Plum Creek Timber (PCL)
Q4 2012 Earnings Call
January 28, 2013 5:00 pm ET
John B. Hobbs - Vice President of Investor Relations
Rick R. Holley - Chief Executive Officer, President and Director
David W. Lambert - Chief Financial Officer and Senior Vice President
Mark Wilde - Deutsche Bank AG, Research Division
Anthony Pettinari - Citigroup Inc, Research Division
Chip A. Dillon - Vertical Research Partners, LLC
Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division
George L. Staphos - BofA Merrill Lynch, Research Division
Gail S. Glazerman - UBS Investment Bank, Research Division
Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division
Steven Chercover - D.A. Davidson & Co., Research Division
John Charles Tumazos - John Tumazos Very Independent Research, LLC
Previous Statements by PCL
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John B. Hobbs
Thank you, Jamaria. Good afternoon, ladies and gentlemen, and welcome to the year end 2012 conference call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations. Today, we have on the line Rick Holley, President and CEO; and David Lambert, Senior Vice President and CFO.
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 other participants to please follow up with any questions by calling me at 1 (800) 858-5347. I encourage you to visit our website, www.plumcreek.com. There, you will find our press release and supplemental financial statements for the full year and fourth quarter of 2012.
Before we begin, 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 R. Holley
Good afternoon. Plum Creek had a strong finish to 2012 and we expect continued improvements in 2013. We are already seeing encouraging signs of meaningful price improvement for sawlogs, and believe with residential construction expected to approach 1 million starts in 2013, we will see that strength manifest itself further during the year.
Over the course of the past year, we continued to manage all our assets with the goal of maximizing the long term value of investment in Plum Creek. We're in great financial shape and looking forward to 2013.
We exceeded our goal for the year as adjusted EBITDA increased about 19%, and our earnings grew about 5% from 2011. Importantly, our Timber Resource and Manufacturing businesses report a combined $44 million improvement in adjusted EBITDA, and a $26 million improvement in operating income. We believe the foundation for a strong recovery in 2013 was built in 2012.
Lumber and wood panel prices have increased significantly, encouraging lumber mills to increase their output. With continued strong lumber and panel pricing, and the expectation for continued improvement in demand in the residential construction and repair and remodel markets, we expect growth in U.S. lumber production in 2013 to exceed that of 2012. Mill operators are reinvesting in their mills and some are adding shifts. Both of these actions will lead to improved sawlog demand and pricing. We experienced sharply improving sawlog prices on the West Coast, where mills have recently added shifts, and where logging conditions have constrained supply. We believe this could be approaching a similar tipping point in the South due in 2013 as lumber production in the region increases and constraints in logging capacity begin to be felt.
As you know, we've been working for the past several years to make sure that Plum Creek's supply chain is in great shape and ready to serve our customers as demand increases. Our preferred contractor program and logistics optimization efforts were designed to counter the effects of the supply chain dislocation that has occurred in the industry over the past several years. We've worked hard to ensure that Plum Creek is in a position to serve its customers efficiently and reliably as demand recovers.
While contractor availability is expected to be a meaningful supply constraint to the industry, we believe our position will be a strategic advantage as demand increases.
We experienced growing interest from European power companies and sustainably managed wood supply from the U.S. South. Last week, we finalized a long-term fiber supply agreement with one of the U.K.'s largest power producers, Drax. They supply about 7% of the U.K.'s electricity needs and are in the process of becoming a predominantly biomass fueled power producer. Through a long-term fiber supply agreement, we will deliver 770,000 tons per year of our wood fiber to Drax pellet plants in Louisiana and Mississippi. Deliveries will start in early 2014, and consist of 80% pulpwood and 20% woody biomass, which includes limbs and tops that we have previously left in the forest.
Through the fiber supply agreement, we expect to capture a premium to prevailing pulpwood prices for the total volume delivered under this contract. We've been working with Drax and other European power companies to help them understand the U.S. wood fiber market and ensure the supply changes in place to handle the unique requirements of this emerging customer base.