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Plum Creek Timber Company, Inc. (NYSE:PCL)

Q4 2008 Earnings Call

February 2, 2009 5:00 pm ET

Executives

John Hobbs - Director, Investor Relations

Rick R. Holley - President and Chief Executive Officer

David W. Lambert - Chief Financial Officer

Analysts

Gail Glazerman - UBS

Steven Chercover - D.A. Davidson & Co.

Peter Ruschmeier - Barclay Capital

George Staphos - Banc of America Securities

Claudia Hueston - JP Morgan

Christopher Chun - Deutsche Bank Securities

Mark Weintraub - Buckingham Research

Operator

At this time I would like to welcome everyone to the Plum Creek 2008 fourth 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

Good afternoon ladies and gentlemen and welcome to the fourth 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 Chief Financial Officer.

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 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 fourth quarter and full year of 2008.

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.

Now I’ll turn the call over to Rick.

Rick R. Holley

2008 was a challenging year for companies across most industries. Plum Creek was not immune to the steadily declining residential construction markets or the economic downturn. We responded to these challenges by taking advantage of the operational flexibility our diverse land and timber base provides.

We reduced our sawlog harvests to their lowest recorded levels, preserving the value of the portion of our most valuable timber assets. We maintained our accelerated pace of pulpwood harvests to capture attractive peak cycle pricing. We adjusted the rural land we listed for sale, increasing our listings in active regions and pooling our offerings in weaker areas. We will bring those properties back to market at a more attractive time.

We demonstrated the value of our Southern core timberlands, capturing $1,725 per acre through our Southern Timberland Joint Venture. We completed the first phase of one of the largest conservation transactions ever recorded, the Montana Legacy Project, valuing a portion of our Montana lands at nearly $1,600 per acre. Phase I closed in December 2008 for $150.0 million. The $250.0 million Phase II is scheduled to close during this quarter. We acquired 150,000 of timberlands at attractive prices.

Through opportunistic share repurchase program we reduced the shares outstanding by 3.7%. We continued to invest time and effort developing long-term growth opportunities. These include growth from our sub-surface, non-timber assets as well as growth from markets that value our force as a source of renewable energy. Through this we never forget that efficient capital allocation is one of our most important tools and one of our most important jobs.

We enter 2009 in excellent financial shape with nearly $900.0 million in ready liquidity and a strong balance sheet. Combined with our broad asset base, we have a combination of operation and financial flexibility that allows us to execute our strategies to maximize the value of our assets, pay our dividend, position the company to benefit as new markets emerge, and grow long-term shareholder value.

As many of you know, investing in timber is a long-term prospect. We are proud of our long-term track record of value delivery. Over the past ten years Plum Creek has provided shareholders with annualized total shareholder returns of more than 9%, placing us in the top quartile within the S&P 500.

David will now review our first quarter results and discuss our outlook for 2009 and the first quarter. Following our prepared remarks we will open it up for your questions.

David W. Lambert

In the northern resources segment operating profit was $8.0 million, down from third quarter’s $12.0 million profit. Sawlog prices retreated from the strong third quarter levels about 9%, or $7 per ton. That was a bigger decline than we had originally anticipated. The price declines were driven by a sharp 12% retreat in softwood sawlog prices in the West, the result of extensive downtown from mills across the region and multi-decade low lumber prices.

Hardwood sawlog prices in the Lake States and Northeast regions held fairly steady during the quarter. Our sawlog harvest was unchanged from the third quarter level and was a little less than we had originally planned.

Average pulpwood prices fell 2%, or $1 per ton, compared to the third quarter. Northern pulpwood prices were stable in the Lake States and weaker in the Northwest where paper mill chip inventories were full. We reduced our pulpwood harvest about 10% from the third quarter level as planned.

Given the very low level of residential construction projected for 2009 and slowing demand in repair and remodel and industrial markets, we expect sawlog markets in 2009 to remain difficult.

We expect the early part of 2009 to be particularly weak for our lumber customers. Many plan on taking extensive down time during the first quarter and we have announced our own production curtailments in our Montana mills.

Therefore, we plan to defer some of the Northern segment harvest, particularly sawlogs, into the second half of the year when we feel there is some potential for improved markets. As a result, we expect our first quarter sawlog harvest to be the lowest level of the year, between 500,000 tons and 550,000 tons. We expect to harvest between 2.5 million and 3.0 million tons of sawlogs in the Northern segment during the entire year of 2009.

