Plum Creek Timber Company (PCL) CEO Rick Holley Discusses Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: Plum Creek (PCL)

Plum Creek Timber Company, Inc. (NYSE:PCL)

Q2 2014 Results Earnings Conference Call

July 28, 2014; 05:00 p.m. ET

Executives

Rick Holley - Chief Executive Officer

David Lambert - Senior Vice President & Chief Financial Officer.

John Hobbs - Vice President of Investor Relations

Analysts

Alex Ovshey - Goldman Sachs

Collin Mings - Raymond James

Gail Glazerman - UBS

George Staphos - Bank of America

Steven Chercover- DA Davidson

Mark Wilde - Bank of Montreal

Chip Dillon - Vertical Research

Mark Weintraub - Buckingham Research

Anthony Pettinari - Citi

Paul Quinn - RBC Capital Markets

Operator

Good day ladies and gentlemen and welcome to Plum Creek’s, Second Quarter 2014 Earnings Conference Call.

At this time all participants are in listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. John Hobbs, Vice President of Investor Relations. Sir, you may begin.

John Hobbs

Thank you, TE. Good afternoon ladies and gentlemen and welcome to the second quarter, 2014 conference call for Plum Creek. I’m John Hobbs and today I’m joined with Rick Holley, 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, supplemental financial statements and any reconciliation to non-GAAP financial measures for the second quarter of 2014.

Before we begin, I’d like to take this time to remind everyone that certain of our statements today will be forward-looking, involving known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ from those expressed or implied. These risks and factors are routinely detailed in our filings with the Securities and Exchange Commission.

Following today’s prepared remarks, we’ll open up the call for your questions. Rick?

Rick Holley

Good afternoon and thanks for joining us today. Overall Plum Creek has performed well in what is really a slow growth environment. Our second quarter financial results were in line with our expectations despite our decision to reduce the Southern timber harvest.

Timber prices have trended upward over the past year and this, combined with our additional harvest from the lands we acquired in December has led to a nearly 30% growth of both operating income and adjusted EBITDA from our timber resource segments. We expect growth to continue in the second half of the year and expect our second half results to surpass those in the first half.

Our manufacturing segment should complete a very profitable year with minimal operational impact from the June 10 fire at our MDF plant. Thanks to the tremendous response from our employees, we were back in production within 30 days of that event.

The investments we’ve made in our energy and natural resources segment are paying off as well. Our returns are meeting or beating our original expectations and as a result the segment is on track to produce more than $30 million of EBITDA this year.

Our real-estate segment is on pace to sell between $240 million and $280 million of properties in 2014, capturing significant value premiums for conservation, recreation and non-strategic rural lands. Interest in rural lands remains good and the traffic in the early stages of improvement in some markets such as Montana, which has been quite as you know in recent years.

In short, we’re performing well and continue to expect growth in the second half of the year. However the pace of growth in 2014 has been slower than we originally expected. We also have improved visibility into the composition of our second half real-estate sales. As a result we’ve adjusted our outlook for 2014.

As you saw in our press release, we are reducing our full year earnings guidance by $0.25. We expect net income to be between $1.05 and $1.25 per share for the year. We expect third quarter results to be between $0.27 and $0.32 per share.

First it’s important to note that the EPS adjustments we’re making largely reflect non-cash items or deliberate choices related to harvest timing, their design to maximize the value of the timber that we do harvest. We are still having a very good year and expect adjusted EBITDA to exceed $560 million, up more than $60 million compared to 2013.

Now let me address the real-estate side of the equation first. We are maintaining our expectations for 2014 land sales and real estate segment cash generation. However, we are adjusting our guidance with respect to the book value of the lands we expect to sell this year.

With the passage of six months we have better visibility into the specific properties that will likely be sold in the second half of this year. We are now expecting the land basis, the book basis of land sold to be in the neighborhood of 45% of sales revenue in 2014. This compares to the midpoint of our prior guidance range of 33%. This simply means that the specific lands we expect to sell at attractive premiums to their underlying timberland value are on our balance sheet at higher values than we have factored into our original assumptions that we gave you earlier in the year. This can arise from a number of reasons.

