Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John Hobbs - Director, Investor Relations

Rick R. Holley - President and Chief Executive Officer

David W. Lambert - Chief Financial Officer

Analysts

George Staphos - Banc of America Securities

Gail Glazerman - UBS

Peter Ruschmeier - Barclays Capital

Christopher Chun - Deutsche Bank Securities

Claudia Hueston - JP Morgan

Mark Weintraub - Buckingham Research

Steven Chercover - D.A. Davidson & Co.

Laura Sloate – Neuberger Berman

Plum Creek Timber Company, Inc. (PCL) Q4 2008 Earnings Call April 27, 2009 5:00 PM ET

Operator

At this time I would like to welcome everyone to the Plum Creek 2009 first 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 first quarter 2009 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 only. We ask that any other participants please follow up with any questions by calling me at 1-800-858-5347, following the conclusion of our call. I encourage you to visit our website, www.plumcreek.com. There you will find our press release and supplemental financial statements for the first quarter of 2009.

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

Good afternoon. Without a doubt we are experiencing some of the most difficult economic conditions any of us has faced in our careers. We realize that we are not alone and that industries and companies across the globe face similar challenges.

At Plum Creek we are fortunate to own and manage a diverse portfolio of valuable land and timber assets and have a strong balance sheet and excellent liquidity in this challenging environment. These attributes allows us to take thoughtful actions to manage the company through the recession and to emerge well positioned to benefit in the recovery that will come.

When faced with unattractive markets we make decisions that will result in the best long-term economic value return for our investors. As you read in our press release we have elected to further reduce our sawlog harvest to protect value. This obviously has an impact on our 2009 results, reducing our earnings forecast by $15.0 million to $20.0 million for the year, however it is a severe value decision and the right thing to do.

We are downsizing our lumber business. We announced today that we are closing our Pablo, Montana, pine board mill. We took this action to match current product to market conditions and to consolidate our lumber production in the mills best positioned to compete over the long term. We will continue to match our manufacturing and production with demand and ensure that the segments performance is cash-flow positive.

During these difficult times we are mindful that we don't operate in a vacuum. We have long-standing business relationships with logging and hauling contractors. All of them are feeling the effects of the economically challenging environment. We are working with many contractors to increase supply chain efficiency and reduce costs for all of us.

These efforts are resulting in real cost savings and furthering relationships with our best and most progressive contractors. These relationships are an intangible asset and they are likely to become more valuable as more contractor struggle to compete in this economic downturn.

We also have important business relationships with our customers who are doing what they can to manage their businesses in this environment. Here again, our long-term relationships come into play.

Customers value our ability and willingness to work closely with them to manage log inventories, a major working capital component for any mill. They also know that logs they receive from Plum Creek will consistently match their specifications helping them operate as efficiently as possible.

Our ability to consistently serve our customers' needs translates into a preference for doing business with Plum Creek. Working closely with our contractors and customers pays dividends today and will provide us a competitive advantage when markets improve.

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

David W. Lambert

We reported earnings of $0.95 per share, within our initial guidance range. Before reviewing the performance and outlook for each segment, I will summarize the adjustments we are making to our 2009 harvest plan.

We have elected to reduce our 2009 harvest by approximately 500,000 tons in aggregate. In the northern resources segment we will reduce our sawlog harvest by 500,000 tons, particularly in the Pacific Northwest where prices declined sharply during the past quarter.

We have not made material changes to our pulpwood harvest plan in this segment. We expect our northern segment harvest for 2009 to be between 4.5 million tons and 5.0 million tons. In the southern resources segment we will alter our harvest mix, deferring approximately 500,000 tons of sawlogs and increasing our pulpwood harvest by a similar amount.

We expect our southern sawlog harvest to be between 4.5 million tons and 5.0 million tons in 2009, while we expect our pulpwood harvest to be between 6.0 million tons and 6.5 million tons. We now expect our southern harvest mix to be approximately 43% sawlog and 57% pulpwood.

These actions will allow approximately 1.0 million tons of the company's sawlog to continue to grow. They will be harvested when prices are more attractive. As Rick mentioned, this decision is the primary driver behind our adjustment in our 2009 earnings guidance.