Northern pulpwood markets are also likely to soften during 2009 due to slowing paper production. We expect to harvest between 600,000 and 650,000 tons of pulpwood during the first quarter. For the year we expect to harvest between 2.0 million and 2.5 million tons of pulpwood in the Northern segment.

We expect our Northern segment harvest for 2009 to be between 5.0 million and 5.5 million tons, lower than 2008’s 6.0 million ton harvest.

In our Southern resources segment our first quarter operating income was $25.0 million, down $4.0 million from the third quarter. We reduced both our sawlog and pulpwood harvest from third quarter levels. Sawlog markets remained weak with extended holiday down time taken by sawmills and plywood plants throughout the South.

We harvested about 1.0 million tons of sawlogs during the quarter, a 28% reduction from third quarter’s level, and about 200,000 tons less than we initially planned. We deferred harvests in some particularly weak local markets. Our sawlog stumpage margins increased about $1 per ton, a benefit of lower log and haul costs as diesel fuel prices fell.

We reduced our Southern pulpwood harvest during the fourth quarter about 17% from third quarter’s level. While our harvest was down, it was about 150,000 tons more than we initially planned. Strong pricing during the quarter encouraged us to bring some pulpwood markets harvests forward to capture the attractive values.

Our pulpwood stumpage margins increased about $2 per ton during the quarter. We benefitted from some spot market strength in the markets caused by wet weather as well as some benefit from lower log and haul costs.

Our Southern resources segment harvest will be lower in 2009 than recent years for two reasons. First, Southern harvests will decline as a result of our Southern Joint Venture. The joint venture lands contributed roughly 1.4 million tons of harvest during 2008. Second, we will reduce the pace of our pulpwood harvest. We expect our Southern sawlog harvest to be between 5.0 million and 5.5 million tons in 2009 while we expect our pulpwood harvest to be between 5.5 million and 6.0 million tons.

We expect our Southern harvest mix to be approximately 48% sawlogs and 52% pulpwood. This compares to pulpwood representing almost 59% of the harvest mix in 2008.

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

The real estate segment recorded revenue of $215.0 million and operating profit of $104.0 million for the quarter. The results include the closing of Phase I of the Montana Legacy Project, as well as the sale of approximately 60,000 acres of rural, unentitled land.

This Montana transaction contributed $150.0 million of revenue and cash flow and $74.0 million of operating income. As the economic downturn accelerated during the first quarter, inquiries into properties did slow and individual buyers became more cautious and value conscious.

As in past quarters, there were some noted differences in regional markets. Mississippi and Louisiana rural land markets remain active while activity in higher priced regions like Florida and Montana has slowed.

In general, pricing appears to be stable in the low end of the market while prices in the high end of the market are weaker, off 10% to 15% from levels experienced a couple of years ago.

During the quarter we sold about 47,000 acres of small, non-strategic timberlands for $750 per acre. The per acre price is lower as this includes about 33,000 acres of lower value, non-strategic properties in Michigan’s upper peninsula.

We sold about 7,500 acres of HBU recreation lands during the quarter, capturing average values of nearly $3,000 per acre. As was the case with the first nine months of the year, we sold a greater proportion of lands from lower priced regions such as Louisiana and Mississippi than we did in 2007. Development sales remain quiet with 45 acres sold for about $4,100 per acre.

We expect the severity of the economic downturn to reduce the pace of rural land sales in 2009. We continue to experience reasonably good interest from individual buyers for land but they are more cautious and value conscious.

We adjusted our offering moving lands from weaker markets in parts of Georgia, Florida, and Montana, and increased the listing in active markets such as the Gulf South.

We expect first quarter revenues to be between $265.0 million and $275.0 million, including the second phase of the Montana conservation sale.

We estimate land bases to be approximately 35% of revenue. Land bases associated with Phase II of the Montana conservation sale is approximately $90.0 million.

We expect a full year real estate revenue to be between $430.0 million and $460.0 million with land bases of approximately 30 percent of revenue.

The manufacturing segment reported a $20.0 million loss compared to third quarter’s $4.0 million loss. The results include an $8.0 million write down of the value of purchase log commitments and log and finished product inventories. In addition, we recognized about $2.0 million of severance cost associated with our plans to reduce manufacturing production.