For example, lands bought in 2007 are likely to have a higher book value than say, lands we acquired in 1993, and a perfect example is the merger that we did in 2001 with the Timber Company. We have the Timber Company’s legacy lands on our books today at historic values or basis and the Plum Creek lands, legacy Plum Creek lands were written, put on the books at appraised value at the time of their merger.

So the specific mix of properties sold can have a significant influence on reported income within the segment. This change in expectations would reduce our reported operating income by approximately $31 million or $0.18 per share, assuming the $260 million midpoint of our guidance range, for real-estate segment revenue. This has no impact on our expected cash flow.

The second change to our outlook is based on our goal of maximizing the value of every acre to every tree that we harvest. By, shifting our harvest to better future -- towards the future where we see better value, we will move approximately $15 million of cash flow and approximately $13 million or $0.07 per share of earnings from 2014 to later periods. With this shift, we expect higher cash flow and earnings from the tress when they are harvested in the future.

This decision is based on our current analysis of the marketplace. The economists have moderated their growth expectations for residential construction this year, in part due to the lackluster activity during the first six months of the year.

As housing demand improves, we expect to see increased lumber demand and increased lumber production and log prices in the U.S. South. However, the overall pace of demand growth in 2014 is not as robust as originally expected and we have moderated our price growth expectations to Southern sawlogs in the second half of 2014.

We experience significant variability in the pace of demand improvement from the one local market to the next in the south. However, we do expect to realize improving market opportunities as demand grows and our customers respond with higher production levels. We are using our geographic diversity to focus our current production in the most attractive markets and we have adjusted our near term harvest plans in markets that have superior upside potential.

With this in mind, we have chosen to defer a portion of our sawlog harvest to certain other southern micro-markets and as a result we now expect our harvest to be at the low end of our 20 million to 21 million tons harvest range we gave you at the beginning of the year. The great thing about timber is that we are not foregoing this income or cash flow; we are simply delaying its delivery.

David will now review this past quarter’s performance and discuss our expectations for the third quarter. David.

David Lambert

Thanks Rick. Timber markets continue their gradual recovery. As we move into the second half of 2014, lumber and pellet producers are steadily moving forward with a number of previously announced capital projects that will result in growing log demand in the U.S. South.

As we look at our Northern resources segment, our $5 million operating profit was $11 million lower than the first quarter’s result. This is the normal seasonal pattern, as the second quarter is typically the slowest period of the year, as thawing spring conditions turn roads muddy and limit timberland access.

As planned, harvest volumes were approximately 750,000 tons or about two-thirds of our first quarter’s volume. As expected, Northern sawlog prices declined approximately $3 per ton from their first quarter highs. This was driven by an orderly declined in West Coast saw log prices as export market demands softened and the spring’s timber supply was enhanced by unseasonably dry weather.

Pulpwood prices declined about $2 per ton on the temporary mix shift between regions. Pulpwood harvests were limited by an extended spring thaw in New England, where pulpwood prices are generally higher than the segment’s average pulpwood price.

With the spring thaw behind us, harvest volumes have seasonally rebounded. Third quarter harvest volumes are expected to be slightly over 1 million tons, with a 60-40 sawlog pulpwood mix. We continue to expect the Northern harvest to be a little less than 4 million tons for the full year of 2014.

Northern sawlog prices are expected to recover modestly, about $1 per ton from the second quarter level. Pulpwood prices are expected to rebound to the first quarter level of $43 per ton as the regional mix returns to normal.

The Southern resources $33 million operating income was $2 million higher than the first quarter’s results and higher harvest volumes and stable prices for both sawlogs and pulpwood. Harvest volumes of nearly 3.8 million tons increased 5% from the first quarter, but we are approximately 400,000 tons or 10% lower than we had planned as Rick had indicated.

Across the south, lumber mills are making very attractive profits and many mills are making investments in their facilities. Projects are underway and increased demand is on the horizon. But the slow pace of housing recovery has encouraged mill owners to take a measured pace to their production decisions in order to match supply and demand.