Previously we had planned to harvest between 16.0 million tons and 17.0 million tons of timber during 2009, now we expect to harvest between 15.5 million tons and 16.5 million tons during the year.

Now we'll go through the segments. In the northern resources segment operating profit was $2.0 million, down from the fourth quarter's $8.0 million profit. Sawlog prices fell 16%, or $10 per ton, from the fourth quarter level, a much larger decline than we had originally anticipated.

During the first quarter, lumber production in the west was down 30% year-over-year as residential construction markets were at record low levels and lumber prices remained at multi-decade lows. During the quarter our log prices in the Pacific Northwest fell sharply, an average of 28% from fourth quarter levels. Hardwood sawlog prices in the Lake States and the Northeast region also fell as hardwood lumber markets contracted during the quarter.

We reduced our sawlog harvest 36% from the fourth quarter level and we will further reduce sawlog harvest during the second quarter. We expect to be out of the market for most, if not all, of the second quarter in Montana and Washington state, while in Oregon we have reduced our harvest levels to serve our commitments under existing fiber supply agreements.

In the Northeast and Lake States our harvest plans are more a function of the seasonally low activity levels during spring breakup. As a result, we expect our second quarter Northern sawlog harvest to be between 400,000 tons and 450,000 tons.

We expect sawlog prices to weaken further from first quarter levels, down $3 to $4 per ton. We expect sawlog markets in 2009 to remain difficult and pricing in some regions to remain unattractive. As I mentioned earlier, we are deferring approximately 500,000 tons of sawlog harvest as a result. We now expect to harvest between 2.0 million tons and 2.5 million tons of sawlogs in the northern resources segment during 2009.

Northern pulpwood prices were relatively stable during the quarter, down only about $1 per ton. A substantial portion of our pulpwood is delivered under fiber supply agreements in this segment. The prices we experienced during the first quarter were strongly influenced by prices prevailing in the fourth quarter under these fiber supply arrangements.

We expect pulpwood prices we report during the second quarter to decline $2 to $3 per ton, reflecting the weaker spot market prices that emerged during the first quarter. Northern pulpwood harvest should decline seasonally during the second quarter to between 350,000 tons and 400,000 tons. For the year we expect to harvest between 2.0 million tons and 2.5 million tons of pulpwood in the northern segment.

The decline in revenue during the first quarter was somewhat offset by lower costs. Our largest benefit resulted from reduced log and haul rates during the quarter, in part due to lower diesel fuel prices and in part to a reduction of average hauling distance. This resulted in savings of approximately $3.0 million compared to the fourth quarter.

Turning to the southern resources, in our southern resources segment our first quarter operating profit was $20.0 million, down from fourth quarter's $25.0 million profit. We reduced both our sawlog and pulpwood harvest from fourth quarter levels.

Sawlog markets remain weak throughout the South. Customers have adequate log inventories and with very weak lumber demand are purchasing just enough to keep their log inventories at comfortable levels. We harvested 940,000 tons of sawlogs during the quarter, an 8% reduction from fourth quarter levels.

We deferred harvest in some particularly weak local markets. Our sawlog stumpage margins declined less than $2 per ton, or about 6%. The entire decline reflected weakness in larger sawlogs as prices for smaller sawlogs held fairly steady.

We expect to harvest between 1.1 million tons and 1.2 million tons of southern sawlogs during the second quarter. We expect our average sawlog price reported during the second quarter to decline about $2 per ton.

We continued to reduce our southern pulpwood harvest during the first quarter, about 15% from fourth quarter's level. Southern pulpwood stumpage prices fell $1 per ton, or 8% from fourth quarter levels as pulp and paper companies reduced production sharply during this quarter.

Although we expect average pulpwood prices to decline $1 or $2 per ton during the second quarter, pulpwood prices remain relatively attractive compared to levels over the past few years.

Our second quarter pulpwood harvest will increase from our first quarter level and be between 1.6 million tons and 1.7 million tons. As with the Northern segment we did see improvement during log and haul rates during the quarter, reducing costs approximately $3.0 million.

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 $269.0 million and operating profit of $170.0 million. The results included the closing of Phase II of the Montana Conservation Sale. This 112,000 acre transaction contributed $250.0 million of revenue and $162.0 million of operating income. Other real estate sales contributed $18.0 million to revenue and $8.0 million to income.