Prices for lumber and plywood were both down about 4% while average MDF prices were up slightly. However, sales volumes were significantly lower in all of our product lines. Lumber volumes declined about 15% on extremely slow housing activity and lower repair and remodeling markets. Plywood and MDF volumes declined 40% and 30% respectively from third quarter levels.

Customer orders declined sharply in reaction to deteriorating economic conditions during the fourth quarter. Our plywood and MDF businesses focus on specialty and industrial users and during the quarter these customers reduced orders to manage their inventories.

Earlier this month we announced the permanent closure of one sawmill and significant production curtailments during the first quarter in our lumber and MDF businesses. We took these actions to match our manufacturing production with demand and ensure that the segment’s performance is, as a minimum, cash flow neutral in 2009.

Below the operating lines we are expecting equity earnings from our Southern timberland venture to offset the interest expense from the loan we received from the venture. Interest expense for the year, excluding the loan from the Southern timberland venture, should be about $100.0 million, down approximately $35.0 million year-over-year, the result of debt reduction and lower variable interest rates.

With the expected narrowing in our manufacturing losses during 2009 we expect a smaller benefit from taxes than we received in 2008.

Summing it up, we are expecting to report earnings between $1.38 and $1.63 per share during 2009 with first quarter earnings expected to be between $0.94 and $0.99 per share.

Now I will turn the call over to Rick for summary comments before opening up the call to your questions.

Rick R. Holley

Looking ahead in 2009 we are planning conservatively and do not expect meaningful, near-term improvement in the economy or in our markets. Our approach in 2009 will be to maintain, remain disciplined, and capitalize on our ability to exercise operational flexibility.

Even in these challenging markets we expect to generate cash flow from our operations that exceeds our dividend of approximately $280.0 million. We have a strong balance sheet and are responding appropriately to market conditions. We won’t let the current economic environment detract us from executing our long-term strategies or investing in future growth.

We are controlling our costs, scrutinizing everything we do. We are making sure that we make continued progress in strategic areas. We will continue to pursue long-term growth opportunities, such as wood-based renewable energy markets and non-timber natural resources.

We will also continue with our efforts to drive sustainable long-term cost savings through logistics and contractor performance improvements. These efforts, along with the lower fuel prices in 2009, should improve our operating cost position.

We are remaining disciplined when it comes to capital expenditures. For example, in 2008 when fertilizer prices spiked, we deferred fertilization of our timberlands during much of the year. During the fourth quarter fertilizer prices dropped sharply and we resumed our fertilization program.

We are targeting 2009 capital expenditures between $80.0 million and $85.0 million. About half of this amount is maintenance capital, primarily a reforestation of harvest and lands. About half of the capital is discretionary, civiculture investment that will enhance the growth and productivity of our forests.

We will maintain the strength of our investment-grade balance sheet during the coming year. We will retire $158.0 million of notes maturing during 2009 and be opportunistic in retiring additional debt, as we were during the fourth quarter, when that makes good sense for us and you as shareholders. We won’t need to tap debt markets for the next two years.

Over the past two and a half years we have been very opportunistic in buying our company stock, repurchasing 19.4 million shares, boosting our shareholders proportionate interest in the company by more than 10%. During 2009 we will continue with the same approach.

We will also look to acquire timberlands when we can find good opportunities to generate excess returns from the investment. During 2008 we found a few transactions that met our criteria and purchased more than 150,000 acres in Florida, Georgia, Oregon, South Carolina, and Vermont.

We are encouraged by the early days of the Obama administration. Beyond the effects of the stimulus package before Congress, it is clear that the new administration plans to accelerate the use of renewable energy in the United States, including wood-based renewable energy.

Our asset diversification, financial capability and strategic focus have Plum Creek well positioned to benefit from the opportunities that lie ahead.

Now we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gail Glazerman – UBS.

Gail Glazerman - UBS

Can you talk about what you are seeing in terms of transactions and opportunities in the timberland market? It seems like there has been a bit of a slow down and I’m wondering if you are seeing properties to look at in terms of core industrial timberlands out there?

Rick R. Holley

I think there is a fair characterization that the market has slowed. There were a couple of large transactions completed in the fourth quarter last year, one in particular in Oregon, with a private company. And as you know, Potlatch did a recent transaction in Arkansas.

What we are seeing is a lot of smaller transactions out there, 25,000 to 50,000 acres, but nothing large at the present time. And even with that we haven’t seen prices, not a lot of transactional evidence, but the prices we are seeing are still holding up at levels we saw last year.

