due to improving timber prices and better-than-expected land sales. Throughout this quarter and the near term, PCL hopes to capitalize on attractive pulpwood prices by focusing on harvesting activities of thinning young stands of trees while maintaining a low sawlog harvest level.[9]
Q1 FY2010 Earnings Summary
Plum Creek first quarter profits posted $87 million, a drop of 45% compared to $157 million in Q1 FY2009 due to low top-line growth, but still beat analyst expectations.[10] Revenues dropped 33% to $317 million, but beat analyst estimates of $298.6 million.[11]
Performance improved in every segment except real estate, which benefited from a $250 million conservation sale from FY2009.[12] The manufacturing segment also was able to improve due to a profit on cost-cutting measures. This, combined with the overall pulpwood supply tightness in the US South brought about by wet winter weather translated into higher prices for Plum Creek.
Q2 FY2010 Earnings Summary
Plum Creek posted earnings of $35 million ($0.21 per diluted share) for the second reporting quarter of FY2010, an increase of 9.4% compared to $32 million during second quarter FY2009. Further, PCL posted revenues of $258 million, a 5.1% decrease compared to $272 million same quarter FY2009.[13]
PCL's Northern Resources segment reported a $3 million profit for the quarter, an increase of $10 million from the $7 million operating loss experienced same quarter last fiscal year.[14] Further, operating profit in the Southern Resources segment was $24 million in Q2 FY2010 compared to $23 million reported in Q2 FY2009. PCL's real estate business segment however reported operating income of $26 million, a decrease compared to $44 million in same quarter FY2009, but FY2009 includes a $38 million sale of Wisconsin timberland that contributed about $23 million.[15] If that figure was taken out, second quarter FY2010 figures actually increased 23.8%. Finally, PCL's manufacturing segment reported $10 million of operating income, which resulted to about same performance as Q2 FY2009.[16]
The overall increase in operating income performance in all business segments was a result of improved demand from industrial panel customers and attractive pulpwood markets. For example, sawlog demand and pricing improved from record lows (30% increase) from the lows seen in the second quarter of FY2009. PCL's second quarter sawlog harvest of 484,000 tons was 113,000 tons, reflecting higher demand from lumber customers.[17]
Q3 FY2010 Earnings Summary
Plum Creek posted earnings of $32 million or $0.20 per diluted share for the third reporting quarter of FY2010, a 68.4% increase compared to $19 million compared to same quarter last year.[18] The earnings figure exceeded analyst consensus estimates by $0.08 earnings per share.[19] Plum Creek reported revenues of $259 million, a decrease of 11.9% compared to $294 million same quarter last year.[20] The discrepancy between lowered top-line growth versus higher bottom-line growth was attributed to Plum Creek benefiting from its manufacturing downsizing and cost-management efforts.
Plum Creek's Northern Resources division reported an operating profit of $5 million compared to $3 million due to improved sawlog prices.[21] Average sawlog prices increased by more than $10 per ton on a year-over-year basis. In the Southern Resources segment, operating profit totaled $25 million compared to $21 million same quarter last year due to higher pulpwood prices offset by lower sawlog harvest volume.[22] Plum Creek's Real Estate segment totaled operating income of $19 million compared to $20 million same quarter last year. Finally, Manufacturing reported an operating profit of $7 million compared to an operating loss of $1 million same quarter last year as Plum Creek continues to sell large tracts of rural lands including non-strategic timberlands to raise cash.
Q4 FY2010 Earnings Summary
PCL posted earnings of $59 million or $0.37 EPS for the fourth reporting quarter of FY2010, an increase of 110% compared to $28 million in the same quarter last year.[23] Top-line also increased from $258 million same quarter last year to $356 million this quarter. Earnings within the fourth quarter also include a $3 million, or $0.02 EPS, loss on early extinguishable of debt.[24]
Despite increased sales and earnings, PCL saw that prices for sawlogs remained below attractive levels and that it will retain its most valuable real estate lands until pricing improves.[25] Therefore, PCL will continue 2011 conservatively. Sales in Plum Creek's real estate unit, however, is still taking on the positive uptrend of rising prices, with sales more than doubling to $155 million.[26]
Key Trends and Forces
Plum Creek's Profitability is Highly Dependent upon the Timber Market Cycle
Timber is a commodity good, which means that trends usually impact the industry as a whole, not affecting just one company. As a result, changes in the timber market and fluctuating demand for wood products are the largest forces that can impact Plum Creek's profitability. The way in which Plum Creek deals with production is very important to its success among its competitors.