We received more than $1,300 per acre for about 1,700 acres of our small, non-strategic timberlands. We sold nearly 2,200 acres of recreational lands at an average price of 3,400 per acre. We also completed the sale of nearly 1,500 acres of development land for nearly $4,100 per acre.

Typically our first quarter is our seasonally slowest quarter in this segment. Our assessment of the market hasn't changed materially since our last conference call. The severity of the economic downturn has reduced the pace of rural land sales in 2009, however we continue to experience reasonably good interest from individuals looking for land but they are more cautious and value conscious.

Transaction activity was slow. Prices remained attractive. In general pricing appears to be stable in the low end of the market while prices in the higher end of the market are a little bit weaker, off 10% to 15% from the levels experienced a couple of years ago. We have noticed an increase in inquiries over the past two or three weeks, which is an encouraging sign.

We expect second quarter real estate revenues to be between $25.0 million and $35.0 million. We estimate land basis to be approximately 30% of revenue. We continue to expect the full year revenue for this segment to be approximately $430.0 million and $460.0 million, with land basis approximating 30% of revenue.

The manufacturing segment reported a $22.0 million loss. The results include a $12.0 million non-cash asset impairment on our remaining lumber mills. In addition, we recognized about $2.0 million of severance costs associated with staff reductions in this segment. Absent the write-offs and severance, the segment reported an $8.0 million loss. Lumber, plywood and MDF demand remained weak in this environment.

As Rick said, we are adjusting our production to ensure this segment as a cash-flow contributor and positioned to be very competitive as the recovery unfolds. We expect to see some seasonal pickup in lumber during the second quarter and as a result expect to narrow the loss in this segment.

Turning to some of our other product lines, in addition to realigning our manufacturing production, we also reduced our workforce outside our wood products mills by approximately 8%. These are difficult decisions we have made but they were necessary to properly size our cost structure in this environment.

Interest expense for the year should be down to $95.0 million, the result of debt reduction we accomplished during the first quarter and low variable interest rates.

Summing it all up, we are expecting to report between $1.20 and $1.45 per share during 2009 with earnings during the seasonally slow second quarter to approximately break even.

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

Rick R. Holley

[inaudible] capital allocation is absolutely key in this environment and something we focus on every day. In our last call we laid out a capital investment plan of between $80.0 million and $85.0 million for 2009. About half that amount, roughly $42.0 million, was discretionary capital.

Given the extraordinary economic environment we have revisited our discretionary capital investment plans for 2009. Substantially all this capital consists of treatments designed to enhance the productivity of our forests. The application of these treatments is fairly flexible from a timing standpoint and we have decided to defer about $20.0 million of these investments. As a result, we now expect our capital investments to be between $60.0 million and $65.0 million for this year.

During the past quarter we continued to allocate capital to provide investors with the best returns possible. As we noted in our press release, we retired a total of $125.0 million of debt during the quarter, including executing open-market purchases of our publicly traded bonds at an attractive discount as well as prepaying $51.0 million of private debt at par value.

In addition, we continue to find our own stock attractively priced in the market and used $87.0 million to repurchase 3.3 million shares, nearly 2% of our outstanding shares, at an average price of $26.57 per share.

At the end of the quarter we had nearly $900.0 million in ready liquidity with $355.0 million of cash in the bank and nearly $540.0 million available under our line of credit. So we are in an excellent financial position.

We will continue to maintain our investment-grade balance sheet. We have ample headroom under all of our debt covenants. During the first quarter we met with Moody's and S&P and they have since reaffirmed our credit ratings with stable outlooks.

Last Friday we filed a universal shelf registration. Our old shelf expired on April 24 and the new filing just replaces that facility. We view this as good financial housekeeping. We have ample liquidity to handle the $114.0 million of debt maturities due over the next two years so we have no need to access capital markets for quite some time.

In summary, these are very difficult market conditions. We are taking steps to mitigate the effects of the economic downturn while preserving long-term shareholder value. We are in an excellent position to prosper and thrive in the recovery and as we have discussed on earlier calls, we continue to see very positive, long-term fundamentals as owners of timber, land, and non-timber resources.

We will now be happy to take your questions.

