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Executives

David Lambert - Chief Financial Officer and Senior Vice President

Rick Holley - Chief Executive Officer, President and Executive Director

John Hobbs - Vice President of Investor Relations

Analysts

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

Peter Ruschmeier - Barclays Capital

Joshua Zaret - Longbow Research LLC

Christopher Chun - Deutsche Bank AG

Mark Weintraub - Buckingham Research Group

George Staphos - Bank of America Merrill Lynch

Richard Skidmore - Goldman Sachs Group Inc.

Steven Chercover - D.A. Davidson & Co.

Chip Dillon - Crédit Suisse AG

Gail Glazerman - UBS Investment Bank

Plum Creek Timber (PCL) Q3 2010 Earnings Call October 25, 2010 5:00 PM ET

Operator

Good afternoon. My name is Casey, and I will be your conference operator today. [Operator Instructions] Thank you. Mr. Hobbs, you may begin your conference.

John Hobbs

Thank you, Casey. Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2010 Conference Call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the company. Today, we have on the line Rick Holley, President and CEO; and David Lambert, Senior Vice President and CFO. This call is open to all investors and members of the media. However, the Q&A portion of the call is intended for the professional investment community only. We ask that other participants please follow up with any questions by calling me at 1-(800) 858-5347 following the call. I encourage you to visit our website, www.plumcreek.com. There you will find our press release and supplemental financial statements for the third quarter of 2010.

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

Now, Rick?

Rick Holley

Good afternoon. Market conditions in our Timber and Manufacturing businesses were better than we initially expected, with average sawlog prices holding steady and pulpwood prices remaining at attractive levels. Our Manufacturing business continued to perform well, controlling costs and delivering better-than-expected operating profit and cash flow.

The Real Estate segment didn't experience the top line growth we had anticipated. Interest and purchase activity in rural lands held steady, but we did not experience the increase in sales that we had forecast. In this environment and economic uncertainty, individual buyers continue to be cautious, especially as it relates to what is truly a discretionary expenditure. Although the recovery from the recession continues to move slowly, our business has improved over the past year.

David Lambert will review our third quarter results with you and then discuss our outlook for the fourth quarter. David?

David Lambert

We reported third quarter earnings of $0.20 per share at the low end of our guidance range, all of which is attributed to lower Real Estate earnings. In the Northern Resources segment, we reported a $5 million profit, up from the second quarter's $3 million profit. Seasonally higher harvest volumes and slightly higher pulpwood prices drove the improvement in results.

Our harvest volume increased 27% to about 1,050,000 tons from the seasonally low second quarter level. Pulpwood accounted for roughly 80% of the 220,000 ton increase. Pulpwood markets remained attractive throughout the quarter, but high paper mill operating rates translating into good pulpwood demand. This helped move pulpwood prices up a $1 to $39 per ton.

During the fourth quarter, we expect pulpwood demand to moderate, with scheduled downtime planned at some customer facilities. As a result, we expect pulpwood prices to drift down about $1 per ton during the fourth quarter. We expect our Northern segment pulpwood harvest to decline seasonally to 350,000 tons to 400,000 tons.

Average Northern sawlog prices held steady at $66 per ton. This reflects our regional and species diversity as increasing prices for hardwood sawlogs offset the decline in Oregon's softwood sawlog prices. Hardwood sawlog demand was good from pallet customers to high-end hardwood veneer customers. Black cherry was particularly in high demand. As a result, our average hardwood sawlog prices increased 6% in the Northeast and Lake States regions.

Softwood sawlog prices were stable in Montana and declined in Oregon. Oregon prices appeared to have bottomed in September as a result of growing export demand. While prices in the Oregon markets have improved, they remain at unattractive levels and we continue to limit our harvest there. We expect Northern sawlog prices to hold steady during the fourth quarter and expect our sawlog harvest volume to be 10% below the third quarter's level, primarily due to lower harvests in Oregon.

Turning to the South. In our Southern Resources segment, our third quarter operating profit was $25 million, up from the second quarter's $24 million profit. The improvement was driven primarily by higher harvest volumes, offset somewhat by $1 per ton decline in pulpwood prices. Dry weather and favorable logging conditions allowed customers to maintain healthy log inventory levels. Both our sawlog and pulpwood volumes increased relative to the second quarter. However, most of this increase came from pulpwood, where values remain relatively more attractive. Pulpwood prices did decline $1 per ton as expected, but sawlog prices remained firm at second quarter levels.

Looking forward, we expect prices for both pulpwood and sawlogs to remain stable during the fourth quarter. We plan to harvest approximately 1.4 million tons of sawlogs and the pulpwood harvest to approach 1.6 million tons during the fourth quarter.

Total harvest for the year for the company will be approximately 15.2 million tons, about 4% below 2009's level. 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 operating income of $19 million on revenue of $39 million, which was below our expectations of $50 million to $55 million. As Rick mentioned, we did not see the growth in sales we'd anticipated as individual and family buyers remain cautious in light of the current economic conditions. Additionally, the book value of the lands we sold during the quarter, or our land basis, was 36% of revenue, which was about 14 percentage points higher than our estimate going into the quarter. This non-cash basis expense reduced our operated income by an additional $5 million or $0.03 per share, but had no impact on cash flow.