As we entered the third quarter, mills in most regions of the south have adequate log decks. With good harvest conditions prevailing in most of the south, we expect third quarter saw log and pulpwood prices to remain firm at second quarter levels.

We do expect to experience price improvement of $1 to $2 per ton for Southern sawlog in the fourth quarter as lumber mills increased log demand in preparation for the spring 2015 building season.

With the demand growth lagging our initial expectations, we project our 2014 southern harvest to be between 16 million and 16.5 million tons, down about 500,000 tons from our prior plans. The harvest mix for the full year is forecasted to be approximately 42% sawlogs and 58% pulpwood. The third quarter’s harvest is expected to be 4.4 million tons.

Second quarter real estate segments sales came in at $77 million, towards the upper-end of our initial expectations for the quarter. Operating income was $45 million. Prices received in the second quarter for the various property types were lower than we have recently reported, as the geographic mix was influenced by a timberland sale in Wisconsin. In this transaction, the company sold 49,400 acres, comprising a mixture of recreational lands, non-strategic timber lands and conservation lands.

Rural land values in the Lake States region are generally lower than most other regions, so this transaction had a significant influence on our reported price realizations for the quarter. Excluding this Wisconsin sale, realize property values for each property type were right in line with our recent experience.

Interest in rural lands remains stable and we’re seeing the typical seasonal pick-up in traffic. As Rick mentioned in his remarks, we continue to expect real-estate segment revenues to range between $240 and $280 million in 2014. However, we have revised our land basis estimates for the year, and expect them to be approximately 45% of sales. Third quarter real estate sales are expected to be between $60 million and $70 million, and we expect the land basis for the third quarter to be approximately 45% of sales.

Our manufacturing segments recorded $10 million of operating income, up $1 million from the first quarter of 2014. The segment second quarter results were negatively impacted by the June 10 fire at our MDF facility. Altogether, the fire negatively impacted the segment’s second quarter operating income by approximately $2 million.

We’ve detailed the different components of the fires impact in our results in a schedule within our financial supplement. The foregone operating income resulting from the fire is expected to be covered by business interruption insurance. Later in the year, property damage by the fire is covered by our property insurance.

The accounting gains resulting from the property replacement have been excluded from our earnings guidance. For the year we estimate the after tax impact of this gain to be approximately $0.02 per share.

Profitability in our lumber business improved on higher sales volumes and stronger prices for appearance grade boards. Plywood profits were largely unchanged from the first quarter as better prices were offset by lower volume.

The MDF plant resumed operations on July 10 and third quarter manufacturing earnings should remain strong, as MDF shipments pick back up and plywood production advances. Pricing for our especially mix of MDF and plywood products is expected to increase from second quarter levels. We continue to expect our manufacturing business will post another year of strong earnings and cash flow.

Operating income from our energy and natural resource segment was $6 million, similar to the first quarter’s result. We continue to expect ENRs adjusted EBITDA to grow to over $30 million in 2014.

Third party interest expense for the third quarter is expected to be $27 million, unchanged from the second quarter. There was no tax expense in the second quarter and we expect to record some modest tax expense during the third quarter.

Total capital expenditures during the quarter were $24 million and included $4 million of MDF capital to help rebuilt from the fire and to rebuild the plant. We continue to expect ongoing capital expenditures for all business segments in total to be between $85 million and $90 million in 2014. This does exclude approximately $8 million to $10 million of total capital required to replace the buildings and equipment damage by the MDF fire, which will be recovered by insurance.

Our balance sheet remains strong with a 4% cost-to-debt and no maturities until late 2015. We continue to have a strong liquidity position of over $650 million and we are well positioned to meet our commitments to our share holders and to grow our business. Rick.

Rick Holley

Earlier this month we marked a milestone in our relationship with Drax, the U.K.’s largest power station and a leader in biomass power generation. We have a long term fiber supply agreement in place to provide to Drax pellet mills, the 750,000 tons of wood fiber on an annual basis. Pricing under this take or pay contract is market based plus the market premium for assurance of supply, a sustainable certification of the wood.