Question-and-Answer Session

Operator

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

George Staphos - Banc of America Securities

First question, could you give us a bit more color in terms of the inquiries that you are seeing beginning to increase in the last two or three weeks? Is there any kind of common denominator, if at all? Any color would be appreciated.

David W. Lambert

Nothing consistent. We have a seasonally weak first quarter and it's hard to tell how much of it is a seasonal increase or people are just becoming a little bit more comfortable with what's happening with the economic environment. We just have a noticeable pick up in kind of demand and interest in our lands.

George Staphos - Banc of America Securities

When you look at your business, I think you mentioned somewhere in your release that you're running at around a 6% operating rate within lumber. What, if you had to guess at a range, what operating stance do think most of your customers are running on within the wood products markets right now?

David W. Lambert

I mean, we've seen on the solid wood side where lumber production is down 30% about from where it had been so they're running at kind of 70% of where they were.

George Staphos - Banc of America Securities

Okay. I guess if we put that all together, your guidance assumes some pick up in the second half of the year from the earnings rates that you've been generating. Obviously these are very difficult markets and you are performing reasonably well but what gives you, aside from being a little bit of a pick up that you're seeing in terms of indications of interest, what gives you confidence that you will see an improvement in earnings in the second half of the year? Is that just your expectation or are you seeing any other tangible evidence right now?

Rick R. Holley

Clearly we have seen sawlog prices come down this quarter and we expect maybe to deteriorate a little bit more in the second quarter. But again, second quarter is our lowest volume quarter in any case. And we expect them to be flat and maybe there is a chance for improvement in the second half.

You know, the real estate business is always a third and fourth quarter business, as you guys know from our history, and based on the amount of interest we have, on the activity we have talking to potential customers in the real estate business, you know, we feel pretty good still and that's why we haven't adjusted our outlook for our real estate revenues for this year.

So again, I think the real estate business, we'll know more next quarter than we do now, but as of right now we still feel pretty good about where it's at.

George Staphos - Banc of America Securities

One quick question there, and realizing that we're not going to take this as a guarantee, but just given your discussions with customers and your walk around the industry, do you think we're at a point where affordability, months of supply of inventory, at a point were we can begin to see an improvement in the housing market, or do you think we need to see more of an improvement in the employment market, or something else for that matter, for housing to recover sustainably?

Rick R. Holley

There's three factors. One is housing affordability and that index is at all all-time low virtually, which is a positive, or high, I mean for affordability.

George Staphos - Banc of America Securities

Understood.

Rick R. Holley

And interest rates are clearly very low right now. I think it comes down to consumer issues and I happened to be speaking at a conference last week in Arizona, and that's an area obviously that has been very depressed from the housing standpoint and activity has picked up quite a bit there.

And I think consumers are looking at the housing market now and saying prices are really cheap, they're off 30% to 40%, housing is very affordable, and they are starting to come into the market. And that 9 or 10 months of inventory can come down pretty quickly, given the amount of starts that we have.

So, you know, if we get a little consumer confidence here, I think this thing could start moving forward. But we view this as not a quick recovery, it's going to be more of a slow recovery. Certainly more of a u-shape and not a v-shape.

Operator

Your next question comes from Gail Glazerman – UBS.

Gail Glazerman - UBS

In terms of your plan to shift your southern harvest between sawlog and pulpwood, I'm just wondering if you could talk about your confidence in being able to sell that incidental pulpwood. Are you seeing your paper and pulp customers pick up interest or is it new end markets?

David W. Lambert

I think the harvest mix that you are seeing us exercise this year is a little more closely aligned with where it had been last year. We thought it was going to be moving closer to 50/50 but on a relative value basis we're getting more for the pulpwood and we're just going to protect the value of the sawlogs.

I think given our market position we think we can place that volume at attractive prices. I don't see, and we're not banking on, pick up in pulpwood demand.

Gail Glazerman – UBS

And Rick, you touched on it a little bit but the price trend, particularly in the Northwest moving through the first quarter, how much confidence do you have, based on the trends during the quarter that things won't erode moving into the second quarter.

Rick R. Holley

Well, in the Northwest, as we mentioned, prices were off some 38%, or 28%, since last year. And there's a lot of install capacity out here in the West and most of it is very well capitalized. If there are any improvements in these markets at all we believe it will happen here, and therefore on a relative basis we should see a pickup—at least a flattening if not a pick up—in sawlog prices in the Northwest.

