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Plum Creek Timber (NYSE:PCL)

Q4 2012 Earnings Call

January 28, 2013 5:00 pm ET

Executives

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

Analysts

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

Operator

Good afternoon. My name is Jamaria, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Plum Creek Fourth Quarter and Year-End Earnings 2012 Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Mr. John Hobbs, Vice President of Investor Relations for Plum Creek. Sir, the floor is yours.

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.

Our position as one of the largest timberland owners in the U.S. South, our long outstanding third-party certification under the sustainable forestry initiative, and our deep knowledge of wood fiber supply chain logistics, position us well with these new customers and aid the development of the renewable energy market.

Within our Real Estate segment, we have protected value by deferring sales of recreational real estate in Florida, Georgia and Montana, where the market for these higher value properties has been soft. At the same time, we are creating future value by securing important entitlements on high value development lands in Georgia and Florida. These properties are well-positioned and are expected to capture significant upside value as industrial, commercial and residential properties in the future.

In our manufacturing business, we serve specialty and industrial customers with premium products. These value-added markets have proven to be less volatile than commodity markets and have generated positive cash flow even through the downturn. 2012 was a very good year in our manufacturing business, as segment income nearly doubled to $29 million and adjusted EBITDA grew to $44 million. We're expecting continued growth in this business in 2013.

We consider disciplined capital allocation the most important tool we have to build long-term shareholder value. We approach all of our capital allocation decisions with the same rigor, whether it's a discretionary capital spending, acquisition of new assets, the sale of existing assets, the repayment of debt or share repurchases.

Plum Creek also has a reputation for innovation within the timberland investment and management community. We were the first pure-play timber investment, the first timber REIT, and the leader recognized in alternative land values.

This past year, we continued these true traditions of disciplined capital allocation and a willingness to think outside the box. Early in 2012, we acquired approximately 4.7 million tons of mature Southern yellow pine timber, in a timber deed transaction valued at $103 million. This purchase was exclusively composed of standing mature and near-mature Southern yellow pine plantation timber, that would grow and be harvested over an 8-year period. While timber deeds are a common practice within the industry, the scale of this particular deed was not common. It's worked out to be a nice investment and it achieved our expectations in the first year of operation.

Continuing with the theme of disciplined capital allocation and innovation, we will grow the value of our non-timber Resource business with the recently announced Vulcan Materials transaction. Our non-timber resource business generates income largely from the collection of royalties from some surface assets such as oil, natural gas, aggregates, and industrial minerals. Today, we have about 30,000 acres of industrial mineral and construction material assets, including: Kaolin, which is a clay; titanium; and various construction materials including sand, gravel and aggregates. These are located on more than 30 distinct properties across our ownership. These assets are developed and brought to market by third party operators. This is a business we've quietly built over the years and we have in-house experts, including geologists, environmental engineers and others who have worked in this business for years.

Last March, at our Analyst Day, we discussed an opportunity for us to make an investment in construction material assets. One that will provide above cost of capital returns on a familiar asset for us, while allowing the construction materials firm to free up their balance sheet and recognize the value of some of their assets. In 2011, we made such an investment, a $12 million acquisition of aggregates in Oregon. The investment has performed very well for us.

We work to continue or further this concept in 2012, and late in the fourth quarter, closed on a $75 million transaction with Vulcan Materials that we announced a few weeks ago. We purchased an interest in approximately 144 million tons of aggregate production at 4 of Vulcan's quarries in the Greeneville, Spartanburg, South Carolina market. Vulcan is the leading producer in this attractive geographic market. For this, we will receive a 10.5% average royalty rate on the production from these quarries over an estimated 25-plus years.

We believe we are investing at the right time in the cycle and the risk adjusted returns, and the long-term cash flow file -- cash flow profile are compelling. We expect this investment will be earnings neutral and cash flow accretive in 2013, and become more profitable over time as this market improves.

We completed a $58 million large, non-strategic timberland sale during the fourth quarter. For our shareholders, this sale locks in an attractive return, that fully reflects expectations for cyclical market recovery, as well as the structural changes in North American supply. The timberland sold were 16,600 acres of industrial timberlands in Western Oregon, about 4% of our holdings in that state. These particular lands are good, productive, Douglas Fir timberlands.

The sales price of approximately $3,500 per acre represents an attractive value for this property. This transaction underscores the continued high level interest in well-managed industrial timberlands. As you saw in our press release, we aren't anticipating the same level of large sales in 2013. However, we do expect to close on a transaction of this type in the South, valued at approximately $50 million during the first quarter.