The regional mix of lands sold during the quarter was consistent with the past two years, with most transactions occurring in the lower-valued Gulf South and Lake States regions. Per acre values were also consistent with the values we've experienced over the past several quarters. Sales consisted of nearly 10,000 acres of recreation HBU properties, with an average sale price of approximately $2,300 per acre. We also sold about 10,250 acres of small, non-strategic lands at an average price of $1,025 per acre.

Nearly 3,000 acres of conservation lands captured average values of nearly $1,900 per acre. We expect Real Estate segment revenues in the fourth quarter to be between $140 million and $160 million. This includes the $89 million third and final phase of the Montana Conservation Sale. Revenues from our typical recreation and non-strategic land sales are expected to grow during the quarter to $50 million to $70 million.

We expect land sale basis will be between 45% and 50% of revenue. This is usually high, as our Montana lands in this closing have a higher book value than our other typical properties. One of the fundamental assumptions in our outlook for 2010 was the expectation that the economic recovery would be gaining traction during the second half of the year. Given the continued economic uncertainty, buyers remained cautious, and we have revised our outlook for our Real Estate segment revenues. Total Real Estate sales for the year projected to be between $320 million and $340 million, or about 8% below our earlier guidance.

Profitability in the Manufacturing segment was $7 million, better than expected, but down from the second quarter's $10 million operating profit, which included a $2 million profit from the sale of equipment sales from our closed lumber operations. Sales volumes declined in each of our product lines; lumber and plywood volumes were up 5% and 6%, respectively. Medium density fiberboard volumes declined 21%, as the temporary demand increase created by the Chilean earthquake waned. Product prices were mixed, lumber prices declined 6% and plywood prices declined just 2%. However, MDF prices increased 4% as our mix shifted to more valuable products. We expect the fourth quarter results in Manufacturing to be seasonally weaker, with lower sales volumes for each product line and lower pricing for our panel products. In all, we expect the segment to report a profit of approximately $1 million during the fourth quarter.

Assuming no change in our debt levels, we would expect fourth quarter interest expense to be similar to the third quarter's level, and we expect full year interest expense to be less than $80 million. With operating results from our Manufacturing segment expected to be seasonally lower, we expect to record a small tax benefit during the fourth quarter. In all, we expect fourth quarter income from continuing operations to be between $0.40 and $0.47 per share, and to report 2010 income from continuing operations between $1.28 and $1.35 per share.

We continue to execute our reforestation and civic cultural treatments that will grow our future harvest. We expect to invest roughly $75 million during 2010. About half of these capital investments are reforestation, including the planting of about 60 million seedlings per year. The other half of our capital investment is discretionary. These are primarily investments aimed at boosting the productivity of our timberlands.

I'll now turn the call over to Rick.

Rick Holley

Thanks, David. While current conditions are challenging, we see excellent prospects for cash flow growth in the coming years. The fundamental demographics of the United States are positive, and timberland remains an attractive asset class to both individuals and institutions. Our growing harvest profile, combined with an economic recovery and the positive structural changes in timber supply-demand, will meaningfully grow the cash flow from our timber resource segments, and help drive the future value of Plum Creek.

In the midst of the recession and slow recovery, Plum Creek has continued to perform well financially. We have strengthened our balance sheet and reduced future cash obligations by opportunistically paying down debt and repurchasing our stock. Our geographically diverse assets continue to grow in value, and we remain focused on growth in the value of the company in everything we do.

Cash flow from our operations this year, exclusive of any changes in working capital, should be approximately $450 million, resulting in a dividend payout ratio of about 60%. Even without the Montana Conservation Sale that will close in the fourth quarter, our payout ratio would still only be 75%. So we remain very comfortable with our dividend. One of the structural changes to the North American market is the impact of the mountain pine beetle on North American lumber supply. The listing of the northern spotted owl as an endangered species in the early 1990s structurally changed North America's timber supply. We believe the effect of the mountain pine beetle will result in a similar lasting structural impact.

The British Columbia Ministry of Forests estimates that more than 45% of its merchantable pine inventory was dead at the end of 2008. And it projects that nearly 70% of its merchantable pine inventory will be dead by 2015. This long-term supply issue is starting to have an impact in the viability of some lumber mills in Western Canada. Canadian producers faced with a strong Canadian dollar, poor current demand environment and lasting supply issues, are looking ahead and acting. Two lumber mills have recently closed, specifically citing impact to the pine beetle as part of the closure rationale. We believe these actions are clearly indicators of what is to come more broadly in the future.

At the same time, Canadian lumber producers and U.S. West Coast log exporters are noting growing demand from the Far East, particularly China, as it seeks new sources of softwood logs and lumber in its growing markets. Combined, we see these two forces, increased demand from China and a decline in supply in British Columbia, leading to a stronger sawlog price as domestics sawlog demand recovers from the deep cyclical trough. This will be a positive for U.S. timberland owners, as well as U.S. lumber producers.

As we discussed last quarter, our bank line of credit matures next June. We are in communication with our banks and are confident in our ability to refinance this line on attractive terms. We plan to refinance our line of credit before the end of this year. We evaluated the appropriate size for the new line as the current $750 million line that we have, have provided more liquidity than we've ever needed. You should expect us to reduce the line to $600 million.

We also have about $300 million of long-term debt maturing next year, mostly in the fourth quarter of 2011. Again, we are carefully monitoring 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 attractive pricing. We would expect to refinance this debt later this year.

Looking ahead, I'm personally more excited about the future and the prospects for Plum Creek than ever before. The economic recovery and the positive structural changes to North American supply and demand taking place are positive drivers for the value of Plum Creek and our ability to generate much stronger cash flows in the future. We are well-positioned financially to continue to make the operational and strategic decisions that maximize the value of each share of the company.

Casey, we'll be happy to take questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from George Staphos from Bank of America.

George Staphos

I guess, first question I had, when we look at the basis on the Real Estate result for the third quarter, why did it trend higher than you were initially, perhaps, forecasting for the third quarter? The first question. The second question related to that is, when did you see the weakness begin to surface in terms of your Real Estate sales? And, I guess, aside from the obvious, had it materialized and did it materialize in any one region more significantly than the other?

David Lambert

With respect to the Real Estate, we didn't see it weaken during the quarter, it just didn't accelerate the way that we were hoping it to during the quarter. We still produced kind of levels consistent with where we had been in prior quarters. But with the economic conditions being kind of weak, the headlines, we just saw our customers not really willing to open up their wallets at this point in time to advance their discretionary expenditures as much as we had originally thought it might be. With respect to the Real Estate basis, many of the properties, it depends on which region they're coming from, it's not really a function of kind of the profitability we're making. It's more a function of the historical book basis, and that's sometimes hard to estimate in advance which properties we'll be moving. So we just ended up with, I guess, an adverse mix from an earnings reported basis. There's no real story behind that.

Rick Holley

George, the positive news there is, it's really focused on cash flow and it had no impact on that. So these land sales still generated significant amount of cash flow even though the earnings were lower.

George Staphos

Was there any region that didn't pick up as much as you had anticipated, Dave or Rick?

Rick Holley

No, I don't think so. I think as Dave said, there were a lot of inquiries, there's a lot of people in the ground, there's a lot of people looking at these properties. I think a real -- personally, I think the real issue right now is the election that's going to be held here shortly. And the uncertainty with tax policies and environmental policies for some buyers and that sort of thing, what that means to the economic climate as we get into 2011. So I think there's a very conservative approach to most buyers right now, and I would expect to see some of that freed up after the election as people have more certainty of what's going to happen to the general economic climate, especially tax policy.

George Staphos

Harvesting costs, how were they relative to your expectations for the quarter? It seemed like pricing itself was in line or better than you were forecasting?

David Lambert

Excuse me, George, I didn't hear the first part of that. What cost?

George Staphos

Harvesting cost, Dave, sorry about that.

David Lambert

Harvesting cost continued to be managed very well. When you look at our cost lines, there were no variations with prior quarters that drove earnings one way or another.

George Staphos

To the extent that you've seen capital continue to be allocated to potential investors in the sector that you have conversations in the market. What kind of mid-cycle do you think investors are looking to in terms of a more normalized housing environment? Are we looking at the next two years or are we looking middle of the decade? What's your vantage point in terms of the market expectation at this juncture?

Rick Holley

George, I think this is going to be a very slow recovery. And demographically, this country can support kind of the 1.5 million to 1.6 million starts kind of on a run-rate basis. But from my view, is we don't get there for five years. So, I think, we're going to -- this year, it's about 600,000 starts, next year, 700,000, maybe a little better. I think we're just going to see a slow improvement. The unemployment numbers are still poor, and the economic growth coming out of a recession, you'd expect to see a 5% to 7% and it's at 2.4%. And next year maybe only 2%. So, I think, it's going to be a really slow climb back to what's going to be more run-rate at 1.5 million to 1.6 million starts.

George Staphos

Does that mean that the BC supply constraints also take till the middle of the decade until we really see them...

Rick Holley

I think as we start to see improvement in the markets, I think we're going to see better pricing for sawlogs, at much lower housing and production numbers than we have historically because the Canadians, historically, we're at 30%, 35% of the market. As this all impacts BC, it's going to be 25% of the markets or 20% of the markets. That will have a big impact and help log prices in the U.S.

David Lambert

A couple of things that will help when it rebounds, and we alluded to them, exchange rate environment is very different today than it was in the past. So I think when you have real demand come back, Canadian lumber is going to behave differently, and we're going to get much better pricing response. And during this market weakness, they're developing these export markets in China. And so when we do see our fundamental demand come back, and people reach out for wood, I think we're going to see a much steeper cost curve than we have historically and that will be a very positive for driving log values.

Operator

Our next question will come from Chip Dillon from Credit Suisse.

Chip Dillon - Crédit Suisse AG

Rick, it seemed like the Manufacturing segment, which I know isn't a big focus, but it certainly seemed to come in quite strong compared to certainly what we've heard from other competitors and where prices are for some of the more commodity products. Could you talk a little bit about what might be going on there? And as we think about 2011, could we start to see it, normal to see that business above breakeven every quarter of the year, especially given that you expect to stay above breakeven in the fourth quarter?

Rick Holley

Well, to answer the second question, absolutely. We would expect that business to outperform above breakeven every quarter even in 2011, although we've not done the budget yet. As far as the strong performance, if you look at our business, our Lumber business is really all pine boards. They get sold to the repair, remodel and other segments, and that's held up reasonably well. And then we have two plywood plants that make more specialty industrial plywood, that's held up. We don't make sheeting and housing-related products, and our medium density fiberboard again is focused. Two lines, a thick board line and a thin board line and again, are focused on very niche value-added type products. So if you look at our average pricing for those products, it's much higher than our competitors. And the other thing that our people have done is a terrific job of managing downtime, managing costs, that not over-producing and we see weakness in the market, we take some production off. When we strength, we bring it back on, and a lot of flexibility among our people. So it's really different markets that we're serving vis-a-vis the competition.

David Lambert

Maybe just to illustrate that, when you look at our specialty plywood, AC markets were down about 5% for the quarter from where they were in the second quarter. Where if you look at OSB kind of more of the commodity housing application, its pricing was up 50% from where it had been the prior quarter. So you can see that we have a lot higher value products and a lot -- better price stability.

Chip Dillon - Crédit Suisse AG

And just to refresh our memory, I know as we get to the last installment of the Montana sale, how many acres are in that chunk that's going to be sold in the fourth quarter?

Rick Holley

The last sale has 70,000 acres for revenue of about $89 million. The average selling price of that is a little bit lower, certainly, than it was last year, reflecting the mix of those properties.

Chip Dillon - Crédit Suisse AG

So it looks like the end of the year, if you -- based on the guidance you gave us, you should end the year with about, and correct me, around 6.8 million acres, would that be a good place to assume you start 2011 in terms of your inventory?

Rick Holley

Yes, it's in the ballpark, yes.

Chip Dillon - Crédit Suisse AG

Lastly, just in terms of the -- it seems like you guys have been correct in not refinancing your credit line because of the rates, rates are terrifically low. Any view in terms of the timing? I know you mentioned that you have a due in June. Is there any tax reason or any other factor that would make you want to take care of that before year end or do you think it makes sense to sort of see what would it look like in early 2011?

David Lambert

I think as Rick articulated in the call, we would anticipate completing both our bank line refinancing and our 2011 bond maturities before the end of this year.

Operator

Our next question will come from Gail Glazerman with UBS.

Gail Glazerman - UBS Investment Bank

Just following up on Chip's last question, do you have any sense of what type of interest rate change there might be on the refinancings, relative to what you're paying today?

David Lambert

We’re not going to comment specifically, but the bonds that mature next year, we got like 7.75%. We're going to be able to reduce our interest rate significantly on a long-term debt. And rates will go up on the bank market. Our old rate was significantly below market. But that facility is largely undrawn on a day-to-day basis. So even with a little bit higher market pricing on the bank line, it's not going to raise our interest rates. We would expect interest expense for the company to continue to decline next year.

Gail Glazerman - UBS Investment Bank

And just going back to George's line of questioning on land sales, do you have any visibility into land sales? I guess, you’re confident that you will see the type of pick-up ex Montana that you're looking for in the fourth quarter?

David Lambert

Yes, we have kind of -- we build a book of business each quarter. So we're looking out, and we have a number of transactions that are lined up. So the guidance we've given you of kind of $50 million to $70 million of Real Estate, excluding the Montana transaction, that is going to be stronger than the $39 million that we did this quarter, and we feel good about that.

Gail Glazerman - UBS Investment Bank

And, Rick, I appreciate you said you don't have a 2011 budget yet. But with those type of assumptions that you're putting out there, maybe going from 600,000 to 700,000 starts, can you give us any thoughts on both what harvest might do and what we should be thinking about for Real Estate ex the Montana sale that's been boosting Real Estate for the last couple of years?

Rick Holley

If you take Real Estate and our guidance is $320 million to $340 million and you take out the $89 million from Montana, that kind of gets you in the mid-200s. And I don't think that's a bad number as we look ahead to 2011. As we look at our harvest level for next year, we're at 15.2 million tons this year. My guess it will be up a bit but unless we see very strong prices, you're not going to see it north of 16 million tons. So, it's probably somewhere between where it is now and 16 million tons. So all that volume we've been deferring, we will not bring it back to market these price suggest. So, now, if market improves more rapidly, and we see better housing and we see higher prices, then we'll advise you guys and adjust it appropriately. And we would expect with even slightly improving housing situation that we'll see as good or not better performance from our Resource business in 2011.

Gail Glazerman - UBS Investment Bank

I think there was some news flow on the BCAP program last week. I was just wondering if you could give us an update and is there anything that we should really be thinking about for 2011?

Rick Holley

They've come out with a new rule and basically, the value of product in the BCAP program is the same as it previously was. But they've limited the amount of products. It's really waste and it's fire-damaged timber and those kinds of residuals that are available to the program. So going forward, it's going to be a much smaller program for the industry, and we really look at it as a way for the industry to kind of build a supply chain in anticipation of down the road of the bigger bio-energy business as we get renewable energy and other opportunities in the marketplace. So I wouldn't build a lot of value on it. As we see that change, we'll clearly give you guys some indication what it means to us. But it's going to be fairly modest.

Operator

Our next question will come from Christopher Chun from Deutsche Bank.

Christopher Chun - Deutsche Bank AG

I was fairly impressed with the per acre price that you guys had on the conservation sale. Could you give us a little more color on that?

David Lambert

There were a handful of different sales. It was not one particular transaction, and they were spread out in a number of regions. Just, for example, there's like a 400-acre sale down just the outside of Mount Rainier National Park, and we $2,500 an acre for that. And there were a number of other transactions in kind of that range. Typically, sometimes in the past, our conversation sales will come from like the Lake States region, where they're generally a lower value property, so you might only be doing $1,100 or $1,200 per acre for the conservation.

Christopher Chun - Deutsche Bank AG

So it was largely a mix issue?

David Lambert

Correct.

Christopher Chun - Deutsche Bank AG

Do you see any trend that's different lately compared to what you've been seeing in recent quarters in terms of per acre prices on the land sales?

David Lambert

No, we saw our higher and better-used land sales, they're up about $100 compared to the second quarter. But, I mean, we've really seen those prices remain flat throughout the entire year. And by region, if you look at the percent of sales coming from the Gulf South and the Lake States area, that's been holding in at about 2/3 of sales, which is not -- these are our lower value regions. As we kind of move back to a more normalized program, you would expect that to kind of flip flop and you'd see strength coming out of the Montana and Georgia, Florida markets. And so we'll have a better sales realization once you return back to normal markets. Right now, it's being driven by these lower-value regions.

Christopher Chun - Deutsche Bank AG

Then in terms of the market for timberland. Rick, I believe that earlier this year, you commented that you thought that values were down perhaps 10% to 15% from the peak and that may be discount rates that private buyers were using might be up about one percentage point. Do you still feel that way or do you see anything different that has developed in recent months?

Rick Holley

No, Chris, there really hasn't been any transactions. I don't think there were any other than that one property that was quickly resold at IP, transact in the second quarter. There was no transactions of size in the third quarter at all. So, I think, our best evidence in stuff that we've looked at over the last few months would say, the markets are up 10% to 15%. The buyers that we talked to said their discount rates are up 100 basis points, and so that's the best we have to go on. But even today, not only there haven't been no transactions, there's nothing in the market that is quality, if you will, that we would be interested in.

Operator

Our next question will come from Peter Ruschmeier from Barclays Capital.

Peter Ruschmeier - Barclays Capital

Dave, maybe a question for you. Can you confirm, it looks like $51 million of buybacks in the quarter, and can you remind us the average price point?

David Lambert

We bought shares earlier in the year in the second quarter, so there was no activity this quarter, and what we bought in the second quarter was just about $36 per share.

Peter Ruschmeier - Barclays Capital

And remind us if you would, your authorization, what's remaining?

David Lambert

We have a $200 million authorization currently in place.

Peter Ruschmeier - Barclays Capital

And, Rick, I'm curious if you can elaborate on how you're thinking about priorities for free cash flow? Are you willing to consider acquisitions or do you see it as, you mentioned there's not much in the market. Do you prefer buybacks? Mention, if you would, as well on the capital structure, you mentioned in your press release a conservative capital structure. What kind of range of capital structure are you comfortable with?

Rick Holley

As far as the capital structure is concerned, when you keep debt below 35% of our value and it's probably 25% today or less, so we feel very comfortable with our current capital structure. It's very conservative. And until we see this market notably improve, we're going to continue to manage the company and our balance sheet in a very conservative manner. With respect to capital allocation, if we saw what we have found to be attractive timberland investment that gave us good returns, we'd be all over it. We have the capital certainly to execute on that. In the meantime, if you had a dollar to spend and given where timberland values are today and what we could buy our stock at today, I'd use that dollar to buy stock. But even thinking about that, we're going to continue to hold on to our capital and manage very conservatively through the end of the year and see what next year brings.

Peter Ruschmeier - Barclays Capital

Shifting to the Timber business in the Northern segment, you mentioned the positive effects of Asian demand on logs and lumber. But yet, I think, you said you're still holding your quality logs off the market. Can you elaborate on what you're seeing? Are there certain types of sawmills that you see are getting more active with volumes going to Asia, certain types of logs? And what it is you're looking for in terms of re-entering the market? Is it just the higher price?