But quite frankly, other than supply commitments we have in Oregon per se, we're not going to harvest any wood because the prices long-term there are going to be very, very attractive and have come down a lot and we're just going to wait it out and capture that value at a later time.

Gail Glazerman – UBS

And when you look at the lumber markets moving in the second quarter are you seeing signs of the seasonal pick up in home building activity or not really?

David W. Lambert

It's hard to tell when the market is relatively week, but in the spring you do have greater take outs, more construction than in the winter. So even without affirming and starts, the flow's moving through the system a little more rapidly at this point.

Rick R. Holley

And one the one positive there, clearly in the Northwest and also in the South, is most of these sawmills are keeping fairly low inventories, log inventories, so if we do see any pick up, you know, we could see a little help on the price side.

Gail Glazerman – UBS

In terms of kind of government policy looking at alternative energy and carbon trading, can you talk a little bit about how that affects you and also slightly related, were there any REIT provisions in the tree acts that are up for renewal or were those all kind of firmed last year.

Rick R. Holley

I will let David handle the REIT question but with respect to any government policy actions, as probably many of you know, there is the renewable energy standard is being discussed in the RES back in Congress right now and part of that has to do with all power plants being required to generate 25% of their energy by the year 2025 from renewable sources. Clearly wind and solar, hydro power and nuclear. And wood. So if we see that bill enacted, which we think we'll see something, that could be a very positive—not necessarily today—but clearly a positive for large owners of wood fiber, like Plum Creek is.

Particularly in the southern United States where a lot of these coal-fired plants exist and they will be required over time to find 25% of their energy from another source. And many of these plants can coal-fire with both wood pellets as well as coal.

David W. Lambert

With respect to the tree act we do have a provision where mineral incomes categorized as good read income and so there is a modest benefit for us from that but it's not a material item for us.

Gail Glazerman – UBS

But it would be up for renewal, the tree act, next month, or?

Rick R. Holley

The tree act, as it currently exists, expires the end of June I believe and so obviously they are looking at whether they continue it or not.

Gail Glazerman - UBS

And do you have any opinion on that right now? Which way it would go? I know you're saying it's not material for you, but.

Rick R. Holley

It's certainly not something we're working hard on but like most things back in our nation's capital today, it's probably a 50/50 proposition.

Operator

Your next question comes from Peter Ruschmeier - Barclays Capital.

Peter Ruschmeier - Barclays Capital

A couple of questions. Congratulations on the buying back of the shares at such a distressed level. How many shares do you have left in your buyback authorization?

David W. Lambert

We have $50.0 million worth of authorization under our current Board resolution.

Peter Ruschmeier - Barclays Capital

I'm curious, Rick, what are the limiting factors, if any, from contemplating accelerating some of your non-strategic timber sales? You've had some good price points in the past and you've been able to put the capital to work in buying back your stock effectively. How do you think about that? Are there limiting factors in the amount of buyers in the marketplace for more lands or is it something that you're simply not focused on at this point in time? Can you comment?

Rick R. Holley

Well, as you know, we have identified about 250,000 acres in our portfolio of what we call non-strategic timber lands and the focus here is to move those, quite frankly, as quickly as we can. And to markets and not give them away but at attractive prices in this last quarter we got about $1,300 an acre for them.

You may be referring to larger tracks of timber land and in moving some of those in the market, as we did with the joint venture last year, or even the Montana transaction. You know, we continue to look at all those types of opportunities and I clearly think it's still more of sellers' market than a buyers' market, given what values are today. So it is something we will continue to look at.

Peter Ruschmeier - Barclays Capital

Dave, can you comment on the cost of funds that you retired, the $125.0 million or so of net debt? Or debt that you retired?

David W. Lambert

We did a modest repurchase on the open market of some public bonds. Those are relatively low coupon at 5.875% but we bought those back at $0.80 on the dollar, much as we had done in the fourth quarter of the prior year. And then the notes that we were buying back at par, those were running at about 8.73%.

