July 25, 2021

Forest Products

Homebuilders remain fairly positive, but DIY demand has slowed – D.R. Horton noted that housing market conditions remain robust, but building material shortages have made construction times less predictable. The company has had to slow the sales pace in order to deliver on closing commitments. TRI Pointe noted that housing demand continues to outstrip supply in their markets and management expects to continue restricting sales through the end of the year. According to UFP Industries, DIY demand has fallen y/y, although professional contractors are still very busy.

• So what? A mix shift in demand towards new residential construction favors OSB producers, with the slowdown in DIY having an outsized impact on lumber.

Distributors could be looking at a big quarter – Builder’s FirstSource pre-announced Q2 EBITDA of $820-850MM well above consensus at just $520MM. As prices fall, we will see how lean distributors were able to keep inventory levels. For example, UFP Industries booked a $23 million charge against the value of its SYP inventory, which management noted could have been higher.

• So what? The strong results from both BLDR and UFPI suggest it could be a good quarter for Doman Building Materials. Our Q2 EBITDA forecast is nearly 20% above consensus, which we think is in the right direction; however, inventory write-downs could weigh on sentiment.

European lumber producers reported strong results – Södra noted that demand remains favorable in the Swedish market and that it is expected to remain favorable in the near-term. SCA noted that inventories of solid wood products are still at a very low level (-13% y/y) despite local sawmills running at full capacity. SCA and Södra reported Wood Product segment margins in the 35% range (+11-12% q/ q). Stora Enso highlighted strong demand from both Europe and overseas markets and lean inventories in its core markets. Management expects a normalization to be at least ~6 months away.

• So what? If Canfor Europe and Mercer Wood Products experience similar q/q margin improvement, we think there could be upside relative to our forecasts.

Pulp producers saw q/q improvements driven by pricing – SCA noted that European pulp demand continues to be strong, with net prices in China now about $50/tonne lower than it is in Europe. Stora Enso management pointed out that July and August are seasonally weaker for Chinese demand, but expect the weakness to be temporary as fundamentals remain strong. SCA and Stora Enso Pulp EBITDA margins were 38%, while Södra and Rottneros came in at 28% and 21%, respectively.

• So what? The sequential improvement likely bodes well for Canfor, Mercer, IP, and West Fraser results. However, RISI reported that maintenance at Mercer’s Peace Valley mill took a week longer than expected and that it has run well below capacity since, so there is some risk to our production forecast.

Tissue producers are facing a volatile environment – Kimberly-Clark reported that they are pulling back on bath tissue marketing in North America due to the demand volatility. Input costs have also spiked and the supply chain continues to face challenges. Management noted that pricing actions are generally on track and that they expect pricing to fully offset the impact of input cost inflation over time. Essity noted that AfH demand took off towards the end of Q2.

• So what? We expect it will be a challenging quarter for Cascades, Clearwater, and KP Tissue given the demand volatility in consumer tissue and input cost headwinds.