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Executives

John Hobbs - VP, IR

Rick Holley - President and CEO

David Lambert - SVP and CFO

Analysts

Chip Dillon - Credit Suisse

George Staphos - Bank of America

Gail Glazerman - UBS

Christopher Chun - Deutsche Bank Securities

Peter Ruschmeier - Barclays Capital

Steve Chercover - D. A. Davidson

Mark Weintraub - Buckingham Research

John Tumazos - John Tumazos Research

Laura Sloate - Neuberger Berman

Plum Creek Timber Co. Inc. (PCL) Q2 2010 Earnings Call July 26, 2010 5:00 AM ET

Operator

Good afternoon. My name is Chanelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Hobbs, you may begin your conference.

John Hobbs

Thank you Chanelle. Good afternoon ladies and gentlemen and welcome to the second quarter 2010 conference call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the company and today, we have on the line Rick Holley, 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 1800-858-5347. I encourage you to visit our website www.plumcreek.com. There, you will find our press release and supplemental financial statements for the second quarter of 2010.

Before we begin, I remind everyone that certain of our statements today will be forward-looking involving known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ from those expressed or implied. These risks and factors are routinely detailed in our filings with the Securities and Exchange Commission. Following today's prepared remarks, we'll open the call up to your questions.

Now, Rick?

Rick Holley

Good Afternoon. We believe we are in the early stages of a slow recovery and demand is improving for most of the products that we have produced over the last year. Pulpwood markets continue to be strong by historic standards with attractive pricing and good demand levels. This demand is primarily a function of healthy operating rates for many of our pulpwood customers, supplemented by their need at the margin to produce relatively more pulpwood as residual wood chip supply from lumber mills remains constrained. Industrial demand for medium density fiberboard and plywood has improved as well with notable improvements across many industry sectors such as recreational vehicles, marine applications and concrete forms.

Fundamentally, lumber production and therefore saw log demand has improved somewhat over the past year. Industrial end markets for lumber has experienced the most strength. However, the largest end use market for lumber, residential construction remains weak and we expect it to remain so for the remainder of the year.

As we said in the last conference call, we believe a portion of the lumber price rally the industry experienced through the beginning of May was a classic inventory cycle as the lumber industry shifted its stance from inventory liquidation in the late 2008 and 2009 to inventory re-stocking in anticipation of an improved 2010 building season.

Lumber prices have fallen from their spring rally and although ahead of where they were a year ago, are approaching cash breakeven levels for many lumber operators. Lumber customers have been quick to react with many mills slowing production, making temporary downtime to balance supply with the current demand levels.

The demographic underpinnings for residential construction are strong. But we believe the recovery in these markets will be slow. We are taking a conservative stance with regard to the demand environment to the reminder of this year. With the weaker housing permit data that we saw in the first quarter, we expect second half lumber production and therefore, sawlog demand to be lower than our initial expectations. As a result, we expect our harvest levels to come in on the lower half of the 15 to 16 million ton range we planned for the year.

Within our real estate segment, interest in activity levels from families and individuals has improved from the low levels we saw in 2009. We expect activity levels for world real estate in the second half of this year to continue to track above the levels we saw during the same period last year. Dave will review our second quarter results and discuss our outlook for the third quarter with you and I'll come back and talk about some strategic initiatives. David?

David Lambert

We reported second quarter earnings of $0.21 per share above our guidance range for the quarter of $0.10 to $0.15 per share. Fundamental performance within our northern resources and manufacturing segments were better than we originally anticipated and our real estate segment sales were above expectations. $0.02 of the upside is attributable to lower than forecast land basis and income from the sale of equipment from our closed Pablo lumber mill added an additional $0.01 to earnings.

In the Northern resources segment we reported a $3 million profit, down slightly from the first quarter's $4 million profit. Higher sawlog prices nearly offset the effects of seasonally lower harvest volumes. Our Northern sawlog harvest was seasonally low at 484,000 tons as the spring thaw limits logging activity in the Northern regions during the second quarter. Our average Northern sawlog prices increased $7 per tons or about 12% during the quarter. Spot market prices in the Pacific Northwest improved, with saw log prices in the region up 19% quarter-over-quarter.