Gail Glazerman - UBS

Last conference call you were confident you would be able to replicate your Southern transactions again at similar levels. Are you less confident today?

Rick R. Holley

I think you could take a transaction to the market and get the same values that we received from the Southern timberlands transaction but maybe not one of that size. So you might have to go out instead of with 454,000 acres, maybe 100,000 acres or 200,000 acre transaction I think is doable. But at that size, you know, that market, given what’s going on in the stock market and funds through most of the pension acquirers, who are the money behind many of these transactions, has slowed a bit, for obvious reasons.

Gail Glazerman - UBS

And taking on your last comments about renewable energy, at the analyst’s day in November you were talking about negotiations with customers, and I want to say it was 3.0 million tons of pulpwood going into renewable energy. Can you give any sort of update on those opportunities?

Rick R. Holley

We have signed an agreement with one such customer for 1.0 million tons of pulpwood and bio mass that will go to pellet plants for use in basically power plants, ultimately. So we will go to a pellet plant and the pellets will go to a wood-burning energy plant.

Gail Glazerman - UBS

And the other negotiations are ongoing?

Rick R. Holley

Yes.

Gail Glazerman - UBS

Can you get a little more specific about what legislation might be out there. I think I saw something where maybe your pulp and paper customers are trying to get some government support. Can you talk about anything that is pending?

Rick R. Holley

In the stimulus bills, it depends on what day of the week. There is so much stuff in that that everybody is at the trough trying to get a piece of that. There is a lot of tax legislation there that benefits lots of different industries. Clearly the energy bill will be looked at after they get through the stimulus bill and that energy bill will have things on renewable energy and certain renewable energy standards, probably required across the board by all power generating plants in the United States.

I think the question there is whether the standard is 15%, 20%, or 25% of their energy output. But clearly that is going to be something that is in there.

There are a lot of tax-type things right now to help stimulate the economy and I know all industries, including the paper industry, is looking at that.

Gail Glazerman - UBS

Can you give an update on what your depreciation was in your manufacturing segment in 2008?

David W. Lambert

The depreciation in the manufacturing was approximately $18.0 million.

Gail Glazerman - UBS

Have any actions you have taken, in terms of your asset base, would lower that for 2009?

David W. Lambert

It will be a little lower because we have lower production rates with the one mill closing and reduced production, we would expect to see slightly lower depreciation in 2009.

Operator

Your next question comes from Steven Chercover - D.A. Davidson & Co.

Steven Chercover - D.A. Davidson & Co.

Can you give us the volumes associated with the three Montana tranches that are going away?

Rick R. Holley

With respect to acres?

Steven Chercover - D.A. Davidson & Co.

No, the harvest levels. Just as you did for the Campbell Group transaction, I think you said it was 1.4 million tons of harvest foregone. Can you give us the volumes in the Northern resource?

David W. Lambert

For the first couple of years of this transaction, we have a wood supply agreement and they are not going to change materially as a result of the transaction.

Steven Chercover - D.A. Davidson & Co.

So just the margins go down in the first couple of years?

David W. Lambert

Yes.

Steven Chercover - D.A. Davidson & Co.

Sticking to Montana, Smurfit-Stone, as you know, is now in chapter 11 and their Mazula facility is rumored to be not a strong one. Have you done any scenario analysis to see what would happen to the entire wood basket in Montana if that was to go away? Because clearly there are some sawmills that are concerned that their digester is going away.

Rick R. Holley

Chip prices are very high over that part of the world today and I think if the plant that Smurfit-Stone has in Mazula were to shut down, there will be plenty of chips available in the marketplace and chip prices will go down. And we do sell chips to Smurfit-Stone so that would affect some of the values we get for residuals.

But there are so many sawmills that have already been shut down, that supply is so tight already, that I don’t think it’s going to have a meaningful impact, certainly on our situation there.

Steven Chercover - D.A. Davidson & Co.

Did you say that the basis for the Montana Phase II would be $90.0 million this quarter?

Rick R. Holley

Correct. The revenue will be 250 and the basis on that is $90.0 million.

Steven Chercover - D.A. Davidson & Co.

Would you say that that is going to contribute about $0.95 toward your full year earnings?

David W. Lambert

It’s about $0.94 per share.

Operator

Your next question comes from Peter Ruschmeier – Barclay Capital.