We began initial pulpwood in biomass deliveries to Drax’s pellet plant in Gloster Mississippi in mid-July. We expect to begin deliveries to Drax’s pellet plant in Beekman, Louisiana later this quarter. Combine we expected to deliver approximately 200,000 tons of wood fiber to these facilities in the second half of 2014. Deliveries will gradually ramp up over the next several months as the facilities build the inventory necessary to begin pellet production.

The timberlands and other assets we acquired in December 2013 from MeadWestvaco have performed well and are expected to be cash flow accretive on a per share basis this year. During the first six months of 2014 we harvested over 1.2 million tons of timber from the required timberland and generated about $12 million in operating income and $21 million in cash flow from that harvest.

The coal and wind assets are also performing well and have added nearly $2 million to operating income, nearly $3 million to our year-to-date cash flow. The real-estate ventures are on track and they are expected to operate at a small operating loss this year, but they will produce positive cash flow.

Over the past 12 years we’ve developed a disciplined approach to evaluating rural lands for the recreation and alternatively use values. This process has allowed us to identify and realize superior values for certain properties within our profile. We’ve utilized this process on the lands we required from MeadWestvaco and finalized our detailed analysis of the higher and better used characteristics during the second quarter.

We analyze these lands based on their physical characteristics that drive value and in person visits by our valuation teams. In addition this analyzes included a thorough evaluation of the composition and depth of the HBU markets where these lands are located.

We’ve identified 88,000 acres of timberland that we believe a worthy a significant premium to underlying timberland value for recreational other uses. These lands are located throughout the 0.5 million acres we acquired from MeadWestvaco and are located in South Carolina, Virginia, Georgia and Alabama. We expected that these lands will be sold at very attractive premiums to underline timberland value over the coming years.

As with all of the lands with HBU potential, these lands will continue to be managed for timber production until they are sold. In today’s market we believe these lands would typically capture values range from $2500 to more than $3000 per acre. With good opportunities for continued price appreciation going forward.

In the second quarter we listed approximately 15,000 acres of these lands with real-estate brokers. During the month of July we closed a $21 million sale of nearly 8,000 of these acres at an average price of $2,750 per acre. This price represents a significant premium to be underlying timber value as approximately 70% of the track involved, consisted of bottom land hardwood or open fields. These very attributes made it desirable from a recreational standpoint, but certainly less attractive as industrial timberland and highlights the very attractive premiums. These HBU lands can command compared to their underlying timber values.

We have additional sales in the pipeline for the second half of 2014 and expect we could close another $5 million of these type of properties that we acquired from MeadWestvaco in the second half.

In summary, due to our financial disciple, the value added approach to portfolio management, we are very well positioned to benefit as markets improve. The building blocks for recovery in the south remain in place, residential construction activity is expected to improve and cashable investment in Southern saw mills is broadening.

Cash flow remains strong and is expected to grow $60 million or more this year on improving performance in our timber, energy and natural resource and manufacturing businesses. Over the years we’ve built and managed a timberland portfolio of unmatched geographic diversity and a variety of values, be it the land itself, the timber on it or the other natural resources underneath.

Our consistent goal is to maximize the value of these assets to the benefit of our shareholders and we are confident in our abilities to over growing cash flow, a secure and reliable dividend and long term capital appreciation as recovery continues to take hold.

Now, we’ll open it for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Alex Ovshey from Goldman Sachs. Your line is open. Please go ahead.

Alex Ovshey - Goldman Sachs

Thank you, how are you guys?

Rick Holley

Good. Thank you

Alex Ovshey - Goldman Sachs

I have a couple of questions. On the fiber being supplied to Drax, can you comment sort of what the mix between softwood and hardwood will be?

Rick Holley

Yes, it will be 100% softwoods, Loblolly pine basically and there might be a little biomass, but the majority will be pulpwood.

