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Plum Creek Timber Co. Inc. (NYSE:PCL)

Q4 2009 Earnings Call

February 1, 2010 5:00 pm ET

Executives

John Hobbs – Vice President of 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

Chip Dillon – Credit Suisse

Christopher Chun – Deutsche Bank

Mark Weintraub – Buckingham Research

Steven Chercover – D. A. Davidson

Richard Skidmore – Goldman Sachs

Joshua Zaret – Longbow Research

Operator

I would like to welcome everyone to the Plum Creek earnings conference call. (Operator Instructions) Mr. Hobbs, you may begin your conference.

John Hobbs

Good afternoon ladies and gentlemen, and welcome to the year-end 2009 conference call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the company. Today we have on the line, Rick Holly, President and Chief Executive Officer, and David Lambert, Senior Vice President and Chief Financial Officer.

This call is open to all investors and members of the media. However, the Q&A portion of the call is intended for the professional investment community. 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'll find our press release and financial statements for the full year and fourth 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. Following today’s prepared remarks, we will open the call up for your questions. Now, I'll turn the call over to Rick.

Rick Holley

Good afternoon. 2009 was the most difficult operating environment the company and I’m sure most other companies have ever faced. Our operations were not immune to the effects of the economic recession and record low residential construction activity. We responded to these challenges by taking advantage of the operational flexibility provided by our diverse land and timber base. We reduced our saw log harvest to the lowest recorded levels, deferring roughly 20% of our initial plans for the year; that was about 1.6 million tons. We estimate that this harvest deferral reduced our 2009 income by $30 million. This is a correct NPV decision from a value perspective. We maintain an accelerated pace of pulpwood harvest to capture to attractive pulpwood prices and improve the productivity of the thin stands.

We adjusted our rural real estate offerings to the markets that were most active, the Lake States and Gulf South regions. We right-sized our manufacturing business taking aggressive action to return these operations to profitability. We completed the second phase of the three phase Montana conservation sale. As a result, we performed pretty well financially.

We generated $540 million in cash flow from operations, comfortably more than our $275 million in dividend payments. We strengthened our balance sheet and position the company well for 2010 and beyond. We permanently reduced our debt by $182 million, and in the process, helped reduce our interest expense by $45 million from the 2008 level. Through our share purchase program, we re-purchased $87 million of stock at an average price of $26.57 per share. This reduced our shares outstanding by 2%.

Financially, we enter 2010 in excellent shape with nearly $720 million in ready liquidity and a strong balance sheet. As in 2009, our asset base and flexibility allow us to execute our strategies to maximize value, pay our dividend, position the company to benefit as renewable energy markets emerge and grow long-term shareholder value.

David will review our fourth quarter results and discuss our outlook for 2010 and the first quarter with you.

David Lambert

We reported fourth quarter earnings of $0.17 per share, at the top end of our guidance range for the quarter. Performance within our operating segments was as much as we anticipated. In the Northern Resources segment, we operated $1 million loss as expected, down from the third quarter's $3 million profit.

The lower results were primarily driven by seasonally lower harvest volumes. Our average Northern saw log prices were unchanged during the quarter; however, spot market prices in the Pacific Northwest continued to improve with Douglas Fir prices in Oregon up approximately 5% quarter over quarter. While the price momentum is encouraging, log prices in Oregon remain below what we consider attractive levels, so we limited our participation in the Oregon markets to servicing existing fiber supply arrangements.

Prices were stable in other regions of the Northern segment with supply and demand in relative balance and the tone of the markets more positive. Looking forward, we expect Northern saw log prices to improve as much as $3 per ton during the first quarter. Northwest saw log supplies remain very tight as land owners restrict harvest.

Saw mills in the region are increasing prices to attract incremental supply. Hardwood saw log markets in the Lake States in the Northeast are expected to improve slightly. Hardwood customers have become a bit more optimistic and are seeking to increase their log inventories. We expect the first quarter saw log harvest to be similar to the fourth quarter’s level at about 600,000 tons.

Northern pulpwood prices held steady at $38 per ton during fourth quarter. Customer demand was good, and prices remained attractive. We expect our average Northern pulpwood price to be down $1 per ton in the first quarter as hardwood pulpwood prices have softened slightly in the Northeast.

