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Executives

John Hobbs – Vice President of Investor Relations

Rick Holley – President, Chief Executive Officer

David Lambert – Senior Vice President, Chief Financial Officer

Analysts

Chip Dillon – Credit Suisse

Gail Glazerman – UBS

Christopher Chun – Deutsche Bank

George Staphos – Bank of America Securities

Claudia Hueston – JP Morgan

Mark Weintraub – Buckingham Research

Peter Ruschmeier – Barclays Capital

Steven Chercover – D. A. Davidson

Plum Creek Timber Company, Inc. (PCL) Q1 2010 Earnings Call April 26, 2010 5:00 PM ET

Operator

Welcome everyone to the Plum Creek first quarter earnings conference call. (Operator Instructions) Mr. Hobbs, you may begin your conference.

John Hobbs

Thank you. Good afternoon ladies and gentlemen and welcome to the first quarter 2010 conference call for Plum Creek. I am 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 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 2010.

Before we begin, I would 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 will turn the call over to Rick.

Rick Holley

Good afternoon. We are pleased with our first quarter results. Sawlog and pulpwood prices were better than expected, particularly in the U.S. South. We increased our Southern pulpwood harvest above our initial plans to take advantage of very attractive spot market pulpwood prices.

Real estate segment sales were $4 million above the top of our guidance for this segment. Manufacturing posted better than expected results. Our business has continued to do a very good job managing costs. Our customers have experienced some significant improvement in end-product prices. For example, first quarter structural panel index prices were up 22% from the first quarter of 2009. Framing lumber prices rebounded 51% over the past year. These gains have extended into the second quarter. Structural panel prices are now 51% higher than the first quarter of 2010 average and premium lumber prices are 23% higher. Pulp and paper product prices are on the rise as well.

These improved prices have increased our customers’ ability to pay for logs and that has translated into higher prices for both sawlogs and pulpwood. We appear to be in the early stages of an economic recovery but risks remain. We believe a portion of the lumber and structural panel price rally we are experiencing is a fairly classic inventory cycle as the inventory shifted its stance from inventory liquidation in late 2008 and 2009 to inventory restocking over the past several months.

However, the efforts to rebuild inventories have been hampered by constrained log supplies in the U.S. South due to wet winter weather. Additionally the Chilean earthquake on February 27th further increased spot demand for certain finished products as shipments from that country abruptly halted. In total these factors created a tight supply environment for lumber, structural panels and market pulp. We are assuming the rally in end-product prices may correct as the supply chain is replenished but we do not expect prices to return to the low levels we saw in 2009.

Our customers are well aware of this potential dynamic and as a result have been very disciplined in their response to increased demand levels. Most have responded by adding incremental overtime hours rather than adding new shifts.

Dave will review our first quarter results and discuss our outlook for the second quarter with you now. David?

David Lambert

We reported first quarter earnings of $0.54 per share. This included an $11 million below the line gain on the sale of certain natural gas assets. As a result, we reported income from continuing operations of $0.47 per share, above our guidance range of $0.34 to $0.39 per share.

Performance within each of our segments was better than we had originally anticipated. In the Northern Resources segment we reported a $4 million profit, an improvement from the fourth quarter’s $1 million loss. The improved results were driven by higher sawlog prices and lower seasonal road expenses. Our average Northern sawlog price increased $3 per ton or about 5% during the quarter. Spot market prices in the Pacific Northwest continue to improve with sawlog prices in a region of nearly 15%. Pacific Northwest sawlog supplies remain tight as landowners continue to restrict harvests and sawmills increased production in response to increasing demand and higher lumber prices.

Hardwood sawlog prices increased during the quarter, up an average of 9% during the quarter as hardwood sawlog customers entered the year with very low inventories and increasing concerns about the near-term availability of logs. Northern segment pulpwood prices were stable at an average price of $38 per ton. Pulpwood harvest volumes were slightly lower than fourth quarter’s level.

In the Northern Resources segment harvests seasonally decline in the second quarter to their lowest levels of the year as thawing spring weather limits timberland accessibility. We expect our second quarter harvest will be between 725,000 and 750,000 tons, slightly lower than the 770,000 ton harvest we conducted during the second quarter of 2009. We expect Northern sawlog prices to continue to improve with average prices up $2-3 per ton during the second quarter. Softwood sawlog prices in the west should continue to advance as mills compete for limited supply of available logs. We expect our average Northern pulpwood price to be stable during the second quarter. In aggregate we expect the seasonally low harvest volumes will result in a slight operating loss for the Northern Resources segment during the second quarter.