Alex Ovshey - Goldman Sachs

Okay, and I know it’s really, really early, but given you’ve already started to move some of the volume, I mean is there any initial implications for the markets that you’re in from a pricing perspective or is it too early to be able to say.

Rick Holley

I think it’s too early, but suddenly when you take 750,000 tons of fiber out of a market and that fiber is already going somewhere else, it certainly should tighten up the market place and we would expect to see higher prices in those micro-markets.

Alex Ovshey - Goldman Sachs

All right, thanks for that Rick. And I have just one more, you talked about a potential increase in sawlog price in the South I think, later on this year, if I heard that correctly. What is that based on? Is that based on initial conversations you’ve had with customers and them saying that they’ll be rebuilding the decks going into ‘15 or is that based on just your analysis of supply-demand in the markets you are in and that’s what’s driving that view.

Rick Holley

Well, it’s really some of both. As David mention in his comments, there is a significant amount of capital investment going into sawmills throughout the south today, both capital improvements to sawmills to increase their productive capacity. There is a number of customers and others looking at Greenfield and Brownfield plant sites. A lot of the capital is come into place. We should expect to see that now in the second half of the year, so that should improve some demand. But it really is more of a seasonal thing as all those mills want to build inventories to get ready for the spring building seasons, so it’s a combination of both.

Alex Ovshey - Goldman Sachs

Got it. Thank you.

Rick Holley

Thank you.

Operator

And our next question comes from Collin Mings from Raymond James. Your line is open. Please go ahead.

Collin Mings - Raymond James

Hey, good afternoon; a couple of questions guys. In the release you referenced your housing start forecast of just roughly over $1 million starts for 2014. Can you talk at all about how you are thinking about 2015 at this point?

Or I just maybe another way to think about that is, as you made a decision to defer harvest activity, how much of that was really contingent upon 2015 begin materially stronger or maybe just a little bit more details around that would be helpful.

Rick Holley

Certainly, Collin. As we look out, we expect housing to start improving still in the second half of this year, although it is gradual. As we look at next year, the consensus outlook for housing starts is in the 1.2 million to 1.25 million starts range. So we still our expecting growth in that segment. We don’t believe that we are in kind of a new norm where we languish around 1 million stats and so as we see the economic start to accelerate, especially if you get close to that 1.2 million, we think we are getting closer to that tipping point where we are going to see an acceleration of price improvement this Southern sawlogs.

Collin Mings - Raymond James

Okay, and then just on that sawlog outlook for the U.S. South, can you talk about just – did you really see it may be June or into July where your really seeing EBITDA pricing maybe take a step back from where it was early in year. I know and David in your outlook you said that your 3Q pricing was going to hold firm overall, but I mean there are some wood baskets now, where you’re actually giving back some pricing that you had earlier this year.

Rick Holley

I mean there is a little bit of seesaw in some wood baskets, seasonal supply flows pretty readily in the summer and so that can have a little of a negative impact. But we think we see prices holding this quarter and then as we move into the winter months, would have a seasonal firming in pricing, and then you start combining that with growing end user demand and higher log consumption; that’s where we’re seeing some optimism.

Collin Mings - Raymond James

Okay. So I guess going back to the last call, where I think you were calling -- for call it 10% move or so in U.S. sawlog prices this year. Is that now safe to say rough math right around 5% type price appreciation this year?

Rick Holley

That is correct.

David Lambert

That’s fair

Collin Mings - Raymond James

Okay, and then just touching really quickly on the acquisition environment, obviously you guys completed a rather landmark transaction last year and we’ve seen a number of more deals coming now. I’d call it $2000-plus an acre. Can you just discuss the opportunity you’re seeing and if you think some of these recent deals really reflect better quality timberland starting to come to the market or just really price appreciation of timberland.

Rick Holley

I think it really reflects two things; its productivity of a lot of these Southern timberland that come on the market and like the transaction we did, MeadWestvaco was very productive land that we brought and certainly warrants a $2,000 an acre plus price and that’s some of the lands you see coming on the market today, and I think it’s also some optimism on behalf of the buyer seeing a price recovery.

Now we talked about this price recovery and we thought it would have occurred by now, but it certainly hasn’t, because the whole housing market has been more anemic than any of us thought it would be. But that said, we will slowly seen some recovery here and with that higher demand we should see better sawlog prices and I think some of it is optimism on better price as well, some very productive lands in the south.

Collin Mings - Raymond James

Okay, thanks guys. I’ll turn it over.

Rick Holley

Thanks Collin.

Operator

Thank you. And our next question comes from Paul Quinn from RBC Capital Markets. Your line is open. Please go ahead.

Paul Quinn - RBC Capital Markets

Yes, thanks very much. Just a question on log inventories, what you’re seeing in the market place. We saw a real buildup at the end of – or when you guys reported last quarter, especially in offshore markets in China and just what you’re seeing on those markets today?

Rick Holley

Yes, I think if anything, I think we said on the last call as everyone probably else did as we expected the Chinese inventories to come down a bit and have continued to go up. So I think they are about 4.5 million cubic meters today and they’d probably like that to be about at least a 1 million cubic meters less.

So the first half of this year, the Chinese have bought more wood than they bought in the first half of last year, but our expectation is just so that they can get that inventory down a bit, but the second half is going to be pretty flat, both from a price standpoint for logs going to China and certainly the volumes. But the inventories there are a bit high right now, not just from the U.S., but from certainly from Russia and New Zealand as well.

Paul Quinn - RBC Capital Markets

Okay, thanks for that. And just on the real-estate side and I guess reduced guidance, it sounds down that $0.25 from previous and it looks like it’s made up of $0.18 on the real-estate side and $0.07 on the harvest referral.

Just on the real-estate side, I’m just trying to understand how you plan out those sales. It sounds like I guess part way through the year you decided to sell different lands. I’m just trying to understand -- I would have thought you would have had your, the lands picked out to sell well in advance and i.e., not able to change that much and what brought about that change I guess.

Rick Holley

Yes Paul, at any point in time you might expect, we have a lot more land listed or kind of in our pipeline that we plan to sell. I forget what the – you probably put on 5 acre for everyone, you want to sell in the market place from a listing stamp point and so at the beginning of the year we kind of looked at certain profile, probably from a more historical standpoint of what we thought the land bases would be and long behold, hold after we went through this process on the MeadWestvaco lands, we identified this transaction that we’re closing here in the third quarter, we’ve already closed it in July, which is a very attractive price at $2,750, but the basis on that land, because we just bought it, is going to be about 60%. So obviously it’s a big transaction and has a high basis.

We also have some opportunities perhaps in the second half to sell some legacy Plum Creek plants to various customers that are looking at them and those because again, they were booked at upraised value at the time of the merger in 2001, generally have a much higher basis per acre than a lot of the other lands; well certainly the other lands we acquired from the Timber Company in the merger. So it’s just, you kind of look at the whole portfolio and you identify them and the year goes on, that’s why we update you guys quarterly not only on sales, but also on the basis.

And these are terrific transactions. They create a tremendous amount of value, a lot of cash flow, but it does have an impact on earnings. That’s why we try to give investors, everybody a focus on not earnings per share, but on cash flow that we generate.

Paul Quinn - RBC Capital Markets

All right, and that’s appreciated. Just on the highlight, the 88,000 of HBU on the MeadWestvaco timberlands, was that more than the original assessment or about the same?

Rick Holley

No, I think we got to be fair; it’s about 17% of the 500,000 acres; we knew that based on the geographic location of these lands. But there’s probably an above average opportunity to capture enhance values for real-estate.

Paul Quinn - RBC Capital Markets

Great, that’s all I have. Best of luck. Cheers.

Rick Holley

Thanks Paul. Cheers.

Operator

Thank you. Our next question comes from Gail Glazerman from UBS. Your line is open. Please go ahead.

Gail Glazerman - UBS

Good afternoon.

Rick Holley

Hey Gail.

Gail Glazerman – UBS

Can you just remind us strategically where you see your Southern harvest going in terms of volume, but also in terms of mix?

Rick Holley

In terms of volume, it’s going to continue. Obviously we dropped it a bit this year, but over time it should continue to grow and David will give you the specific numbers. But the mix as he commented, it was 42% sawlogs and 58% pulpwood and we should be moving a kind of a50-50 mix overtime, so…

David Lambert

So as we think of our harvest as the company accelerated over 22 million tons of over time, all of that incremental growth comes from the U.S. South and not from the Northwest. And so Rick’s right on the mix, it’s going to accelerate over 50% saw log. So we see much stronger cash flows, not just from a total volumetric base, but that mix is going to be important to that.

Gail Glazerman – UBS

And, any sense of timing on how quickly you can get it there?

Rick Holley

Well, a lot of it is just is a biology of the trees. It’s not necessarily a market governor in any way. So we would think that for the initial three to five year period, the mix is going to be gradually improving and the harvest will accelerate certainly above the low-end of the guidance range that we issued this year.

Rick Holley

But the other thing that’s fair to say in this pricing environment, in certain markets we’ve seen excellent prices for pulpwood and kind of we haven’t seen any improvement we expect in sawlogs. We’ve kind of moved in substance and done mort thinning then left more saw logs on the stump as well.

So a lot of it, even though we didn’t necessarily reduce the absolute harvest, a lot of it had to do with moving into different types of stands because the values were better. So, as we start to see improvement in saw log prices, where just in and of itself you’ll start to see a higher mix of sawlogs in our harvest.

Gail Glazerman – UBS

Okay, and you touched on kind of where you see China? Can you just in terms of their export markets, can you just talk about your export activity. I guess the last couple of quarters you’ve haven’t exported very much at all. Is that still the case?

Rick Holley

Yes. We still expect to do about 200,000 tons in 2014. The majority of that may be surprising to me. It will be from the U.S South, some of that will go out of ports in the Gulf South, some will go up the Atlantic Cost. We have very little going out of Oregon, even though others are exporting there, which is what’s important, that somebody is doing it so that you get the attention to the market place. But the majority that 200,000 tons will come in the South.

Gail Glazerman – UBS

Okay and just in terms of the domestic impact of that kind of anticipated slowdown that you’re expecting with China getting their inventories back in order. How do you expect that to impact kind of general pricing in the Northwest and I mean it’s been under pressure. Are you starting to see it stabilize or would you expect it to get worse if China hasn’t really stopped buying yet?

Rick Holley

I think as we go in the second half of the year it will stabilize, but clearly it was down in the second quarter in the west, largely due to China and also that you see more wood in the market place from a lot of the small amount of industrial land owners who tend to have a higher harvest levels in the second quarter. But I think that it will be flat in the second half; it’s kind of our view. We shouldn’t see any price improvement, but I’m not sure we’ll see a lot more erosion.

Gail Glazerman – UBS

Okay, and I guess you referenced particularly dry weather in the North West. I’m just wondering how you saw kind of weather rolled in to harvest conditions in the south in the second quarter and entering the third quarter?

Rick Holley

We had in a lot of areas in the South we had a lot of wet weather, which is surprising to that time of the year and in fact interacts with some others on their start up, which we are very happy that they are starting those two plants, but the start up’s been delayed a little bit, only because of wet weather and we’ve seen that with a number of other capital projects in the South as well that our customers are understating, so. Especially in the Gulf South it was a lot wetter than we normally see this time of the year.

Gail Glazerman – UBS

And is it showing signs of drying out or is it kind of more the same at this point in the third quarter?

Rick Holley

It’s really variable that the weather isn’t enough to really slow down deliveries from that perspective and create the tighter markets in the South at this point.

Gail Glazerman – UBS

Okay, thanks very much.

Rick Holley

Thanks Gail.

Operator

Thank you. And our next question comes from George Staphos from Bank of America.

Your line is open. Please go ahead.