Trees increase in value over time due to the high-cost nature of products that use larger-volume timber (like homes). This creates the potential for a timber investment to offset the negative effects of inflation. The unique nature of trees as investments gives timber companies some insulation against the usual commodity price cycles. Companies can harvest more timber during high-demand sectors of the timber market cycle, providing higher revenues. By the same logic, timber companies can cut back on harvesting during periods of low demand, decreasing supply so as to keep per-tree profits higher. Since trees become more valuable over time, this also allows a company's timber stock to grow in both size and value. Plum Creek's sustainable forestry practices take advantage of the unique valuing of timber. This selective harvesting makes Plum Creek both environmentally friendly and also highly competitive.
A massive insect infestation in Canada could negatively impact Plum Creek, however. Over the past decade, the mountain pine beetle has wreaked havoc on timberlands in British Columbia, the country's largest timber-producing region. Though the problem has yet to be contained, the total amount of timberland destroyed by the mountain pine beetle is estimated at around 17 million acres. The Canadians have developed a plan to salvage as much usable timber as possible from the affected areas, which could lead to a supply glut in the global timber market. If even a small fraction of the 17 million acres of timber is salvageable, hundreds of thousands of acres worth of timber could be streaming across the U.S. border, which would likely force Plum Creek and other timber companies to lower prices significantly.
Plum Creek depends on the Success of the U.S. Paper Publishing Industry
Smaller logs harvested by Plum Creek often go to paper mills. A large amount of paper demand stems from the publishing industry - books, magazines, newspapers, etc. With the rising popularity of digital media, the publishing industry is facing increasing competition. Many newspapers are considering going digital because of declining subscriptions and considerable loss of advertisements to internet sources.
Chinese paper production is putting further pressure on Plum Creek's profits. Asia's paper production has rapidly increased, much of its output has been consumed by Chinese customers. This has led to a rapid decrease in China's demand for imported paper, causing non-Chinese companies to overproduce paper, creating a global supply glut and driving prices downward. While this might appear to be disadvantageous for PCL, it might be a blessing in disguise as the astronomical growth in the Chinese paper industry in the past decade has dangerously depleted the productive timberland of both China and many of its neighbors such as Indonesia or Myanmar.[27]
Because PCL is Largest Private Land Owner in USA, Real Estate Demand affects PCL's Gains
Though only 3% of Plum Creek's land is classified for development after logging, this 3% has been extremely profitable over the past five years, allowing Plum Creek to invest in more profitable timberlands. More than the sale of timberlands for development, the condition of the real estate market also affects PCL's business since construction is the greatest end market for timber. By extension, Interest Rates are determinate for the company since they determine how easily consumers and businesses can borrow money to finance real estate and new home purchases. Higher interest rates make it more expensive to borrow money, thereby leading to fewer new home purchases and, as a result, fewer land deals and building timber sales. Falling interest rates, on the other hand, could have greatly positive effects on Plum Creek by stimulating demand for both timber and land.
Cellulosic Ethanol Offers a New Source of Revenues Derived from PCL's Waste Materials
Ethanol is being touted as the new alternative to oil and gas. Traditionally, ethanol has been produced from corn through a rather inefficient refining process. Cellulosic ethanol, however, is a new form of ethanol that can be produced from a variety of plant products, including wood. The entry of cellulosic ethanol onto the renewable energy market creates the possibility of a new revenue source for Plum Creek. In the past, wood chips and sawdust from timber production were considered to be waste materials and discarded. If cellulosic ethanol were to popularize, Plum Creek would be able to sell its wood waste to ethanol refineries and monetize what was previously waste. The demand for cellulosic ethanol is being driven by a number of trends, including rising oil and gas prices and public concern over environmental degradation.
Competition
Timber companies are often hard to compare because of the different ways in which they operate. Plum Creek harvests and sells raw timber, sells and leases land, and manufactures some wood products. Other timber companies operate differently, participating in different stages of the process of turning a tree into paper. Weyerhaeuser Company (WY), for example, participates in nearly every aspect of timber production, harvesting trees, making paper and containerboard, producing lumber and wood pulp, recycling paper, and dabbling in real estate. International Paper Company (IP) focuses mainly on the production of end products like paper, lumber, and packaging materials, but it also harvests some timber (around 20% of the amount it needs every year) and engages in real estate transactions.