Peter Ruschmeier – Barclay Capital

I was hoping you could share with us your philosophy of dividend again, especially in light of potentially a period of below-average cash generation, and how do you think about the ability of raising cash from asset sales as using that for a period of time. Any color you can offer on how you think about the dividend. It obviously has not been variable and is that the way you think about it going forward?

Rick R. Holley

As you know, our long-term plan is to continue to grow the dividend until we got in these more difficult economic times we were increasing it 4% to 5% every year, I think for three years in a row. Clearly, as we look at 2009 or 2010, with the speed bumps that may be before us, that none of can totally predict, the dividend is totally safe. As I mentioned on the call today, the earnings guidance that we gave you today more than takes care of the dividend for 2009.

And you know we had finished 2008 in a very strong financial position, both with our balance sheet and a lot of cash in the balance sheet. So, we feel very good about the dividend.

I think the question we often ask ourselves is when will we increase it again. And when we see markets improve for our saw timber and the rural land business, and some of those markets right now are a bit weak, we will begin to grow the dividend again, because that’s our long-term focus. Short term it’s not something that anybody should be worried about.

Peter Ruschmeier – Barclay Capital

Can you remind us on the key changes in the deal with Nature Conservancy, in terms of the amount and timing of the cash, and how do you see groups like the Nature Conservancy and others going forward in terms of their interest in your properties?

David W. Lambert

With respect to the timing of the cash flows, we are expecting $250.0 million in the second closing that will occur in this quarter. The third and final closing will be in the fourth quarter of 2010. In the National transaction that is approximately $90.0 million.

Rick R. Holley

And your question about transactions with groups like that, we’re looking at, this year even, a couple of other smaller conservation transactions in the United States. And clearly organizations like the Nature Conservancy and others, they are large organizations and they are very active in the marketplace.

They do a lot of private fund raising and in my guess that’s a bit more challenging today than it would have been a couple of years ago. That said, when we see markets improve, their fund raising will improve. And I think you are going to continue to see Plum Creek from time to time still be very active in conservation generally and certainly specifically with groups like the Nature Conservancy.

Peter Ruschmeier – Barclay Capital

On the last page of your press release you provide a nice breakdown on the acreage by state. Are these figures pro forma for the entire Montana sale or can you remind us what’s in and what’s not in these numbers?

Rick R. Holley

As of December 31, 2008, so it included Phase I of the Montana deal but not Phase II, which will close this quarter.

Peter Ruschmeier – Barclay Capital

On the acquisitions that you made during the year, what states were those included in?

Rick R. Holley

The biggest number of acres was in Vermont but it was also acres in Oregon, Florida, Georgia, and South Carolina. [inaudible] acres in total for about $117.0 million.

Operator

Your next question comes from George Staphos - Banc of America Securities.

George Staphos - Banc of America Securities

I want to segue a little off Steve’s last question. So if we are basically at around break-even in the first quarter, excluding Phase II of Montana, and looking at your guidance for the whole year, where should we expect to see some underlying improvement in the business? Will it solely be in cost in log and haul or will there be some other operational improvements that we should expect or market improvements within the business?

Rick R. Holley

I think you are going to see a combination of both. Clearly we have seen diesel fuel prices come down and that is probably $1 a ton kind of thing, so we probably going to save $13.0 million to $15.0 million this year in diesel fuel costs. Most of that we will get back through log and haul costs. And again, that’s volume driven so as the year goes and we increase volumes you will see more of that.

Some of these other logistical things I mentioned, we will see some of those improvements take hold. The other thing we expect, as we commented on, markets to improve ever so slightly but in the second half of the year.

You look at the sawmill industry right now, lumber mills, they’re operating at about 60% of capacity. I’m not sure that’s going to go down a lot more from there. And we have seen a lot of closures in the fourth quarter that we will see in through the first quarter. And as any of those mills start back up and we see any improvement in demand that will help sawlog prices in the second half.

So we are presuming sawlog prices in the second half get a little better, lumber prices get a little better in the second half, and you see more of the impact of those cost things we are working on.

David W. Lambert

Also in the first quarter we have a relatively low level of harvest compared to subsequent quarters throughout the year and the rural land sales that we have in our outlook is very modest compared to the balance of the year.

George Staphos - Banc of America Securities

Looking at your numbers, making some adjustments for thinning, nonetheless your pulpwood harvests are down 25% in the South from where you had been for 2008 to what you are guiding to in 2009, roughly speaking. How much of that is thinning being pulled back and how much of that is just reflecting the market overall, if there is a way to parse it that way?