Peter Ruschmeier - Barclays Capital

And going back to the energy discussion, I'm curious if you can share with us the degree to which inquiries are picking up from utilities to supply wood to biorefineries. Maybe asking the question a different way, how much of your harvest volume today is going to these types of end markets and given the visibility of what you know is coming down the road, how bit a number do you think that will be in say, three to five years?

Rick R. Holley

I think it's fair to say that virtually none of our harvest, that we call harvest and we quote tons to you, is going to that type of customer today. We generate about 2.0 million tons of biomass off our lands and most of that gets burned for energy. A lot of it just in even paper plants that burn it in their boilers. But the opportunity, and we've got 8.0 million tons a year of pulpwood today with our 16.0 million ton harvest, 20% of that, 30% of that potentially down the road could go to those kind of uses.

Peter Ruschmeier - Barclays Capital

And are you in serious discussions, I understand a number of utilities in the South are targeting start ups in three to four, five years. Is that a serious dialogue that is taking place or is it still premature?

Rick R. Holley

I think with some of those customers it is a very serious dialogue. They are trying to look to the future, they see it's going to happen and they're trying to secure sources of supply. So I think it's very serious.

Operator

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

Christopher Chun - Deutsche Bank Securities

I was wondering if you might tell us a bit more about what is going on in the Pacific Northwest. A 28% quarter-over-quarter price decline from what was already a pretty weak level seems pretty dramatic and I'm wondering if there was anything going on other than just the continuing deterioration in terms of new housing starts.

Rick R. Holley

If you look at a lot of the lumber, and we're talking about lumber capacity there, a lot of that lumber finds its way into Southern California, Las Vegas, and Arizona. And as you look around the country, other than maybe Miami and Florida, there is no markets that have been hit more. So you look at random link prices and you clearly look at some of the prices from lumber going to those markets, it is such low levels now every time these guys make a stick of lumber they lose money. So we have seen a huge amount of capacity curtailed, particularly in Oregon. Also in Washington as well.

So I think it's just been hit harder than the southern. If you look at southern 2x4 prices, they're higher than they are in the Northwest today. So they are more impacted therefore we have seen more curtailments, percentage-wise.

Christopher Chun - Deutsche Bank Securities

And then you talked about positioning your manufacturing business to be cash-flow positive and I'm wondering if you are still going to be able to do that if housing starts remain as weak as they've been for the last few months, or whether you're baking in some improvement in the new housing start number.

Rick R. Holley

Well, we are not assuming that for this year we see any improvement in housing starts, so I think as you look at our manufacturing business or medium-density fiber board business today is still very cash-flow positive. Even though we have seen weakness in plywood our plywood business is also cash flow positive and we are announcing today that we are going to shut down one of our lumber mills, and that leaves us basically with two lumber mills open and what we told those employees as well, today at those two mills, is if we can't be cash-flow positive in those two mills, we will shut those down as well. Permanently.

So that is the way we are kind of thinking about that business. But we still feel pretty good about plywood and clearly very good about MDF to put that whole segment in a cash-flow positive position for the year.

Christopher Chun - Deutsche Bank Securities

I'm wondering for the lumber mills you close, eventually let's say the housing market picks up to something closer to normal, how easy or difficult would it be for you to reopen them?

Rick R. Holley

Well, the three mills, one of them Pablo, is a pine board mill. We would not plan to reopen that, even if markets improve. The remaining two mills, if markets improve and they're cash-flow positive we will continue to run them. Now if we shut them down, we have—one is a stud mill which is right next to our of our plywood plants. We would keep that in place and plan on reopening.

The other mill is a pine board mill like Pablo and if we end up shutting that down the plan would not to be reopening it, so basically if markets don't improve we will have one lumber mill down the road when markets do improve and that will be just a stud mill in Kalispell, Montana. Along with our two plywood plants and our MDF plant, which has two lines in it.

Christopher Chun - Deutsche Bank Securities

And then can you give us a little more color in what you're seeing in terms of demand for our HBU land, either by category or by region?

Rick R. Holley

I think when David mentioned in his comments that we are seeing inquiries pick up, we are actually seeing that everywhere. I mean, we're seeing it in Montana, people starting to show some interest. We are clearly seeing it in the southern United States, in Georgia, and Mississippi, Louisiana, Wisconsin. Those markets continue, as they have been, to be pretty good. And it's across the board. It's for some of the higher value stuff. But it's more for HBU and some of the non-strategic stuff.