We expect to hold our first quarter Northern pulpwood harvest steady at about 550,000 tons. In aggregate, we expect higher saw log prices, slightly lower pulpwood prices, and fairly stable volumes to result in a modest operating profit for this segment during the first quarter. For the full year, we expect our Northern saw log harvest volumes to be similar to those of 2009, between 4 and 4.5 million tons.

In our Southern resources segment, our fourth quarter operating profit was $17 million, down $4 million from the third quarter’s $21 million profit. The decline in operating profit was primarily a function of sequentially lower harvest volumes as planned. Prices for saw log for saw logs and pulpwood were as anticipated as extremely wet weather throughout the south constrained access to timberlands. These conditions led to log shortages in several markets.

In general, saw log prices were flat to slightly up as the wet weather and low customer log inventories offset the effects of the extended holiday at downtime at many customers’ mills, and as anticipated, our saw log price declined about $1 per ton. Our mix of small diameter saw logs was higher than typical as we sought to defer the harvest of our larger more valuable saw logs.

During the fourth quarter, southern pulpwood prices improved $1 per ton, as customers struggled to maintain adequate log inventories in the face of wet conditions. As planned, we reduced our pulpwood harvest during the fourth quarter by 365,000 tons from the third quarter level. We expect to harvest about 1.3 million tons of pulpwood during the first quarter. The sequential decline is a function of limited timberland accessibility due to wet weather and our lower pulpwood harvest plans for 2010. Low pulpwood inventories, limited supplies of saw mill residual chips, the wet weather constraints, and contractor capacity issues in some markets will continue to keep pressure on pulpwood markets, likely throughout the first half of 2010. We expect average pulpwood prices to move up another $1 per ton during the first quarter to an average price of $11 per ton.

The same constraints on pulpwood supply are also influencing saw log markets in the south. In general, lumber customers’ optimism is improving, and more are seeking to replenish log decks in anticipation of seasonal increases in demand. We expect our first quarter average saw log price to increase $1 per ton and expect our southern saw log harvest to be between 1.15 and 1.25 million tons.

We expect the overall southern harvest in 2010 to be similar to 2009’s level, in the 11 to 11.5 million ton range. Over the past 3-1/2 years, we’ve been working through a backlog of first thinning harvest bringing to market pulpwood at attractive prices and gaining incremental growth that benefits our forests. With this backlog largely complete, we will focus a higher proportion of our 2010 harvest on second thinnings. These second thinnings produce a mixture of pulpwood and small diameter saw logs. As a result, our 2010 southern harvest mix will shift adding roughly 1 million tons of small diameter saw logs and reducing a similar amount of 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.

The real estate segment recorded revenue of $67 million and operating profit of $44 million for the fourth quarter. Rural land markets were stable during the quarter, with the exception of Florida where we noted an increase in the interest levels for affordably priced lands. The bulk of the fourth quarter revenue and income came from the sale of 26,700 acres of recreational and higher and better use lands at an average price of $2200 per acre. Consistent with the rest of the year, about 70% of the acres sold during the quarter came from lower value regions of the Gulf South and the Lake States. These two regions accounted for les than 40% of the acres sold in prior years.

During the fourth quarter, we completed the sale of roughly 2500 acres of small non-strategic land at an average price of $855 per acre. The lands were almost exclusively lower productivity properties scattered in Maine and the Lake States. We also sold nearly 5000 acres of conservation lands at an average of about $1300 per acre.

Rural land markets appear to have stabilized and with no distant increase in activity levels as the broader economic outlook improve from the dire straits that we experienced in the first half of 2009. We expect 2010 real estate segment revenues to be between $350 and $370 million. This includes the $89 million final phase of our three-phase Montana conservation sale scheduled to close in the fourth quarter. For the year, we estimate land bases will approximate 35% of segment revenue. We expect first quarter real estate revenues to be between $85 and $95 million. This includes $32 million from the sale of non-strategic lands as well as the sale of a couple of conservation properties. We estimate land bases will be approximately 30% of revenue for the first quarter.