We continue to fully invest in all of our business during 2012, investing $72 million of capital, including planting 74 million trees. We also acquired $18 million of productive timberlands in a handful of small transactions.

In 2013, we expect capital expenditures to once again be in the $70 million to $80 million range. This covers all of our reforestation activities, as well as maintenance capital for our manufacturing business. And most importantly, advanced silviculture treatments that enhance the growth and yield of our forest.

We're looking forward to 2013 and believe 2014 and beyond are likely to be even more compelling as residential construction trends towards long-term demographic demand and the impact of the structural changes in North American timber supply are manifested.

David will now review our last quarter's performance and discuss our expectation for the first quarter of 2013, as well as the full-year, and then we'll take your questions. David?

David W. Lambert

Our fourth quarter results of $0.49 were above our guidance range of $0.25 to $0.30 per share. Compared to the third quarter, higher income from our Real Estate segment drove the $18 million improvement in our net income. The operating income from our timber resources and non-timber businesses were stable, while our manufacturing segment posted slightly lower results.

Northern Resources, $5 million operating profit, was slightly down from the third quarter's $6 million profit due to lower harvest volumes during the quarter. As planned, the company reduced its hardwood harvest in the North East and Lake States, leading to an overall harvest reduction of 10%, compared to the third quarter. Average pulpwood prices were unchanged from the third quarter.

In the West, lumber production continued to expand, leading to increased sawlog demand from domestic customers. Sawlog prices were at their lowest level at the beginning of the fourth quarter and improved as the quarter progressed. As a result, average sawlog prices were essentially unchanged from the prior quarter's average. The $1 per ton decline in sawlog prices we are recording is simply the result of a mix shift from the higher valued hardwood sawlogs towards softwood sawlogs.

While domestic customers are leading this demand and price recovery, export customers are competitive, particularly for lower valued species like hemlock. Reports show that log inventories in China have declined significantly over the past year, and we have seen a pickup in export log demand as a result.

We delivered 60,000 tons to export customers during the fourth quarter, the highest level of export activity in more than a year. As we enter the first quarter, Western sawlog demand continues to improve, as several mills have added shifts and the competition for sawlogs in the region is strong. Our domestic customers are now the driving force behind market improvement. This is in contrast to our experience 2 years ago when export customers lead a West Coast log price recovery. With the rapidly strengthening sawlog markets on the West Coast, we expect our first quarter sawlog price to increase $5 per ton or more during the first quarter.

In the Northeast, pulpwood demand remains good and we expect our average pulpwood prices to remain about $41 to $42 per ton in the first quarter. Within the Northern Resources segment, we expect our 2013 harvest to be approximately 4 million tons. We expect the sawlog/pulpwood mix to be similar to last year, roughly 60% sawlogs and 40% pulpwood. The first quarter harvest is expected to be between 1 million and 1.1 million tons.

The Southern Resources' $24 million operating profit was up slightly from the third quarter's $23 million profit. As expected, prices for sawlogs were unchanged and pulpwood prices advanced $1 per ton.

While our total harvest declined about 270,000 tons from the third quarter, it was higher than we had planned. We harvested nearly 400,000 tons more pulpwood than we had initially expected, as some customers struggled to build winter inventories at their mills. Across the South, pulpwood markets remained strong, with solid demand from pulp and paper customers, recovering demand from OSB and emerging demand from pellet manufacturing customers.

Southern sawmill owners are running extra hours to increase production to meet demand, and many are at the point where they are contemplating adding employees and an additional shift to meet the expected demand growth this year. Although Southern sawlog prices have been stagnant, pressure on sawlog prices is building.

And as we see in the strongest pulpwood markets, pine pulpwood prices begin to compete with small chip and saw prices. This, combined with improved demand for framing lumber, is putting upward pressure on sawlog prices. We expect prices to improve in the fourth quarter -- sorry, we expect prices to improve from their fourth quarter levels for both sawlogs and pulpwood, as yet -- as wet winter weather tightens markets by restraining logging in the first quarter. With a constrained supply and demand growth, we expect pulpwood prices to continue to strengthen and add $1 per ton during the first quarter. We also expect sawlog prices to increase $1 to $2 per ton.

For the year, we expect our 2013 Southern harvest will be between 13.5 million and 14 million tons. With strengthening sawlog demand and pricing, we expect our harvest mix to shift a couple of percentage points towards sawlogs, compared to 2012, when sawlogs made up 42% of the Southern harvest. We expect the first quarter's Southern harvest to be approximately 3 million tons, with pulpwood at about 1.7 million tons and sawlogs at about 1.3 million tons.

