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Plum Creek Timber Company, Inc. (PCL)

Q3 2008 Earnings Call

October 27, 2008 5:00 pm ET

Executives

John Hobbs - Director of IR

David W. Lambert - Sr. VP and CFO

Rick R. Holley - President and CEO

Analysts

George Staphos - Banc of America Securities

Richard Skidmore - Goldman Sachs

Claudia Hueston - JP Morgan

Hamzah Mazari - Credit Suisse

Christopher Chun - Deutsche Bank Securities

Steven Chercover - D.A. Davidson & Co.

Ross Gilardi - Merrill Lynch

Peter Ruschmeier - Barclay

Mark Weintraub - Buckingham Research

Gail Glazerman - UBS

Operator

Good afternoon. My name is Allie and I will be your conference operator today. At this time I would like to welcome everyone to the Plum Creek third quarter earnings conference call. (Operator Instructions)

I would now like to turn the call over to Mr. John Hobbs, Director of Investor Relations.

John Hobbs

Thank you, Allie. Good afternoon ladies and gentlemen and welcome to the third quarter 2008 conference call for Plum Creek. I’m John Hobbs, Director of Investor Relations for the company.

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. We ask that any other participants 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 third quarter.

Before we begin I’d like to take this time to remind everyone that certain of our statements today will be forward-looking, involve 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.

I’ll turn the call over to Rick.

Rick R. Holley

Good afternoon. To say the least, the last several weeks have been extraordinary. No doubt, this may be the toughest economic situation that the United States will undergo in our lifetimes. Yet there is reason to be optimistic at Plum Creek. We are in excellent financial health. We manage a portfolio of valuable hard assets, assets that grow biologically every day. In a very tough environment, our asset base and strong balance street allow our people to focus not only on protecting current value but also to grow long-term value.

Our financial health and flexibility is excellent. We don’t use the commercial paper market and our credit agreements are with institutions with excellent staying power. Since the third quarter balance sheet of September 30, our financial position has only improved and we expect to improve further our position during the fourth quarter.

On October 1 we completed our Southern Timberland Joint Venture with The Campbell Group and as part of that transaction, we received $783 million in cash from the joint venture as we outlined to you in late August. Subsequently we permanently retired $75 million of private placement notes and plan to retire an additional $225 million of private placement notes as they mature over the next 12 months.

In the meantime, we have paid down $432 million, the entire drawn amount, on our $750 million revolving line of credit and have cash on hand exceeding $270 million. With our strong liquidity position, we don’t’ need to tap the debt markets for the next two years. In the past few weeks we have found an opportunity to conduct an attractive arbitrage using proceeds from the Southern transaction to acquire owned company stock, effectively buying Timberland’s Plum Creek lands at less than $1200 per acre.

Between October 1 and October 24 of this year, the company has used $172 million to purchase 4.3 million shares of our common stock at an average price of about $40 per share, reducing the share count by about 2.5% We find today’s values even more compelling and have $177 million remaining in the recently approved $200 million repurchase authorization. This will allow us to continue to take advantage of the apparent disconnect between the price of Plum Creek’s stock and private market transactions and purchase today our own timberlands for less than $1000 per acre.

As you know, at the end of June we signed a Purchase and Sale Agreement with the Nature Conservancy and Trust for Public Land in which we will sell approximately 310,000 acres of Montana land for $510 million. We expect to close this sale in three phases over the next three years, starting in December of this year. The Nature Conservancy has asked us to adjust the phasing of the land sales to better match their funding sources and as a result we expect to close on $150 million of this transaction during Phase I this December. Phase II which is valued at $150 million is expected to close in the fourth quarter of 2009, and the balance, $110 million, will close in the fourth quarter of 2010.

As a result we find ourselves today in an excellent position to protect and grow the value of our shareholders’ investment and expect to further improve that position by the end of this year.

David will now review our third quarter results with you and discuss our outlook. Following the prepared remarks, we’ll open it up for your questions.

David W. Lambert

We reported earnings of $0.40 per share for the third quarter within our guidance range. Timber market conditions were slightly better than we initially anticipated, particularly in the northern tier states. Our rural land sales came in just below our original expectations and extremely difficult markets led our manufacturing business to report a loss.

In the northern resources segment, operating profit was $12 million, up from the second quarter’s $8 million profit. Saw log prices were approximately 9% or $6 per ton higher across the northern markets compared to the second quarter. In particular, northwest saw log prices recovered from the [inaudible] experience during the first half of the year as mills sought to rebuild depleted log decks in anticipation of seasonally stronger lumber demand. We expect northern saw log prices to retreat from third quarter levels to prices we experienced late last year as we anticipate sawmills will take extended holiday downtime to match lumber protection with seasonally slower demand.

We expect saw log harvest volumes to be about 850,000 tons, up slightly from the third quarter level but well below last year’s 1 million ton level. Northern pulpwood prices were up across all regions as pulp and paper mills’ pulpwood inventories remain lean throughout the quarter due to wet weather conditions in the Lake states and the northeast. Our average pulpwood prices increased another 4% or $2 per ton compared to the second quarter and are up nearly [inaudible] so far this year. We are expecting pulpwood prices in the northern resources segment to hold firm during the fourth quarter.

We have accelerated our harvest over the past few quarters to capture what we viewed as attractive prices. We plan to reduce our pulpwood harvest from this recent pace to about 600,000 tons during the fourth quarter. In our southern resources segment, our third quarter operating profit was $29 million, down $8 million from the second quarter. Southern saw timber prices drifted lower this quarter as expected. On average, saw log prices fell about $1 per ton.

We expect sawmills across the south to take extended holiday downtime in response to weak lumber demand and expect saw timber prices to remain weak during the fourth quarter. Given the market conditions we plan to further reduce our saw log harvest. We now expect to harvest a bit less than 8 million tons of southern saw timber this year. As a result, our fourth quarter southern saw log harvest should be about 1.2 million tons.

Southern pulpwood prices remained attractive during the third quarter with significant spot market spikes caused by wet weather. We altered our initial plans, bringing about 100,000 tons more pulpwood to market than initially planned to capture attractive prices. This is a timing difference and we will reduce our pulpwood harvest pace during the fourth quarter to less than 1.6 million tons. We expect pulpwood markets to remain attractive, averaging up $1 per ton during the fourth quarter.

The real estate segment recorded revenue of $108 million and an operating profit of $73 million. These results were just below our estimate for the quarter. The results so far this year were about $13 million ahead of last year’s pace. Our experience during the third quarter wasn’t much different than we anticipated and is consistent with the first half of the year. Casual inquiries are off in most markets compared to a couple of years ago and prices are holding steady in most markets.

Mississippi and Louisiana rural land markets remain very active and activity in Montana and Georgia was a bit better than expected with stable pricing. Rural unentitled land accounted for essentially all of the 70,000 acres sold during the quarter. We received nearly $1150 per acre for the 14,800 acres of small, non-strategic lands. The per acre values we are experiencing this year are lower as these properties are generally lower quality than we sold over the past couple of years.

We also sold nearly 40,000 acres of conservation lands at a little over $1000 per acre. About 28,000 acres of these lands were located in northern Wisconsin with the balance of the lands located in Georgia. During the quarter we sold more than 15,000 acres of HBU or recreational lands, capturing average values of more than $3200 per acre. As was the case with the first half of the year, we sold a greater proportion of lands from lower priced regions such as Louisiana and Mississippi. Development sales were very quiet, with 10 acres sold for more than $13,000 per acre.

During the fourth quarter real estate segment sales are expected to be between $75 million and $85 million. Land basis in the fourth quarter is expected to be steady at about 23% of revenue. We tempered our fourth quarter real estate expectations as the events of the past weeks have recently caused some individuals we’ve been working with to pause or delay a purchase. Transactions are taking longer to work through and individual buyers are assessing their financial position. We are holding firm on price expectations and electing to hold valuable lands when prices don’t meet our expectations. We may lose a deal here and there but we do not anticipate this to be significant. Our fourth quarter outlook takes these conditions into account.

During the fourth quarter we expect to close on the first phase of the Montana Conservation sale, valued at $150 million. The book values of these lands is approximately $80 million. Our guidance for the fourth quarter does not include the approximately $0.40 per share of earnings from this transaction as we have yet to clear all the contingencies. We expect to increase our guidance to include the earnings from this sale once the contingencies are cleared in late November.

The manufacturing segment reported a $4 million loss, worse than our expectations of break-even performance. The results include a $3 million write down of the value of purchase log commitments. Prices were mixed with lumber prices seasonally strong, up about 5%, and plywood prices down slightly. MDF prices increased slightly as a result of higher raw material costs. Sales volumes were lower in all product lines, particularly MDF, which declined 30% sequentially. MDF customers reduced demand as they saw their flooring, cabinetry, and molding inventories rise.

Fourth quarter sales volumes typically weakened during the fourth quarter and we expect this to hold true this year. As a result, we expect manufacturing segment results to decline somewhat from third quarter levels. Overall we expect to report fourth quarter results between $0.17 and $0.22 per share. We expect to increase our fourth quarter guidance at the time the Montana conservation sale clears its contingencies.