Pacific Northwest sawlog prices peaked in May, and then declined in June as sawmills in the region cut production in response to the fall in lumber prices that had declined to cash cost level.

Hardwood sawlog prices in the Northeast and Lake States increased during the quarter as well, up an average of 4% quarter-over-quarter as hardwood sawlog customers rebuilt low log decks to serve important hardwood lumber demand, improving hardwood lumber demand.

Our regional diversity will serve us well during the coming quarter. Sawmills in the Northwest have reduced lumber production in response to weaker lumber prices, and as a result sawlog prices have declined from their May highs. At the same time, hardwood sawlog markets are expected to be steady to up slightly during the quarter. Our harvest mixture in the third quarter will shift towards the more attractive hardwood markets, and as a result, we expect our average sawlog price to decline just $1 to $2 per ton from the second quarter average.

We expect our third quarter sawlog harvest to be between 550,000 and 600,000 tons, lower than the 632,000 ton harvest we conducted during the third quarter of 2009. Pulpwood harvest volumes were seasonally low at 343,000 tons and Northern segment pulpwood prices were stable, at an average price of $38 per ton. We expect our Northern pulpwood prices to increase about a $1 per ton during the third quarter and expect our pulpwood harvest to grow to between 475,000 and 525,000 tons.

In our Southern Resources segment, our second quarter operating profit was $24 million, down from the first quarter's $30 million profit. The results were driven primarily by lower harvest volumes and slightly lower pulpwood prices. The wet weather condition that impacted the Southern markets during the winter months moderated during the second quarter, and allowed customers to secure additional log supplies.

Southern sawlog markets during the second quarter can be separated into two distinct phases. The first half of the quarter was dominated by strengthening demand as customers replenish log decks. The second half of the quarter customers reduced operating rates in response to the falling lumber prices in weaker than expected housing activity. Southern sawlog prices were stable during the second quarter, but are expected to decline $1 per ton during the third quarter as customer log decks are full and timberland access remains good.

We reduced our Southern sawlog harvest by approximately 150,000 tons from the first quarter level to match supply and demand. The third quarter Southern sawlog harvest is expected to between 1.25 million and 1.3 million tons. Demand from pulp and paper customers remain good, but there were the spot market supply shortages that drove up log prices during the first quarter. As a result, average pulpwood prices corrected $1 per ton, but still averaged an attractive $12 a ton.

We expect our third quarter prices for pulpwood to decline $1 per ton from the second quarter level. We expect demand to remain good for pulpwood and expect third quarter Southern pulpwood harvest to approach 1.65 million tons. As always, we will continue to adjust our harvest plans in response to the market conditions, differing harvest in weaker markets to protect value and temporarily increasing harvest in attractive markets to capture value.

The Real Estate segment recorded revenue of $43 million and operating income of $26 million. Activity levels in this segment were a bit better than we had anticipated. Second quarter sales consisted of nearly 18,200 acres of recreation, higher and better used properties. The regional mix was consistent with the past year, with the bulk of the transactions occurring in lower valued Lake States and Gulf South regions. The average sale price is approximately $2,200 per acre. The company also sold 2,000 acres of small non-strategic land at an average price of $1,120 per acre along with a few small conservation and development properties.

Interest and activity in the rural land markets were stable. Montana, Georgia and Florida markets remain weak while activity was steady in the lower value markets such as the Lake States and the Gulf South regions. We expect third quarter real-estate revenues to be seasonally stronger between $50 and $55 million, slightly higher than last year's third quarter. We expect land bases will be between 20% and 25% of revenue.

We still expect 2010 real estate segment revenues to be between $350 million 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 be approximately 35% of segment revenue.

Profitability in the manufacturing segment improved to $10 million, up from the first quarter's $4 million operating profit. Income from the Pablo mill equipment sales accounted for $2 million of the second quarter profit. Operating results improved in each of the product lines when compared to the first quarter. Prices and sales volumes increased in each product line. Prices increased 4% for lumber, 13% for plywood and 3% for medium density fiber boards.

Sales volume of medium density fiber board increased 39% sequentially as the MDF markets were tight as a result of the Chilean earthquake. Lumber and plywood volumes were up 7% and 4% respectively. We expect third quarter operating profit in the segment to be similar to the first quarter's $4 million level as prices moderate from the second quarter high's in each product line and MDF volumes are reduced as Chilean supply returns to the market.

With little change in our debt levels, we expect third quarter interest expense to be similar to the second quarter's level and we expect full year interest expense from third parties to be approximately $80 million. With operating results in our manufacturing segment expected to be similar to the first quarter's results, we also expect to record taxes similar to the first quarter's $1 million benefit. In all we expect our third quarter income from continuing operations to be between $0.20 and $0.25 per share. We are narrowing our full year guidance range increasing the low end buy a nickel, we now expect to report 2010 income from continuing operations between $1.35 and $1.50 per share.

We have not altered our capital expenditure plans for the year and expect to spend between $75 million and $80 million during 2010. Reforestation makes up the bulk of our $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 shareholders. These investments are primarily advanced to the cultural treatments aimed at boosting the productivity for us. Now, I will turn the call over to Rick.

Rick Holley

Thank you, David. We are active managers of our timberland portfolio and we have not been shy about selling assets when others had been willing to pay attractive private marketing values for these assets. The assets we have sold have less attractive profiles and relatively low current cash flow yields compared to the balance of our Timberland portfolio. These selected non-strategic asset sales have not been used to fund our dividend. Rather we have used the capital generated by these transactions to repurchase stock and reduce debt, creating very attractive risk adjusted returns for our shareholders.

Over the past two years we have retired over $500 million of debt. We purchased over $400 million of stock and reinvested about $200 million an attractive timberland acquisition. During the second quarter, we used $50 million of cash sourced from transactions completed in the first quarter and in late 2009 to repurchase an additional 1.37 million shares of our stock at a very attractive average price of about $36 per share.

This is an attractive arbitrage opportunity for our shareholders. Selling an asset at private market value and buying good quality timberlands represented by Plum Creek stock at a significant discount to those private market values. Selling at full value and buying below intrinsic values always been a successful value creation strategy.

Additionally, these capital allocation decisions have increased our operational and financial flexibility during the economic downturn.

Our third party interest expense is down more than $65 million a year, and our share repurchases have reduced our annual dividend payment by $23 million from 2007's levels. This combined with our cost management efforts have reduced our annual cash needs by more than $100 million. We understand that effective capital allocation is one of the most important tools we have to create shareholder value.

Based on discussions we've had with our contacts, it appears that interest in timberland investment by institutional investors remain strong. Many of the have received new allocation from investors. However, there are very few quality timberland tracks on the market. As a result, timberland tracks and transaction accounts remain quite well. We continue to expect the supply of timberlands to be limited as there are very few natural sellers remaining in the market.

Market valuations continue to be consistent with our last quarter's point of view but they are down about 10% to 15% from the market peak. Our outlook for the remainder of the year remains cautious. We will continue to be conservative in our capital structure decisions.

Our bank line of credit matures next June and you will note on the second quarter balance sheet that we've allowed our line to go current. This is a deliberate decision on our part. With our line of credit price at LIBOR plus 42, this is a very attractively priced source of liquidity. We are in constant communication with our banks and are confident in our ability to refinance this line when the time is right. The capacity of our banking consortium has not been affected by the consolidation in the industry and a significant portion of the participation in our credit line is from Farm Credit Banks that remain in excellent shape.

The pricing improvement in bank markets has generally lagged the bond markets, but the cost of bank credit is slowly improving. With a solid group of banks behind the credit line, we see no need to rush to refinance incur a negative interest carry associated with it. A decision we will need to make is the size of our new line.

A $750 million line although available to us is clearly more than we needed. We'll evaluate our desire for excess liquidity versus the facility fees involved and decide appropriately. You will likely see us refinance this line of credit before the end of this year or in early 2011. We also had debt maturing over the next few years as well. Again, we are watching carefully the public debt markets with investment grade credit ratings and positive outlooks from both Moody's and S&P; we have good access to the markets at sub 6% pricing. We regularly evaluate our breakeven on our refinancing options, and again we'll expect to access markets in late 2010 or early 2011.

Not withstanding the slow pace of the economic recovery, we at Plum Creek continue to be very excited, more excited than we've ever been about our asset base and the significant cash flow growth, we expect to experience in the coming years. The unfolding economic recovery and the positive structural changes to North American supply and demand that are taking place in our industry bode well for the value of this company. We are well positioned financially to continue to make good operational and strategic decisions that maximize the value of each share of the company.