The manufacturing segment reported breakeven results for the fourth quarter as anticipated. Sales volumes declined seasonally for plywood and MDF, and their prices were largely unchanged. Profitability of both the plywood and medium density fiber board operations were similar to the third quarter results. Lumber sales volumes declined more significantly, the result of the product lines downsizing earlier in the year. However, results within our lumber operations improved somewhat as lumber prices increased 6% sequentially. Higher levels of residential construction activity and improved industrial demand for wood products are expected to return the manufacturing segment to profitability for 2010. We expect to report a profit of as much as $10 million in this segment in 2010, including a modest gain in the first quarter.

As mentioned in our last conference call, during the fourth quarter, we used our low cost line of credit to retire at a modest premium to par $68 million of relatively higher coupon private notes that mature in two years. The average coupon on the notes retired was 7.71%. This debt retirement will save about $4 million in interest expense annually for 2010 and 2011. This transaction resulted in a fourth quarter debt extinguishment charge of $3 million. Over the past year, we’ve permanently retired $182 million of debt. This combined with debt prepayments in the fourth quarter of 2008 and lower average interest rates on our variable rate debt reduced 2009 third party interest expense to $89 million, a reduction of $45 million compared to 2008. Already during the first quarter of 2010, we retired another $53 million in debt that matured in January. So while interest rates on our variable bank debt may increase somewhat during the calendar year, we expect our third party interest expense for 2010 to decline to approximately $81 million. Additionally, we have only $3 million of debt coming due in the next 12 months.

The improved performance in our manufacturing segment will result in a significant reduction in our tax line during 2010. Any tax benefit in 2010 is expected to be $5 million or less. In all, we expect 2010 income from continuing operations to be between $1.25 and $1.45 per share, with first quarter results between $0.34 and $0.39 per share.

Now I'll turn the call over to Rick.

Rick Holley

As our results illustrate, business conditions stabilized in the second half of 2009, and we’ve seen some modest recovery from the extreme lows set earlier in the year. We’ve seen improving tone in our conversations with customers across the nation. Lumber prices have been on a positive trajectory—another positive sign for log demand and pricing. While we believe recovery in our core businesses will continue in 2010, we believe the recovery will be slow by historic standards. Markets for investment quality industrial timberlands were steady during the second half of 2009, with values off roughly 15% from the highs reached in early 2008. Given the long-term nature of these investments, timberland values have been more stable than saw log prices as investors look through the economic cycle and recognize some of the positive trends in timber supply and demand.

We are approaching 2010 conservatively with an eye toward protecting shareholder value and position ourselves for the long-term. We plan to keep the harvest of our most valuable saw logs low. In our real estate segment, we will concentrate on capturing attractive prices for lower value properties, holding our most valuable lands for the future. In 2009, we reduced our SG&A expenses by $22 million, and we expect to hold the line on these items during 2010.

During 2010, we’re planning capital expenditures between $75 and $80 million. Reforestation makes up $35 million of maintenance capital, and we expect to plant about 60 million trees. The remaining capital is discretionary investment and must earn excess returns for our investors. These investments are primarily advanced silviculture treatments aimed at boosting the productivity of our forests.

During our last call, we discussed a US Department of Agriculture program known as Biomass Crop Assistance Program or BCAP. While the draft rules for the program have yet to be published, the USDA has funded the program during the first quarter of this year for a little over $500 million and is administering the program under the outlines provided in the Farm Bill legislation. Both the status of funding beyond the first quarter of 2010 and the timing of the release of program rules are unknown at this time. Based on initial reaction of land owners, contractors, and customers, we believe this program will likely be successful in helping to develop a supply chain for emerging biomass markets. Plum Creek began delivering biomass under the program in early January. At this early stage, we expect the benefit to the company will be fairly modest in the $8 to $12 million range in 2010 depending on the final rules.

We’re proud of our long-term track record of value delivery. An investment in Plum Creek has outperformed that of the S&P 500 on 2-, 3-, 5-, 10-, and 15-year measures. For example, since the beginning of the housing correction four years ago, Plum Creek has provided shareholders a total return of more than 25%, placing an investment in the company in the top third of the S&P 500. During that same period, an investment in the S&P 500 actually declined 2.6%.