As always, we will continue to adjust our harvest plans in response to market conditions, deferring harvest in weaker markets to protect value and temporarily increasing harvest in attractive markets to capture value.

Fourth quarter Real Estate segment sales were about $27 million higher than we had initially expected. Sales were $109 million and operating income was $74 million. As Rick mentioned, our fourth quarter results included a $58 million large, non-strategic timberland sale in Oregon. The balance of the sales consisted of approximately 17,100 acres of small, non-strategic lands capturing $1,365 per acre, approximately 3,500 acres of conservation properties that captured about $2,250 per acre and about 9,700 acres of recreational lands, at captured values of roughly $1,950 per acre.

Rural land markets have been quite steady over the past several quarters. The geographic remix remains similar, with growing interest in the Gulf South and steady demand in the Lake States. We expect to see more activity in other parts of the nation as consumer confidence in the economy improves. We expect our Real Estate segment revenues in 2013 to be in the range of $250 million to $300 million. And we estimate that land bases will be in the range of 30% to 35% of sales, lower than the 39% of sales we experienced in 2012. As Rick mentioned, we expect to close on a large, non-strategic sale in the first quarter, and including this sale, we expect first quarter segment revenue to be in the $80 million to $85 million range, with land bases of approximately 35% of sales.

Our manufacturing segment posted a $7 million operating profit, down $2 million from the third quarter, as seasonally slower, medium-density fiberboard sales. Profits in both lumber and plywood product lines were similar to the third quarter results. As mentioned in our press release, we expect the manufacturing segment's 2013 operating income to continue to improve, with strengthening demand for the products that we make.

We will use the proceeds from our recent $325 million, 3.25% bond issue to pay off $174 million of about 6.2% notes due in the first quarter, and another $76 million of notes bearing interest rates of about 7.75% coming due later in the year. With the lower cost of debt resulting from these actions, we expect our 2013 interest expense to be about $80 million, down about $2 million from 2012's level.

The new bond offering also funded our construction material acquisition. We expect to have just a modest tax expense in the year 2013.

In summary, we expect our 2013 net income to increase to be between $1.25 and $1.50 per share, with the first quarter results to be between $0.28 and $0.33 per share. Rick?

Rick R. Holley

The new year's off to a good start at Plum Creek. With housing strengthened to more than 950,000 starts in December, residential construction is clearly gaining momentum. We're experiencing vibrant sawlog markets on the West Coast, and seeing some improvement in Southern sawlog market prices as well. The company is well-positioned strategically and operationally benefit as markets improve. Poised for a strong 2013, and expect the cash flow from our non-real estate businesses to increase approximately $50 million, 5-0, as compared to 2012.

Now we'll open up for your questions. Jamaria?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question for the day will come from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Rick, you are sounding a little more confident about, kind of Southern saw timber prices in '13 than we've heard from some other companies. Can you put a little more color around exactly what you're seeing, and when -- how you think this may play out as we move through 2013?

Rick R. Holley

Well, clearly, assumptions that we'll see, 950,000 to 1 million housing starts next year, and we believe for that demand to be met, you're going to have to see an increase in production U.S. South, and the Southern production right now is about 14 billion board feet, and we expect that you'll see an increase in production in North America of about 3 billion board feet, and about half of it should come from the U.S. South. If you see that, you'll have to add shifts, and you could -- and certainly you're going see some price improvement. Clearly, in the first quarter, we're already seeing $1 to $2, and you'll -- we believe, again, if you see that kind of production increase, you'll see more than that for the year. So it's headed in the right direction.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, and then a question for Dave Lambert. Dave, can you give us some sense of what type of volume and what type of income you reported on that timber deed in 2012?

David W. Lambert

Yes, the income was much as we had expected. We said that it'd be pretty much neutral to earnings. I think we had a modest $0.5 million of reported income from the deed. And the total volume harvested was 650,000 tons.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, and can you just walk us through, real quickly, how does the accounting work on that timber deed as you roll through it?

David W. Lambert

We put the asset on our books, and as we harvest the timber, we simply deplete it. It does have a discrete basis to it, and so that's why we're not reporting much income. Cash flow from the timber deed for the year was just over $11 million.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And so you're going to have a lot of sensitivity there, just as would on your own timberland, a sort of what price does. Is that correct?

