1. Results Overview
The second quarter results published by companies in the timber sector highlighted the differing market dynamics between Europe and the United States. U.S. companies were characterised by a more positive and optimistic tone, compared to the rather negative tone of their European counterparts.
Increasing interest rates are identified as a key cause for the slowdown in the European construction industry, while U.S. companies tend to highlight the resilience of the housing market relative to expectations, that have so far been too pessimistic.
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2. Timber Construction
Companies with a focus on durable wood products (Primary and Secondary Wood Products as well as Timber REITs) continued to report large declines in revenues on a Year-on-Year basis. The median decline in quarterly revenues was -30%, which is in line with Q1 results. At EBITDA and EBIT level the declines were, as is normal, larger at -57% and -70%. Hardest hit were secondary products manufacturer Louisiana Pacific (LPX) and primary products manufacturer West Fraser Timber (WFG), with revenues declining -46% resp. -44%. LPX’s decline in revenues, significantly below market expectations, was predominantly driven by the large decline in OSB prices that was already reported in Q1. WFG was hit by both lumber and OSB prices, as lumber prices remain around historical averages after reaching all-time highs in 2021 and briefly peaking again in early 2022. The notable positive outlier this quarter was again Stella Jones from Canada, which produces specialised products such as utility poles and railway ties. While those segments were strong, the residential lumber segment was again lower YoY.
On a Quarter-on-Quarter basis, which is affected by seasonal effects in certain cases, revenues were on average higher, despite significant dispersion. The largest top-line increases were posted by the American composite products manufacturer TREX (+49%) and the Canadian timber products wholesaler Goodfellow (+34%). Other timber products distributors like Doman and Builders FirstSource were also up double-digits in revenues terms. Lumber and, in particular, OSB prices while being extremely weak YoY, have slightly rebounded this quarter pointing to a normalization of supply and demand.
The U.S. real estate market continues to be more resilient than expected, especially considering the aggressive tightening cycle that led to dramatically higher mortgage rates, which remain a significant headwind. Multi-family construction in the U.S. remains stronger than single-family construction. In their quarterly analyst call, LPX noted a somewhat softer remodeling market compared to new construction, pointing to low inventory and slower existing home sales. Low housing inventory levels are a major structural difference between today’s situation and the prevailing market circumstances during the subprime crisis of 2007-2009.
In Europe, demand for wood products has been weak, with companies such as Steico and Bergs Timber pointing to inventory reductions and softer construction activity. Nordic integrated forestry company Stora Enso, more focused on packaging, but with a strong presence in solid wood products, also explicitly noted the slowdown in construction activity.
While some bright spots were reported by individual companies (e.g., in the windows segment for Bergs), the overall tone is less upbeat than their American counterparts.
3. Paper & Packaging
The Paper and Packaging market, after a resilient Q1, reported on average double-digit revenue declines (median -13%) YoY, with margins contracting significantly. Ence Energia y Cellulosa, the Spanish pulp and biomass company, reported the sharpest decline with revenues down -48% due to lower energy and pulp prices. It was followed by the Portuguese paper company Navigator, whose revenues were down -26%. North American companies performed better, with revenues declining on average only -6%, significantly outperforming their European counterparts.
Leading Nordic Integrated forestry company Svenska Cellulosa, focused on forestry, pulp and containerboard, while also selling durable wood products, reported revenues declining -22% YoY, driven predominantly by lower prices. It also highlighted lower volumes of solid wood products.
4. Construction
Results by construction companies were mixed both in terms of actual numbers and outlook. Nordic construction group Veidekke is expecting weakness in Sweden, which so far was supported by public investments, while business overall was resilient. French real estate promoter Nexity reported robust semi-annual revenue growth of 4% YoY, but this positive number masks the -28% decrease in residential real estate reservations and a rather pessimistic outlook by the company’s management as a consequence of reduced affordability in the light of higher mortgage rates. In the U.S., leading single-family homebuilder D.R. Horton reported an increase in revenues of +11% YoY, while at the same time its backlog is down -31% YoY. Management noted in the quarterly call that housing starts are a better predictor of future activity, since a significant part of the business is done within the quarter and does not appear on the backlog. Another mixed picture is provided by NVR, a U.S. homebuilder also active in mortgage financing, which reported a 13% decrease in homebuilding revenues, a 27% increase in new orders (units) YoY but also at the same time a decrease in backlog (units) of -9%.
Figure 1: YoY changes in orderbook/backlog values for selected companies. Sources: companies’ quarterly reports.
5. Disclosures and Conflicts of Interest
Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and included in the Timber Finance Carbon Capture & Storage Index.
Please note that this research is prepared for information purposes and targeted to institutional investors in Switzerland. They do not represent investment advice and do not take into consideration the individual requirements, risk tolerance and goals of an investor. Recipients who are not Swiss institutional investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.
The information presented in this report is obtained from several different public sources that we consider to be reliable. Nevertheless, we cannot guarantee the accuracy of the presented information. The information used may change quickly and we are not committed or obliged to modify the reports base on new information. The opinions and views expressed in this report reflect those of the author at the point in time of its compilation and may vary at any time. Valuation methods like DCF and any other analysis or expert judgement do not provide any guarantee that the target price or fair value will be reached, for example because of unforeseen changes in financial or economic conditions.
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