As we enter 2010, we are financially healthy and well positioned to weather a continued difficult business environment and take advantage opportunities as recovery unfolds. We expect the results from our core businesses to improve and to generate cash flow well in excess of our dividend. We will continue to make effective disciplined capital allocation—our top priority in the company.

Now we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from George Staphos – Bank of America Securities

George Staphos – Bank of America Securities

I have a couple of questions on real estate and land values. Rick, with land values down 15% or so from the peak, very consistent with what you’ve been saying in the past, and perhaps some stabilization that you’re seeing the market, does that encourage you at all to perhaps be more of a buyer at this juncture than you might have been, say, 6 months or a year ago? I realize that you said to start 2010 you’re going to try to be conservative and obviously preserving of the value of the shares, but give us an update on your thoughts there.

Rick Holley

The markets have come up a bit, but we look at every transaction on the market, and we still find it very difficult to generate excess returns from any of these transaction you’ve seen on the market place, at least given how we see cash flows for the foreseeable future into the next year; however, that said, given some of the positive catalysts that we talked to all of you about in the past that will occur over the next 2 or 3 or 4 years, if we see timberland values come off as we see those catalysts take hold, we very well will be a buyer again. At least, that’s our point of view at this time.

George Staphos – Bank of America Securities

One other question in terms of real estate—I realize it’s difficult to project real estate sales quarter to quarter. We appreciate the details on the first quarter, and we obviously know Montana is coming in the fourth quarter, but over 2Q and 3Q, how should we perhaps split the difference in land sales?

David Lambert

They’re relatively balanced at this point in time.

George Staphos – Bank of America Securities

Are you seeing any effect in terms of timber prices in the Northwest because of the pine beetle effect and the effect on supply-demand at this juncture? Obviously, it’s been a difficult market to see that given the downturn, but are you beginning to see any of that in pricing?

Rick Holley

We really haven’t yet. We’ve seen a little pricing improvement that we mentioned in the call today, and prices in Oregon, for instance, where we have such a large position, still remain relatively weak and unattractive at least for us to do any meaningful harvest work there. As we said, we’re focused primarily in supplying our supply agreements there and nothing more, but I think if we start to see improvement in end-use demand with the housing hopefully improving, repair, remodel and other markets and higher production levels of lumber, we should start to see the impact of that because clearly there’ll be less lumber coming into the market from Canada than at least has been in the past.

Operator

Your next question comes from the line of Gail Glazerman – UBS

Gail Glazerman – UBS

Speaking on land for a second, can you talk generally about what you’re seeing in terms of institutional timberland? Has there been any change in investor interest from TIMO specifically for that, and are you seeing much on the market?

Rick Holley

We don’t see a lot on the market. I think what wee see on the market is generally 15,000, 20,000, 30,000-acre parcels by all kinds of land owners. We do hear from TIMO and others that there continues to be a strong institutional interest in the asset by both US and European investors, but it’s hard to say what the interest is because there is really not much on the market. The Anthony Forest Products transaction got completed recently by TIMO for a very attractive price. I think it was certainly over $200 million—a size that we were quite frankly surprised at. So we hear there continues to be investor interest.

Gail Glazerman – UBS

Perhaps just a little bit more color on what you’re seeing in the current markets, starting in the South. How widespread have the weather issues in the South for your operations just in general and in terms of your pulpwood customers? What are you hearing in terms of their ability to cope with it?

Rick Holley

Obviously the weather, normally in places like Arkansas, they get 55 inches of rain, and they’ve had in some places 90 inches of rain in the last year. I was just there this last week, and they got more rain over the weekend, so lying additions are challenging. Customer inventories, whether it’s a sawmill, whether it’s an OSB plant or a paper mill, are extraordinarily low, and I think some of these paper mills are very concerned about running out of wood, not being able to operate. So clearly in the spot market, we gave some information today on how we see the overall market, but in spot market, we are seeing pulpwood prices up $5 to $10 a ton because these mills will pay what it takes to get wood to their mills. So it’s very challenging, and the concern that most of those customers is that winter has just set in, and it could be damp there for another two to three months.