And people are very inquisitive, they are looking at properties, they are looking at our listings and interest rates are pretty low and many of them have access to capital. We may see some activity. So it's really across the board.

I've got to tell you, the highest value stuff we have, the development lands and the higher value HBU lands, that business is still pretty soft and we're certainly not going to—anybody that is interested in those lands and the kind of money they're willing to pay for them, we're just going to, as we are with the sawlog harvest, we're just going to not even listen. We're not going to move that. We're not going to give stuff away that has that kind of value.

Operator

Your next question comes from Claudia Hueston - JP Morgan.

Claudia Hueston - JP Morgan

Most of my questions are already asked but I was hoping you could just give a little more color on the supply chain efficiency actions that you referenced. Maybe just a little more about specifically you are doing and just how those savings are coming through and how we should think about them over the next year.

David W. Lambert

From the perspective I think we have seen a material improvement in our log and haul costs. Part of that is just related to fuel cost. We are still at the early inception of working on supply chain management on how we can do better freight logistics, truck loading and other things. So this is something where we will continue to refine and improve our business, but the lower oil prices certainly have helped in the near term, compared to where log and haul rates were last year.

Rick R. Holley

But our major initiative is really focus on, as David said, on delivery. The whole way logs are delivered is pretty backward in this day and age. You know, trucks fall loaded one way and unloaded the other way and we are trying to get them to up more of a 60% and given the large ownership we have in some regions, we are trying to optimize the use of the hauling part of this equation and if we do get those empty miles down it will be a huge

amount of savings for both ourselves as well as our contractors.

Claudia Hueston - JP Morgan

And how has that reception been by the contractors?

Rick R. Holley

Some of them it was a very good reception, some of them, geez, we've been doing this forever, why should we change now. So I think it's a mixed bag but basically we are going to work with ones that are going to be proactive and work us on these kinds of things because there is too much money at stack. I mean, we spend a lot of money hauling wood in this country and we have got to get that cost down.

Operator

Your next question comes from Mark Weintraub - Buckingham Research.

Mark Weintraub - Buckingham Research

On the pick up in activity, do you have a sense as to whether it's seasonal or whether it's something beyond seasonal?

Rick R. Holley

I think it's beyond seasonal. I think people like in the housing market are saying, "I've got some capital, and maybe I don’t want to put it in the stock market, I want to buy some land. I backed off the market because of the uncertainty but I think I'm okay now," an so people are coming back to the market an looking. Clearly they are looking for bargain. And again, in many cases where you can buy rural land for $1,300 an acre or $2,000 to $4,000 an acre, that's a pretty good buy for people. So they can go buy 40 or 80 acres and feel very good about it. So I think the light switch has been turned back on again.

Mark Weintraub - Buckingham Research

And also it caught my attention that Georgia Pacific had ended their supply distribution with Blue Links early and they did pay them some money to do that. When you have your various supply agreements are there out clauses that might exist in those and in particular on the Georgia Pacific one, which is due to end next year, what type of implications would there be if those were to end early? Or can they end early?

Rick R. Holley

Most of them have force majeure clauses so if somebody were to shut down and not be able to deliver, that's a way you can at least not deliver under the contract, if you will. But in most cases we don't have a clause where we can just terminate.

Now, we can go to any one of them or they can come to us and say it doesn't work for them any more so they want to buy their way out. Now, with respect to Georgia Pacific, which is still our largest log customer today, in most cases we renegotiated or changed the supply agreements that we had with them, which was pre-Plum Creeks merger with the timber company. So those have all been changed over time just because both parties said, you know, that's the way it was designed but it doesn't work as well for us, let's change it this way or that way. And it has worked out for both of us very well.

Mark Weintraub - Buckingham Research

Okay. So we shouldn't expect any significant changes on supply agreements any time in the next year or two.

Rick R. Holley

No, you should not.

Operator

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

Steven Chercover - D.A. Davidson & Co.

We've seen how quickly log prices can come down in a weak environment, how quickly do you think they snap back when things get better?

Rick R. Holley

The reason they came down so quickly is a lot of install capacity went off line and once lumber prices, and therefore the end-use markets improve, the demand for logs will go up and those mills will come back on line and I think you will see them come up pretty quickly. That's why we are going to be very patient in this market and save that very valuable product.

