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Plum Creek Timber (NYSE:PCL)

Q1 2013 Earnings Call

April 29, 2013 5:00 pm ET

Executives

John B. Hobbs - Vice President of Investor Relations

Rick R. Holley - Chief Executive Officer and Executive Director

David W. Lambert - Chief Financial Officer and Senior Vice President

Analysts

Anthony Pettinari - Citigroup Inc, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

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

Chip A. Dillon - Vertical Research Partners, LLC

George L. Staphos - BofA Merrill Lynch, Research Division

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

Mark A. Weintraub - The Buckingham Research Group Incorporated

Operator

Good day, ladies and gentlemen, and welcome to the Plum Creek Q1 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, John Hobbs, Vice President of Investor Relations. Sir, you may begin.

John B. Hobbs

Thank you, Samya. Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2013 Conference Call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations. Today, we have on the line, Rick Holley, 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 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 first quarter of 2013.

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. We started off 2013 with a strong first quarter. Each of our business segments reported improved operating profit compared to the same period last year. Northern sawlog prices were up sharply over the past 6 months, helping drive improved results in our Northern Resources business segment.

Southern sawlog markets are showing encouraging early signs of improvement as well. Our Manufacturing business continues to perform very well, serving less volatile specialty and industrial markets. It is expected to post one of its best years ever in terms of both earnings and cash generation. Overall, we are on track to grow adjusted EBITDA for our non-Real Estate business segments by $50 million this year.

Now I'll turn it over to David to cover our first quarter details, as well as our guidance for second quarter of 2013. David?

David W. Lambert

Thanks, Rick. Our first quarter results of $0.35 exceeded our initial expectations, despite Real Estate sales coming in $2 million below the low end of our expectations. Robust West Coast log markets and growing demand in prices for our lumber and panel products were the hallmarks of the quarter.

Northern Resources' $11 million operating profit was excellent, more than doubling the fourth quarter's $5 million profit. Much stronger sawlog prices drove the sequential improvement in profitability. Northern sawlog prices improved sharply throughout the first quarter, averaging $77 per ton, up $9 per ton or 13% from the fourth quarter. Sawlog demand was strong as domestic sawmills in the Pacific Northwest have ramped up lumber production significantly over the past year.

The latest statistics available show West Coast lumber production of nearly 12% year-over-year through the end of February. Domestic sawmills were bidding aggressively for Douglas fir logs to maintain their log decks. As our Oregon forests are approximately 80% Douglas fir, we directed the vast majority of our first quarter harvest to these domestic customers and limited our export sales to lower-valued species.

As a result, our first quarter export volume was 28,000 tons, down about 30,000 tons from the fourth quarter. Export markets on the West Coast remain active. These customers compete effectively for lower-valued species, such as hemlock, during the first quarter. Our export prices were up about 10% from the fourth quarter's level, and we expect them to strengthen further in the second quarter. Pulpwood markets in the lake states in the Northeast continue to show resilience. Pulpwood prices edged up on average $1 per ton during the first quarter.

The second quarter is always a seasonally weak period for the Northern Resources segment as thawing spring weather turns logging roads muddy and limits access to timberlands. Second quarter harvest reflects these conditions. We expect to harvest roughly 800,000 tons, down nearly 30% from the 1.1 million tons harvested in the first quarter. About 70% of this harvest should be sawlogs.

We expect the strong second -- we expect the strong prices in the Northern sawlog markets to continue throughout most of the second quarter. We expect our average prices will increase another $2 to $3 per ton. We would expect to see some seasonal moderation in Northern sawlog prices during the third quarter, as harvesting conditions improve and more timber comes to market from nonindustrial landowners during the summer months. Pulpwood prices have moderated in the Northeast, and as a result, we expect Northern pulpwood prices to take a breather from their advances and decline $1 per ton.

The Southern Resources' $24 million operating profit was unchanged from the fourth quarter's results. The impact of improving sawlog prices was offset by a planned reduction in pulpwood. Our average Southern sawlog price increased $1 per ton. Sawlog demand in several Southern timber baskets improved, as sawmills selectively increased lumber production. Our 1.3 million ton sawlog harvest was unchanged from the fourth quarter level. Average pulpwood prices from 6% during the quarter. As planned, our pulpwood harvest was approximately 300,000 tons or 15% lower than the fourth quarter's harvest.