Gail Glazerman – UBS

If I remember correctly from a couple of years ago, you had some large energy-related contracts that were supposed kick in at some point in 2010. Is that correct? If so, can you just give us a sense as to the timing?

Rick Holley

I think what we’ve talked before at least on the supply side is talking to some very large energy companies—both in the US and also in Europe—about supply commitments so that they can serve renewable energy needs, and those discussions continue. None of those contracts at least at the present time have been signed.

Operator

Your next question comes from the line of Peter Ruschmeier – Barclays Capital.

Peter Ruschmeier – Barclays Capital

On the energy contracts, does your outlook for harvest include or exclude any assumption related to those volumes?

Rick Holley

It does not include. Our feeling is clearly if the market was stronger and we saw prices go up, we could increase to some extent our pulpwood harvest, but we’re assuming that other than supply agreements, that wood will get sold to the highest value markets. So if we see an energy outcome and it raises the market, that’s where the wood will go.

Peter Ruschmeier – Barclays Capital

Maybe further on the $15-$16 million ton harvest, how far in advance do you have to change that? I am trying to better understand the sensitivity to your forecast to changes in price. If price is up 10 or 20% above your current forecast, how quickly can you respond and can you give us a sense of your sensitivity and how you’d react to the market?

Rick Holley

I think if we saw prices that we thought for our high value saw logs were acceptable and they’d need to be much higher than they are today, I think we could respond very quickly. One of the advantages Plum Creek has in the market place is because of our footprint and our contractual relationships throughout the country, it gives us the ability to respond very quickly. So for instance, if in the spot market we saw an opportunity to get huge value for pulpwood or saw logs, we could probably get a contractor and within a week or two respond to that.

Peter Ruschmeier – Barclays Capital

David, did you hear you correctly that you’re expecting the mix overall of pulpwood to be down 1 million tons and the small diameter saw timber to be up 1 million tons?

David Lambert

Correct, and that’s for our southern segment.

Peter Ruschmeier – Barclays Capital

Can you help us understand the differential on price between the pulpwood and the small saw timer logs you’re talking about?

David Lambert

Yes. Pulpwood we’re trading at close to $11 per ton, and small saw logs or sometimes we call them chipping saw logs trade in the upper teens at $17 to $18 a ton, compared to a large saw log that’d be trading for $29 a ton.

Peter Ruschmeier – Barclays Capital

Looking at some of the trade publications, it looks like in the fourth quarter that some of the stumpage prices were up more than the delivered prices which would imply a reduction in cut and haul cost. I am curious if Rick maybe you can comment on how you’re seeing the cut and haul cost trends as you look at the market.

Rick Holley

We saw the cut and haul cost trends pretty stable in 2009 once diesel prices stabilized, so that was the thing that pushed them up and they came back down with fuel prices. I think you see an uptick in stumpage sales because everybody is concerned about availability of wood, and that’s really a spot market trend so a lot of users are looking to contract for some stumpage so that they have wood as markets improve, and we’ve sold more stumpage here in the last couple of months than we historically do as well just because that’s where higher prices were available in the market.

Operator

Your next question comes from the line of Chip Dillon with Credit Suisse.

Chip Dillon – Credit Suisse

First question is just to review the conservation sale. I think it was originally 320,000 acres and $510 million. It looks like it’s a little bit less than that in dollars if I add up what you’ve gotten, unless I just mis-added it; $150 in ’08, $250 in ’09, $89 million this year, and I just wanted to verify those numbers, and then also is the finial installment acreage about 78,000 acres?

Rick Holley

Yes. The transaction was originally announced at $510 million. We moved some things around as far as timing and some other adjustments for the past year, so we have been disclosing that the total is about $489 million on 310,000 acres in total.

Chip Dillon – Credit Suisse

So it’s 310,000 acres then?

Rick Holley

Yes.

Chip Dillon – Credit Suisse

Then we if we include that, obviously it is included in the 350 to 370, would that mean that roughly speaking, you would expect somewhere around 180,000 to 200,000 acres to end up being sold in the real estate segment in 2010?