Now, we'll be glad to take your questions, Chanelle?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Chip Dillon with Credit Suisse.

Chip Dillon - Credit Suisse

When you look at the real estate that you expect to be sold in the second-half, will it be similar and its obviously excluding the Montana track, but will it be similar to what you've done year-to-date, do you think in terms of it mainly being recreational, mainly in the lakes and in the gulf region?

David Lambert

We see that trend continuing. We are just getting a lot more traction in some of these more moderately priced regions at this point in the economic cycle.

Chip Dillon - Credit Suisse

Got you and then just as a follow-up. I know Rick you mentioned that, you were seeing sort of levels in the market 15% to 20% down from the peak and you re saw it I guess the transaction last week with international paper that I think was reprised down 36%. I know that wasn't apples-to-apple but was there something different you think about that transaction than sort of what you guys are seeing?

Rick Holley

Well, I think it's probably almost unfair that was initially priced at $1,900 an acre by a company we have never heard of and obviously that transaction never got completed. And we are very familiar with those lands and they were quite frankly poor quality timberlands but they did have some entitlements in place, so there are some longer and probably very long-term development potential with them. But very poor quality timberlands are quite frankly at $1,223 an acre. That was probably a pretty good price for the quality of lands that were sold.

Chip Dillon - Credit Suisse

Got you.

John Hobbs

Late last year, Anthony Forest Products sold some very high quality timberlands at roughly $1,900 an acre, and during the earlier part of this year, Forest Capital sold some timberlands to Hancock in the South, probably more representative of the generally quality of southern timberlands for about $1,500 an acre. So, that's kind of what we're seeing, it's kind of the $1,500 per acre price for pretty decent quality southern yellow pine timberlands.

Chip Dillon - Credit Suisse

And I guess lastly, you mentioned there is not a lot of natural sellers, do you think that will change in coming years where maybe, where you as a company may see yourself circling back on offence a little bit or is it just too early to tell?

John Hobbs

Well, I would hope. We were hopeful that in this downturn in the economy that the institutional capital will might go elsewhere, and quiet frankly some of the team of customers who would be willing to sell their timberlands and there would be some attractive opportunities for us. We just haven't seen that yet, in fact if anything, we see more capital seem to come in the market. So, that's why in this market place we're going to be very patient with our capital and our time will come and hopefully we'll be in that buyer again.

Operator

Your next question is from the line of George Staphos with Bank of America.

George Staphos - Bank of America

Maybe say going off that last question from Chip, from your discussions with the team, I also expect that they can comment and that you can comment why do you think they are being allocated more capital if in fact there are, as you put it, few natural sellers of high quality land at this juncture?

David Lambert

I think from an asset allocation perspective, they've looked at the returns that have happened with timberland. They are happy with what happened during the cycle and people would like to invest in the space.

Clearly, people moved to the sidelines in 2009 and kind of sat on their capital. I think there is still the desire to be in timberland investment and they are just starting to kind of reliquefy their managers to make those acquisitions in the possibility of a $500 million deal is, I think it's very doable now where it wasn't a year ago. We saw down in Australia where there was a closing on a $500 million transaction. So people are looking for quality timberlands and there really just hasn't been that much availability in the market place.

George Staphos - Bank of America

Dave, do you think at all it reflects some of those leading edge investment issues that you've talked about in the past whether it's a supply constraint from DC or Biomass and pulpwood demand a longer term because of renewable energy, where do you think that's really not a factor here?

David Lambert

Now I think most it's just been priced in as a recovery. We have talked about how we're expecting a solid $10 ton improvement in sawlog prices when you get a housing recovery and such, and once they've dispatched with those then, they have done that, but I think the market is not fully priced, the optionality that it could occur with this Canadian supply or the bio-energy.

George Staphos - Bank of America

Okay. Two quick ones and I'll turn it over. As we were reverse engineer the guidance for the rest of the year relative to what you've already put up, you know from our math, you've taken down the second half about a nickel. It seems like from your prepared comments, it's because you're seeing maybe a bit more of a slowdown and housing than you would have anticipated three months ago. Would that be a fair characterization? Are there any other elements to the guidance adjustment that we should be aware of and given that backdrop and given what you're seeing in terms of land prices, should we expect it'll be even more opportunistic and aggressive with your share repurchase program or because of the slowdown perhaps should we expect you to be more cautious? Thanks and good luck in the quarter.

John Hobbs

I think, as we mentioned on our comments, George, we are kind of cautious and I would say cautiously optimistic even. The recent housing number and the permit numbers make us and I guess all of you on the call today a bit uneasy and this economy is very, very fragile and the job situation is not improving. So, we are not looking for a lot of improvement in the second half. In fact, we will see a little come-off from pricing for I think southern yellows pine sawlogs will be off a buck and we've lost some value and showing the Pacific Northwest sawlogs.

And manufacturing won't be quite as good in the second half because it had a great second quarter. So, that's some of our cautiousness, but we will continue to watch it, and if we see attractive value arbitrage between our stock price and what we believe these assets are worth, you'll continue to see us buy our stock back.

George Staphos - Bank of America

Do you anticipate that as being at a greater rate than what you've seen in the first half? Sorry, it's just as a follow-on.

Rick Holley

Yes. Well, we bought $50 million in the first half and I think it depends on where the price of the stock is. It certainly could be. If we see the stock fall off, and then it's very attractive at 36, if it gets cheaper than that, clearly it will be more attractive and we would be willing to buy more of it.

George Staphos - Bank of America

Thank you very much.

Operator

Your next question is from the line of Gail Glazerman with UBS.

Gail Glazerman - UBS

Can you talk a little bit about the energy end markets, particularly in light of maybe some of the slowdown in energy policy in Washington? Do you think that's going to early signs that that's affecting the indications of interest you've been getting from domestic buyers?

David Lambert

At this point, we are seeing strong demand from the European community, we mentioned earlier our 1 million ton a year contract that we put in place that would expect to start deliveries in 2012.

There's other parties in Europe. We are starting to see interest from the domestic players as well. Certainly, the policy being uncertain and the government being slow in implementing that. It doesn't help move that along but we are still starting to see continued new demand for installation of facilities that would produce wood pellets or other things for the domestic or export market.

Rick Holley

We would not expect to see any energy policy through Congress this year and we've read a lot about it here recently, all of us had. I clearly do not think you'll see any energy policy passed, the cap and trade piece of that is too controversial.

So it's probably, it will be handled by the next Congress but eventually, especially the renewable energy side will get some legs under it. But until it does, a lot of the large domestic utilities are going to be in a wait and see mode until they have to do it. But as David said clearly, the Europeans are in the market today and that's having some impact.

Gail Glazerman - UBS

Okay. And I'm wondering if you can make some comments relative to your experiences as the first timber REIT out there. The field of timber REITs is likely to get much bigger, given Weyerhaeuser’s recent announcement. Do you see any opportunity there, are you getting more indications of interest from dedicated REIT investors and anything you can do there? Any change that you might expect in terms of the index?

Rick Holley

I think it's very positive and clearly with Weyerhaeuser announcing to become the REIT, the REIT’s going to represent a pretty big piece of whole REIT-world and sets a net positive. I think we'll get some -- and all due respect to those of you on the phone, we're going to get some I suspect dedicated sell side REIT analyst coverage which will be a positive because lot of the dedicated REIT investors, know Green Street and some of these, these analytical houses and kind of look to them for guidance and buy their research. So, I think it's a net positive for all of us.

Gail Glazerman - UBS

Okay. And just one last question. You talked about the relatively good discipline on the lumber side with a slowdown in demand, are you equally confident that on the harvesting side, producers have been fairly disciplined there and that's the price decline that you are seeing in third quarter may not escalate, kind of moving through the balance of the year?

Rick Holley

Yes, I think they will continue to be as or has been over the last two years, a lot of discipline. I mean, we will be, we will hold our harvest down. I mean we are not going to more wood for sure as we reduced our Southern sawlog harvest in this last quarter.

So, we are going to be very disciplined and at least what we see in the market place, everybody else’s as well.

Operator

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

Christopher Chun - Deutsche Bank Securities

Hey, I don't want to belabor this IP sale too much but Rick, since you said that you were familiar with it, I was just wondering if you are surprised at all that they weren't able to get at least more recreational value because you guys sold recreational land this quarter at 2200 which seems pretty good compared to their sales at just over 1200. Now, I guess I'm just wondering if it was just poorly sold or whether their land was just had less recreational value.

Rick Holley

Well, two things. One is the market, market, market. It had a lot to do with where some of these lands were located. As I mentioned some of them had entitlements in place already. So, they were less attractive to your typical recreational buyer if you will and it was sold in bulk.

And when you sell that much acreage to one buyer, you end up taking a haircut I think on some of the lands. So I think that is the way we play, I hate to say a small ball. In most cases, for recreational lands, we sell them in smaller tracts because you get, you get more buyers because of the price point and you get a better price on a per acre basis.

So, I think some had to do with the markets, some of these lands, even our recreational lands we sell oftentimes are very well stocked and have some value from that perspective and these were not. So, they were a different type of land and less attractive. So I think the price they got, frankly for these lands is very good.

Christopher Chun - Deutsche Bank Securities

Yes, okay. Fair enough. And then switching gears, I just wanted your thoughts on the potential trajectory of price recovery as the housing market eventually recovers. I think there are some people making the arguments that at least in the initial stages of the housing recovery, we really shouldn't expect log prices to experience much of a rebound because land donors have been holding back on sawlog supplies.

So the supply will come back and forth as the market recovers, muting any price recovery. Just wanted to hear what you might think about that.

Rick Holley

Well I think, let's just say that housing recovers and lumber production goes back up 20-30% or what have you. Well you are going to have to have logs to serve that market. The problem is, is those logs are not in the market today and there is no contractors in the woods managing those timberlands today.

So, as we've said on a couple different calls, I think the governor on this engine is going to be contractor capacity and it's not just going to be there to allow massive amount of sawlog capacity come back in the market all at once.

It's going to be very muted. So I think that's what is going to help sawlogs to recover. If you see lumber production go up 20%, 30%, 40%, clearly the lumber pricing is going to go up, and log prices will go up, but they are not going to go up in the same fashion as lumber prices, they won't be quite that cyclical, but they will in fact go up.

Operator

Your next question is from the line of Peter Ruschmeier with Barclays Capital.

Peter Ruschmeier - Barclays Capital

Couple of questions, Rick, I was hoping you could update us or Dave on the number of acres in your buckets of non-strategic conservation, recreation and development as you see it, roughly today?

David Lambert

They are largely unchanged to what we presented earlier, There's about 1.6 million acres dispersed in the buckets, about 150,000 of development. The lion's share is in the HBU and recreation, about 1.1 million acres with the rest of it being small non-strategic and conservation.

Peter Ruschmeier - Barclays Capital

Okay, and can you remind us when your ten year anniversary is as a REIT and the significance of that Dave is from a tax perspective?

David Lambert

There is a ten year anniversary that's associated with the built in games packs associated with the timber company transaction that we did in 2001. We converted to a REIT in 1999, and there's no relevance there for us. Some of the more recent conversions to REITs that's when they started their built-in gains period, we did not have one when we converted to a REIT. But any built in gain associated with former land of a timber company would go away in October of 2011.

Peter Ruschmeier - Barclays Capital

Okay, and I guess in light of some of the comments earlier, about the market, and looking at fewer timber sellers in the marketplace and in light of your large non-strategic holdings, Rick, any comment on whether you see potential to accelerate some of these sales over the next year or two? We know you like your stock at 36 and we know you still have non-strategic sale of acres here.

Rick Holley

Well, clearly we are going to be, as we said in the comment we are willing. If we've got somebody willing to pay more than we can earn on a piece of property, we're willing to sell it, because of the value arbitrage we find between the private market values that we can sell an asset for and the public market values of our stock today.

So, as long as we see that arbitrage opportunity and we see those kind of values in the marketplace, we'll continue to execute on that strategy. As far as some of the lands in that 1.6 million acre bucket, we’re best served by our continuing to sell those in smaller parcels as opposed to trying to bulk them out in some manner, because we don't need the capital and to bulk them out you just take such a big discount. So we'll be very thoughtful about taking those lands to market, and we'll look at some other non-strategic timberlands from time-to-time as I said on this value arbitrage opportunity.

Peter Ruschmeier - Barclays Capital

Okay, that's helpful. Now just lastly a quick one on the supply chain, I am curious we had issues earlier in the year but that seems to have been worked out. Can you comment on what you are seeing in terms of logger availability, truck availability, whether the supply chain is functioning properly in your various markets?

Rick Holley

I would say on average it's tight. Logger availability and especially in places like Maine where a lot of the loggers come from Canada, it’s very challenging right now. In the Southern United States, trucking capacity is very tight. That was my comment a few minutes ago to Chris I believe is, even as the market improves and sawlog demand improves, they are not going to see a lot of wood in the marketplace because there is just nobody to harvest it, no one to deliver it. It's going to be very, very constrained I think. So that's what's going to help pricing. But most markets, our contract capacity is still tight.

Operator

Your next question is from the line of Steve Chercover with D. A. Davidson.

Steve Chercover - D. A. Davidson

Thanks good afternoon. Just two quick questions, one is a clarification, David, did you say that the land base will be 25% in Q3 and 35% for the full year?

David Lambert

20% to 25% in Q3 and 35% for the full year. And that 35% is averaging pretty close to our experience in the past two prior years.

Steve Chercover - D. A. Davidson

Good, thanks for that clarification. And then secondly, are there any export log opportunities that you can exploit right now or how is that developing? And might you also participate in biomass projects abroad and would you put any capital into chip plants or any of the power plants?

David Lambert

There is some opportunity in the market, the Chinese have brought some export logs from Oregon to Washington, and Japanese are always in the market, and we will sell through a third party some logs into the export market. The prices are a little more attractive than domestic market, but more importantly, it's a demand source which keeps pressure on the demand market in Oregon or Washington.

With respect to the biomass marketplace, we are going to participate as a supplier. We will not participate as a capital investor, either here in the United States or overseas. There is plenty of capital in the market building these facilities and we'll let somebody else put their capital risk and do something that they do a heck lot better than we do. We are good at growing trees and selling them, and then we will continue to do that.

Steve Chercover - D. A. Davidson

Great, a final question and I guess this is more for the South. If lumber remains depressed and volumes are really low, because housing just fails to gain traction. Do you think that ultimately pulp logs will start to appreciate again? I mean they were really quite a good offset when there was very little sawmills available.

David Lambert

Yeah, we have seen that pressure on the pulpwood as a result of reduced sawmill residuals. We had great pulpwood values early in the year that was whether driven, but we have had growth in demand from the pulp and paper sector. We are very optimistic about where pulpwood values are going. We think it's been an undervalued asset for the past decade and it's starting to show some of those fruits of where it should be more appropriately priced. So as you have any incremental demand from bio energy, we are pretty favorably disposed towards the pulpwood outcome.

Operator

Your next question comes from Mark Weintraub with Buckingham Research.

Mark Weintraub - Buckingham Research

Could you just repeat again what you were expecting the total harvests, the range to be this year and what would you consider your sustainable harvests at this juncture to be?

David Lambert

The total harvest for the year, we have given guidance of 15 million to 16 million tons and indicated especially given that we are probably going to produce a little fewer sawlogs than we anticipated being at the lower end of that range. From a sustainable harvest, we could be producing at a rate greater than that and it will grow overtime to north of 20 million tons.

Mark Weintraub - Buckingham Research

Okay. And I guess when you talk about that 16 million is that on 7 million acres or what's the acreage count that I should be using in doing an analysis?

David Lambert

Well, that's on our existing acreage, but also on a forward perspective. When we have given you the indications of growing our harvest to that 20 million ton level, that would assume that we were able to sell the full 1.6 million acres that we have positioned in these higher and better use in non-strategic categories and the remaining land based after selling those due to its productivity will be capable of producing 20 million tons a year. And we will be able to fully execute this revenue stream from a real estate program and have a growing harvest profile.

Operator

Your next question is from the line of John Tumazos with John Tumazos Research.

John Tumazos - John Tumazos Research

Would you be inclined to issue public debt or draw down your bank lines to buy stock as an alternative to selling non-strategic lands issue arbitrage between the public and private values?

David Lambert

We are relatively conservative, John. I don't see us leveraging up our balance sheet to buy back the stock, but if we can kind of on one hand capture a full private market value through a demonstrated transaction, take that and reinvest it back in purchasing our stock, that just is a win-win guarantee transaction for us.

Operator

Your next question is a follow-up from Chip Dillon with Credit Suisse.

Chip Dillon - Credit Suisse

Hi. The question I had was just to make sure the total acreage we have is right and it would seem like I guess with the timber sale in Montana that this year you are probably going to end up I guess selling somewhere close to what or reducing your acreage by about 300,000 acres, and that would get us down to about 6.7 to 6.8 at year end. Is that pretty consistent with I guess the revenue and the guidance for Real Estate?

David Lambert

Yes, that's fair. Our acres being sold this year through the business are a little bit more than would be typically because it's focused on lower value HBU in the non-strategic, in the traditional year if you were to fast forward five years I mean you could expect to sell 110,000 to 120,000 acres a year.

Chip Dillon - Credit Suisse

Got you. And then when you mentioned the 16 million, which would be obviously off of a timber base that would be declining more slowly as you just mentioned. When do you think we could get there if the demand, obviously the demand is not there, but when the housing market gets back to something closer to normal, when do you think you could get to a 20 million ton rate and how long do you think what would seem to be a 6.5 million acre system, how long it could sustain at that kind of harvest level?

David Lambert

It won't be available in five years, but it probably could be in 10, based on our age classes and once that's there that's not a short temporary peak that cycles back down. That would be viewed as more of a sustainable long-term production level.

Chip Dillon - Credit Suisse

Sort of a sustained yield basis once everything is there. And is it fair to say this is as one of this covered you got for a long time that it seemed like, Rick, that like in early to mid 90s before back in the MLP days, then you were harvesting I believe more than you were growing, but since in the last obviously five years or so that's slipped around partly because of the market and maybe probably because of the actions taken in the past. And so you can see in 10 years that will start to move back through. Is that a big picture way of looking at it?

Rick Holley

Yes, absolutely win rate MLP spread because we were largely a company in the Pacific North West with very slow growing older timber stands, so we were harvesting in those days more than we were growing.

Really the acquisitions we did in the South back in '96 and more importantly the merger with the timber company in 2001 really transformed the company and our harvest profile and again these investments were the making over the several years in silviculture really enhanced the growth of our southern forest.

Neither of these forest, we own in Oregon also grow very fast. And, so we have a really productive group of assets today, and so that's why you can sell 1.6 million acres and still have a harvest that goes up 15% over the next 10 years.

So and it will stay as David said really at that level and the perpetuity and again let's assume we don't buy another acre, and we clearly hope the markets will allow us to be (in there for) the timberlands again because we think we do a pretty well and can get a good returns out when the prices are right.

Operator

Your final question is from the line of Laura Sloate with Neuberger Berman.

Laura Sloate - Neuberger Berman

You have answered pretty much all my questions just any update on the Canadian situation?

Rick Holley

Well Canadian situation with respect to the volume out there or the timber?

Laura Sloate - Neuberger Berman

The volumes out there and the beetle problem?

Rick Holley

Yes, the only update that we have is we have said consistently is probably over the next five years, you are going to see the amount of timber resource coming out of both British Colombia and now more New Alberta, diminish it's going to come down over the next probably 15 years by half of the harvest level and sustain itself with that level for like 60 years will be in a much lower level.

So as markets recover we should see a heck of lot less Canadian lumber in the market place which really bodes well for manufacture, both in the West and the Southern United States. The Canadians are harvesting that timber as rapidly as they can but it's also deteriorating much quicker than they initially anticipates.

Laura Sloate - Neuberger Berman

Any update on Moose value and what's on going there? Is this been approved?

Rick Holley

Yes, the Moosehead Lake project in May was approved 70 by the Land Use Regulatory Commissions, one of the environmental group did appeal it, so it's in appeal process right now, but we expect the project to be upheld through the appeal, and we can start working on that project today even though it's under appeal and we are starting to do that.

So it's very exciting for us and we got some entitlements there that were very important to us, and also the people who stayed in Maine, and lot more long term certainty of operating there.

And thanks all of you and we will talk to you next quarter and enjoy the summer. Bye.

Operator

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

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Source: Plum Creek Timber Co. Inc. Q2 2010 Earnings Call Transcript
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