Steven Chercover - D.A. Davidson & Co.

Although you did say you think it will be a u-shaped recovery as opposed to a v-shaped so it might take some time, correct?

Rick R. Holley

Yes, it should take some time but you look at housing at such low levels and saw that in a recovery we only get back to 800,000 or a million starts in the next 18 months, that's more than double than where we are now. So at the same time you've got some supply concerns in Canada which supplies a lot of lumber to the United States so we could see some lumber improvement in the next 12 to 18 months.

Steven Chercover - D.A. Davidson & Co.

When you refer to the supply situation in Canada is that because of the pine beetle or because of if the pulp industry goes away then there's no place for those residuals.

Rick R. Holley

It's really the pine beetle.

Steven Chercover - D.A. Davidson & Co.

And my other question was, I guess you have kind of alluded to it. The folks who are now buying these lower end timber lands, so they're not really high net worth individuals but they are folks who are just tired of the market, or can you characterize them?

Rick R. Holley

I think in many cases its neighbors, many cases its hunting clubs that sees some land we have on the market and, "we have hunted on this for years, let's get our guys together and buy it." And in some cases high net worth individuals just looking for investment. So I think it's kind of across the board. It is not home builders, it's not developers and those kind of buyers. It's more your recreationalist, if you will.

Operator

Your final question comes from Laura Sloate – Neuberger Berman.

Laura Sloate – Neuberger Berman

What is the status of the main Moose Lake approval process?

Rick R. Holley

The final documents are with the land use regulatory commission now and it will go to the commissioners for their final vote in late June or early July and it should be finalized at that point in time.

Laura Sloate – Neuberger Berman

On the prices of lumber I have read here and there that the prices of lumber, meaning forests, are coming down because the end product prices are down and the fact that there is going to be a fair amount of properties around for sale. What is your view on that?

Rick R. Holley

Our view is quite frankly right now there is not a lot of properties for sale and we don't expect a lot of them to come on the market. I think it would be fair to say that if today that joint venture we did last year in the South, if that went on the market today, maybe the prices would be down 10% but I don't think they would be down any more than that.

And that's surprising to people because log prices are down more than that. And I think the reason being is first of all the owners of timber land, like Plum Creek, we see this as a very good long-term investment and market will recover and values will come back and we're not going to give it away. So even though it's a sellers' market I think sellers are still going to be somewhat picky about the value they take for these lands because these prices will come back.

So I think maybe they're down 10% but no more than that.

Laura Sloate – Neuberger Berman

If carbon cap legislation gets approved, is that a positive for forest land?

Rick R. Holley

Absolutely. Well, it depends, it's a positive if it's a part of the cap and trade that on the trade side people look at the forest, because we do store carbon in forests, as a way to get credits for that. Obviously it's a hotly debated topic given that you already have an existing forest, why should we pay you anything. And we would argue we should be paid something because we don't have to keep it in forest. So it will be something that is hotly debated over the next few months but it could be a positive for people who own forests. Small and large land owners alike.

Laura Sloate – Neuberger Berman

How are dealing with receivables? I gather a lot of small lumber yards are going out. And have you seen any improvement in the last five or six weeks from people like Home Depot, Lowe's, any kind of demand pick up on supplies?

David W. Lambert

We continue to monitor our receivables, we've got good processes there and have no issues there. I don't have any direct feedback on Home Depot's buying patterns.

Rick R. Holley

When I've been around Home Depot, two months ago the parking lots at stores were pretty empty and then activity seems to have picked up. Clearly one of the ways people do remodel projects is home equity loans and even though interest rates are low people can't seem to borrow money very easily and obviously the equity in their homes is down, but I think they're seeing a little pick up in Lowe's and Home Depot and some of the home centers.

David W. Lambert

What we do know is that in the supply chain at the distributor level, that inventories are extremely low so if there was a pickup I think you would see it pushing back against the mills and triggering that demand rather rapidly.

Rick R. Holley

Well, thank you everybody and we will talk to you next quarter and we'll just keep our fingers crossed that things continue to get better.

Operator

This concludes today’s conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Plum Creek Timber Company, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts