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Executives

John Hobbs – Director, Investor Relations

Rick Holley – President, Chief Executive Officer

David Lambert – Senior Vice President, Chief Financial Officer

Analysts

Gail Glazerman – UBS

Peter Ruschmeier – Barclays Capital

George Staphos – Bank of America Securities

Claudia Heuston – J.P. Morgan

Chip Dillon – Credit Suisse

Christopher Chun – Duetsche Bank

Mark Weintraub – Buckingham Research

Steven Chercover – D. A. Davidson

Richard Skidmore – Goldman Sachs

Plum Creek Timber Co. Inc. (PCL) Q2 2009 Earnings Call July 27, 2009 5:00 PM ET

Operator

I would like to welcome everyone to the Plum Creek second quarter earnings teleconference. (Operator Instructions) It is now my pleasure to turn it over to our host, Mr. John Hobbs, Director of Investor Relations.

John Hobbs

Good afternoon ladies and gentlemen and welcome to the second 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 Holly, 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 other participants please follow up with any questions by calling me at 1-800-858-5347 following the call.

I encourage you to visit our website, www.plumcreek.com. There you'll find our press release and supplemental financial statements for the second 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 Holley

Good afternoon. It's no surprise that market conditions remained challenging during the second quarter. During this recession, we have taken steps throughout the company to reduce expenses and protect the economic value of our assets.

Over the past year, we took action to ensure our manufacturing business remained a contributor to earnings and cash flow for the company. We've permanently closed two lumber mills and indefinitely curtailed production at a third mill. We summarized the current status and capacities of our lumber, manufacturing facilities for you in our financial supplement.

We are running our remaining facilities at significantly reduced levels to match customer demand. Our medium density fiber board operations remain profitable despite running at about 50% of its capacity. Our industrial plywood operations are running at 60% of capacity and our pine board mill in Columbia Falls, Montana continues to operate at roughly 75% of capacity.

In addition to the production adjustments we have downsized our manufacturing overhead to the level required to support the smaller operation. Together, these actions returned our manufacturing operations to break even performance during the second quarter and positioned it to be profitable and contribute to our cash flow on an ongoing basis.

Over the past year, we've also reduced overhead across the balance of the company. In total, our overhead reduction efforts have decreased salaried head count by 120 individuals. This translates into approximately $13 million of reduced cost on an annual basis.

In addition, we've reduced interest expense significantly by paying down debt. Over the past year, we've reduced our debt by $520 million and expect interest expense to be down more than $40 million from the $134 million of expense we had in 2008.

We've also taken steps to protect the value of our timber assets, even though this means reducing our current earnings and cash flow. We're reducing our total harvest for the year to about 15.5 million tons, down significantly from our original plans to harvest between 16 million and 17 million tons. We are managing our day to day activity to avoid harvesting more valuable saw timber in this weak environment.

The impact of these harvest decisions is most apparent when viewing the mix of saw logs to total harvest. In the south, a typical harvest mix would be 50% saw logs and 50% of the less valuable pulp wood. In 2008 and thus far in 2009, our southern harvest mix has been about 40% saw logs and 60% pulp wood. The same pattern holds true in the north where saw logs typically make up 60% of our harvest. Year to date, they have been well below 50%.

Less apparent however, are mix shifts among species as our foresters seek to minimize the harvest of our most valuable trees? For example, in our mixed hardwood forest of West Virginia, cherry is a highly valued species. It typically makes up 20% of our saw log harvest in the region. With cherry prices depressed, we targeted timber stands dominated by other less valuable species.

As a result, cherry only represented 7% of our second quarter harvest in this region, 7% versus normally 20%.

In total, the decision to defer approximately 1.4 million tons of saw log harvest this year has reduced our projected 2009 cash flow more than $30 million. Note that the $30 million estimate is based on current depressed cash margins. The 1.4 million tons of harvest would add more than $45 million to cash flow, assuming cash margins return to 2007 levels.

These harvest reductions protect the economic value of our timber assets and position our business to benefit during a recovery in three ways; higher harvest volumes, improved prices and a more valuable harvest mix.

Within our real estate segment, we are maintaining our discipline as well. In the weakest markets, we've reduced our listings and are holding fast to our price expectations. In stronger markets, we've responded by increasing our listings.

Dave will now review our second quarter results and discuss our outlook for the third quarter and following our prepared comments, we'll open it up for your questions.

David Lambert

We reported second quarter earnings of $0.19 per share. This performance was better than our original estimate, primarily due to the Wisconsin land sale and better activity from our ongoing rural land sales. In the Northern Resources segment, we posted an operating loss of $7 million, down from the first quarter's $2 million profit.

Harvest volumes during the second quarter declined to the lowest level of the year as the spring thaw limits harvesting activity throughout the north. Prices for both saw logs and pulp wood declined in the first quarter and were weaker than we expected.

Average saw log prices in the segment, declined about 11%, almost $7.00 per ton compared to the first quarter. Saw log prices declined because of lower hardwood saw log prices and a less valuable mix.

Northern hardwood saw logs represent the most valuable timber we manage in the company. High grade hardwoods are valued in fine furniture, in veneer markets around the world while lower grade logs often serve flooring, pallet and other industrial markets. These end markets have not escaped the effects of the global recession.

During the quarter, we reduced our hardwood saw log harvest in response to weak hardwood market. As a result, our northern saw log harvest came in below our original plan and the mix shift contributed approximately $2.00 of the $7.00 per ton saw log price decline.

In the west, saw log prices declined 2% from the very low levels we experienced during the first quarter. The prevailing prices, particularly in Oregon are at unacceptable levels. We've reduced our harvest there to levels required to service our long term contracts in the region.

Softwood saw log prices appear to have bottomed in April. We're expected our average saw log prices to increase $2.00 to $4.00 per ton during the third quarter. We expect the third quarter saw log harvest to seasonally rebound and be between 600,000 and 700,000 tons, but remain below normal levels.

Northern pulp wood prices declined about 10% from the first quarter level, about $4.00 per ton where pricing of $38.00 per ton remained attractive by historic standards. Our northern pulp wood harvest was as planned about 400,000 tons.

We are seeing demand from pulp and paper customer improve somewhat and expect pulp wood prices to be stable during the third quarter. Our northern pulp wood harvest should be between 550,000 tons and 650,000 tons during the third quarter.

In our southern resources segment, our second quarter operating profit was $23 million, up $3 million from the first quarter's $20 million profit. Our saw log and pulp wood harvest increased from first quarter's level. Our saw log harvest of 1.2 million tons was up nearly 30% from the very low levels of the first quarter.

Heavy rains in April and May led a number of our customer to purchase additional volume during the quarter to keep their log deck at a comfortable level. The $2.00 per ton price decline we experienced was in line with our expectation.

Our saw log customers are remaining disciplined, matching their production to current demand and keeping both their finished lumber inventories and log inventories lean. We expect saw log markets to remain weak based on the low level of housing activity and lumber demand. Southern saw log markets appear to be moving sideways and we expect prices to be flat during the third quarter. We expect our third quarter harvest of saw logs to be similar to the second quarter.

During the second quarter, our pulp wood harvest increased 24% to 1.8 million tons, about 150,000 tons more than we initially expected. The same weather patterns that impacted saw log demand, had a similar effect on pulp wood. Average pulp wood prices declined $2.00 per ton in line with our expectations.

Current pulp wood stoppage in the $9.00 per ton range continues to be attractive, as in the north we are seeing some firming in the pulpwood paper markets. We expect pulp wood prices to hold steady during the third quarter. We expect to reduce our southern pulp wood harvest by about 100,000 tons from the second quarter level.

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 harvest in attractive markets to capture value.

The real estate segment recorded revenue of $78 million and operating profit of $44 million. The results include the sale of 59,000 acres of non strategic Wisconsin land late in the second quarter. The sale resulted in a profit of $23 million. The $38 million sale for about $650 per acre reflects a good value for the type of property sold. As mentioned in the press release, we used the sale proceeds to retire debt, taking into account the use of proceeds, this transaction is cash and earnings accretive. The balance of our real estate sales were $40 million in revenue and $21 million of income.

As we noted in last quarter's conference call, interest levels and activity increase from the very low levels we experienced in the fourth quarter of last year, and the first quarter of 2009, during the second quarter we completed the sale of nearly 10,000 acres of small, non strategic land at an average price of $900 per acre.

These lands are generally small, non industrial grade properties scattered throughout our ownership. Sales were heavily weighted to the lake states region in the second quarter. We sold nearly 4,000 acres of conservation lands for about $1,700 per acre. We also sold 11,000 acres of recreation or higher and better use land at an average price of $2,200 per acre.

These values are lower than the roughly $3,000 per acre we realized for all of last year. Much of the value reduction is simply a reflection of the geographic mix of the land sold. Over 60% of the acres sold during the quarter came from lower value regions such as the Gulf south and the lake states. By comparison for full year 2008 sales from these two regions made up less that 40% of the acres sold during the year.

As we mentioned in our last call, we're seeing some pressure on rural land values, particularly in higher value regions such as Florida, portions of Georgia and Montana. In some of these regions, market prices appear to have declined by as much as 25% from their highs. Land values in lower priced markets have been more resilient and appear to be off between 5% and 15% from their peaks depending on the market.

While activity did increase during the second quarter, we believe the recession has had an impact on overall activity levels, reducing it by about one-third when compared to the past year. Our outlook for the remainder of the year takes these conditions into account.

We expect third quarter real estate revenue to be between $50 million and $70 million. We estimate land bases to be approximately 50% of revenue, significantly higher than typical due to the mix of sales during the third quarter.

Rick has already covered the actions that we've taken to improve manufacturing performance. The operations are running well at greatly reduced capacity and we expect the segment to be profitable for the third quarter and the remainder of the year.

As Rick mentioned earlier, we expect our third party interest expense for the year to be about $90 million, down significantly from 2008. We expect third quarter earnings to be between $0.05 and $0.10 per share. This is $0.06 to $0.09 below what we might expect due to higher than normal land bases in the expected sales mix for the real estate segment in the third quarter.

We have narrowed or earnings guidance for the year, taking into account the Wisconsin land sale, our expectations for ongoing rural land sales and a total harvest of 15.5 million tons. Summing it up, we're expecting to report earnings between $1.25 and $140 per share for 2009.

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

Rick Holley

The first half of 2009 has presented the most challenging markets any of us at Plum Creek has ever faced. I am gratified by our employees' response to these economic conditions. We're more market focused than ever, working closely with our customers and contracts to help all of us manage through this environment.

The team work of our manufacturing businesses has been outstanding despite the difficult task of closing facilities with a long history of dedicated service. Our real estate team has done an excellent job remaining disciplined and focuses on long term value.

We continue to pursue long term opportunities developing in the use of wood as a source of renewable energy. We are in discussion with numerous domestic and foreign power companies who are trying to secure a bio energy supply chain. We're also monitoring the process and progress of the Energy and Climate bills before Congress as they will have an impact on the pace and scale of growth in the energy area.

Cash flows from our operations are down during this recession. Some of that reduction is deliberate. Based on our conviction of long term value of our saw logs, we've elected to hold some of these assets for the time being. We'll bring them back to the market when trees are larger and prices are better and capture a much higher value that we could today.

And even in this difficult year. we will generate far more cash flow than our dividend requires. No doubt in the near term, business conditions will continue to be challenging, but we sense we have seen the bottom as residential construction has halted its decline and credit markets have thawed.

The long term fundamentals of our business remain sound. Residential construction and the global economies will recover. Demand for renewable energy continues to grow. Our balance sheet is strong. We have nearly $350 million in cash and we have ready access to another $540 million at very attractive rates under our line of credit.

We're in excellent position to prosper in the recovery. In the meantime, we'll continue to be disciplined with the assets we own and manage.

Now we'll be happy to take your questions.

Question-and-Answer Session

Operator

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

Gail Glazerman – UBS

We've seen huge curtailments from your [inaudible] from other timber owners and I'm just wondering if you could talk about how you see that impacting the pace of recovery down the road as everybody else has a lot of timber sitting on the sidelines as well. Is that a concern?

Rick Holley

I think you have to keep in mind even though Plum Creek has obviously reduced its harvest, other large industrial land owners have and certainly a number of the teams have. The majority of timber, especially in U.S. south is owned by small non industrials and I'm not sure we can say the same for them in all cases.

So I think when we do see a recovery in housing and general economy and we see lumber mills that are curtailed today start operations, I think you can see clearly greater demand for saw logs around the country and higher prices.

I think the price of saw log recovery will follow lumber. Lumber will come first then saw logs will recover. The pace could be a little bit slowed by volume coming back to the market from Plum Creek and others, but I think we'll all be very thoughtful about that so that we continue to get the price that we expect in this commodity.

Gail Glazerman – UBS

In terms of land, you talked in detail about how you see the rural markets. I'm wondering if you could talk a bit more general about particularly the course in the land markets. Are you seeing a lot of opportunities, a lot of acreage on the market and what you see in terms of transaction values there?

Rick Holley

The transactions at least have been announced in the market place. The values as we talked about last quarter held up very well; the four star transaction which happened earlier in the year. There's a couple of other transactions rumored in the market today and the values appear to be holding up.

If I had to guess, timberland values from the peaks, maybe they're off 10%. If you went to market today with the transaction like we did in 2008, you'd probably see 10% less price, but they're holding up pretty well.

Gail Glazerman – UBS

I understand it's still uncertain in terms of where it is in Congress, but can you give any sense of when you might expect to see renewable energy and uses start to benefit you? I think you have one large contract out there signed already.

Rick Holley

On the renewable energy, the House has passed a bill which includes both energy as well as climate change. The Senate is looking at it now. I think there will be an energy bill passed this year, but I don't think in the form that the House has currently approved. I don't think climate change is going to be, it's probably two to three years away, but I think there's enough momentum behind an energy bill, that we'll see something pass in Congress and signed by the President this year and it will require between 15% and 25% of energy by all power companies to come from renewable sources.

As I mentioned in my comments, there's a number of domestic and foreign power generators currently in the market place trying to say, okay this is going to happen. I need to secure my supply chain, a source of fiber. So we've had a number of discussions and I'm sure other companies have as well.

Gail Glazerman – UBS

Those projects and they 12 months out, three years out in terms of, assuming legislation were in place, how long would it be until they'd actually need the wood?

Rick Holley

I think it's 12 to 24 months. A number of these companies will get pelletized wood which in those plants get built a lot sooner. A lot of these plants will be co-fired and there's come capital that has to be spent on some of these power plants but that will happen sooner. Any new green filled plants will obviously take longer to get permitted and approved and built. But I think you could see it happening certainly in 12 to 24 months.

Operator

Your next question comes from Peter Ruschmeier – Barclays Capital.

Peter Ruschmeier – Barclays Capital

In addition to the $347 million of cash availability, can you quantify your untapped liquidity at this point?

David Lambert

We have $530 million available under our line of credit and that's still got about two years to expiration and so we're in a pretty strong position from a liquidity perspective.

Peter Ruschmeier – Barclays Capital

On the debt side of the equation, the debt amortization schedule, remind us the schedule for the next couple of years.

David Lambert

We have modest maturities through the remainder of the year coming due. There's one tranche that's due in the third quarter of this year, another $58 million. Looking forward in 2011, we have about $380 million of maturities due in our privately placed debt towards the end of the year primarily, and we'll be looking at redoing our bank facility that year as well.

Peter Ruschmeier – Barclays Capital

How about for 2010?

David Lambert

In 2010 we only have $56 million due.

Peter Ruschmeier – Barclays Capital

On the same topic, I'm curious if you comment on in a better scenario, with stronger cash flow, what level of debt are you uncomfortable with on the low side? Presumably you're going to repay debt going forward I would think with cash flow, but how low is too low?

David Lambert

I think we're looking to build flexibility. It's a little bit of an uncertain environment. We're comfortable with our current level of debt. I think we'll just opportunistically repay as conditions present. We're not trying to get to a no leverage position but when we can capture strong values in the market place and retire debt with coupons we find attractive, we've been pursuing that course.

Peter Ruschmeier – Barclays Capital

What are you seeing in terms of the independent logger contractors out there? Are you seeing any folks leave the business and importantly down the road with an eventual recovery, do you see availability of contractors as a limiting factor once demand picks up?

Rick Holley

As I said before, I think the number one issue this industry has is contractor capacity across the entire country. Even before times got difficult here in the last year it was a tough business. They didn't make a lot of money. If they made any, it's heavily capital intensive and I don't know that we've quantified it, but my guess, contractor capacity today is probably at least 10% if not 20% less than it was a couple of years ago.

One of the things at Plum Creek that we're doing is just working closely with our best contractors and working on longer term contracts with them to enable us when the recover occurs, we will have contractor capacity.

Gail asked a good question a few minutes ago about if everybody is holding back on harvest and when things improve and all the harvests come back to market will prices really recover? One of the things that are going to keep those harvests coming back too quickly is a lack of contractor capacity. So I think that's going to be a very limiting factor when things improve.

Operator

Your next question comes from George Staphos – Bank of America Securities.

George Staphos – Bank of America Securities

I wanted to go back through the guidance for a minute and try to reconcile the full year which hasn't changed from the last quarter relative to what was better than expected performance in 2Q. I know a portion of it is the higher than expected basis on the land you expect to sell for the third quarter. I'm guessing the rest of the variance is maybe slippage more in the northern markets, but if you could us a bit more color in terms of how the puts and takes evolved for your third quarter across your businesses, that would be great.

David Lambert

I think a little bit is the northern segment, the pressure there, but also we've discussed how we're reducing the saw log harvest in particular even from where our previous guidance would be. So I think that's having an impact on keeping the range within the original bounds that we had described.

George Staphos – Bank of America Securities

Back in the first quarter reporting season, you discussed the fact that you're seeing increased interest on your land again. People had stopped sitting on their wallets. You had mentioned that there was a fair amount of interest in Georgia and Mississippi and Louisiana, etc. Did the interest that you were beginning to see at the end of the first quarter in the reporting season translate as you had expected geographically in the second quarter across both the non strategic and other categories of land? If you could give us a little color around that, that would be great.

David Lambert

We guided $25 million to $35 million of real estate revenue for the quarter absent the Wisconsin transaction. We actually ended up at $40 million. So we actually did get good traction during the quarter. People are renewing that interest. It's not as vibrant as it once was but we had both the seasonal rebound we had discussed with you earlier, and the markets are warming up a little bit better.

We did have better traction on average though is some lower value regions; the lake states and the Gulf south, and we still don't have the full engine running in some of the higher value regions such as Florida, Georgia and Montana. And that partially explains the lower than expected value per acre for our HVU lands.

George Staphos – Bank of America Securities

Two last questions; one related to the prior. As you sit where you do and see various expression of interest for your lands come across the table at times, do you think there is increasing interest for timberland outside of North America, say in South America or elsewhere, and if the answer is positive or yes to that point, do you think that's creating at all any kind of competition for your lands and lands within North America are all realizing. A very, very broad market and a broad question.

Rick Holley

I think what we see is a lot of interest in lands here from European investors. I'm not sure I'm seeing so much of the investors here in the United States say; well maybe I'll look elsewhere, South America or New Zealand or Australia or other places in the world.

We haven't sensed or seen that yet, but there seems to be a fair amount of interest from European pension fund and other investors in owning this asset generally specifically here in the United States.

George Staphos – Bank of America Securities

Is there any way to handicap what kind of returns they're typically looking at these days?

Rick Holley

I think they all want to get what's been stated as the 8% real return in this investment which I'm not sure you get today, but it's a long term investment. You hold it 10 or 15 years, and with the bio cyclical growth and all the other attributes of timberland ownership, I think they feel that over time they can get that. But I think they look at 8% real returns.

George Staphos – Bank of America Securities

I saw the corporate unallocated decline. I assume that's all related to the fixed cost reductions that you've been working on, but anything else in that number?

Rick Holley

That's what it is. It's all the overhead reductions that we've had.

Operator

Your next question comes from Claudia Heuston – J.P. Morgan.

Claudia Heuston – J.P. Morgan

On the manufacturing segment, if you look at where you came out of the quarter, do you feel you're at pretty much a full run rate in terms of the cost savings or do feel like there's still more room to go to improve those operations. And then as you think about a potential recovery in the products market, how much do you think is permanent savings embedded in that business now going forward?

David Lambert

I think we have the operations right sized at this point in time both from a production level and from an overhead perspective. We'll be in a position to respond should markets improve. We have our panel facilities working at 60% of their capacity. I think we're well positioned from that perspective and don't need to do any further.

Rick Holley

The overhead cost reductions we've achieved in the company both generally and also manufacturing even when business improves, those should be permanent. You'll not see those costs come back.

Claudia Heuston – J.P. Morgan

CapEx seems to be running a little bit lower than I thought thus far. Could you confirm your outlook for this year and if you have any early thoughts on 2010.

David Lambert

CapEx is running less than previous. We're maintaining the guidance we had given you last quarter and we're expecting CapEx for the year to be in the range of about $60 million.

Rick Holley

And next year we would not expect it to be much higher.

Operator

Your next question comes from Chip Dillon – Credit Suisse.

Chip Dillon – Credit Suisse

You had mix in your third quarter forecast that the price change for saw logs in the west was that $4.00? Did I hear that correctly?

David Lambert

We could see saw log prices rebound $2.00 to $4.00 per ton.

Chip Dillon – Credit Suisse

One thing you mentioned were the prices were, you thought they bottomed in April and maybe this is just different regions. I noticed on the Weyerhaeuser slide from May 29, they said that prices had fallen in the west for saw logs by over 25%. Did that all kind of happen in April and then it stabilized or could they be talking about a different area?

Rick Holley

If you look at saw log prices in Oregon for instance, since the fourth quarter of 2008 till the second quarter of this year, they're down about 28%, but most of that decline was fourth quarter and first quarter when it was only down a couple of percent in the second quarter.

Chip Dillon – Credit Suisse

I guess that's largely because of the supply response, people pulling, like you are doing, pulling their harvest off the market.

Rick Holley

That’s correct.

Chip Dillon – Credit Suisse

On the Wisconsin sale, I know last year you sold some land out there, and I don't know if you revealed the price per acre. Recy believes its $800.00 and I think you're saying this year it's about $650.00. Is that apples to apples or is the land you sold this year just a little different in its character?

David Lambert

There's some difference in its characteristics. Both of them were quality timberlands, but the price per acre was almost 19% lower now. That's really a function of the characteristics of the land. The stocking while good, was about 17% lower than what it was on the earlier tract. They're both very well stocked, but the other one was greater stock, and this one had just a little lower percentage of the upland hardwoods that has a higher value than some of the other timber types. So on a comparable basis, yes the price is lower, but it's certainly within our range of estimates.

Chip Dillon – Credit Suisse

In that transaction, and I think others we're seeing, some of the teams where they're more recent partnerships put together, who are certainly out there looking for land, do you see a period at which these current partnerships will continue to be interested in buying land and do you see a point where new monies will need to be raised for it to continue or do you see a point where this might taper off a bit?

Rick Holley

Most of the teams that we see or talk to including the one we did this transaction with, seem to already have funds allocated to them. I think as we mentioned on the call last quarter, I think that size of transactions are probably going to be smaller than we saw over the last two or three years so you're going to see I think $50 million to $150 million type transactions done.

I don't think in this market without the influx from new funds from some of these large pension funds, which is not likely for a little while to see a $500 million type transaction done. But I think there's enough interest out there that you'll continue to see the smaller ones completed like the one we did in Wisconsin.

Chip Dillon – Credit Suisse

As you look at the market place, if you get to a situation where let's say these transaction prices do come down, not necessarily involving you but in the market place, is there a point where you might consider not paying not quite as high a dividend so that you would be in a better position to buy? Clearly at this point that makes no sense with your stock where it is, but if those lines crossed over where the price of timberland falls below what is reflected in your stock price or it gets close to that, given your cost of capital advantage as a REIT, would you consider doing that?

Rick Holley

I don't think so. I think the dividend is not only important to the company, it's very important to the shareholders, and you think about capital allocation for Plum Creek, we look at it in two buckets. One is the dividend and certainly as to the cash flow of the enterprise from our recurring businesses grow, we expect that to grow the dividend, and that's the goal and expectations of the company.

And then the other bucket of capital allocation you have money for capital investments. You have it for buying stock back. You have it for paying debt down and you have it for acquiring timberlands.

And we like timberland. We love the business. We think we're pretty good at it and to the extent we see timberland values come to where we can get a better return than buying stock, or buying debt back, that's in fact what we'll do.

As David mentioned, we have a lot of liquidity on our balance sheet today, so we could transact a fairly large timberland transaction without even going back to the debt or equity markets. So that's how we would think about it.

Operator

Your next question comes from Christopher Chun – Duetsche Bank.

Christopher Chun – Duetsche Bank

How much is your manufacturing DD&A now? Going back to the Wisconsin sale, was there any portion of that that would not be considered core timberland, and HVU categories or non strategic, or anything like that?

David Lambert

There wasn't really HVU associated with that transaction. That was more from traditional core timberlands, but these were some lands that were less strategic to us and based on our forward looking yields, we found it very attractive to transact at that level and redeploy the proceeds to pay down debt.

Christopher Chun – Duetsche Bank

You end of the quarter share count?

David Lambert

Just under 163 million. 162.8 I believe. Yes, that's correct.

Christopher Chun – Duetsche Bank

Going back to the discussion about the potential demand for energy uses, have you thought about if a law is passed that says 20% of energy needs to come from renewable sources, what type of demand volume are we looking at in terms of tons of wood or bio mass per year or something like that. Have you studied that yet?

Rick Holley

We talked to a couple of fairly large power companies and they're need would be in the neighborhood of six million tons a year, so obviously there's a number of utilities or power generators both in Europe and the United States should this happen in the United States, they'll both be competing for that volume.

So it will be a substantial amount of volume required to meet this need. It's going to ramp up obviously over time. It's not going to all happen year one or two, but clearly it's a substantial amount of wood fiber.

David Lambert

Getting back to your question on manufacturing the DD&A, for the year it's probably going to be just under $23 million, but that did include the impairment charge that we took in the first quarter of the year of approximately $10 million. I think for the second quarter we were just over $3 million for manufacturing, so that's kind of a good run rate going forward.

Operator

Your next question comes from Mark Weintraub – Buckingham Research.

Mark Weintraub – Buckingham Research

The Wisconsin land sale, was that in the prior guidance that you had been giving?

David Lambert

No, it was not.

Mark Weintraub – Buckingham Research

What is it that you do include land sales in the guidance and when would you choose not to, or specifically to the Wisconsin, why would that one you would have elected not to have included that in the guidance.

David Lambert

It's depending on the timing, whether it's firmly under contract and such at the time we were issuing the guidance.

Rick Holley

Basically at the time of the last quarterly call when we gave guidance for the second quarter and for the rest of the year, there was no contract. We had been approached. We were working with somebody, but we had no expectation, at least at that point in time that this transaction would consummate. If we had, we would have put it in the guidance.

Mark Weintraub – Buckingham Research

Does that mean that the land sales that you have embedded for the balance of the year are fairly locked tight at this point and we should have a very high degree level of confidence in them?

Rick Holley

I think that's fair, especially third quarter which we gave you guidance on here, and for the year. Clearly third quarter, we have a pretty good idea what's going to close. We have transactions that are in process. Fourth quarter obviously is further in the future, a little more speculative, but we feel pretty good about it.

Operator

Your next question comes from Steven Chercover – D. A. Davidson.

Steven Chercover – D. A. Davidson

Presumably if you were selling to any pellet manufacturers, that would show up in pulp wood, right? Are you selling to any pellet guys at present that you know of?

David Lambert

Not really. When we sell in the future for the bio energy fuel, it will be a functional bio mass and pulp wood. I think they have a desire to buy both products and not just the limbs and the needle. So many of the discussions we have, their appetite might be for 70% pulp wood, 30% bio mass to get to their targeted diet and they make pellets out of it.

Currently we're selling about $1.3 million of cash flow from pure bio mass this year on a year to date basis.

Steven Chercover – D. A. Davidson

I recognize you like to be as pure timber play as possible and avoid capital intensive businesses, but given that you have manufacturing assets that are idled, would it make sense to convert anything or with a partner enter the bio mass realm, particularly since you've always wanted to have a hand in the market in Montana, although that might be less of an issue now that you've sold some land?

David Lambert

That's always a possibility and we've looked at it. We have an MVF plant in Montana that uses small residual fiber and chips and such. There's somewhat of a natural outlet for a pulpwood style product in our Montana wood basket.

Rick Holley

We've been approached in Montana as we have other places of people that want to build these bio mass energy generating facilities. So we're in discussions with people, and if it makes sense to do it there, we'll do it there. But we prefer it with somebody else's capital and we provide the raw material and get the opportunity there.

Operator

Your final question comes from Richard Skidmore – Goldman Sachs.

Richard Skidmore – Goldman Sachs

If the Cap and Trade legislation did get passed, how might that change your thinking with regards to harvesting and plantings and how you're managing the forest going forward? Would you be thinking of shifting more towards pulpwood as opposed to saw logs, or how would you think about that?

Rick Holley

I think it's too early to call as to what that's going to mean? There are some that say, well if a tree stores X amount of carbon at age 30, it will store more at age 60, and there's others that say well a tree that's just planted stores on a percentage basis, a heck of a lot more carbon than a tree that's 80 or 90 years old.

So how this all plays out, I think is yet to be seen. And clearly we're going to manage our forests for the maximum value potential whether it's for carbon, whether it's an opportunity in energy. If energy really caught hold and you see pulp wood go up double or triple in value over time, you could see more lands managed on a pulp wood rotation if that's what really made sense.

As time goes on and we see how these play out, that's what we'll do and we'll manage our plans accordingly.

Richard Skidmore – Goldman Sachs

Are you having any discussions with Washington with regards to getting any credit for what you already have planted?

Rick Holley

I think the idea, and we're involved in the Chicago Climate Exchange with others, and the idea would be, if you've got existing forest that's storing a huge amount of carbon, you should get some credit for that. Really not just for Plum Creek, but for other landowners, the ones that are worried about conversion.

If you can incent people with things like carbon and credits and others, existing lands won't be converted. There will be enough economic value in them that they'll hold them in timberlands long term. So there will be a lot of push to make sure that whatever lands are currently forested, that you get some kind of credit for that.

Richard Skidmore – Goldman Sachs

Do you feel like there's a lot of momentum behind that or traction that you're getting with those that you're speaking with?

Rick Holley

I think there's a reasonable chance. It's probably 50/50 at anything. It's so early and this whole Cap and Trade thing needless to say is controversial. It could be very expensive and it's like Health Care or anything else. Who's going to pay for it? But once it all gets figured out, timber is at the table and I think timber will have a say in all this. At least that's what we focused on, both Plum Creek as a company, but our industry association, NAFO, National Alliance of Forest Land and owners, we're very focused on this.

Well thank you everyone, and we'll talk to you next quarter. Have a good summer.

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Source: Plum Creek Timber Co. Inc. Q2 2009 Earnings Call Transcript
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