We expect to see slowly improving sawlog prices in the U.S. South as the year progresses. Similar to the first quarter, we expect price increases to be realized in timber baskets where mills have expanded production by adding shifts. As lumber demand continues to grow, we'd expect more and more mills to increase production. We expect sawlog prices to increase $1 per ton in the second quarter.

In general, our Southern pulpwood customers are entering the quarter with adequate log inventories. Continued steady demand should result in pulpwood prices being flat to up $1 per ton during the second quarter. Overall, we expect our Southern harvest to be similar to the first quarter's level, with a comparable sawlog pulpwood mix of approximately 43% sawlogs and 57% pulpwood. 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.

In our Real Estate segment, we completed $78 million of sales during the first quarter, just below our initial expectations of $80 million to $85 million. These results included a $53 million large nonstrategic timberland sale or approximately 36,000 acres in Texas and Oklahoma at a price of $1,475 per acre.

The balance of the sales consisted of approximately 5,700 acres of small, nonstrategic lands capturing $1,230 per acre, approximately 1,000 acres of conservation properties that captured about $2,600 per acre, and about 7,600 acres of recreation lands that captured a bit more than $2,000 per acre.

As consumer confidence has improved, we have noticed growing interest in rural land from families and individuals. Ultimately, we expect that interest to translate into purchases and higher prices for rural properties. We expect second quarter segment revenue to be seasonally slow with stronger closings in the second half of the year.

Second quarter sales are expected to be between $45 million and $50 million, and we would expect land bases to be roughly 35% of sales. Our outlook for the year hasn't changed, and we continue to expect sales to fall between $250 million and $300 million. We estimate that land bases will be in the range of 30% to 35% of sales.

The Manufacturing segment had another great quarter, posting a $10 million operating profit, up $3 million from the fourth quarter. We experienced price improvement across all of our product lines. Compared to the fourth quarter, lumber prices were up 9% and plywood prices were up 10%.

With our thin MDF production line running at full capacity and demand for thick MDF continuing to grow, our MDF production volumes increased 10%. Lumber production increased 12% and plywood production increased a more modest 2% over the last quarter.

As we noted in our press release, we reopened our Evergreen sawmill in late March and expect to run the mill profitably at one shift or approximately 40 million board feet on an annual basis. Since 2009, our lumber production has consisted exclusively of pine boards, a product that trades at a premium to framing lumber.

The restart of our Evergreen mill will reintroduce stud lumber into our lumber product mix. In full production, our product mix will be approximately 75% pine boards and 25% stud lumber, so this move will reduce our reported average lumber price. For modeling purposes, you should anticipate lumber sales volumes will be about 40 million board feet per quarter, and average prices will decline about 5% based on our anticipated mix of lumber products from both our mills. We expect continued strengthening in our Manufacturing segment and expect second quarter profits will continue to grow.

Our second quarter interest and tax expenses are expected to be similar to the first quarters. And looking at the quarter and the year, we would expect our second quarter results to be between $0.20 and $0.25 per share. The second quarter outlook is below the published consensus estimate for the period. We attribute this primarily to differences in the timing of Real Estate activity, which typically is much stronger in the second half of the year. Our expectations for 2013 are unchanged. We continue to expect net income to be between $1.25 and $1.50 per share. Rick?

Rick R. Holley

We're encouraged by the trends we are seeing in each of our businesses today. Cover residential construction and repair remodel markets are the drivers of near-term demand growth. I'm sure it won't be a straight line. There will inevitably be temporary disruptions and dislocations in the market, as the supply chain adjusts to higher levels of demand. That said, trends are positive and very encouraging.

In the medium term, by that I mean over the next 18 to 36 months, we see even more demand placed against Southern forests. Lumber mill owners like Georgia-Pacific, West Fraser and Klausner have made significant investments or are making significant investments today to improve efficiency and expand production in their Southern operations. It's not surprising to see this capital flowing into the region. The South has arguably the lowest cost softwood logs in North America, if not the world.

As these mills are upgraded, expanded, and in some cases built on green field sites, we expect that new demand will translate directly to even more robust sawlog price improvement.

Just as we expect sawlog values to increase, we also expect pulpwood values to improve as well. Over the course of the next -- over the past 5 years or so, Southern pulp and paper producers have enjoyed access to the lowest-cost softwood fiber on the globe.

As lumber production in the South increases, residual chip supplies will increase. However, we expect this to be more than offset by resurgent demand for wood fiber from OSB producers, as well as new demand from wood pellet plants currently under construction.

Over the course of the past few months, permitting and construction of several industrial scale pellet mills have commenced, including mills from well-capitalized companies like Drax, which is building mills in both Louisiana and Mississippi, and the firm German Pellets Group, which is constructing mills in Texas and Louisiana.

The investments we are witnessing today in both wood pellet mills and lumber and panel mills are the leading indicators of increasing log demand in the U.S. South for years to come. Disciplined capital allocation remains our top priority. We continue to evaluate a variety of investment opportunities to generate excess returns for our shareholders.

Last quarter, we discussed our recent investment in aggregate production, some 144 million tons in South Carolina. I'm pleased to say the first 3 months of this investment is performing well and is on track to meet our goals for the year.

We've also remained active in the timberland markets. During the first quarter, we acquired an $18 million timber deed in Mississippi that will add incremental volume to our harvest in that state for 8 years, provide our investors with attractive, above cost-of-capital returns.

Additionally, as you saw last week, we acquired a little more than 46,000 acres of well-managed timberlands in the Southeast. These productive lands are intermingled with our timberlands along the Georgia, Alabama state line. We are uniquely positioned to efficiently integrate these lands into our operation. The land is above-average quality in terms of productivity. The property is well stocked with a growing harvest profile.

The acquisition will generate above cost-of-capital returns, be cash accretive in year 1 and provide increasing cash flows as the harvest grows over time.

We are well positioned to benefit from the market recovery and remain very, very excited about the future prospects for the company. Now we'll open it to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Anthony Pettinari of Citi.

Anthony Pettinari - Citigroup Inc, Research Division

In Southern sawlogs, you referenced pockets of strength in geographies where lumber production has picked up. And I guess across the business, your log prices were up $2 a ton or 6%. And I was wondering in those Southern markets or maybe micromarkets where mills are being capitalized and really ramping production, can you give us any color where some of those prices were up in the quarter? I mean, you talked about those regions being maybe leading indicators. I'm just trying to get a sense of maybe how much log prices are moving in some of those micromarkets?

David W. Lambert

From a general standpoint, we saw greater strength on the Eastern seaboard than we did in the Western part of our Southern ownership during the quarter. A lot of appetite for small chip and sawlogs and some better price tension. They were up about $1 per ton as a whole for the quarter and not the 2 that you referenced, but in some markets, we saw a greater traction than that.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, okay, that's helpful. And you almost doubled your earnings year-over-year, but your free cash flow in the quarter was more flattish. And I'm wondering, as you look at the full year and think about potentially increasing EPS, maybe double digits, assuming you hit the midpoint of your guidance, would you expect full year free cash to kind of keep pace with the earnings growth? Or are there items that we should be modeling for the remainder of the year from a cash perspective that might impact your cash generation?

David W. Lambert

Well, as we discussed in our call last time, we are expected to have lower Real Estate sales this year than we did last year and growing cash flow from non-Real Estate activity. So net-net, we don't see quite the same improvement in overall free cash flow, but we are seeing significant growth in kind of the manufacturing in timber cash flows this year.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. But you would still expect free cash flow to rise year-over-year? Is that fair?

David W. Lambert

I think EBITDA is down slightly as a result of lower basis on our Real Estate sales this year than it was in 2012, consistent with the guidance we had provided on the last call.

Operator

Our next question comes from Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

To start out, Rick, I'm just curious, you had a better-than-expected first quarter. Wood products prices were better than any of us, I think, expected back in January. You're seeing kind of a -- you had a nice pop in sawlog prices. But you held your guidance for the full year. Can you just -- can you help us understand that?

Rick R. Holley

Well, I think it's still early in the year, Mark, and I think we're a bit optimistic that the second half will continue to show some improvement and we'll start to see some even increased improvement in Southern sawlog prices. But it's really too early to call. So I think at this point in time, we're going to stay within our guidance range of $1.25 to $1.50. It's a pretty broad range in any case. So I think we're very comfortable in the range, but we just want to see the trend that we've seen continue, and I know there's a lot of uncertainty over the second half in Southern sawlog prices giving wood deferrals and how much production capacity will come online to meet the demand of the growing markets. So again, we're pretty optimistic we're going to continue to see improvement in the second half. And if we do, we'll adjust guidance as we go.

Mark Wilde - Deutsche Bank AG, Research Division

Yes. And Rick, I wondered, just moving over to Real Estate, if you can update us on that joint venture with The Rockefeller Group, what kind of progress you've made there? And also just what you're seeing in terms of Real Estate inquiries and pipeline in general? I thought last week, Rayonier had some pretty constructive things to say on that account.

Rick R. Holley

Well The Rockefeller Group is evaluating 2 projects that we have in the Southeastern United States currently, and we're supposed to hear back from them in the next month or so with their full evaluation. They seem pretty excited, so I think hopefully we'll be net-net positive for both themselves and Plum Creek and we'll keep you posted on that. The pipeline, as David mentioned in his comments, the inquiries are up. There's a lot more activity today, especially in markets like Florida and Georgia and even Montana, the lights are on again. So markets where it was pretty dark last year, the lights are on and they're starting to see some activity. And I think as we go through the next couple of years, that should translate into much better pricing than we've seen, in which case, we start to see price recovery in those high-end markets and start to move some of that products. So we're feeling a lot better now than we would've a year ago on that.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. You had either some developments or perspective developments, as I recall, in both Florida and Georgia. Has there been any more movement on that front?

Rick R. Holley

Yes, in Alachua County, Florida, where the University of Florida is, we've made a lot of progress on there. If you go to Envision Alachua, there's a lot of information on that website about our project and we've made great strides. It's going to be a terrific project. Currently, we're working with the state of Florida and others, trying to find some anchored tenants to come in with some industrial and commercial development, large-scale ones to kind of partner with the University of Florida. So we feel very good about where that project is and our ability to do something very special there.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then finally, Rick, could you just remind us about how you think about the different wood products operations that you're involved in? Some others have kind of monetized into a strengthening market. Just want to get a sense of how core each of those wood products operations is to Plum Creek?

Rick R. Holley

You mean you're talking about our Manufacturing business?

Mark Wilde - Deutsche Bank AG, Research Division

Yes, exactly.

Rick R. Holley

Well, we clearly -- the MDF business is doing very, very well. We just increased capacity of one of our lines there, so we'll continue to perform there. We like our position in the plywood business very well with both plants, so I think we're really long term with those businesses that are well positioned. As you know, even in the weakest part of the market a few years ago, they were all cash flow and earnings positive. Our lumber business, we're in the board business, which is a nice niche value-added. We reopened the, basically, the stud mill here, recently, just to capture what's going on in the market today, which should continue to go on in the next few years. So I think we feel very good about what we have. We don't plan to expand outside that footprint. We're not going to add manufacturing capacity anywhere else in the country.

Operator

Our next question comes from Gail Glazerman of UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

Can you talk a little bit more, I guess, about the activity you're seeing and the incremental startups you're seeing in the South? I mean, how pervasive is it, like how much of your acreage would it be? It sounds like it's kind of isolated, I guess, on the Atlantic side. And what do you think are the hurdles? I mean, if you look at it, look at what the sawlog prices are and you look at what lumber prices are, you would certainly see a lot of incentive out there. What do you think is holding your customers back?

Rick R. Holley

Well, I think what's holding some of the customers back is, especially some of those -- the smaller producers that might have 1 or 2 mills, is the -- they had some tough times in the last few years, and I think it's -- not from Missouri, but they say show me. They really want to see this second half continue to improve in the first half. And I think if that happens, you're going to see them add another 20% or 30%, in some cases, a second shift of capacity. They're just really hesitant to get ahead of themselves and hire back employees and do a lot of other things that they had to cut back on in the past years. So I think that's one of the pacing items. Now some of the larger manufacturers like West Fraser, as I mentioned, and Georgia-Pacific, they have made fairly large announcements and some capacity expansions, improvement of mills that they're going to do. So they're going to go ahead and do it. They understand the business. They feel very good about the turnaround in the economy, and they're going to try to capture those values. And on the wood pellet manufacturing, Drax has announced those 2 plants, and they're getting those permitted currently. And that German company's already -- has one -- started construction on one and getting another one permitted. So there's activity finally going on in wood pellet manufacturing, which we've heard about for years, but now it's really happening and that's going to put some pressure on pulpwood prices as these markets recover. One of the things that a lot of people talked about in these wood baskets is harvest deferrals and there's probably some of that by some of the small nonindustrial landowners and perhaps even from some of the TIMOs and clearly some of the large industrials. But really to bring all that wood to market and -- is that the pacing item or the governor on that engine is going to be contractor capacity. I know you guys probably are tired of hearing us talk about it. That's going to be a real pacing item with respect to bringing wood to the marketplace. So I think when you see capacity expansion and you start to see continued improvement demand, that's going to equate into higher sawlog prices, even if there's a little wood on the sideline has been deferred.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just shifting to the Northwest. Do you have any concerns about the affordability of current log prices? I know a couple of years ago, we saw a rally, but it seemed to peter out because the customers really couldn't pass it on. Are you more confident that at these levels, that's sustainable or something that you can build on?

Rick R. Holley

I think the Southern sawmill guys are making a lot of money right now. The guys in the Northwest are not making much margin. They're probably net cash flow positive but not making a lot of money at these log prices. The California market's improving, so a lot of that product gets shipped even as green lumber to California and as that improves, that will help them because it will get their costs down. But they're not making a lot of money. So I think there is the inability of them to pay a whole lot more for sawlog prices from where they are today. But again, most of them have doubled capacity. They've added a second shift to kind of average their costs down. They're competing against the Chinese for some of that wood right now. So that's the price they have to pay to get the logs to run.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And then just one last question. There was a lot of noise and a couple of popular peer articles last week about Congress kind of reviewing the tax code, and one of the items that they were looking at versus the REIT tax treatment. Is there any insights that you can offer, particularly as it would pertain to timber REITs in that discussion?

Rick R. Holley

I don't think so, nothing other than what you've heard maybe from some of the other companies. But we stay very close to it. The REIT world has a very large association, NAREIT, that looks after that. REITs have been around in the tax code since the 1960s. I think Congress is going to look at everything if -- any kind of revamping of the tax code means everything is up for grabs. But I think the whole REIT industry and the way it was structured and the way it's worked over time has gone very well, and I think it's probably in good stead. But we don't lose sleep over it, but we pay attention to it.

Operator

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

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

So there haven't been a lot of timberland transactions in the last year or 2, but they seem to be back to, I'm going to call it, prerecession levels, maybe a little bit lower. What's your sense of roadmap going forward? Do you think there's a lot of upside?

Rick R. Holley

Well, I think, when we talked about in the downturn that even though you saw cash flows from timber drop 40%, timberland values only dropped 10% to 15%. We probably got most of that back or some of it back now. I think as you start to see this market recover, and we start to see higher sawlog prices in the South, that means improved cash flows and when we buy timberlands, we buy them based on cash flow, not other value aspects. So I think you should -- can see some upside in timberland values as we start to see this housing recovery. And I think it will be above when they settle down above their peak in the past. So I think there is some upside.

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

And I just wanted to ask is perhaps the risk to that assessment that you and your peers get a lot of logs on the stump. Is it possible that, I guess, the pent-up supply is equal to or greater than the pent-up demand?

Rick R. Holley

No, I don't think so. We have some statistics on Southern inventories. And Southern sawlog inventories for the whole region are slightly up above where they were a couple of years ago, but I think they're like 252 billion tons versus 248 billion tons, up slightly. That's still below the peak, which was about 290 billion tons in kind of the early 90s. So there's not -- I mean, there's excess inventory in different pockets and some people deferred. As I said, it's going to be hard to bring a lot of timber back to market in any point in time just because the contractor capacity is so constrained everywhere, not just in the South, but in the Northwest and the Northeast as well. So I think U.S. contractors will be able to move wood regardless of whether they had deferrals or not. So I really don't think there's that much on the sideline in any case, but I don't think it will all come to market just because of the constraints.

Operator

Our next question comes from Chip Dillon of Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

First question is on the prior timber deeds that you acquired about 1.5 years ago or so. How much depletion and/or EBIT was there in this quarter from that?

David W. Lambert

Let me try to help you with that, Chip. From this year -- in the first quarter, we had about $2.9 million of cash flow from that timber deed and it generated about $200,000 of operating income.

Chip A. Dillon - Vertical Research Partners, LLC

Got you, that's very helpful. And then on the deed you just acquired, and actually I guess on both of them, did they -- I guess on the balance sheet, that would show up as timber and timberlands net? Or is there another place that would be on the balance sheet?

David W. Lambert

It shows up in timber and timberlands.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. And then if you could talk a little bit about the land you acquired in Georgia and Alabama. It seems like that's one of your larger acquisitions in the past few years and a, I see you have a like-kind exchange escrow entry in this quarter. Was there any kind of tax benefit from that? And secondly, can you just talk a little bit about the maturity level of that stand -- those stands?

David W. Lambert

Let me start with, at least -- we did do a 1031 exchange on the property that we had sold in the first quarter and those proceeds were used to purchase this new property early in the second quarter. So that will all flip and so that's already been completed. We just did that to maintain the ultimate flexibility. With respect to the lands, they're in great areas. Georgia and Alabama are the #1 and #2 states as far as consuming sawlogs in the South, very good markets, very good site in silvicultural aspects. And so we think these are going to be exceptional acquisitions for us.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And then the last question is, could you just talk a little bit about how you see the supply chain as it impacts Plum Creek and maybe others? Are you -- I know that you all have done a good job of keeping your contractors busy during the downturn. And are you either finding any challenge in your situation in getting folks to cut down the trees? Or maybe more the point, are you sensing that some of the -- some other owners may have trouble? I mean, you suggested that maybe some nonindustrial owners would increase their supply, so maybe they're not having a challenge. But I always heard that there was a -- it was hard to find loggers in the last few years.

Rick R. Holley

Well, it is and think about it this way. When production capacity went down 40%, that was 40% less contractors were needed. And some of them stayed on the sidelines, found another thing to do and they'll come back to work and some of them went out of business permanently. Now, some of those larger contractors can expand capacity as markets improve. The other thing to remember, Plum Creek predominantly has a delivered log model, which means for all the wood we deliver, at least 80% probably, we actually deliver it. We have our own hired contractors to cut it and to haul it to our customers. Whereas many others actually are on a stumpage basis, so they don't have contractors in place. That's going to be a real competitive advantage for us. And over 1/2 of our contractor capacity are core contractors today, where we've actually gone out and committed to long periods of time with them. Now that said, even though we took care of them in the downturn, we realized as markets improved, we're going to have to pay more. Log and haul costs are going to go up in the future. That's just going to be a cost of doing business. But at least we feel we're very well positioned to any market recovery with respect to at least having access to quality contractors.

Operator

[Operator Instructions] Our next question comes from George Staphos of Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

Want to come back to the land purchases in the South. And I just want to confirm, can you remind us, were those purchases at all within your guidance previously? And if they weren't, we recognize that you kept guidance where it was because of all the other issues that you -- or factors that you consider, I think, in your answer to Mark earlier.

David W. Lambert

Well, the large nonstrategic sale that occurred was in our guidance. Purchases, that's not part of our guidance.

Rick R. Holley

So neither the timber deed that we did in the first quarter, or the recently announced timber acquisition, were in our guidance. So as we fully integrate those, we'll certainly adjust our guidance in the quarters ahead.

George L. Staphos - BofA Merrill Lynch, Research Division

But said differently, that's again, realizing there's always some uncertainty, that's tailwind for you at this juncture in terms of achieving your objectives for the year?

Rick R. Holley

Yes, sir.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. The second thing, again, on these lands, you ultimately gauge the attractiveness of them based on the ultimate cash flows. Were these lands just -- were they opportunistic purchases or have your expectations for cash flow in the South in these areas gone up recently because of what you're seeing in the market? How would you begin to answer that question?

Rick R. Holley

Well, I think the way to answer it is we look at everything that comes to market, and we found this particular opportunity. We worked on it throughout the early part of the year. And I wouldn't say it's opportunistic, but in essence, it is. I mean, it came to market and we took advantage of what we thought was a very good property and a very good market that's -- really will add no incremental overhead to manage it because we already have people in place there. So it just worked out really well for us because it's right in the middle of our ownership.

George L. Staphos - BofA Merrill Lynch, Research Division

Understand, Rick. But have your expectations for cash flow within these regions moved up measurably, would you say, over the last year or so?

Rick R. Holley

Yes. Certainly over the last year, so much of it is the timing of when we'll see sawlog prices in the South improve. But we've certainly factored some of that into any investment we make, and obviously, we're factoring those cash flow improvements in nearer today than we would have a year ago. So yes, we're more opportunistic now than we were a year ago.

George L. Staphos - BofA Merrill Lynch, Research Division

I appreciate the color. The last question and I'll turn it over. You've mentioned, you expect Southern pulpwood price to be up, I think, $1 sequentially per ton, and mentioned that your customers log decks appear to be relatively full at this juncture. To the extent that you have visibility into this, are log decks full because your customers perhaps over-anticipated what their demand would be? Or just because it was fairly easy accessing forests and so it was fairly easy building up log decks or some other reason entirely different than those?

Rick R. Holley

I think it's really the latter, even though weather returned in the South at fairly normal patterns. I think people took advantage in the marketplace of some dry weather and pretty good logging conditions in the first quarter and built up log decks. So I think they're just in good shape not because their businesses are backing off, just because they saw opportunities to build inventory.

Operator

Our next question comes from Joshua Barber of Stifel.

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

Most of my questions have been asked and answered already. Just curious, with some of the larger parcels of timberlands potentially on the block in the next year or 2, as always seems to be rumored at some point. Would you guys think at some -- using shares or some sort of equity capital to be able to expand your presence today. I guess it's been a while since you were really able to take a lot of advantage of that. But do you expect that to be an advantage in your acquisitions going forward?

Rick R. Holley

Well, let's not say it's an advantage, but today, we would certainly be willing to use our equity for the right acquisition. But it's all about relative value. What we believe our equity is worth if we were to use it, vis-a-vis whatever the transaction would be. Also we want to maintain an investment-grade balance sheet. So if we saw a very large acquisition, we would clearly have to use other source of capital, which would be our equity to consummate it, so to keep our balance sheet in good shape. So -- but we're willing, for the right opportunity, to use our equity. But it's got to be on a relative basis, a really good opportunity.

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

Okay. Do you believe any of the price impact in the West Coast in the first quarter, in particular, had anything to do with Canadian supply or any of the Canadian rail lumber shortage -- railcar shortages? And as that's starting to ease now into the quarter, do you expect that to partially be impacting your thinking on pricing?

David W. Lambert

I don't believe so, because if you look at their numbers like B.C., they weren't able to really increase their production, but they did increase their shipments into the United States based on the markets. So we don't -- we didn't feel that.

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

Okay. And one last, just quick maintenance question. Could you remind us when the Montana mill comes online?

David W. Lambert

It started up in late March and so the first shipments really happened just here in early April.

Operator

Our next question comes from Mark Weintraub of Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

In the acquisition, the Southeast acquisition, you noticed that you're anticipating better than cost-of-capital returns. Can you, order of magnitude, what do you see as your cost of capital at this point?

Rick R. Holley

Well, our cost of capital over time, as you know, will go up and down with the cost of borrowings. But it's been between 7% and 8% so the returns are higher than that, on this acquisition.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. And as you -- as we look forward, there's been talk about more money flowing into the TIMOs, et cetera, and they're having a healthy appetite. And at the same time, you are also getting more optimistic on the cash flows, et cetera. A difficult question to answer, I'm sure, but do you anticipate you're going to be more a buyer or a seller of land over the next couple of years?

Rick R. Holley

Well, we hope the opportunity to be more of a buyer of land, so it's -- obviously, it's dependent. Josh mentioned a minute ago some large parcels coming to market. I'm not sure which ones those are, but we hope some come to market. We'd really love to buy more timberland for the right values, because we think we operate it pretty well and create a lot of value on it. So we hope to be a net buyer.

Operator

And at this time, I'm not showing any further questions on the phone. I'd like to turn the call back to management for any further remarks.

Rick R. Holley

Well, thanks, everybody and we'll talk to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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