David W. Lambert

Yes, as we see, price is growing as the economy recovers, then that timber deed will start becoming accretive to earnings, and we'll see higher cash flow.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right, and then the last question I had. Just, and it seems like, as we see housing pickup and these wood products markets pickup, we're starting to see more transactions as people make, kind of longer-term strategic decisions about whether they want to be in wood products or they don't. Can you just refresh us on what your stance is toward your wood products operations?

Rick R. Holley

Yes, our stance is it's clearly that they've done very well throughout the downturn in the economy. They're doing very well now, in 2012, and should do better in 2013. Very strategic to the timberlands that we own in the state of Montana, and they're very well positioned in the marketplace, so we see those as a whole. We have no plans to increase our capacity in other regions of the country.

Operator

Our next question will come from Anthony Pettinari with Citigroup.

Anthony Pettinari - Citigroup Inc, Research Division

Regarding the outlook for stronger Southern sawlogs, we continually hear about constraints on contractors and loggers and, I guess, as you look to 2013, what's your level of confidence that, assuming we have some price improvement that, that really translates into earnings improvement, or are these kind of higher contractor costs and fuel costs and road costs, are they going to kind of eat away at the margin? Or how should we think about that for the year?

Rick R. Holley

Well, clearly, as we start to see a capacity increase, there's going to be, there is a constraint and that's contractor capacity, and anytime you have a constrained supply, which is going to be contractors, that cost is going to go up. Now we think we're in a very good position to have an access to contractors, but it's likely this constrain is going to cost more. But we don't think, clearly, there'll still be a net margin based on the price increases we expect to see in the market. Fuel, really, has been pretty stable, so we don't expect diesel fuel cost to eat into margins whatsoever in 2013.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, that's helpful. And then, I apologize if you mentioned this before, but exports in the quarter, can you just recap how many tons you exported for the full year? And looking forward to 2013, do you have any particular view on export tonnage?

Rick R. Holley

Yes, for the quarter from Oregon, we exported about 60,000 tons of sawlogs. And for the year, we exported just over 200,000 tons from Oregon. We've talked to you a little bit about how we're trying to improve dynamics in the Southern wood basket. We've been doing trials and logs shipments out of the South, and we exported about 35,000 tons out of the South. We would expect these volumes to be growing as we move forward.

Anthony Pettinari - Citigroup Inc, Research Division

Great. Did the Oregon sale, did that impact your export footprint at all, or was that timber going domestically, mostly?

David W. Lambert

It's where it could to the highest value market, but that was just about 4% of our land base there. So it'd be proportionate to the land base. It's not really a material driver.

Rick R. Holley

And mostly, that was in the Northern part of our holdings, whereas mostly the exports out of Oregon are in the Southern part of our holdings.

Operator

Our next question is from Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

First question is on the aggregates transaction, I guess, twofold. One is, I might get -- could you give us an idea as to how the cash flow there will work? I'm sure it probably, mechanically works a lot like the timber deed, and if you spread it over 25 years, my guess is, maybe it's -- the depletion rate might be $3 million or $4 million, and then it builds over time. How should we think about that?

David W. Lambert

The cash flow, we're expecting in the first year, cash flow in the $4 million to $5 million range. And the cash -- the depletion will just be variable with the production levels. We see a growing cash flow as the volume improves, and as pricing improves as well.

Chip A. Dillon - Vertical Research Partners, LLC

And could you talk a little bit about: a, will this be showing up in the timber segment and/or not? And, b, do you think there are more opportunities like this out there?

Rick R. Holley

It'll actually be in the other category along with our other at -- the other revenue from our non-timber Resource businesses, be it oil and gas, and the other aggregates business we have. Chip, we look very opportunistically at all kinds of opportunities whether it's timberlands -- obviously we'll look at some construction material assets. This one was very attractive to us. It was in a very good market. We think we caught it at the bottom of the market. Pricing in that region stayed pretty stable. Vulcan in that particular area has a 55% market share. These are very, very good quarries so we feel very good about this transaction. And it's got a cash on cash return and an internal rate of return well north of anything we've seen in the timberland acquisition markets. So now to the extent we find something else similar to this, it has those kinds of returns, it generates a lot of shareholder value, we'll look at it, because we look at a lot of different things. This is a very, very attractive acquisition, just from a return standpoint to shareholders.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. And then you mentioned you had a -- you're, you having a sale, a large sale of $50 million in the south of the first quarter that you expect to close, and, what's the number of acres, roughly, involved there?