Plum Creek's competitors' relatively diverse sources of revenue could be advantageous, allowing them to capitalize on economies of scale and earn revenues from both timber and timber products. If Plum Creek's operating income breakdown is any indication, however, timber product manufacturing is far less profitable than timber resale, which could mean put Plum Creek at a relative advantage.
As the largest landholder in the U.S., Plum Creek's large resources allow it to produce timber at lower costs, putting it ahead of competitors in terms of profitability. As one of the only timber REITs (Rayonier Inc. REIT (RYN) is another), the company also pays fewer taxes, which can mean significant cost savings. Because of these savings, it can keep its prices low while still making a profit, making its products more attractive to timber customers. All in all, Plum Creek's resources make it highly competitive, even in a commodity industry.
CL), the largest non-government landowner in the U.S., is a major timber producer in the U.S. The company's motto is "maximize the value of every acre", and it achieves this through logging, as well as through the acquisition and resale of property that is not useful for timber production. Plum Creek sells its timber to the lumber, plywood, and strandboard industries, as well as to the pulp/paper industry. It also has its own manufacturing business, making products like plywood and fiberboards. Plum Creek also stands to gain from the advent of cellulosic ethanol, a technology that, if commercially viable, would turn Plum Creek's timber into a fuel source for cars. For FY2009, the company earned $236 million dollars on revenues of $1.294 billion.[1]As a timber dealer and landowner, Plum Creek uses sustainable forest management practices and a price differentiating scheme called "log merchandising" in order to offset some cyclical volatility and create competitive prices. Plum Creek also resells land that is not useful for timber-harvesting purposes in order to reap as much profit as possible from all its holdings. Because timber is usually pretty similar regardless of who harvested it, much of the competition in the timber industry comes in the form of pricing battles between competing companies. This can decrease profits as companies cut prices to boost sales volume and revenue. Like any other commodity, timber prices tend to fluctuate cyclically in response to general market conditions, which can lead to cyclical revenues for Plum Creek.
Contents
1 Company Overview
1.1 Timber and Manufactured Goods
1.1.1 Sustainable Forest Management
1.1.2 Log Merchandising
1.2 Real Estate
1.2.1 Large Land Holdings
1.2.2 Property Resale
1.3 Q3 FY2009 Summary
1.4 Q4 FY2009 Summary
1.5 Q1 FY2010 Earnings Summary
1.6 Q2 FY2010 Earnings Summary
1.7 Q3 FY2010 Earnings Summary
1.8 Q4 FY2010 Earnings Summary
2 Key Trends and Forces
2.1 Plum Creek's Profitability is Highly Dependent upon the Timber Market Cycle
2.2 Plum Creek depends on the Success of the U.S. Paper Publishing Industry
2.3 Because PCL is Largest Private Land Owner in USA, Real Estate Demand affects PCL's Gains
2.4 Cellulosic Ethanol Offers a New Source of Revenues Derived from PCL's Waste Materials
3 Competition
4 References
Company Overview
Plum Creek Timber Company earns its revenues primarily through the sale of timber and manufactured timber products, though (as the largest landholder in the U.S.) it does gain sizable profit through the sale of land. Over the past three years, Plum Creek has seen increasing revenues and increasing harvest sizes; however, it has also seen decreasing profits, indicating shrinking profit margins. This trend is most likely attributed to the commodity nature of timber, the declining success of the publishing industry, and an oversupply of paper on the world market - all of which would lead to lower prices and, thus, lower profit margins.
Annual income data, in millions[2] 2004 2005 2006 2007 2008 2009
Net Sales $1,528 $1,576 $1,627 $1,675 $1,614 $1,294
Net Income $362 $354 $317 $282 $233 $236
Profit Margin (%) 23.7% 22,5% 19.5% 16.8% 14.4% 18.2%
Timber Harvest Volume (millions of tons) 18.6 19.2 21 20.4 19.6 15.8
Timber and Manufactured Goods
Plum Creek harvests timber for resale to lumber mills, pulp/paper mills, and cellulosic ethanol refineries. The company also manufactures products like logs, lumber, plywood, etc., in its own factories. Though manufacturing brings in sizable revenue, it is one of the least profitable parts of Plum Creek's business; timber resale is far more profitable. Because timber is a commodity resource, Plum Creek uses forest management and log merchandising to maximize profitability.
Sustainable Forest Management
Plum Creek practices sustainable forest harvesting in line with the 2001 Sustainable Forestry Initiative. Sustainable forestry involves either harvesting only what will grow back before the next harvest, or replanting trees after they have been harvested. Plum Creek plants about 85 million seedlings a year, allowing the company to maintain a renewable stock of product without expanding land holdings at high cost.
Log Merchandising
When trees grow in volume, they grow in value -- larger trees can be put to more valuable uses such as lumber for construction. Plum Creek is able to maximize its revenue by cutting trees into various-sized pieces and selling them to different customers, a process known as "log merchandising". For example, the larger portions of a tree are cut off and sent to sawmills or plywood mills, smaller portions go to lumberyards, and the smallest chunks go to pulp and paper mills. If cellulosic ethanol becomes a commercially viable technology, Plum Creek will be able to sell its waste products, like sawdust, to cellulosic ethanol refineries, monetizing what was once discarded.
Real Estate
Plum Creek, aside from being a timber producer, is a real estate investment trust (REIT). This means that its securities are invested directly in real estate, even though they sell like stocks. REITs pay very little income tax and are required by law to redistribute 90% of their profits to shareholders every year. As investments, REITs can be considered as mutual funds for real estate; they provide a way for the public to invest in real estate without actually purchasing land. Plum Creek has REIT status because of its very large land holdings, which it sells and leases to real estate developers and other companies that can use the land more efficiently. Plum Creek's real estate practices are highly profitable.
Large Land Holdings
Plum Creek takes advantage of its large land holdings in three ways. First, it cuts its costs by capitalizing on economies of scale for timber production. Second, because Plum Creek holds land all over the U.S., natural disasters in one region pose less of a threat to the overall success of the company. Additionally, certain wood end products require different types of trees. Plum Creek's diverse land holdings enables it to sell timber to a variety of secondary industries, providing some protection from fluctuations in demand for any one end product.
Property Resale
Plum Creek classifies its lands in three ways: timberlands, higher and better use (HBU) lands, and non-strategic use lands.
Timberlands: self-explanatory, these lands are used for their ability to grow trees to be harvested for timber; besides this, there are no better economic uses for the land.
Higher and Better Use Lands: HBU lands are valued for their timber, but also have other uses past their abilities to produce wood. These uses range from residential development to recreational uses to environmental conservation and future use. Plum Creek harvests wood, but eventually sells the land in a way that maximizes its higher use. For example, the company's development lands are especially valuable; with proper management, the value of Plum Creek's real estate sector has tripled in the past five years.
Non-Strategic Use Lands: These are acquired lands with no timber value that are sold off to the highest bidder.
Q3 FY2009 Summary
Plum Creek beat analyst expectations of $0.08 earnings per share when it reported $0.12 earnings per share for the third reporting quarter of FY2009.[3] Plum Creek's revenue for the three months ended Sept. 30, 2009 dropped 29% to $294 million compared from $414 million in the third quarter of FY2008.[4] Plum Creek's net profit declined by 73% to $19 million compared to FY2008 third quarter. Plum Creek attributes these decreased earnings to a prolonged slump in the construction sector and its own downsizing costs. As for the fourth quarter and near future, CEO Rick Holley stated that "timber markets appear to have stabilized in most cases, and we have experienced some modest log price improvement in some regions."[5]
Q4 FY2009 Summary
Plum Creek reported earnings above analyst estimates in the fourth quarter FY2009 of $28 million, which was down 71% compared to the fourth quarter FY2008.[6] Likewise, revenues from this reporting quarter was down 44% to $258 million, and was worse than analyst estimates of $263 million.[7] The decrease in both top and bottom line was attributed to all of the three company's major business segments; however, business segment "real estate" took the biggest hit with declines in earnings of 81% and decline in revenues of 69% compared to fiscal 2008's fourth quarter.[8] Despite a gloomy year-over-year drop in growth, PCL's outlook for FY2010 was positive, partly due to improving timber prices and better-than-expected land sales. Throughout this quarter and the near term, PCL hopes to capitalize on attractive pulpwood prices by focusing on harvesting activities of thinning young stands of trees while maintaining a low sawlog harvest level.[9]
Q1 FY2010 Earnings Summary
Plum Creek first quarter profits posted $87 million, a drop of 45% compared to $157 million in Q1 FY2009 due to low top-line growth, but still beat analyst expectations.[10] Revenues dropped 33% to $317 million, but beat analyst estimates of $298.6 million.[11]
Performance improved in every segment except real estate, which benefited from a $250 million conservation sale from FY2009.[12] The manufacturing segment also was able to improve due to a profit on cost-cutting measures. This, combined with the overall pulpwood supply tightness in the US South brought about by wet winter weather translated into higher prices for Plum Creek.
Q2 FY2010 Earnings Summary
Plum Creek posted earnings of $35 million ($0.21 per diluted share) for the second reporting quarter of FY2010, an increase of 9.4% compared to $32 million during second quarter FY2009. Further, PCL posted revenues of $258 million, a 5.1% decrease compared to $272 million same quarter FY2009.[13]
PCL's Northern Resources segment reported a $3 million profit for the quarter, an increase of $10 million from the $7 million operating loss experienced same quarter last fiscal year.[14] Further, operating profit in the Southern Resources segment was $24 million in Q2 FY2010 compared to $23 million reported in Q2 FY2009. PCL's real estate business segment however reported operating income of $26 million, a decrease compared to $44 million in same quarter FY2009, but FY2009 includes a $38 million sale of Wisconsin timberland that contributed about $23 million.[15] If that figure was taken out, second quarter FY2010 figures actually increased 23.8%. Finally, PCL's manufacturing segment reported $10 million of operating income, which resulted to about same performance as Q2 FY2009.[16]
The overall increase in operating income performance in all business segments was a result of improved demand from industrial panel customers and attractive pulpwood markets. For example, sawlog demand and pricing improved from record lows (30% increase) from the lows seen in the second quarter of FY2009. PCL's second quarter sawlog harvest of 484,000 tons was 113,000 tons, reflecting higher demand from lumber customers.[17]
Q3 FY2010 Earnings Summary
Plum Creek posted earnings of $32 million or $0.20 per diluted share for the third reporting quarter of FY2010, a 68.4% increase compared to $19 million compared to same quarter last year.[18] The earnings figure exceeded analyst consensus estimates by $0.08 earnings per share.[19] Plum Creek reported revenues of $259 million, a decrease of 11.9% compared to $294 million same quarter last year.[20] The discrepancy between lowered top-line growth versus higher bottom-line growth was attributed to Plum Creek benefiting from its manufacturing downsizing and cost-management efforts.
Plum Creek's Northern Resources division reported an operating profit of $5 million compared to $3 million due to improved sawlog prices.[21] Average sawlog prices increased by more than $10 per ton on a year-over-year basis. In the Southern Resources segment, operating profit totaled $25 million compared to $21 million same quarter last year due to higher pulpwood prices offset by lower sawlog harvest volume.[22] Plum Creek's Real Estate segment totaled operating income of $19 million compared to $20 million same quarter last year. Finally, Manufacturing reported an operating profit of $7 million compared to an operating loss of $1 million same quarter last year as Plum Creek continues to sell large tracts of rural lands including non-strategic timberlands to raise cash.
Q4 FY2010 Earnings Summary
PCL posted earnings of $59 million or $0.37 EPS for the fourth reporting quarter of FY2010, an increase of 110% compared to $28 million in the same quarter last year.[23] Top-line also increased from $258 million same quarter last year to $356 million this quarter. Earnings within the fourth quarter also include a $3 million, or $0.02 EPS, loss on early extinguishable of debt.[24]
Despite increased sales and earnings, PCL saw that prices for sawlogs remained below attractive levels and that it will retain its most valuable real estate lands until pricing improves.[25] Therefore, PCL will continue 2011 conservatively. Sales in Plum Creek's real estate unit, however, is still taking on the positive uptrend of rising prices, with sales more than doubling to $155 million.[26]
Key Trends and Forces
Plum Creek's Profitability is Highly Dependent upon the Timber Market Cycle
Timber is a commodity good, which means that trends usually impact the industry as a whole, not affecting just one company. As a result, changes in the timber market and fluctuating demand for wood products are the largest forces that can impact Plum Creek's profitability. The way in which Plum Creek deals with production is very important to its success among its competitors.
Trees increase in value over time due to the high-cost nature of products that use larger-volume timber (like homes). This creates the potential for a timber investment to offset the negative effects of inflation. The unique nature of trees as investments gives timber companies some insulation against the usual commodity price cycles. Companies can harvest more timber during high-demand sectors of the timber market cycle, providing higher revenues. By the same logic, timber companies can cut back on harvesting during periods of low demand, decreasing supply so as to keep per-tree profits higher. Since trees become more valuable over time, this also allows a company's timber stock to grow in both size and value. Plum Creek's sustainable forestry practices take advantage of the unique valuing of timber. This selective harvesting makes Plum Creek both environmentally friendly and also highly competitive.