David W. Lambert

I think a portion of it is the volume that was from lands that were contributed to the joint venture. But the balance of it is we saw an opportunity over the last couple of years to increase the thinning on our lands, and we had a little bit of a backlog and so we were able to do this and take advantage of the market. And so we are stepping down the harvest of our pulpwood for we think the level is going to be for the next couple of years.

Looking back in the rearview mirror, I think our timing has been pretty good as far as when to deliver this pulpwood to the market.

George Staphos - Banc of America Securities

So this should be the normalized run rate for pulpwood harvest in the South for the time being, given what you know?

David W. Lambert

Yes.

George Staphos - Banc of America Securities

As we look at some of the comments you made about Florida, can you give more color in terms of what you are seeing in these markets? You mentioned that you walked away from some transactions. Has there been any kind of improvement from depressed levels from what you’ve seen in the first quarter, early fourth quarter perhaps versus third quarter or is it beat dead right now?

Rick R. Holley

I think if you look at the higher value markets we are in, which are really Georgia, Florida, and Montana, those markets are probably off 20% value-wise from where they were a couple of years ago and they’re pretty quiet. I mean, you can move transactions but you’re taking a 20% to 30% discount and we’re just not going to do that. Fortunately we have other markets, in Mississippi and Louisiana and Wisconsin, which quite frankly are still very good. And we’re just kind of moving our focus onto those markets, which in the long term, those other high-end markets will be back and the values are excellent. But my guess is it could be a year or two years out.

George Staphos - Banc of America Securities

As we look out over the next year or two would you say that maintaining cash flow, which is quite good even at these depressed earnings levels and maintaining the balance sheet might take precedence over perhaps share repurchase? How would you have us think about it today, versus a quarter ago?

Rick R. Holley

Maintaining a strong, investment-grade balance sheet and liquidity is job one in this marketplace. Again, we will be very opportunistic at trying to bring value to shareholders through buying timberlands at attractive values or buying their stock back but we’re going to, until we see the light of the day clear on this economic outlook, we are going to be very conservative.

Operator

Your next question comes from Claudia Hueston - JP Morgan.

Claudia Hueston - JP Morgan

I was hoping you could comment on your pension plan. I noted the cash contribution for 2008. Just wondered if you had any guidance for 2009? And also if you just had a most recent shares outstanding.

David W. Lambert

The most recent shares outstanding, as of the end of the year, was 166.0 million even.

We did have pension funding happen during 2008, reflective of somewhat the weaker markets and then total, both our qualified and our supplemental pension, there were contributions of a total of $37.0 million. That was higher than in 2007 when we were kind of in an overfunded position and had no contributions at all.

In 2009 we would expect normal funding levels that might be in the $10.0 million to $12.0 million, depending on how market conditions are.

Rick R. Holley

And both plans are funded fully, just so you know.

Operator

Your next question comes from Christopher Chun – Deutsche Bank Securities.

Christopher Chun – Deutsche Bank Securities

Can you tell us what region your recreation plans sales were in?

David W. Lambert

We had sales in all regions but they were focused in the Gulf South and then the Lake States had a higher proportion of the volume in the fourth quarter. You had about 43% that was in the Atlantic South, 18% of the acres in the Gulf South, 16% in the Rockies, 21% in the Lake States. So it’s kind of a little bit of activity in each region.

Christopher Chun - Deutsche Bank Securities

In terms of your EPS for the quarter, it seems that you came in a bit above your guidance. Was that just driven by the high amount of non-strategic land sales? And can you comment on what your thinking was there?

David W. Lambert

We ended up getting a little bit of excess performance in our timberland segment and a number of the other ones. And also there was about $0.04 per share higher realized on the first closing of the Montana transaction, by the time we did all the computations.

Christopher Chun - Deutsche Bank Securities

And the large amount of non-strategic land sales in the upper peninsula of Michigan, was that planned?

David W. Lambert

Yes, that’s something we’ve been working on for a little while. These are lands that had definitely lower stocking. These are less productive lands and so we put together a package and were able to move those at what we viewed as an attractive price. It was a lower price than what we had paid for the Michigan asset as a whole, but relative to the productivity and the characteristics of the land, we feel very good about the transaction.

Christopher Chun - Deutsche Bank Securities

As to your sawlog billings that you are planning for 2009, can you tell us where those volumes would be relative to what you would consider sort of a normalized volume level? And then given the low prices that are expected for 2009, how do you think about, in general, what the right volume should be?

David W. Lambert

We look at our customers in markets where we think we are getting fair value at the time relative to growth in that, that we continue to serve these customers. The overall program for 2009, I think we’re operating at a level that is certainly below long-term potential of the land. And so as we move forward in time we would expect higher harvest levels.

Rick R. Holley

So clearly what we do is go through and look at each one of the markets and put a value on what we think, given the fact you’ve grown a log for 25 or 30 years, of what we think it’s worth. And below that price, we don’t go. And so that’s how we decide when we go in and out of markets. And so we have kind of pricing mechanism that we look at.

And as David mentioned, at the rate that we are showing for the Southern timberlands in 2009, that is below what those lands are capable of, but the market at this point and time is weak and we’re not going to take the wood to market until it improves.

But if we see markets improve you can see a higher harvest level in 2010 and 2011.

Christopher Chun - Deutsche Bank Securities

Would it be possible to quantify how much below a normalized level those volumes will be?

Rick R. Holley

We reduced the sawlog harvest in 2008, I think about 0.5 million tons above where we gave you guidance to begin with. So clearly at the level we’re at for 2009, could it be 1.0 million tons higher? Yes. 1.5 million tons perhaps as well. So 1.0 million to 1.5 million tons higher.

Operator

Your final question comes from Mark Weintraub - Buckingham Research.

Mark Weintraub - Buckingham Research

On the manufacturing business, as I look at costs and expenses for the year of about $435.0 million, can you tell us how much of that would have been timber that was supplied from your lands order of magnitude?

Rick R. Holley

Probably half and half. So half would be from our lands and half would be from non-fee sources.

Mark Weintraub - Buckingham Research

And would timber been maybe two-thirds of the cost and expenses or something?

David W. Lambert

That’s fair in a normal.

Rick R. Holley

In the lumber business about 70% of the cost is the wood.

David W. Lambert

A little less in plywood and even less in MDF.

Mark Weintraub - Buckingham Research

So maybe order of magnitude $130.0 million of timber would have gone from your land to your manufacturing business?

David W. Lambert

Yes.

Mark Weintraub - Buckingham Research

On the real estate business, by my math it looks like if we back out the Montana, you are going from about $300.0 million to about $180.0 million to $210.0 million, based on your guidance. How much of the $180.0 million to $210.0 million would be coming from non-strategic versus HBU or conservation?

Rick R. Holley

We’ll get that number for you. But when you think about the $180.0 million to $210.0 million it compares to it was $281.0 million in 2008, so it’s down anywhere from $70.0 million to $100.0 million. Now part of the reason it’s down is because of the marketplace. As we said, we’re going to take less transactions to the market.

But also in that $250.0 million conservation transaction with the Nature Conservancy, there are lands in that transaction that we would have otherwise sold and they would have been a part of our normal real estate program. In a normal year we sell $30.0 million to $50.0 million worth of real estate in Montana. Kind of HBU and some development stuff and even some non-strategic stuff in Montana. So that stuff is in the $250.0 million and therefore not in the $180.0 million to $210.0 million.

So that program is down probably $50.0 million year-over-year and it’s really just volume-related and market-related.

David W. Lambert

In one of the areas our small, non-strategic lands that we have been discussing with you, this is a category where we move this out earlier in the timing, higher and better use land. Sales volumes are building. We would expect to only sell about one half or one-third of the small non-strategic acres in 2009 than we did in 2008, so that’s going to be a smaller part of the sales mix.

Mark Weintraub - Buckingham Research

You had mentioned that it might be hard to do as large a scale transaction in the U.S. South as you did this year but certainly you thought you could do 100.0 million or 200.0 million scale transaction. Is there any reason why you wouldn’t go ahead and do something like that, given a willingness to have done it at those types of prices last year. And it would seem if you can get those prices this year it makes even more sense. And is that or is that not included in the guidance that you gave us?

Rick R. Holley

None of that is included and again, we look at all these opportunities all the time and if something like that makes sense and there is a willing market, that’s something we would look at. But none of that is the guidance that we gave you today.

Operator

There are no further questions in the queue.

Rick R. Holley

Thank you everybody and we will talk to you next quarter.

Operator

This concludes today’s conference call.

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Source: Plum Creek Timber Company, Inc., Q4 2008 Earnings Call Transcript
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