David W. Lambert

That sale, Chip, it's going to be typical Southern yellow pine and with a value in that range. We're going to update you, with you on that, later on.

Chip A. Dillon - Vertical Research Partners, LLC

Okay, so it's probably something with a 3 in front of it, though, in terms of the number of acres and it'd be a good guess, I guess. And then, the last question is on your guidance, I mean, obviously, it's a little trickier now with the manufacturing business and, I mean, if you look at what you earned last year, the fourth quarter was almost at that run rate. And of course, we know, the fourth quarter is seasonally slow and prices were moving up through that quarter. So in your minds, are you -- and I don't want to pin you down because, we -- who knows what prices do next week or next month, but you do expect them to be higher, do you -- would like a good place to be $35 million to $40 million, as you look at the world in terms of the EBIT contribution in 2013? Would that be consistent with your full -- company guidance?

David W. Lambert

Yes, we have $29 million this year, and we expect it to be up. Our businesses is not as cyclical as some of the other people that may -- primarily commodities. But both lumber and structural panels, they're up 14% already on a year-to-date basis, on pricing, compared to fourth quarter. So we are going to see improvement and we'll definitely be north of $30 million in our manufacturing segment.

Operator

Our next question comes from Alex Ovshey with Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

On the construction availability issue, I'm curious if you have a housing starts demand number in mind where you really believe it becomes a problem on the availability side. And do you see it being more of a problem in the South or the West Coast of the U.S.?

Rick R. Holley

Well Alex, it's really a problem today if the housing start number that the seen in the last year or so, and it's first in every region. If you think about the contractor, most of you have been out in the field with us, it's kind of a generational thing, I mean, you pass it from 1 generation to the next generation through a family, it's very capital intensive, didn't pay a lot. They suffered a downturn as well, so contractor capacity, a lot of it went offline. So it's a challenge today. That's why we've spent so much time on this core contractor program we have. But clearly, we've seen it in the Northeast, we've seen it in the West Coast, we've seen it in the South. I wouldn't say 1 region is any better or worse than any other. It's just something you got to really pay attention to. And those like Plum Creek, that have large ownerships in these regions, that have kept these contractors at work during the recession. I think we'll benefit from that as this industry recovers the next year or so.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

And then, on the land sale in Oregon forest, about $3500 an acre, do you think that's a good comparison for the rest of your lands in the state, or will there be a reason that the rest of the land maybe valued at a higher or lower price than that sale?

David W. Lambert

I think it's a reasonable proxy. This land was -- is a very good site. Was -- stocking levels were a little lower than the Oregon transaction we did at the end of 2011. It was more heavy to Douglas Fir, which is a higher value specie. So it was kind of, with its stocking levels a little lower, but you had a better site, more Douglas Fir. It's probably kind of average as you just look across our ownership there, since especially the ownership on the west side of the state.

Operator

Next question comes from George Staphos at Bank of America Securities.

George L. Staphos - BofA Merrill Lynch, Research Division

I guess, piggybacking on the last question, Rick, maybe you'd mentioned this before or Dave, but why was that land actually not strategic? You sound like it was actually fairly good land and fairly well-stocked, and obviously a fairly valuable species?

Rick R. Holley

Well, we call it non-strategic, but it was very strategic. And the reason we transacted it is, we can approach this, I'm sure other timberland owners do all the time, from buyers looking at different regions of the country. Oregon is very attractive to a lot of institutional buyers. So we're approached, somebody looking for a transaction of this size, they looked at some of our lands, and we carved this and sold it for what we thought it was a very, very attractive price, so. This was not on the market, this is a very opportunistic transaction by the company to recognize a bunch of value today. Really, capturing value from a full recovery in the economy and capturing it today, so it was just the smart thing to do financially and, with our capital.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay, understand. Maybe a different take on the aggregates discussion. It sounds like it was a very good -- or it looks like it will be a very good returning investment for you. Why would Vulcan be willing to dilute its position in that area if the returns were so good? You mentioned that it frees up obviously some balance and capacity for them, but were there any other factors other than that in terms of their determination to sell?

Rick R. Holley

I don't know all of Vulcan's motivations. Clearly, their business, like ours, has gone through a pretty big downturn in the recession that we're just coming out of. And I think for them, to some extent, it was to show their investors the value of this asset, because they own, across their ownership, considerable amount of aggregate assets, quarries all over the country. So was it a way to demonstrate value for them, free up a little cash on their balance sheet? Clearly for us, we were only interested if it was a very, very good market and that's why this particular asset in this market was chosen really by us. So it was kind of a win-win for them and us as well.

George L. Staphos - BofA Merrill Lynch, Research Division

Or maybe that can by some of your timberlands, Rick? Unlock some additional value for you? I had wanted to switch topics, on pulpwood. If the outlook is positive as it would appear, why would you be actually shifting production from pulpwood to sawlogs? Why wouldn't the increase in sawlog production just be incremental to the total for the company as you look out?

Rick R. Holley

Well, as we talk about our harvest profile, going from kind of $17 million-something this year, and to over $20 million over the next several years, we've set a higher proportion that is going to be sawlogs, due to all the investments we made in silviculture over time. So as we go in next year and the year after, and we look at the harvest profile, it's just more chip and saw, and more saw and timber, just the nature of how these forests have grown. So, which is obviously all net positive, because the cost is the same, and the revenue generation from that particular product class is a heck of a lot higher. So it's just the nature of the forest and the age of the forest and all the investments that we've made over the last 10 years.

George L. Staphos - BofA Merrill Lynch, Research Division

Last question, I'll turn it over. If you look at the Drax announcement and certainly the implications are ultimately positive in terms of demand for Southern fiber, are there any other considerations that we should be mindful of, with the, sort of the point of view being, if another 1 or 2 or 3 Draxes showed up at your doorstep, would you have the availability of fiber to meet these similar type of contractor, too? And then, can you comment at all in terms of how pricing is set with these contracts, if you mentioned this before, if you could remind us how that's done.

Rick R. Holley

Well, clearly, George, even in the Drax situation and we've mentioned this a couple of years ago, it's taken time, because we were trying to site their pellet plants, that's going to be one in Mississippi, and one kind of on the border of Louisiana and Arkansas, where we thought demand was poor. So we're trying to site these plants and work with these producers to have them build these mills where there's excess supply and not as much demand. Now we have more demand in that market, and you'll get a better price. So it's really us helping them site these plants in those markets.

David W. Lambert

Part of your question, they are looking -- for us to be willing to give up supply to them, we do want to earn a market premium for that. So for us to do it, we not only attract greater demand to our basins, but they're willing to pay us a premium so they can baseload their needs.

George L. Staphos - BofA Merrill Lynch, Research Division

So the price will flow with whatever the market price is? Is that what you're saying at a premium?

David W. Lambert

Yes, this one's indexed to a number of items that will grow over time, and we're capturing the premium over of that.

Operator

Next question comes from Gail Glazerman with UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

Can you talk a little bit more about the weather effects that you saw in operations, I guess, both in the fourth quarter and what you've seen to date, and maybe break that down between what you're seeing in the north and what you're seeing in the south?

Rick R. Holley

Yes, it does vary by region. In the Western United States and Oregon, we went from almost a dry, fire season to a wet, difficult environment in the course of a week. And so the price strength that we're seeing manifest itself on the West Coast is partially a combination of the strong domestic demand, the export demand, plus difficult logging conditions. In the U.S. South, this -- we're moving into kind of a typically wetter pattern in the winter, and that does help tighten things up a little bit. It's not nearly as pronounced as what we're seeing in the West, though.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay, and are you seeing any signs of easing or is it still -- or are Oregon's logging commission still remaining challenging?

David W. Lambert

They're still challenging. We're getting our volumes out, but the industry as a whole gets constrained, and many mills have added extra shifts, even up to a third shift, in light of the strong pricing demand. And so you have this kind of explosive pricing power manifest itself, and we've seen West Coast logs, they're jumping $10 a ton. And that's why, when we looked at what could happen down in the U.S. South, Rick talked about how he feels like we're getting closer to a tipping point, but the incremental pressure that's coming on, there's a real opportunity for price movements to be very rapid, especially in the strong pricing environment for the finished product prices.

Gail S. Glazerman - UBS Investment Bank, Research Division

And just to get back to the Oregon sale, as you look at the slide that you show from time to time, breaking out your land between core overall development, I mean, with that land has been within the core bucket of kind of 5.5 million acres?

David W. Lambert

Yes.

Gail S. Glazerman - UBS Investment Bank, Research Division

And that -- would that be the same case as the land you're selling in the first quarter?

David W. Lambert

Yes, generally, yes.

Gail S. Glazerman - UBS Investment Bank, Research Division

And just one last question on exports, you talked about the pickup in the fourth quarter, you're optimistic about a pickup throughout 2013. I mean, has there been any change in trend in the first quarter to date? Is that holding up at that fourth quarter level or is it accelerating?

David W. Lambert

We see demand has picked up significantly from where it had been last year. The inventories have been rebalanced over there. Their political elections have been completed. They're really trying to refill their supply chains. So things are very good. The only thing that we see that would kind of make exports any weaker, potentially, is just if the overall strength of the U.S. market just says, "I'm not going to let that log leave the shore. I'm willing to bid x for it, and make it stay at home." But we're still, we're seeing good tension from the export market at this point.

Rick R. Holley

And Chip Dillon asked a question earlier about the first quarter transaction and it will be for roughly 35,000 acres.

Operator

Our next question will come from Joshua Barber with Stifel, Nicolaus.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

I know there's been a lot of questions on the Vulcan transaction. Just a quick one. I guess, I'm essentially thinking of it as you guys own 10% of 144 million tons, or basically 14 million tons per $75 million. Could you talk about your weighted average life for recovering that investment is, and then, what would essentially be your break even price over that weighted average life, given the price of material that is going to be, I guess less than $10 a ton for those aggregates?

Rick R. Holley

So the way to think about this, Josh, is we actually own 140 million, 144 million tons of rock. We in essence, own that. And over the next 25 years, in those 4 quarries, they will take that out, and we're -- our rock comes out first. So over the next 25 years or so, they will mine and take out 144 million tons of rock, and we will get paid a royalty based on whatever the revenue of that, so to the extent that, as production increases, obviously our revenue will increase if they're taking out more rocks sooner. And as prices for that rock increase, obviously we get a royalty based on whatever that revenue is, and so that our revenue would increase based on that as well. So it's kind of like what we've done in -- our own land, with oil and gas and other things. We go in, a third-party comes in, they drill a hole in the ground, if they take oil out, we get paid a royalty to that. It's the same thing. We, in essence, own 144 million tons. I know the press release says an interest in, because there's more than 144 million tons in these quarries. But we're the first rock out.

David W. Lambert

One other thing, as you think about it, I mean, they have to extract the rock, they crush the rock, they're selling, kind of a value-added finished product, not the rock in the ground, and that's what the royalty stream's based on.

Rick R. Holley

The end product.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

When it comes to, I guess, when I'm looking at your sustainable harvest, and it's basically, even at the high end of your guidance flat with 2012 levels, but sawlogs are coming up. So sort of a 2 part question. A, what is your sustainable harvest off of your core timberlands today. And second, given the strength in pulpwood markets, it would seem that if your harvest is flat, you're actually decreasing pulpwood harvest year-over-year. Can you talk about why that might be?

David W. Lambert

The pulpwood harvest is off like a couple of hundred thousand tons in the South, volume got pulled forward a little bit into the fourth quarter, due to strong demand there. We think of it as relatively flat. We're currently growing over 20 million tons on our property today, and so we're harvesting in that 17.5 million to 18-million ton range. So based on the biology, the age of the trees, we're probably, 18 million tons is probably close to the appropriate maximizing value. We have flexibility to change that, the based on market conditions. We see the harvest growing over the next several years, and leading up to that biological growth, where we're going to be north of 20 million tons.

Rick R. Holley

So the long-term sustainable production off our core timberlands is in that neighborhood of 20 plus million tons, because that's what the growth on those lands are today.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

But if you saw a stronger log market, then you would expect this year, that you have the ability to actually increase that somewhat, right?

Rick R. Holley

You could increase, probably 10%. But again, you want to be careful, it'd have to be much stronger, because you cut a tree before its economic maturity, it's growing at a pretty rapid rate, so you want to be, you'd be reluctant to cut a tree before its economic maturity, so. But clearly, we could increase the harvest or decrease the harvest by 10% percent easily, in any period of time.

Operator

Our next question comes from Steve Chercover with D.A. Davidson.

Steven Chercover - D.A. Davidson & Co., Research Division

So most of my questions have been answered, but just one on land values. Considering that they are so elevated, why will real estate sales decline? Is it because you basically sold off most of your non-core, as you see it?

Rick R. Holley

No, not really. I think the real estate, again year-over-year is declining because we're not -- just last year, we had opportunities to do like $200 million, $150 million to $200 million large, non-strategic transactions, kind of one-off things, that people came to us, we got great values. That number in 2013 is going to be less than half of that amount. So that's the large reason. And in our HBU program, even though we're selling through, as we mentioned in our comments, that the best markets we have are Florida, Georgia and Montana, and those are starting to wake up, but they're still a little sleepy, so we're not seeing good values there yet. We should start to see that over the next several years as the total economy recovers and consumer confidence improves and those other things. We get more certainty in Washington, if you will. But our real estate, we still have a lot of really good lands, we got a lot of our development lands, we still feel very good about our portfolio.

Steven Chercover - D.A. Davidson & Co., Research Division

Well, the Oregon transaction, was that unsolicited?

Rick R. Holley

That was unsolicited. That was not on the market. It was not something we'd even thought about selling. We got approached, and the price was compelling, and so we executed the transaction. It just made sense to do it at the values we got.

Steven Chercover - D.A. Davidson & Co., Research Division

So presumably, you're always receptive to offers that are in the ballpark, or perhaps a little bit better than what you think something's worth?

Rick R. Holley

Absolutely. On the buy side and the sell side, I mean, we have a pretty good idea what we think the values are, and if somebody's willing to offer some more than we think we can earn for shareholders, we'll execute on that, and redeploy the capital to something that will even get a better return. So that's the kind of job one as capital allocation buying or selling.

Operator

Our next question is from John Tumazos with Very Independent Research.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Could you explain a little bit more the JV with a big-time player and aggregates like Vulcan Materials and sort of how it happened? Were they short for capital? Was it a metropolitan region where you thought there was a big-time opportunity for the land to appreciate or, just tell us how that happened?

Rick R. Holley

Well John, I think it's -- you got to go back 2 or 3 years. As we mentioned, we already have some of these assets on our own land that are in various stages of development or permitting or exploration, just to determine their feasibility. So it's a business we know pretty well. So as part of that, we've gone out and talked to virtually everybody in the industry, be it Vulcan, Martin Marietta, we know everybody, and as part of those discussions with Vulcan, it looked like they had an interest, we had an interest, that was a very attractive market and it seemed to make sense for both parties and we execute the transaction. Now why there? We think the southeastern United States, for both timberland ownership, as well as construction materials make sense, because that's demographically, where you're going to see, I think, more activity over the next 10, 20 years than you will in other parts of the country. So we like the southeast for a multitude of reasons, and that's why we've chosen to focus our attention there with Vulcan, who's a very, very good operator.

Operator

And our final question for today is actually a follow-up from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

I've a couple of follow ups on Drax deal. Dave, when you were talking about how it was tied to indicators or escalators, is that -- is some of that just costs or is that actually looking at just pulpwood stumpage?

David W. Lambert

It's a variety of all of the above: Cost, pulpwood stumpage, and it -- and we reset the base every -- over time. So you should think of this as a way for us to capture a premium for pulpwood values over time.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, but there -- should I also read it as there's there might be something in there that would protect Drax a little bit from a real surge in pulpwood cost?

David W. Lambert

For short periods of time, yes.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, right. And then, when you talked about this, you specifically mentioned that there was going to be about 20% of this that was going to come from residuals? Is there some kind of a mandate that Drax has to meet, or is it really economic to haul stumps and stuff like that to a pellet plant? Can they really carry the freight?

Rick R. Holley

Yes, they can. I mean, currently today, we actually go out in the woods, and we take tops and limbs, and have somebody, a contractor, grind them up. And they're used for various, whether they burn them for energy, some of its palletized. The reason 20/80 is, the old term dirty chip, clean chip, pulpwood's a clean chip, biomass a dirty chip, and that's kind of the right mix for them. So that's what we wanted. We wanted to take biomass so we could get value for it, and they're willing to do it and it's kind of a 20/80 mix.

Mark Wilde - Deutsche Bank AG, Research Division

And then finally, just along the same lines. What are you seeing from kind of the OSB mills in your wood baskets, Rick, in terms of any kind of a ramp-up in volume?

Rick R. Holley

We're starting to see, obviously, within construction, residential construction improve, start -- some of these mills come back online that's been down for the last 2 or 3 years, especially a couple that you're familiar with, clearly in South Carolina. So we're starting to see that heat up a bit. So if you look at pulpwood demand from pulp and paper industry, and then start to see OSB heat up a bit, and all these pellet plants starting to come online, pulpwood price in a lot of these areas can get -- kind of get -- it'll be lot of fun to be in the pulpwood business.

And thank you to everybody and happy new year, and we'll talk to you next quarter.

David W. Lambert

Bye.

Operator

Ladies and gentlemen, thank you for your participation in today's Plum Creek Fourth Quarter and Year-end Earnings 2012 Conference Call. You may now disconnect.

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