I’ll turn the call over to Rick for some summary comments before opening up the call to y our questions.

Rick R. Holley

We continue to invest in productive timberlands when we can uncover good value for our shareholders. During the third quarter we completed three such privately negotiated acquisitions totaling 120,500 acres which were purchased for approximately $64 million. The largest acquisition was 86,000 acres of mixed hardwood timberlands in Vermont. These timberlands in the northeastern part of the state [inaudible] name very well. We also added 26,000 acres of Timberland in Oregon and 8,500 acres in Georgia.

We think the market turmoil highlights the defensive characteristics of an investment in timberlands. The long-term natures of timberlands, biological growth, non-correlation with financial markets, and inflation protection, among others, have attracted a variety of investors seeking direct investment in the asset class. These buyers are generally equity buyers, employing little or no leverage. As a result, Timberland transactions have continued to be completed despite the credit crunch of the past year.

We continue to evaluate timberland opportunities and continue to see healthy competition for the asset class from a variety of investor groups. Timberlands are long-term investments and investors are looking beyond the current conditions to the long-term return potential of the next 10 to 15 years. We expect timberland owners will benefit in the coming years as some positive structural changes to timberland markets emerge.

Those changes include constrained supply as significant reductions in British Columbia’s timber harvest are implemented, as well as the emergence of a new class of customers who value wood fiber for both its energy content and its superior carbon footprint. We believe these customers will increase total demand on a finite supply of timber. We also believe these energy markets may provide some additional diversification benefits as their markets operate independently of traditional forest products markets. Plum Creek is working to be well positioned to benefit as these markets emerge and grow.

I feel very good about where we are positioned both financially and in the marketplace. Great assets, a very strong balance sheet, and people in the field who understand how to protect and grow long-term value. We have significant financial and operational flexibility and will continue to make the correct long-term value decisions and maintain our commitments to our shareholders.

Allie, we’ll take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from George Staphos of Banc of America.

George Staphos - Banc of America Securities

Just a few questions. If you could perhaps give us a bit more color in terms of the real estate segment revenue guidance. Can you, Rick, perhaps give us the number of transactions maybe that were pushed out into 2009 and if not, how do you feel about the segment looking out to next year and whether you’ll be able to continue the progress you’ve seen here over the last 12 to 24 months.

Rick R. Holley

George, I don't recall the exact number of transactions, but I don’t think it’s... Maybe it’s 20 or 30 or something like that would be pushed out just because buyers are on the fence right now because of the general financial markets and their own financial situation which we can all appreciate clearly what’s happened here in the last month or so.

As you think about the real estate segment, you have to keep in mind there’s very large transactions, $510 million we’re doing in Montana, and a large part of the lands that are part of that transaction would have been sold as either higher and better use lands or conservation lands or in some cases, small non-strategic lands over the next 10 years and so those are really being moved up early obviously over this next three year period as we close that transaction, so I think as we think about the real estate segment, both this year where our guidance is off a bit from where it is earlier, part of that reason is some of the land we would have sold even in the fourth quarter are part of this large transaction.

Clearly as Montana, the markets there improve, more of these lands would have been sold in the next two or three years, so in general, even though there’s a current softness in the real estate market and a lot of buyers on the fence, justifiably so. We feel very good about it, even over the next two or three years. The markets we’re in and the value of the properties net market.

That said, we’re going to do the same thing on real estate as we do in the timber markets. We see pricing weakness, we’re going to hold the properties, take it off the market, and capture that value another day. Clearly we have the financial capabilities to do that.

George Staphos - Banc of America Securities

Rick I guess one follow up question. When I parse your previous guidance and what you’re saying now for the rest of the year and then in turn adjust for real estate, there’s a bit of an additional variance that I can’t account for just relative to real estate and I guess that’s largely the pushing out or the reduction that’s in the saw log harvest in the south, would that be fair?

David W. Lambert

Yes, we have slightly lower saw log harvest and manufacturing performance is going to be weaker than our initial expectations in the fourth quarter as we’ve outlined.

George Staphos - Banc of America Securities

Dave, last question, I had missed it, you had mentioned why northern saw log prices were up so much in the quarter, I’d missed it, if you’d just give us a bit more color on that, I’d appreciate it.

David W. Lambert

In the Oregon markets we had seen a rebound from the weakness in the early first half of the year as people built inventories. We continue to get good values for saw logs in both the Lake states and the northeast. That segment performed very well in general.

Operator

Your next question comes from Richard Skidmore of Goldman Sachs.

Richard Skidmore - Goldman Sachs

Just to follow up on the volumes, pulpwood, can you just talk about how you’re seeing those trend and as you see those over the next couple of quarters, we’ve certainly seen things slow down in the pulp and paper markets. Just wondering how you’re seeing that play out.

David W. Lambert

As you’re starting to see some signs of the paper, the industry is slowing, maybe whether it’s recession. We still have not seen that from a purchasing of pulpwood. We have large declines in lumber production and there’s a shortage of residual chips. We see pulpwood prices remaining firm through the fourth quarter. We’ve been opportunistic in taking advantage of the markets as they’ve presented themselves and have had an elevated level of pulpwood harvest. We’re indicating some slightly lower volumes to be occurring in the fourth quarter of this year.

Richard Skidmore - Goldman Sachs

Rick, can you just maybe shifting to a different topic, we’ve seen assets across the board get re-valued over the last few months and in this last year the market has certainly come in pretty sharply in the equities. It’s across most asset classes with the exception perhaps of timber. Can you talk about why you’re comfortable as you look out over the next 12 to 24 months, why timber valuations will hold up and not see what we’ve seen in other asset classes?

Rick R. Holley

Rick I think largely because the investor in timberlands, and there’s still a fair amount of capital on the sidelines trying to invest in timberlands, is longer term. They’re looking through this cycle. If anything they’re starting to look at this cycle and lower prices as being more upside when you look out a year or two years or whatever these markets improve. I know there was a recent [Reese] article talking about some transactions that may or may not get done. We’re in the marketplace and we talk to a lot of buyers. We know who the sellers are, and we think all those transactions will in fact get done at very, very good prices, so I think the market is holding up and there’s still a lot of capital chasing very little opportunity, so...

Richard Skidmore - Goldman Sachs

Looking at your own equity, Rick, given the way that it’s moved just recently, and it looks from your press release that you’ve been active in the market in the fourth quarter, would we expect that you’ll be as active as we move forward or have you sort of put the buying your shares back a bit on hold here given the financial market?

Rick R. Holley

We like the buying the shares back, obviously, at around $40 and closed today at $30 and some change, so we liked it at $40, we like it more at $30, so we’ll continue to be very opportunistic and as I mentioned we have a lot of cash, we have a lot of flexibility in our balance sheet, and with the Phase I of the Montana deal closing in December, we’ll have another $150 million, so I think we have plenty of capital clearly to take care of the dividend through even the most difficult times. To be opportunistic in the timberland acquisition market and also when it makes sense to buy our stock back, so we’ll continue to allocate capital very thoughtfully.

Richard Skidmore - Goldman Sachs

How much do you have left from the share repurchase authorization?

Rick R. Holley

The one we just put together a week ago, we have $177 million left on that.

Operator

Your next question comes from Claudia Hueston of JP Morgan.

Claudia Hueston - JP Morgan

Just wanted to ask one more question on the real estate guidance just in terms of how sort of trends have persisted over the course of the quarter. Was there sort of noticeable weakness in September in terms of interest, and then how is that maybe played out into October in that market?

David W. Lambert

I think it would be fair to say interest lagged more in the last 30 days then it did in the previous 60 days, just as markets weakened, a lot of people that were looking at property said, geez, you know, I have to think about it. I’ll come back to you, that sort of thing, which again, given what’s happened in the marketplace, you can understand for a lot of buyers, and again, most of these buyers for Plum Creek lands are cash buyers, so they’re not borrowing, so it’s not a borrowings problem as much as they’re just looking at their net worth changing and deciding that maybe right now they don’t want to allocate capital to a new investment, but you know, these people want to buy land, they like owning land as an alternative investment, and they’ll be back.

Claudia Hueston - JP Morgan

Then I was hoping you could just talk a little bit more about the trends you’re seeing in the northern region, maybe looking at the northwest versus the Lake states versus the main New Hampshire, Vermont area. Is there much difference in those markets? That would be helpful, just some color there.

Rick R. Holley

With respect to real estate or timber?

Claudia Hueston - JP Morgan

Timber, sorry.

Rick R. Holley

I think we saw towards the end of the quarter which we indicated some weakness in the Oregon log markets, there’s a lot of install capacity there. Obviously there’s some downtime being taken and with weaker lumber prices, we’ve seen some weakness. We saw log prices there. But you look at saw log prices in the Lake states and clearly in Maine are holding up very well, a lot of the hard wood prices and pulpwood prices in these two markets are very, very good and continue and we feel very good about that.

In fact, we can feel good about pulpwood prices generally across the country even through the fourth quarter and probably into next year, so... But you know, Oregon kind of ebbs and flows a bit and right now because of inventories, it’s a bit weaker there, but it’ll be back as people try to rebuild their inventories the first of the year.

Claudia Hueston - JP Morgan

Finally I don’t know if you have just the most recent shares outstanding, something we should be thinking about just given the buy back activity, even if it’s just end of quarter would be helpful.

David W. Lambert

That would be about 167. 3 million.

Operator

Your next question comes from Hamzah Mazari of Credit Suisse

.

Hamzah Mazari - Credit Suisse

Just a couple of quick questions. Most of my questions have been answered. You guys purchased about $64 million of timberland this quarter and talk of our complementary purchases as in w hen you guys see them. Looking back historically, you guys on average have purchased about $100 million each year of timberland. What can we expect in terms of acquisitions going forward? Is that run rate going to moderate?

David W. Lambert

No, I think $100 million or $125 million a year of smaller opportunistic timberland acquisitions is what you should expect.

Rick R. Holley

Largely that’s due to some of the 1031 needs that we described before the built in gains tax issue that we have until October of 2011 so we’re outthinking we can find opportunistic things. Clearly as these markets do in fact change it becomes more of a buyers’ market than a seller’s market. You can see a much higher level of activity in that but I think $100 million to $125 million is appropriate.

Hamzah Mazari - Credit Suisse

Just on your taxes, the last couple of quarters you guys have had a tax benefit, obviously that depends on the mix of your requalified income. Can we expect a benefit going forward as well?

David W. Lambert

In fourth quarter as well.

Hamzah Mazari - Credit Suisse

And just lastly, we’ve been hearing from a number of sources, builders and developers, over the next couple of years, would likely shift and build smaller developments closer to large metropolitan areas versus far-flung rural areas. I’m curious to see if you guys have heard about that and how that trend affects you guys at all.

David W. Lambert

Clearly we believe the development market and as you all know we have about 200,000 acres that we classified as development. That market we considered largely one of just getting entitled and it’s going to be pretty quiet for two or three years, but again where those lands are, although they’re rural, they’re near areas that we think will be very attractive both to developers and to buyers in the next 3 to 5 years but I think development markets generally over the next couple years are going to be, I hate to say it, but kind of dead. They’re just going to be very, very quiet. So what Plum Creek’s doing is just getting all those lands that we have that we see as having higher value ready by getting them entitled in this quiet period.

Operator

Your next question comes from Christopher Chun of Deutsche Bank.

Christopher Chun - Deutsche Bank Securities

Dave, that 167.3 million in terms of shares, that’s the current number?

David W. Lambert

Yes, as of the press release that incorporates the share repurchase activity that’s outlined.

Christopher Chun - Deutsche Bank Securities

Then in terms of the per acre prices that you got in the various categories in 3Q, it seemed to me it was quite strong in the recreation [HBU] category but a little bit soft in conservation and the small non-strategic buckets. Should we draw any meaningful conclusions from that or was that mostly a mix issue?

David W. Lambert

I think we outlined earlier that we were expecting lower values for our small non-strategic this year as a result of generally just a weaker mix from what had been sold in the last couple of years, so that’s not surprising. These are our weaker performing properties that we’re trying to move through and reposition those cash flows. The conservation values really vary by region and I think when you’ve looked at our matrix of values, on average $1000 an acre really isn’t off from that. The lands that were done in Georgia were a materially higher value than the conservation properties that occurred in Wisconsin, so it will really depend region per region.

Christopher Chun - Deutsche Bank Securities

In terms of this Montana sale that’s going to happen in three phases, can you talk a little bit about what the tax impact of that is going to be?

David W. Lambert

This will be handled as a regular straight sale and will generate income and taxes from it just like any rural land sale. This is not happening at the taxable REIT sub level so the income from that will just flow through to shareholders like normal.

Rick R. Holley

So there will be no corporate level tax from that transaction.

Christopher Chun - Deutsche Bank Securities

Actually I’m not... if it’s not happening at the REIT level, I’m not sure if I understand --

David W. Lambert

Sorry. It’s not happened at the taxable REIT sub level.

Christopher Chun - Deutsche Bank Securities

Oh, it is happening at the REIT level.

David W. Lambert

Yes. The income character from that will be capital gains income, just the same way as the harvesting of our timber and most of our regular rural land sales.

Christopher Chun - Deutsche Bank Securities

Okay, very good. Then Rick, I know you already talked about how you still see the timberland market as still healthy. I’m wondering, though, if it would be fair to still say that it’s as healthy as ever or whether you are seeing some moderation, because we are hearing reports that maybe at least one significant seller in the south wasn’t able to achieve the price that they were looking for and then if you look in say the commercial real estate market which to some investors is an alternative area of investment, I think you are seeing cap rates probably moving higher. That’s probably an area of concern for some investors.

Rick R. Holley

I’m not sure exactly. I mean, there was one significant transaction in the southeastern United States by [Atimo] that got pulled from the marketplace and I can’t speak for all the investors but I know when we looked at that particular property, it was very unattractive to us, so I don’t think that property in and of itself is indicative of the marketplace. I don’t think it was a high quality timberland if you will. Clearly not in anywhere the same category as some of the more recent transactions done in the south including the joint venture that we did, so I think today if we took another project to market like the one that we did for the joint venture with The Campbell Group, I have no doubt we’d attract a similar price. I think the market’s still there.

David W. Lambert

Chris, with respect to the commercial real estate market, we know that there’s difficulty getting deals done. That market’s very different from the rural land market. Those are typically credit finance transactions and we know what’s happened to those markets, and that is impacting transactions and even valuations in that space.

Operator

Your next question comes from Steven Chercover with DA Davidson.

Steven Chercover - D.A. Davidson & Co.

First question, with respect to the land you just bought, can you give us any sense of the values per acre in addition to what you gave us on Vermont. Was the Georgia land similar in value to what you just sold?

Rick R. Holley

The Georgia land, we had about 8500 acres and it was about $1950 per acre. This land had exceptional stock in well above the lands that were part of our Southern timberland transaction and had some attractive long term other values, so we feel good about that transaction . The transaction in Oregon involving that 26,000 acres whereas a little bit more on the eastern side of the state, a little dryer site, and we bought that for $925 per acre.

Steven Chercover - D.A. Davidson & Co.

That’s just what I wanted. Thank you and it looks like you were buying shares right up until Friday, so does that mean that there’s no blackout period you can resume purchasing more?

Rick R. Holley

Correct. We have a program in place.

Steven Chercover - D.A. Davidson & Co.

Last question please. With respect to the Montana monetization, and I know that you’ll give us more details once you’ve gone through the gating process, would we just look at that then as totally tax free and it’s $0.87 per share or something to that effect that would be added to your earnings if we didn’t exclude it as extraordinary?

David W. Lambert

Yes. The tax occurs at the shareholder level just like any activity of Plum Creek through the REIT. There is no corporate level taxation.

Operator

Your next question comes from Ross Gilardi of Merrill Lynch.

Ross Gilardi - Merrill Lynch

I just had a couple of questions. First, Rick, you’ve obviously spent a lot of time looking at the alternative energy markets for the last several years. Do you scale back that effort at all with oil at $60 to $65 a barrel or is there a level for oil prices or rural energy prices where investment in those activities is less attractive?

Rick R. Holley

I don’t think so, Ross, because I don’t think any of us on this call probably believe that oil is going to stay at $50 or $60 a barrel. I don’t believe it will be $200 a barrel either, but I think we have a... whichever one of these administrations ends up in office, they’re both going to focus alternative energies and I think you’re going to see more renewable fuel standards around the country requiring even power plants to use 20% of their power from a renewable sources and an ideal one, especially in the southern United States is going to be wood, so I think it’s something that’s going to get some legs under it and something we’re going to continue to focus on.

Ross Gilardi - Merrill Lynch

In the north, no surprise to see you maintaining your saw log harvest at third quarter levels. Is that just because you see certain mix benefits or I guess I would have anticipated you taking more deferrals at this point.

David W. Lambert

We just have a book of business that’s relatively attractive and no material change from third quarter level. If we see market weakness and we can’t hit our price target that we’d alter the harvest accordingly.

Ross Gilardi - Merrill Lynch

Then on the pulpwood side, could you elaborate a little bit more again as to why you’re cutting back your pulpwood harvest, because you also mentioned that pricing was still quite strong and you expect it to move up and you have been opportunistically harvesting more on pulpwood.

Rick R. Holley

Part of it, Ross, is we advanced what would have been in the fourth quarter already into the third quarter because of strong prices now. Again, we’re going to be very value-focused and if we see weakness in that, we’ll pull it down more. If we see strength then we will try to bring some forward, but we’re really going to be totally value focused and we saw such prices in the third quarter we brought some of that volume forward.

Ross Gilardi - Merrill Lynch

Okay, but you haven’t seen any real incremental pricing weakness yet. It’s really more, sounds like it’s related to the timing of your harvest in the third quarter.

Rick R. Holley

That’s correct. We have not seen any weakness whatsoever.

Ross Gilardi - Merrill Lynch

Then one last housekeeping item. Can you just tell us how many acres you have left in the small non-strategic category at this point within our real estate segment?

David W. Lambert

We’ll have to get back to you on that, Ross. In New York, we’ll be doing an Analyst Day in November and we’ll update all those categories or activities and the transactions we’ve been discussing.

Operator

Your next question comes from Peter Ruschmeier with Barclay.

Peter Ruschmeier - Barclay

Any preliminary guidance you can offer for capital spending for 2009?

David W. Lambert

I’d imagine it would be consistent with our historical practice but we haven’t given guidance yet for 2009 yet. $80 million to $100 million kind of thing.

Peter Ruschmeier - Lehman Barclay

I think Dave had mentioned $125 million of potential acquisitions per year is kind of steady, so should we take it to understand that’s as you mentioned, for tax reasons primarily and given your share price at these levels, you wouldn’t necessarily divert additional dollars to buying more acres cheaply through Plum Creek that there’s a necessary tax angle as to why you’d need to buy that much land?

David W. Lambert

There’s a supplemental benefit from that and so we’d do that for maybe the next three years but depending of the value of where our shares trade and what type of returns we see in Timberland acquisitions, that’s our job to kind of allocate the capital between them. We could do less.

Peter Ruschmeier - Lehman Barclay

Okay, that’s fair. I have a question, Rick for you, if I could. In the last decade or so you’ve seen a good 15 million to 20 million acres of Timberlands go up for sale from the Sea Corps and that amount of supply, I think, has been tapped out, so I’m curious to the extent you can comment on where you may be seeing additional sources of supply, you know, acres for sale, you know if it’s just the[Atimo] themselves, that seems like a zero sum game and so I’m just curious if you’re seeing evidence of other sellers, maybe individuals, other land owners.

Rick R. Holley

We’ve seen a number of families that own large timberland tracks either having, bringing lands on the market or thinking about it. Clearly some of the [Atimos] are looking at taking some large ownerships they bought from these Sea Corps brought back to market and it’s interesting if the timberland investment market weakens, and you know, like Plum Creek, we’ll be a buyer not a seller. We see that as the best allocation of our capital, so that wouldn’t be all bad if some of it came to market and there were less buyers and we could avail ourselves to that, but we see both of those. Clearly there’s no other [inaudible] still own some land and there’s a couple other industrial owners other than the REITs and warehouses there’s not many left anymore, so you’re right it’s kind of some small family ownerships that may own anywhere from 100 to 1,000,000 acres and it’s the [Atimo] so that’s held lands for 8 to 10 or 12 or 15 years, you know, bringing them back to market.

Peter Ruschmeier - Lehman Barclay

Okay, just lastly, any update on Moosehead Lake and how things are going there, where you stand, what dates we should be looking to in the future for more clarity?

Rick R. Holley

Yes, you can buy a lot in the second quarter of 2009. No, we recently got formal approval 7-0 was the vote by the work commission on our plans there and we’re in the process of going through all the documentation of the details of the plan and they will officially, finally approve it I think it’s either February or March of 2009 and then we’ll go forward, but basically they approved it 7-0, so we’re very pleased with the outcome at this point.

Peter Ruschmeier - Lehman Barclay

Okay, so joking aside, second quarter of next year it could begin to move forward with different types of sales?

Rick R. Holley

Well, certainly different types of activities where we could start getting entitlements in place on the resort developments or taking some of the 975 lots through an entitlement process to get them ready to take to market, that’s correct.

Peter Ruschmeier - Lehman Barclay

Okay, thanks very much.

Operator

Your next question comes from Mark Weintraub of Buckingham Research.

Mark Weintraub - Buckingham Research

Thank you. First I just wanted to clarify on the first page of the Montana sale, I think when Steve through that number out, that that assumed there would be no call spaces for the land. Would there be no call spaces?

David W. Lambert

Oh, there would, we gave you that. I think it’s $150 million of revenue with basis of about $80 million so you have about a $70 million gain and that’s about $.40 per share. Steve might have been looking at it without any cost spaces.

Mark Weintraub - Buckingham Research

Okay, great, and then second, on that topic, what’s the number of acres in this first phase now?

David W. Lambert

The first phase has a higher concentration for the lower value acres we’re going to see a much higher price per acre in the second phase, so in the first phase, the total acres are about 130,000.

Mark Weintraub - Buckingham Research

The other 45,000 got swung into the second phase? I believe you originally said 175 at a higher revenue amount.

David W. Lambert

Yes, and so that got pushed back into phase two primarily.

Mark Weintraub - Buckingham Research

Ok. And then, Rick, you had indicated that you felt if you were to put another basket together similar to the one you did recently in the US south, that you could attract similar prices and obviously your stock is dramatically lower than when you put the prior basket together, so would it be fair to assume that you’re doing work on putting together a new basket?

Rick R. Holley

Well it would be fair to consider that we’re looking at all alternatives to capture shareholder value and when you see this huge disconnect between that, we think of all those kinds of things, that’s correct.

Mark Weintraub - Buckingham Research

And in curiosity, how long did it take you to put together, how long does it take to put together a program like the one you executed earlier this year?

Rick R. Holley

Normally from the time, if you want to take a large fractive of land, or assets to the marketplace, it’s probably 60 days to pull the information together and it could be a 90 to120 day marketing period depending on the attractiveness in the buyers and how much due diligence is done, so it could take six months.

Mark Weintraub - Buckingham Research

Ok. And then, in curiosity, when you said that if timberland prices were to weaken and it became a buyers rather than a sellers' market you could become a buyer, how important would where your stock price was be within that equation? How do you think about that, because you might view your stock as being very depressed and timberland values as being depressed. Do you think of them as being relative uses of capital in the moment or do you have, when you’re looking at the timberlands, do you view it more where they are valued relative to your longer-term view of value for the asset?

Rick R. Holley

It’s all about net present value. We look at what the value is to repurchase our stock, what that means to shareholders and what the value of personal timberlands and what that means to our shareholders and whatever we believe has the most value long term is what we would do, so for instance, if you saw timberlands prices weaken and we became a buyer; got some very attractive returns, we look at that as we’d be buying our own stock back and hopefully make the correct decision from a value perspective. We look at them interchangeably.

Mark Weintraub - Buckingham Research

Okay, great, and then, one real quick one. Did you happen to have an update on what’s going on with the Russian export tariff?

David W. Lambert

Nothing is new. They’re still looking to implement the jump in the tariff from 25% to 80% at the beginning of the year, so we’ll just have to look and see how it changes wood flows.

Operator

Your next question comes from Gail Glazerman - UBS

Gail Glazerman - UBS

Hi, I may be just summing up for that last comment, there’s been some news about higher kind of finished product export status Canada, is that anything any of your customers in the west would be also looking at?

Rick R. Holley

Certainly export logs, the people who are going to get impacted by the Russian tariff the most, the Chinese are the largest buyer of export logs and also some of the Scandinavian countries. There could be an opportunity for some trade to move out of the western United States to China.

Gail Glazerman - UBS

Okay, but you think there would be logs and not lumber?

Rick R. Holley

Lumber and logs, depending, they might have to ship more finished products as well. I think that’s what the Canadians will be doing.

Gail Glazerman - UBS

Okay, and just looking, going back to the southern resource market, how big a driver was the storm activity in terms of limiting harvest? Do you have any idea, is that a big driver? Is that really more about the lack of chip-driven pulpwood?

David W. Lambert

I think you have to start with the base of reduced residual chips and you add on top of that difficulty in operating with the woods and that continues to deliver strong spot market opportunities where people have needs and we can meet those needs and get attractive values.

Gail Glazerman - UBS

Okay, let me get this final question on the cost buy, is there any guidance that you could give where some of the cost of move in terms of diesel and other factors looking out?

David W. Lambert

That clearly is an opportunity. We’ve seen dramatic declines at gasoline costs and diesel and we’ll be looking at how to try to improve our performance. It’s happened so recently in the last two weeks, we’ve seen large declines, and we expect a benefit from that.

Rick R. Holley

But clearly a lot of our log and [hawk] contractors we index their fuel prices and as fuel went up, obviously we had higher charges which we talked to you about, and they’ve come down, and if they stay down, we’ll get that back, so that will be a positive which when we quantify that we’ll let you know.

Gail Glazerman - UBS

Is that something that would come with a lag or be fairly current?

David W. Lambert

We should start to see some of it in the fourth quarter and that’s not in the guidance we just gave you so that could be upside.

Rick R. Holley

Gail Glazerman - UBS

David W. Lambert

Rick R. Holley

Operator

There are no further questions at this time? Do you have any further comments?

David W. Lambert

Thank you everyone. As a reminder, we do have an Investor’s Day on November 11 in New York and we hope to see all of you there. Thank you.

Operator

Thank you for your participation in today’s Plum Creek third quarter earnings conference call. This concludes today’s conference. You may now disconnect.

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Source: Plum Creek Timber Company, Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript
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