In our Southern Resources segment our first quarter operating profit was $30 million, up $13 million from the fourth quarter’s $17 million profit. The improved results were driven by higher prices and higher harvest volumes for both sawlogs and pulpwood across the south. As we discussed in our last call we are shifting our 2010 harvest focus more towards second thinning, a harvest that produces a mix of pulpwood and small diameter sawlogs.

As planned, our sawlog harvest volumes increased to 1.27 million tons, up 280,000 tons from the fourth quarter. Southern sawlog stumpage prices increased 10% or $2 per ton as improving lumber prices spurred customer log demand while wet weather hampered customer efforts to rebuild depleted log inventories during much of the quarter. During the first quarter southern pulpwood prices increased sharply as customers faced acute log shortages in the face of wet conditions.

Our average Southern stumpage for pulpwood increased $3 per ton or 30% compared to the fourth quarter. As a result of very attractive spot market prices and strong customer demand, we increased our pulpwood harvest 225,000 tons above our original plan. The wet weather conditions that impacted the southern markets during the past six months have moderated and timberland accessibility has improved over the past few weeks. This has allowed customers to rebuild their log decks to more comfortable levels. In general our sawlog customers’ optimism is improving but many remain wary of a decline in end-product pricing. As a result, most are adding production cautiously by extending operating hours and utilizing overtime rather than adding new shifts.

We expect our second quarter prices for both Southern sawlog and pulpwood to hold steady at first quarter levels. We are planning to hold our Southern sawlog harvest fairly steady between 1.2-1.3 million tons in the second quarter and we plan to increase our Southern pulpwood harvest approximately 75,000 to 100,000 tons above the first quarter levels. As always we will continue to adjust our harvest plans in response to market conditions; deferring harvests in weak markets to protect value and temporarily increasing harvests in attractive markets to capture value.

The Resources Segment recorded revenue of $99 million and operating income of $62 million for the quarter, just above our initial expectations. As we mentioned in our last call the first quarter results included a $32 million sale of a large, non-strategic land in the U.S. South that captured a little over $1,300 per acre. The sales price is reflective of the specific level of stocking and age of the timber on this property and is consistent with our view that industrial timberland values are down approximately 10-15% from their 2008 highs.

In addition, we completed $40 million of sales consisting of two conservation properties; one in Wisconsin and the other in Arkansas, totaling 35,000 acres at an average price of $550 per acre and an aggregation of 23,000 acres of small, nonstrategic properties in the Lake States at an average price of $890 per acre. The balance of the land sold consisted of approximately 6,400 acres of small, nonstrategic lands at an average price of $860 per acre and more than 9,000 acres of recreation lands at an average price of more than $2,100 per acre.

Interest and activity in rural land markets have improved from the low levels we saw in the first half of 2009 with inquiries and transaction counts up significantly. Interest from families and individuals is building but they remain very value conscious. The shift in regional activity we have noted in the past several calls continued in the first quarter. The relatively lower valued regions of the Lake States and the Gulf South continued to be the most active while activity in the higher valued regions such as Georgia, Florida and Montana remains relatively low.

Land sales results are seasonal with the second half of the year typically much stronger than the first half. This year is no exception. In fact, we believe the seasonality will be more pronounced this year because the inclement winter weather restricted many prospective buyers’ access to properties during the past six months. Despite this we expect second quarter real estate revenues to be between $35-40 million. This is similar to last year’s level after taking into consideration the $38 million large nonstrategic land sale then completed.

We expect the segment’s second quarter operating margin to be lower than typical because we estimate that land sales basis will be approximately 40% of revenue for the second quarter. We continue to expect 2010 real estate segment revenues to be between $350-370 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 sales basis will be approximately 35% of segment revenue.

The manufacturing segment returned to profitability during the first quarter, reporting a $4 million operating profit. Results improved in each of the product lines; lumber, plywood and medium density fiberboard. Sales volumes increased in each product line reflecting stronger demand as customers sought to replenish inventories and respond to improving end-market demand. We expect the manufacturing segment’s strength will carry on into the second quarter and expect results to match or beat those of the first quarter. Business conditions have been better than we initially thought and as a result we expect our full-year results in this segment will surpass our initial $10 million profit estimate for 2010.

Our other non-timber resource segment reported operating income of $11 million, about $5 million higher than typical for this segment. The results include $5 million we were paid to release our mineral interest in a timberland property we were leasing from a third party. We expect the segment results to return to the $4-5 million level in the second quarter.

During the first quarter the company collected $2 million from the delivery of qualified biomass under the terms of the Biomass Crop Assistance Program (OTCPK:BCAP). As many of you know the Department of Agriculture has decided to suspend the program until the final rules are published later in the year. Once the rules are out we will determine the extent of our further participation in the program. Our outlook for the remainder of 2010 assumes no additional income from the program.

In all, we expect our second quarter income from continuing operations to be between $0.10 to $0.15 per share. As a result of our better than expected start of the year we are increasing our full-year guidance range by $0.05. We now expect to report 2010 income from continuing operations of between $1.30 and $1.50 per share.

Now I will turn the call over to Rick.

Rick Holley

Thank you David. As you have heard our markets are recovering and we are cautiously optimistic about the prospects for the remainder of the year. Our outlook and plans for 2010 are based on the assumption of a slowly unfolding economic recovery. We believe the sawlog price gains we have experienced are sustainable in light of our customers’ demand and improved profitability.

We are mindful of the risks so our forecast for the second half of the year is conservative with saw timber prices remaining at second quarter levels. As a result, there is an upside opportunity should underlying demand and log prices strengthen beyond our forecast. We are encouraged by the progress we have experienced. We also understand we are in the early stages of economic recovery so we expect to be conservative with the free cash flow we generate this year.

The management team at Plum Creek is more excited about the long-term prospects for value growth in our portfolio than any time that I can recall. While we welcome a recovery from the economic downturn our enthusiasm for the portfolio of assets we manage stems equally from the inherent growth in our timber stands and the growing cash flow that they produce. Layered on top of the cyclical and biological driven cash flow growth we see structural shifts developing over the course of the next several years that bode well for timberland values and future cash flow.

We have discussed many of these fundamental views and the potential impact of renewable energy development during our investor morning in March. I encourage you to visit the Investor section of our website and take the opportunity to view and listen to that presentation.

Now we will be happy to take your questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Chip Dillon – Credit Suisse.

Chip Dillon – Credit Suisse

Could you update us on where you stand in terms of share repurchase? You bought some stock last year and I think you bought like a million in the first quarter. Is that going to be a priority this year?

David Lambert

The $1 million you saw in the first quarter that was basically a function of when management redeems our restricted stock units; those that are sold for tax purposes. So we were not active actually in the markets in the first quarter. The last time we bought stock was in the first quarter of 2009. We still continue to see the shares attractively priced relative to private timberland values. We have been conservative with our excess cash flow that we have generated at this point in the cycle.

Chip Dillon – Credit Suisse

When you look at the full-year range of what you expect from the real estate sales, I notice and just to help make sure I get these numbers right, it looks like you sold just about 99,000 acres and got $99 million. Is the mix we saw in the first quarter kind of a good proxy for what we will see for the rest of the year? Or do you think that mix will change a lot and the per acre value could be higher or lower?

David Lambert

The per acre value should be much higher. The average of $1,000 per acre you articulated is well below the average. Included in that quarter was two conservation parcels that averaged $550 per acre. So these had much lower values than our typical properties. We also had a stronger mix of our nonstrategic lands which go out the door at about $900 per acre. As we move more towards a normal mix of higher and better use, having a higher percentage of what is sold we would expect that value per acre to be much higher.

Chip Dillon – Credit Suisse

The range you gave for the full-year also includes the third installment of the 2008 transaction? Could you confirm it does include that and how much that is?

Rick Holley

It does include it and that is $89 million and is scheduled to close in the fourth quarter.

Chip Dillon – Credit Suisse

How many acres?

David Lambert

69,400.

Operator

The next question comes from the line of Gail Glazerman – UBS.

Gail Glazerman – UBS

I appreciate your color on the market and developments with inventory. I was wondering if maybe we could dig into that a little bit further. Maybe some commentary on where your customer log decks stand today, how quickly you think conditions could normalize in the South and any incremental color there.

David Lambert

Log decks in the south went from very tight due to the wet weather. Where the weather has dried out, as we have indicated, over the past several weeks it is not as much a hand-to-mouth situation now as it was before. The levels are a little bit more comfortable. As demand is still building for end-products though there is still going to be strong take outs from those. I think it is a better situation for them than it was during the first quarter.

Gail Glazerman – UBS

In terms of the different end-customers, more aggressive buying behavior from the paper mills and the pulp mills on the wood product side?

David Lambert

Generally we saw pulpwood prices in the south up $3 per ton. We had expected it to be up $1 per ton. So prices improved $2 per ton beyond what our expectations had been going into the quarter. So I think we are seeing very strong operating rates in the paper sector and they have the ability to pay. With the wet weather they made sure they were able to secure wood. Given our dynamic land base even though we had wet weather we were able to increase our pulpwood harvest a little bit above what our expectations were to take advantage of what was very attractive markets.

Gail Glazerman – UBS

It sounds like your wood product customers are being quite conservative which is understandable. Given how far prices have rallied, are you a little bit surprised? Are there any signs of people starting to build log decks at mills that have been idled?

Rick Holley

We really don’t see that at all. I think they are all concerned this is more of an inventory replenishment as opposed to any real end-product demand improvement in the marketplace. I think as we go into the second quarter and we start to see the markets continue to be reasonably strong I think you will start to see them not only add wood to their decks but also perhaps bring on shifts that they have been reluctant to do thus far.

Gail Glazerman – UBS

Going back to the pulpwood harvest is that something you think could be sustainable through the rest of the year? Or do you think you will be giving it back in the second half?

Rick Holley

Our pulpwood harvest for the balance of the year we would expect it to be roughly in line with what you saw in the first quarter. We were able to kind of overcome the seasonably wet weather but in the second quarter we indicated harvest of pulpwood should be up about 75,000 tons. It should be in that range for the balance of the year. Probably the fourth quarter we are going to be a little bit down compared to the others.

Gail Glazerman – UBS

On the land sales, it looks like you are keeping your full-year guidance so you are pushing some stuff maybe a little bit more towards the back half of the year. How much visibility do you have into that channel right now?

Rick Holley

The visibility we have is really with inquiries we get from potential customers. As you might expect people come and look at a tract of land and then they come back and look a second time and then they try to get their financing if they are financing; get their own financial situation lined up. Then they make an offer and contracts are signed. Normally from an inquiry to a sale it could be 2-4 months. What has been going on in the first and second quarter we will see those resulting transactions really in the third and fourth quarters. That is always that way. Part of the dilemma has been it has been difficult for people to see lands because as you know it has been very wet in the south and hard to get on properties. The same for different parts of the country. Now that the weather is better you see more traffic and therefore a lot of those closings will be later in the year. We feel very good about the forecasting we have.

Gail Glazerman – UBS

In terms of the overall level of activity X being able to get out to land compared to maybe a year ago?

Rick Holley

The inquiries are much higher than they were a year ago at this time.

Gail Glazerman – UBS

You discussed BCAP. I am wondering if there are any developments and what your view is on renewable energy in terms of legislation in Washington. Anything positive or negative or anything at all happening there?

Rick Holley

Certainly we have an energy bill already through the house. There was one coming out of the Senate. It got kind of set aside at least temporarily. I think Congress and the Obama administration once they get this financial reform bill complete next on the agenda is the energy bill and I think they will get after it certainly in the second half of the year.

With respect to BCAP we expect it to resurface probably in the later part of the year; September at the earliest. It will be smaller than the opportunity that it was. We factored no opportunity into our forecast here so it is all upside. As we mentioned on the call we realized about $2 million worth of income from it in the first quarter. It will be back. They are working on the rules now and it will be a different bill than it was initially.

Operator

The next question comes from the line of Christopher Chun – Deutsche Bank.

Christopher Chun – Deutsche Bank

I like your discussion of what is going on with product prices recently. I was wondering if you have any insight into what has been going on there just in the last couple of weeks when it seems like from already fairly elevated levels the price has actually seemed to be accelerating. Do you have any informed opinion on what is going on there?

David Lambert

I think what we have seen is in the old days the distribution level carried vast quantities of inventory. People really had depleted that and even as they tried to restock they are trying to target much lower levels of inventory. So any net demand whether it is inventory replenishment or modest cyclical improvement is able to pressure the supply chain a lot more than we saw in the past. We have had uninterrupted increases in lumber prices over the several weeks running and at some point it is probably going to pause or do some modest pull back because this can’t continue on. The supply chain is very sensitive at this point in time.

Christopher Chun – Deutsche Bank

I also wanted to follow-up on your comments that you thought your nonstrategic sales in Louisiana was consistent with your previous comments that maybe the core timberland market was down about 10-15% from their highs. It seems to be that would put the core timberland market at about in the 1,500 range in the South versus our 1,300 or 1,320. Can you talk about what the characteristics were that account for that difference?

David Lambert

When we look at the parcel we sold the average age was about 25% lower than the average age of our typical southern timberlands. The tons per acre was less. It is just a little bit younger property and as a result doesn’t carry quite that value. So we tried to adjust for those characteristics.

Christopher Chun – Deutsche Bank

In terms of the conservation land you sold I think you said it was Wisconsin and Arkansas. Could you give us a breakdown of how much was in each area?

David Lambert

In Wisconsin it was roughly 18,000 acres. Roughly 17,000 acres in Arkansas.

Christopher Chun – Deutsche Bank

Stepping back a bit to sort of a bigger picture in terms of your land sales strategy, you have been very good about giving us guidance in one-year increments but I was wondering if you could think about the next 2-3 years approximately how much land you are going to want to sell, what the mix is going to be and how you think about making those decisions.

Rick Holley

If you look at the portfolio of lands in our core timberlands today it is about 1.5 million acres which was in our presentation in March. We kind of think about moving that over the next 15 years, and again that number is going to change as it has over the last 2-3 years. If you look at the mix of the 1.5 million acres of it or 2/3 is HBU. I think going forward if you look at the mix of the 1.5 million acres being the majority HBU that is what we will see going forward. Clearly we are comfortable with kind of a run rate character of this business of $300 million a year. Again it is higher this year because of the large conservation deal that we are closing in the fourth quarter for the third phase of the Montana transaction. It is kind of a $300 million a year business.

Operator

The next question comes from the line of George Staphos – Bank of America Securities.

George Staphos – Bank of America Securities

A couple of questions on resources. First of all, in terms of harvesting costs for the quarter are there any costs that could dissipate fairly easily as we get to the second quarter. Could you put a bracket around how much that might help you in 2Q versus 1Q? I looked at our model and resource for the quarter the harvest costs wound up being a little bit higher than what we would have modeled.

David Lambert

Not really. We saw pretty reasonable log and haul costs that we in the first quarter haven’t had upward pressure at this point. We have seen some higher diesel fuel prices that could creep in. Trucking is relatively in short supply especially in the U.S. South but we don’t anticipate a material decrease in our log and haul costs going into the second quarter.

George Staphos – Bank of America Securities

On that logistics point you made should we expect any further pressure from trucking and diesel into 2Q at this juncture from what you see or should it be pretty stable?

David Lambert

I think we are going to be able to manage it and we are not anticipating that but I think the risk is you are going to see some slightly higher log and haul costs.

George Staphos – Bank of America Securities

In terms of Southern Resources I was wondering if you could give us a bit more color and your thoughts on direction for the second quarter. On the one hand if I heard you correctly you said harvest should be relatively flat, maybe up slightly especially as far as pulpwood goes. Then again your customers are wary and they think maybe it will be a partial correction in product prices in the second quarter as you get through the restocking phase. You expect to be holding timber prices into the second quarter from 1Q and it also sounds like at least in terms of your forecast the [inaudible] second half. What ultimately should we be expecting from a profit standpoint either up or down in 2Q for Southern?

Rick Holley

I think profitability for the Southern Resources segment should be very good again for the second quarter. Volumes, as we said, should be roughly the same and prices will hold up. Again, even if we see lumber and plywood prices come down a bit they are at very high levels today, much higher than they were a year ago and many of these mills operated then. I think customers are going to continue to want to operate and they are going to need wood. One of the things you just mentioned about trucking costs and log and haul, one of the concerns we have voiced to you many times is the whole contracted capacity issue. We are starting to see some of that with the trucking capacity today. Even when those markets come back and more wood is attempted to be delivered whether there is a logging contracting force there to do it is really a big question long-term. Plum Creek is pretty well positioned that way. I think you will see a very good second quarter in Southern Resources.

George Staphos – Bank of America Securities

Did you have any damage from the storms and the tornados in the south we heard about over the weekend? Can you give us a little bit more color about what was in that land lease termination consideration and why you got $5 million for that?

Rick Holley

There was no damage from the tornados to any of our lands in the south. Really the $5 million is a piece of land we have leased. An energy company wanted to do some exploration on that. We sold our sub-surface interest in that for $5 million. It was a very attractive transaction for us and good for certainly the land owner as well.

Operator

The next question comes from the line of Claudia Hueston – JP Morgan.

Claudia Hueston – JP Morgan

I was wondering if you could provide some color on the land basis for the full-year? You said it would be higher in the second quarter. How should we be thinking about it for the full-year? If you have any guidance on how we should be thinking about tax going forward.

David Lambert

Land basis for the year as a whole will be up 35% we estimate which is kind of typical where in the second quarter we said it would be at 40% so margins are going to be a little bit lower in the second quarter. As we look at taxes on a going forward basis, we expect the tax expense to be kind of similar to where we saw it in the first quarter. Kind of zero to maybe positive $500,000 to $1 million.

Operator

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

Mark Weintraub – Buckingham Research

Curious, you mentioned you expected saw timber pricing to be flat in the south even though we had this very dramatic run in lumber including in the last month or so. Why wouldn’t you be able to get perhaps some higher saw timber prices given what we have seen going on with lumber?

David Lambert

I think there is certainly an upside opportunity. I think our customers definitely have a much better ability to pay. Mills have gone from where they were losing money to where now they are making attractive margin. They will look to probably grow volume. At the same time we see some of the seasonal tightness in the supply dissipating as things dry out so that could counteract the increase in demand. We have taken a conservative posture at this point. We don’t disagree that things could grow higher but that wasn’t in the basis for our guidance.

Mark Weintraub – Buckingham Research

Is the visibility on the second quarter fairly established at this point and the potential upside was primarily in the second half of the year or could it actually even pan out in the second quarter?

David Lambert

It could happen a little bit later. We are probably pretty comfortable. We indicated log prices rising in the Northern segment on the sawlog side a couple of dollars but being flat in the south.

Mark Weintraub – Buckingham Research

You had mentioned you were being conservative with your cash flows. What would it be you would be looking for where you wouldn’t characterize what you want to do with your cash flows as conservative and if you weren’t being conservative with your cash flows as you kind of weigh buying back stock, increasing the dividend or looking for timberland acquisitions is there a particular bias at this juncture as to where a more aggressive use of cash flow would center?

Rick Holley

We are always looking to add to our resource base and if we found some attractively value timberlands we would certainly look to do that. We still have $50 million of authority to repurchase our stock. Stock has done quite well of late so we haven’t chased it up and we will look at that as an opportunity if we see weakness in the price. We want to grow the dividend. As soon as we see sustained growth in our core cash flows especially from our resource business which we are starting to see you will see us focus on growing the dividend as well. So it is really all three and looking for the best opportunity to create value for shareholders.

Mark Weintraub – Buckingham Research

To get that sustained growth in your core cash flows are there certain variables that you think are going to need to be achieved be it a certain level of housing starts? What is the way you are monitoring that?

Rick Holley

You look at housing and this year I guess the consensus estimate is 650-680 or something and next year about 950. So if we see the continued growth in the economy and housing improve to those levels this year and next year I think you could see us, everything else being equal, looking to grow the dividend next year because I think we are going to see much better cash flow from our core timber business as a result.

Operator

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

Peter Ruschmeier – Barclays Capital

I was curious, the basis of land sold over the years has been somewhere between 25-40%. As we think about your 1.5 million acres both HBU and nonstrategic, any rough sense as to what you would peg that blended portfolio at? Is it in line with the basis that we have seen previously?

David Lambert

It is somewhere in the range but probably in the 30-32% on average. It would be less than what we are expecting this year.

Peter Ruschmeier – Barclays Capital

I think you mentioned on your saw timber volumes I think you said more of your harvest reflects second thinning this year. Can you help us understand the degree to which your sawlog harvest is potentially a lower diameter log? Is it a noticeable difference? Is it an inch or two inches in diameter smaller or is it really not that meaningful?

David Lambert

Somewhat. We had that manifested in the fourth quarter of last year where the harvest mix was skewed a little bit more towards smaller diameter logs. We are still experiencing that.

Rick Holley

It is several inches. If you look at a sawlog being 11 inches the average in some of these second thinning is 8 inches. It is a much smaller log relatively speaking and therefore, it carries a much different value in the marketplace.

Peter Ruschmeier – Barclays Capital

Is it fair to say your log prices have been going up even though your mix is not as rich?

Rick Holley

Right. If it had not been for the mix the sawlog prices would have been up even higher than they are. Some of the reason they are not up higher on a relative basis is the mix.

Peter Ruschmeier – Barclays Capital

Looking at your bio fuels opportunity I am curious if you have an update on your off-shore customer. Have you begun to harvest for that customer? If not when does that begin and are you entertaining further dialogue with additional customers or is it just too early to make that assumption?

Rick Holley

We are talking to other customers at the same time. That contract starts deliveries in 2012.

Peter Ruschmeier – Barclays Capital

I was hoping as well to get an update to the extent you have one on your natural gas sale, the $5 million benefit was not necessarily any strategic shift. Can you remind us of your strategy of mineral rights and if you are thinking about that any differently today than you have been in the past?

Rick Holley

We really think about it opportunistically and we had an opportunity to redo a contract with a customer and get some more value up front for a natural gas lease we have. As you know we are spending a lot of time on construction materials. We have a couple of wind projects we are working on. The entire natural resource area is kind of in the early innings but there is a lot of very interesting things going on especially in the construction materials side.

Operator

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

Steven Chercover – D. A. Davidson

First of all, given you beat the high end of your first quarter guidance by $0.08 and I think you said manufacturing is going to be better than you had anticipated. Did your full-year guidance actually go down?

David Lambert

No, we raised our guidance for the year by $0.05 from where it had been before.

Steven Chercover – D. A. Davidson

I realize that.

David Lambert

Are you saying with the first quarter beat [is that] slightly there?

Steven Chercover – D. A. Davidson

Beat by $0.08 from the highest end of the previous guidance. I thought maybe you might have tightened up the lower end of the range or something along those lines.

Rick Holley

We will probably tighten up the lower end of the range at the end of next quarter. It is a $0.20 range right now. We beat the first quarter by $0.07 and we raised it by $0.05. You are right. It is conservative? Perhaps. But we will tighten it up at the end of the next quarter as we see the second half of the year. Again, we tend as you all know to be a bit conservative and until we see the light of the second half of the year and whether this economic situation which we see kind of improving, is it real or is it really ahead fake. So we are really waiting to see. We will know more really here in the next month or so.

Steven Chercover – D. A. Davidson

I think some of your friends in the Pacific Northwest are starting to ramp up export logging activity. Do you have any opportunities along those lines?

Rick Holley

We do sell some of the higher end logs, Douglas Fir logs, through a log broker. We don’t do it directly anymore. Some of them will find their way into the export market. It is pretty minor volume; a couple million feet for us. It is not a whole lot of volume.

David Lambert

You are right; we have seen signs of incremental demand coming from the exports recently.

Rick Holley

That is a good thing because that will help tighten up the domestic market which is starting to improve with increasing demand for lumber products. So even if we don’t sell directly, indirectly we will be a beneficiary.

Steven Chercover – D. A. Davidson

Obviously saw mills and panel mills can certainly afford to pay for logs more than they could a year ago or even six months ago. They need you and you need them. How do you characterize the balance of power between yourselves and your clients?

Rick Holley

Hopefully we have a great partnership with our customers and that is how we intend it. You can’t make lumber without logs. Logs could be used for a variety of different products be it lumber, plywood, OSB, paper products or even an energy outcome so we have perhaps more options to go to market than they have options to buy. I don’t like to think of it in terms of one has power over the other. I hope we have a mutual degree of business opportunity together. That is the only way it is going to work. Even though there are spot market opportunities this is a long-term business and want to have long-term relationships with all of our customers.

Steven Chercover – D. A. Davidson

So the supply side has been a huge part of the equation in terms of appreciation of lumber and panels in the last little while, I guess going forward they have to be disciplined but you just hope to share the spoils of better pricing? Is that how you would look at it?

Rick Holley

Yes. That would be great.

Operator

At this time there are no further questions. Please proceed with your presentation or any closing remarks.

Rick Holley

Thank you everybody. We will talk to you next quarter.

Operator

Thank you for joining today’s conference call. You may now disconnect.

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Source: Plum Creek Timber Company, Inc. Q1 2010 Earnings Call Transcript
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