Rick Holley

If you look at the stuff that is being exported, both lumber and logs, to Asia, a lot of it is going to -- some of it going to Japan, a lot of it is going to China. Most of the lumber is coming out of British Columbia, it's been generally a lower-grade lumber product. And I think this year, they'll export about 1.2 billion board feet from Western Canada to China. The Chinese are also into the Northwest log market. Over the last few years, out of Northern California, 15 years hasn't been an export log ship go out, and there was one recently. You look at Coos Bay and Southern Oregon. Last year, there was no ships. This year, there'll be three or four or five ships. So, the activity is building up a bit. We've got some Japanese and Chinese buyers come to us to see if they can’t buy supply. And basically, what they're looking for is a Douglas-fir/Larch, especially for Japan. They're going to get that obviously from the Coastal Oregon and Washington. So it's something that's starting to heat up a bit. And I think it's really the Chinese, with the growth they've had in their own markets, looking for a source of wood fiber.

Peter Ruschmeier - Barclays Capital

Can you elaborate quick on what you're seeing in the biofuel market, both the direct and indirect impacts on your various markets?

Rick Holley

It's really quiet right now, I mean, with Washington DC worried about the election and not working on energy policy, there's nobody spending much capital. As you know, we have the one agreement, some fiber supply agreement with the European utility to provide 1 million tons of wood fiber, 80% pulpwood, 20% biomass starting in 2012. And we've got a number of other Europeans knocking on the door, interested doing some more things. We've also talked to a lot of the major U.S. utilities. But as you might expect, until they see something happening legislatively, they're going to be very cautious about spending any capital in any biomass facilities or any conversion of coal plants to coal-fired with wood and coal. We're pretty optimistic that certainly down the road, this is going to be a terrific business for us.

Operator

Our next question will come from Dan Cooney from KBW.

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

I was a little surprised not to see any buyback activity during the quarter, just given where the stock price traded to. Is that really a function of the lower expected, lower-than-expected Real Estate sales? And how should we kind of think about that moving forward?

Rick Holley

I think it was a more case of a -- we spent $15 million on buying stock back in the second quarter. We did see from time to time attractive prices. But we're kind of a pretty cautious lot. And as I said, we're going to manage this very conservatively. We're kind of waiting to see what happens over the next several months as well. As it improves, we see our stock at these levels, we're going to be buying it again and we have $200 million with the authorization to do such and encouraged by our board to do that if it makes sense.

Operator

Our next question will come from Steve Chercover from D.A. Davidson.

Steven Chercover - D.A. Davidson & Co.

Five years till we get back to normal, eh? Just a quick question.

Rick Holley

I hope I'm wrong.

Steven Chercover - D.A. Davidson & Co.

We all hope you're wrong but you should be giving us straight goods. I do agree, at least, the demise of the Canadian supply is going to have significant impact. I'm wondering if it changes your view of manufacturing in the U.S.? Are you still comfortable just owning the timber?

Rick Holley

I think we're comfortable owning the timber. We really have a view, and I know we have mills in Montana, but this is something we do really well, and that's managing timberlands and working with customers, and there's others that do that really well. And I think that's the way to create the most value in this business. So I think what you'll see is we find opportunities to buy more timberlands, that's where we'll put our capital, we're not going to build more bricks and mortars.

Steven Chercover - D.A. Davidson & Co.

But the facilities that you closed even within the last year or so, Rick, can they come back on or have they been dismantled?

Rick Holley

We closed two permanently and dismantled those plants, and we had one curtailed indefinitely, which is basically a stud plant. Next to it is a remanufacturing plant. So arguably it's two plants. And we will not reopen those until we see what we think is sustained improvement in the Lumber business based on the price per studs and that's in 2012 or after.

Steven Chercover - D.A. Davidson & Co.

I saw on one of the websites, there's a discussion of the 32,000-acre land sale in Montana and it referred to it as former Plum Creek land, that's going to change hands again in the next month or so. So, can you just clarify, is that something that accrues to you or that's something that you sold?

Rick Holley

This is part of the Montana Conservation transaction, the 300,000 and basically 10,000 acres that we closed in three phases. That's one of the -- that was some acres that were owned by The Nature Conservancy that State of Montana is buying from them.

Steven Chercover - D.A. Davidson & Co.

So, you get the 89,000 that we're aware of but this is not something...

Rick Holley

Yes, that's part of some of the proceeds that we've already received. So from The Nature Conservancy, and then they in turn -- The Nature Conservancy, typically does not hold lands long term, they sell them to the Federal government or the state governments and then try to recoup their investment. That's what that's part of. So these incremental lands that are being sold in Montana.

Operator

Our next question will come from Richard Skidmore from Goldman Sachs.

Richard Skidmore - Goldman Sachs Group Inc.

Rick, can you just elaborate just on the impact of the lower organ harvest on softwood sawlog prices in the fourth quarter and how you think the lower harvest from Oregon may impact your prices in the fourth quarter?

David Lambert

Well, we said harvest in there would be down from the third quarter levels, maybe 10% for this segment. We see prices holding flat quarter-to-quarter in the fourth quarter. So just kind of stable.

Rick Holley

We saw Oregon log prices down about 4% in the third quarter vis-a-vis the second quarter. But we think they'll be flat end of the fourth quarter from where they are today.

Richard Skidmore - Goldman Sachs Group Inc.

So the fact that you're probably harvesting something like Doug-fir in Oregon is not likely to really impact the overall mix in your fourth quarter in terms of price per unit?

Rick Holley

No, it's not.

Richard Skidmore - Goldman Sachs Group Inc.

And, Rick, maybe can you just elaborate, as you look out, you talked about potentially timber values having an earlier recovery as you go forward because of things that are happening with the mountain pine beetle and maybe China. Can you just talk about how you see maybe the deferred harvest levels that you've taken over the last few years and what looks like might be another year or two deferring harvest as well as others? How that factors into the thinking about the recovery and log prices?

Rick Holley

Well, I think as we -- prices for southern sawlogs, for instance, from the peak are down 30%. So as we see those prices recovering, they will as housing goes to 700,000, 800,000, 900,000 starts. We'll start to bring slowly back some of that volume and I think others in the industry as well. So I don't expect everyone is going to sit on the sidelines and wait until prices are up 40% and there's a deluge of wood in the marketplace. That's just not going to happen. It's going to come back slowly. And we'll do the same thing. I mean, some of these logs that we have that we're deferring, you cannot defer the harvest indefinitely. I mean, you have the southern sawlog, at age 28, you opted not to cut, you're not going to hold it until age 35. You might hold it two or three years. You're going to cut it and you'll defer something else. We'll continue to work around the market and defer logs in certain markets and accelerate the harvest of logs in other markets, where we see kind of a supply-demand dislocation due to whether or other factors.

Richard Skidmore - Goldman Sachs Group Inc.

And then just lastly, as you mentioned the structural change when you refer to the spotted owl. Can you just remind us what the magnitude of the structural change was that occurred as a result of the spotted owl?

Rick Holley

I think that the spotted owl, well, the biggest impact was obviously in the Pacific Northwest, where the majority of the timber is owned by the U.S. government, the US Forest Service, it was about 9 billion feet of wood that was sold every year that suddenly left the market. If you look at the Canadian situation, given the amount of the supply that they had of lumber coming to the United States historically, it's going to be an 8 billion to 9 billion board feet dislocation, so that volume will have to be made up somewhere else and most of it will get made up either in the U.S. South or in the Northwest. You might see more lumber trickle in to pin our exchange rates and freight rates from Europe but most of it’s going to be made up here and it's a big number.

Operator

Our next question will come from Mark Weintraub from Buckingham Research.

Mark Weintraub - Buckingham Research Group

Rick, can you remind us order of magnitude, what you think your sustainable harvest level peak on the saw timber side is relative to what you are harvesting this year?

Rick Holley

As we've said, for instance, last year, we harvested roughly, a little over 15 million tons, and we grew like 4 million tons more than that. So we're growing substantially more wood today than we're harvesting. What that means is over time, over the next 15 years, our harvest levels, even if we sell all those high and better use and non-strategic and conservation lands, we'll be up about 25%. So today, we could probably cut 16 million or 17 million tons, it would be very comfortable with that, specially given what we deferred over time. But you're going to see it go from 16 million to 17 million to 18 million, just ratchet up every couple of years over the next 15 years.

Mark Weintraub - Buckingham Research Group

So when you talk about deferring the harvest, how much of that deferral -- is that pretty much all on the saw timber side right now or are you actually deferring some pulpwood as well? Should we...

Rick Holley

Basically, all of the deferrals have been saw timber because we've seen very good pulpwood markets over the last couple of years, so where we could, we see it’s accelerated at least over the guidance we gave all of you, where our pulpwood harvest will be to capture that value. Virtually, all of the deferrals have been sawlogs and the deferrals have been in Oregon and in the south.

Mark Weintraub - Buckingham Research Group

So order of magnitude, it would seem you're maybe deferring a little less than a third of your potential saw timber cut right now. And, I guess, what I was trying to understand is given how far housing starts has fallen, what do you think the overall industry, how much saw timber production or how much saw timber harvests are we having out of North America now relative to what it was at the heights a few years ago? Is there a fairly tight correlation you can just look at housing starts and run saw timber numbers against it, or is there something that obviates that relationship?

David Lambert

Housing starts, on new starts accounted for about 40% of lumber consumption, which is the primary consumer of sawlogs. And so that component is down significantly. But I think you have to look at overall lumber. There's a good piece that goes to the industrial markets into the repair and remodel markets. So overall, the market isn't down nearly the change that we've seen in housing. But it is down significantly. So we are accruing some saw timber on our land and others. Last year, we probably deferred a 1.5 million tons of sawlogs, But we accelerated the harvest of pulpwood by maybe 1 million tons. So we are going after more lower-value product because that was selling quite well. So I think getting back to your earlier question, as harvests grow over time, 20 million tons, it's not just as harvest grow. But right now, we're selling a mix that's below normal. So back in the future, we're not going to have 45% of our harvest being saw timber like this year. It's going to be more like 50% or a little bit higher. So that's going to help us significantly from that perspective. So I think the 1.5 million tons we deferred last year, you kind of said that's like a third of our saw timber. I think that's on the high side. It might be more like 15% to 20% of the capability.

Mark Weintraub - Buckingham Research Group

I'm just a little bit confused, I guess, the 2 million to 3 million number that have been thrown out there. Just to clarify one other thing, since to continue the conversation. So if you deferred the 1.5 million tons that you accelerated 1 million on the pulpwood side, should I see that you have about a little less than 1 million tons of what you ideally would have been cutting, recognizing that since you have more growth going into the future, that number can go higher but actually you're only about 1 million tons below optimal levels right now or 1.5 million tons?

David Lambert

That was our deferrals from what we had given you for guidance at the beginning. I think we have a lot of flexibility. We've already kind of ratcheted back given the environment. But we actually kind of hold back more, we had assume given the environment.

Rick Holley

The other important thing, Mark, as a reminder to everyone when we defer sawlog that's worth at least 3x as much as that pulpwood log. So, what we've done is we've taken something that we deferred and deferred a huge amount of earnings and cash flow into the future when we'll get much higher price. There obviously a lot more leverage on that than there will be pulpwood if it goes up 20%. So what we've done is really taken very valuable asset of the company and deferred the realization into the future.

Operator

Our next question will come from Joshua Zaret from Longbow Research.

Joshua Zaret - Longbow Research LLC

The first, in terms of the beetle kill salvage timber, do you guys have any sense of what volume will hit the market this year and where it’s being marketed? And as what is being marketed?

Rick Holley

Josh, I don't know the exact volume. I know a lot of that is what's being exported to the Chinese. It's a lower quality lumber product that's basically being exported as opposed to the Home Depots and others of the world that do not want that kind of a lower grade lumber product. I don't know the volume but I know they have accelerated in the last two or three years, to cut fairly dramatically to try to get as much as the dead guy into these timbers as possible before it was basically not usable.

Joshua Zaret - Longbow Research LLC

So you don't feel it has really a depressing effect on pricing this year on the West Coast?

Rick Holley

No, not at all.

Joshua Zaret - Longbow Research LLC

A year ago, one of the big concerns was logging improved capacity and clearly with the way things had developed and your less than sanguine view on the future for housing. Is that now a moot issue going forward or is there still concern nationwide, not just for Plum Creek, obviously, but for the industry over this issue?

Rick Holley

I, frankly, think it's still the industry's number one issue in the future. And as markets do improve and they will, and we start to see lumber capacity build, lumber production capacity and then more logs being harvested, especially we have a Renewable Energy business, there's more focus on pulp within the different in-use markets. I think there's going to be a real shortage of quality contract and capacity and it's something we spend a lot of time working on here.

David Lambert

Plum Creek is particularly well positioned, that we sell most of our wood on a delivered basis. We have these ongoing relationships with the companies that are just selling stumpage periodically when demand picks up, they're going to have a hard time securing the loggers that they need.

Operator

Our next question will come from Chip Dillon from Credit Suisse.

Chip Dillon - Crédit Suisse AG

I know, Rick, you kind of touched on this. But is there anything specifically that you -- in terms of the alternative energy opportunities that you see out there, it seems like, especially from Europe and the pallet area, you're seeing an increasing at least interest. And, I guess, the key question is, are you starting to see alternative energy projects where the project is predicated on pulpwood or even sawlogs, even pulpwood versus the lease that they can sort of get waste wood or residuals in the forests?

Rick Holley

These pallet plants and even the user of the pallet, I guess, manufactured there, they don't want just the dirty chip. The dirty chip being basically biomass. They want a combination. So they're here to for why, in a particular contract we have with the European Union utility, it's 80% pulpwood and 20% biomass. They want a combination of both. So it's not going to be one or the other, it will be both. And basically, they're paying the same price for biomass as they're paying for pulpwood under the agreement we have.

Chip Dillon - Crédit Suisse AG

I noticed that there was some filing or something up in Wisconsin not too far, I guess, from where you all have some land. One of the big containerboard companies with a mill up there, somewhere was concerned about wood supply and I'm not sure if that was a filing, encouraging a company not to be allowed to build some kind of a wood-related energy plant. Are you familiar with that? Is that a legitimate concern? Are you starting to see even though it would be small pockets, any markets where paper and/or, say, OSB producers would be concerned about being elbowed out of the way?

Rick Holley

I don't know the Wisconsin situation. I haven't heard of it. We haven't sensed that yet. Clearly, when you're just talked about biomass. That's a product today that burned by boilers by a lot of different manufacturers particularly paper manufacturers, and they're concerned about that supply getting tighter. If there's a new entrant in the marketplace, which is an energy entrant or outcome. But there's not a lot of that yet. So I don't sense that they're pushing back. But my guess, if we have a renewable energy policy says, 20% of your powerhouse come up for renewable source, there's not many alternatives in the south other than wood. And I think that's going to put a little stress on the supply chain for paper and OSB manufacturers.

Operator

We have no further questions. Mr. Holley, do you have any further comments?

Rick Holley

Thank you, everybody, and happy holidays, and we'll talk to you in the new year. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.

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