A massive insect infestation in Canada could negatively impact Plum Creek, however. Over the past decade, the mountain pine beetle has wreaked havoc on timberlands in British Columbia, the country's largest timber-producing region. Though the problem has yet to be contained, the total amount of timberland destroyed by the mountain pine beetle is estimated at around 17 million acres. The Canadians have developed a plan to salvage as much usable timber as possible from the affected areas, which could lead to a supply glut in the global timber market. If even a small fraction of the 17 million acres of timber is salvageable, hundreds of thousands of acres worth of timber could be streaming across the U.S. border, which would likely force Plum Creek and other timber companies to lower prices significantly.
Plum Creek depends on the Success of the U.S. Paper Publishing Industry
Smaller logs harvested by Plum Creek often go to paper mills. A large amount of paper demand stems from the publishing industry - books, magazines, newspapers, etc. With the rising popularity of digital media, the publishing industry is facing increasing competition. Many newspapers are considering going digital because of declining subscriptions and considerable loss of advertisements to internet sources.
Chinese paper production is putting further pressure on Plum Creek's profits. Asia's paper production has rapidly increased, much of its output has been consumed by Chinese customers. This has led to a rapid decrease in China's demand for imported paper, causing non-Chinese companies to overproduce paper, creating a global supply glut and driving prices downward. While this might appear to be disadvantageous for PCL, it might be a blessing in disguise as the astronomical growth in the Chinese paper industry in the past decade has dangerously depleted the productive timberland of both China and many of its neighbors such as Indonesia or Myanmar.[27]
Because PCL is Largest Private Land Owner in USA, Real Estate Demand affects PCL's Gains
Though only 3% of Plum Creek's land is classified for development after logging, this 3% has been extremely profitable over the past five years, allowing Plum Creek to invest in more profitable timberlands. More than the sale of timberlands for development, the condition of the real estate market also affects PCL's business since construction is the greatest end market for timber. By extension, Interest Rates are determinate for the company since they determine how easily consumers and businesses can borrow money to finance real estate and new home purchases. Higher interest rates make it more expensive to borrow money, thereby leading to fewer new home purchases and, as a result, fewer land deals and building timber sales. Falling interest rates, on the other hand, could have greatly positive effects on Plum Creek by stimulating demand for both timber and land.
Cellulosic Ethanol Offers a New Source of Revenues Derived from PCL's Waste Materials
Ethanol is being touted as the new alternative to oil and gas. Traditionally, ethanol has been produced from corn through a rather inefficient refining process. Cellulosic ethanol, however, is a new form of ethanol that can be produced from a variety of plant products, including wood. The entry of cellulosic ethanol onto the renewable energy market creates the possibility of a new revenue source for Plum Creek. In the past, wood chips and sawdust from timber production were considered to be waste materials and discarded. If cellulosic ethanol were to popularize, Plum Creek would be able to sell its wood waste to ethanol refineries and monetize what was previously waste. The demand for cellulosic ethanol is being driven by a number of trends, including rising oil and gas prices and public concern over environmental degradation.
Competition
Timber companies are often hard to compare because of the different ways in which they operate. Plum Creek harvests and sells raw timber, sells and leases land, and manufactures some wood products. Other timber companies operate differently, participating in different stages of the process of turning a tree into paper. Weyerhaeuser Company (WY), for example, participates in nearly every aspect of timber production, harvesting trees, making paper and containerboard, producing lumber and wood pulp, recycling paper, and dabbling in real estate. International Paper Company (IP) focuses mainly on the production of end products like paper, lumber, and packaging materials, but it also harvests some timber (around 20% of the amount it needs every year) and engages in real estate transactions.
Plum Creek's competitors' relatively diverse sources of revenue could be advantageous, allowing them to capitalize on economies of scale and earn revenues from both timber and timber products. If Plum Creek's operating income breakdown is any indication, however, timber product manufacturing is far less profitable than timber resale, which could mean put Plum Creek at a relative advantage.
As the largest landholder in the U.S., Plum Creek's large resources allow it to produce timber at lower costs, putting it ahead of competitors in terms of profitability. As one of the only timber REITs (Rayonier Inc. REIT (RYN) is another), the company also pays fewer taxes, which can mean significant cost savings. Because of these savings, it can keep its prices low while still making a profit, making its products more attractive to timber customers. All in all, Plum Creek's resources make it highly competitive, even in a commodity industry.