Rick Holley

Probably not that high. We typically have been selling about 1.5% of our land as far some of our higher and better use programs and such.

Chip Dillon – Credit Suisse

I know you have done a great job reducing the debt level, and when you look at the next year, I know it’s pretty low, but what is your revolver situation? When does that come up for renewal?

Rick Holley

We have a revolver that matures in the summer of 2011. It’s a $750 million facility. Then we have a bank term facility, a total of $600 million, that matures in the summer of 2012.

Chip Dillon – Credit Suisse

As you pay down like you mentioned the $53 million in the first quarter, is that drawn against the 2011 one or the 2012 one?

Rick Holley

The 2012 is fully drawn because it’s a term, and the revolver, we can fluctuate that up and down, so we can temporarily borrow on that and pay down the other debt or we use proceeds from the transactions we are generating from our internal cash flow to make those payments.

Operator

Your next question comes from the line of Christopher Chun with Deutsche Bank.

Christopher Chun – Deutsche Bank

It seems like in recent weeks we have seen a nice rally in the products of some solid wood products despite this being a seasonally weak period. I was wondering if you had any thoughts on to what extent this might be sustainable and whether this might lead to a better timber pricing this year?

Rick Holley

We believe it is printed at about $280 per 1000. We think that’s going to come of a bit, call it 10%, but clearly lumber prices will be higher this year than they were last year. And if they hold at that level, there will be upside to the log price that we talked about in our guidance today. You’ll see higher saw log prices, be it in the West or in the southern United States. Whether that’s sustainable or not is largely going to depend on what the housing market does and how much repair and remodel comes backs and even industrial construction activity, and we’re hoping to see 700,000 or so housing starts this year, but that may be a bit optimistic, and that will certainly influence what happens to lumber prices and therefore saw log prices. A lot of this lumber is filling inventories; it is concern over wet weather. As we mentioned, lot of these mills especially in the southern United States are very short inventory, and therefore there is not a lot of lumber inventory in the system.

Christopher Chun – Deutsche Bank

Can you talk a little bit more about your decision to focus on second thinnings this year? Was that a strategic decision based on where you see markets or does that have to do more with just where in the growth cycle your trees are?

Rick Holley

It’s really where in the growth cycle our trees are. As you know we have been very focused here the last couple of years on first thinnings. A lot of this extra pulpwood that we have brought to market is first thinnings. Now we are back in a lot of those forests that had been thinned a few years ago. We’re into those and doing second thinnings, so it’s really a nature of that, and with that, you are going to get a fair amount of chip-n-saw or small saw logs and you are really required to do that, so if you say markets are weak for chip-n-saw logs, why don’t you reduce the harvest of that, it would really put us behind the curve, I think, on managing our lands in the most productive manner long term, so it’s really just a function of the biology and productivity of our lands.

Christopher Chun – Deutsche Bank

And then how much of an earnings bump will you get this year from that regime versus the greater pulpwood volumes that we saw last year?

Rick Holley

If you say it’s a million tons and the difference if $5 or $6 per ton, it’s $5 or $6 million extra.

Christopher Chun – Deutsche Bank

How much of an earnings contribution will we see from the third phase of Montana later this year?

David Lambert

The third phase of the Montana transactions has income of approximately $39 million.

Operator

Your next question comes from the line of Mark Weintraub – Buckingham Research.

Mark Weintraub – Buckingham Research

On the BCAP program, the $8 to $12 million, I just wanted to clarify if that is included in the guidance or is that additional to the guidance?

David Lambert

It’s included in the guidance.

Mark Weintraub – Buckingham Research

On real estate, Dave you had mentioned about 1.5%. You’ve got about 7 million acres, so about 100,000 acres or so, I assume that would be additional to the 60,000 acres. Is that right?

David Lambert

Out of the Montana transaction?

Mark Weintraub – Buckingham Research

Yes.

David Lambert

Yes.

Mark Weintraub – Buckingham Research

Can you tell us a little bit more about the HBU cells that you did? For instance, in the fourth quarter, you gave a little sense on the geography. Where they a bunch of very small transaction? Where there a mix of bigger and smaller? Just some color as to what type buyers are out there right now.

Rick Holley

They were a lot of smaller transactions, kid of in the same markets that we’d seen them in—Mississippi, Louisiana, and also in Wisconsin, and private individuals were the buyers. These were not TIMOs or any of those things. These were private individuals like you or me, 40, 60, 80, 160, that sort of size, in basically in those three markets.

Mark Weintraub – Buckingham Research

Are you largely anticipating that that’s going to fill the pipeline in 2010, or are you also assuming that there may be some larger non-strategic sales or how should we think about what you see for 2010?

Rick Holley

That’s predominantly what we’ll see. The individual investor will be the predominant buyer in all these different markets, whether it’s our non-strategic lands or HBU. We do see some conservation activities which obviously are not individuals, which will also be part of the numbers, but it’s going to be what we’ve been doing the last two or three years, but the activity has picked up a lot. We’ve seen a lot more investor interest, a lot more inquiries, and I think people are starting to come back to the market. Obviously they’re looking for deals. They’re buying lower value lands versus the higher value lands in Georgia, South Carolina, and Florida, but even in the Florida market we’ve seen investor interest start to pick up.

Mark Weintraub – Buckingham Research

In terms of gating, what’s the constraining factor? Is that the level of investor interest? Is it the manpower that you have at your disposal because you’re dong lots of smaller transactions? What’s the gating factor would you say on what you end up generating for revenue of these types of sales?

Rick Holley

I don’t know that there’s a gating factor. Typically you’ve got three times the listings for every sale, so you’ve got a lot of properties listed, we’re in the market place, we think we know what’s going to close. So it’s not a manpower issue. It’s not about getting transactions closed. Largely, even though investor interest has improved, there is still a lot of these much higher value properties we have in several states where the investor interest isn’t there at those prices, and we’re just not going to sell them, so if there is any gating interest, it’s just that in some of these markets we’re just not willing to transact.

Operator

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

Steven Chercover – D. A. Davidson

I was wondering whether you have seen any OSB mills that have been indefinitely mothballed starting to fiber up in order to restart later on this year?

Rick Holley

We haven’t seen any, but in several markets, people are starting to talk about it. They’re starting to look at wood supplies and understand the market, and obviously as you’ve all seen OSB prices have come back a bit. If we see that trend continue, I suspect you’ll see some of these previously mothballed and some of them pretty new plants come back online which clearly are not anticipated in the guidance we gave you today, so that would be upside on pulpwood.

Steven Chercover – D. A. Davidson

And I assume that’s the same situation for saw mills that have been indefinitely shut down?

Rick Holley

That’s exactly right.

Operator

Your next question comes from the line of Richard Skidmore – Goldman Sachs

Richard Skidmore – Goldman Sachs

Could you just talk about what happened with the SG&A line in the quarter relative to the third quarter, and then second question would be you mentioned some potential revenue from leases to some wind energy producers, and could you talk about that and what that means?

Dave Lambert

As it relates to SG&A, I don’t have the third quarter number, but looking year over year, we reduced our SG&A $22 million, and that comes really across the board from G&A reductions that happened in our resource operations and our timberland segments and the manufacturing, at the corporate level, and legal, IT, and other type of categories, so it’s pretty much across the board.

Rick Skidmore – Goldman Sachs

Look like the third quarter Dave was about $20 million of SG&A and the fourth quarter was…

Dave Lambert

We had a swing in SG&A from third to fourth quarter. This is primarily share-based comp. We outperformed our peer groups in the fourth quarter of the year, and that did have us do a catch up in accrual, and actually based on how we had performed in the third quarter, we had actually reduced that accrual substantially, so this was primarily just a significant swing in share-based compensation. I think that overall trends for the year are the ones probably to focus on.

Rick Skidmore – Goldman Sachs

Dave, just to follow up on that, can you quantify the sensitivity to the share price change and how that impacts the SG&A line?

Dave Lambert

Not really because it is a relative measure. The metric that changed is in what we have as a value management plan, and this is how we perform relative to the S&P 500, the REITs and industry peers, so you have to take everything into account. There is no dollar metric that would drive that, but when we perform above those, there is some increase in cost. Overall, the share-based comp expense in 2009 was about $6 million greater than what it was the prior year, I believe.

Rick Skidmore – Goldman Sachs

The revenue potential from the wind farm leases that you’re doing that you’re talking about.

Dave Lambert

We don’t have really hardly any in our current operations. We just started some operations in Maine, and we hope to sign up some additional ones, but there is not a lot material revenue from wind at this point in time.

Rick Skidmore – Goldman Sachs

Rick, as you look around your timber portfolio, there has been a number of mill closures that have been announced specially in container board and also uncorrugated free sheet, and how do you see that impacting your log volumes over the longer term and ultimately the timber values in those specific regions such as Western Montana?

Rick Holley

Clearly, we have been fortunate. The only large mill closure that impacted us and there was enough other capacity to pick up the volume was the IP mill in Louisiana. I know you’re referring to the announcement that Stone Container is going to close the mill in Missoula, and we’ve sold a little bit of pulpwood to that mill, and from time to time some residual chips, but if anything it is going to free up the market and help us supply long-term our MDF plant there in Kalispell, Montana, so we don’t think that’s going to have a material impact on us whatsoever. If anything, we found a lot of smaller timberland owners in Montana. We used to sell saw logs to that mill, and they were chipped up for chips, and those logs are now available to us at our mills at a very attractive price, so it shouldn’t have any large impact.

Dave Lambert

Let me correct myself on an earlier statement. On the share-based comp, I had to sign wrong; it is $6 million but it is $6 million less in 2009.

Operator

Your next question comes from the line of Chip Dillon – Credit Suisse

Chip Dillon – Credit Suisse

Could you let us know what your year end timber base was? I know at the end of ’08 it was 7.277 million acres, and my guess would be that you probably have as much if not more merchantable timber because you didn’t cut that much this year? Could you talk a little bit about that interplay?

Rick Holley

We’ll have that available that in the 10-K. We do have the acres information available. We were at 7,052,000 acres at the end of the year, but the inventory data we have not released yet.

Chip Dillon – Credit Suisse

But it’s reasonable to think that your inventory per acre went up a little bit just because of your holding back on the saw logs, correct?

David Lambert

That’s correct.

Operator

Your final question comes from the line of Joshua Zaret – Longbow Research

Joshua Zaret – Longbow Research

One of the interesting I guess events of 2009 was the strong imports of saw logs to China both in Canada and the US. Are you benefiting in this in anyway, out of the Pacific Northwest or do you expect to?

Rick Holley

We have seen a little bit incremental demand pull out of the Pacific Northwest for logs. One of the things we’re seeing is China’s purchasing of Canadian lumber. Exports of Canadian lumber to China are up sharply from where they were a couple of years ago, so there’s a little bit of demand pull starting to happen there.

Joshua Zaret – Longbow Research

I know Canada was almost a billion feet this year. Is it a species issues for you guys or will you be able to update if the opportunity is there?

Dave Lambert

If log prices are attractive, that will pull logs out of the Pacific Northwest and tighten those markets.

Joshua Zaret – Longbow Research

I really didn’t get a sense of how wet the woods are today, and let’s just talk soft woods, which is more important in the South versus where they were at the height of this problem. Can you sort of expand on that a little and give us a sense of how bad it is today?

Rick Holley

I was down in Mississippi, Louisiana, and Arkansas last week, and what my guess is that half the forests are inoperable, and I don’t what it was like two months ago. I know they got some 9 inches of rain in one day. It’s a severe problem, and most areas you can’t operate in today. They need two or three or four weeks of dry weather so that we can get into a lot of these areas. That’s why inventories are so tight in that region. So it’s a huge issue.

Joshua Zaret – Longbow Research

Is it better somewhat than it was three months ago?

Rick Holley

I think it’s probably better than it was a couple of months ago, but it’s not very good yet.

Joshua Zaret – Longbow Research

Thank you.

Rick Holley

Thank you everybody. We’ll talk to you next quarter.

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Source: Plum Creek Timber Co. Inc. Q4 2009 Earnings Call Transcript
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