George Staphos - Bank of America

Hi everyone. Good afternoon and thanks for all the details. I guess all of my questions have already been answered, but the first question I had for you Dave or Rick, could you give us some flavor on incremental trends relative to prices and/or interest you’re seeing across your various regions on rural land?

Rick Holley

Well, one of the comments that I made in my prepared remarks today was that some of the markets that have been pretty dormant the last several years like Montana have kind of lit up again, so we see a lot more interest in lands in some of those areas. A lot of the buyers are places from like Texas. Some of those market places are looking at Montana now.

Clearly we see a lot more recreational interest in the south. Values still aren’t where we expect them to be longer terms, so we’ll be pretty stingy about selling a lot of these higher various properties in the south, but we are starting to see some movement in the market place and prices are starting to recover a bit. But we’re very pleased to see Montana, because it was a great market a number of years ago as you know and it just went to sleep for the last years. It’s awake now, so that’s a positive trend.

George Staphos - Bank of America

Okay, thanks for the reaffirmation on that Rick. The second question I had and recognizing there are no guarantees on anything like this, to the extent that you had engaged the probabilities on the harvest forecast in your guidance range now, would you say the risks are to the upside or downside, especially at the low end of your harvest forecast range of 20 million tons and why or why not?

Rick Holley

I will say the risk is the downside and even though we’re pretty optimistic guys here at Plum Creek, the market still has just been kind of -- the word I keep using is anemic. The housing market’s anemic, the general markets pretty anemic, the economy is anemic and till we start to see that move forward and we believe it well, a lot of this capital’s been invested in the south. They spent the capital for a reason, so expand capacity, so we should start to see some of the impact of that, but if we don’t see it, we’ll reduce the harvest some more. I mean, we’re not going to give this asset away. So we will be very stingy about our timber harvest and we’ll see some, even $1 or $2 recovery in some of these markets.

George Staphos - Bank of America

Okay, thanks. Good thoughts on that. One last question and I’ll put it over. With that as a context and recognizing that the dividend is the board’s decision, do you believe that the recurring EBIDTA on the business, the non-real estate cash flow and EBIDTA has now grown sufficiently large, so that you really can’t consider that next dividend increase? Sometime within the next 12 plus months or so and if you can go around that, that would be great.

Rick Holley

Yes, I think that’s fair. One of the comments we make consistently to all you is, as we see a recovery in the markets and improving the cash flow from our non-real estate businesses that we looked at to grow the dividend and we saw it last year and we’re seen it this year again. I think we management to go to the board and make a recommendation. We clearly like to see some of that price improvement we’re expected in U.S. sawlogs, which will have a substantial impact on our company, but I would expect to see in the next 12 months if you do, I will hope that we could have the conversation.

George Staphos - Bank of America

All right. Thank you Rick, I’ll turn it over.

Rick Holley

Thank you

Operator

Thank you. And our next question comes from Steven Chercover from DA Davidson.

Your line is open. Please go ahead.

Steven Chercover- DA Davidson

Thanks, good morning or afternoon everyone. I was just wondering, are you seeing any particularly strong pockets for hard wood in your system?

Rick Holley

There are parts in the Southern portion where paper mills are reaching out for that hard wood and our paying premiums for that. So that hardwood, pulpwood market can be strong in certain areas.

Steven Chercover- DA Davidson

But not abnormally so that it’s beyond what’s a needle mover or worse.

Rick Holley

Well, it’s not the needle mover. As we look at Plum Creek, one of the unique thing about Plum Creek is, the strength of our timberland base. The value of hardwood lands is just a fraction of the value of intensive pine plantations, and our lands have a significantly higher than average pine plantation and kind of to run a mill southern land owner. So one, its pulp wood and two, it’s a small part of our total mix. We capture that value and it certainly helps markets. But the strength, it’s not going to change our total outlook.

Steven Chercover- DA Davidson

Got it. Okay, second question. Why were peeler logs so scarce in the first half of this year? Was it due to the severe winter or is it something else we are missing?

Rick Holley

Well I think part of the problem of peeler logs, it’s always a weather thing in Montana because they come through breakup. But the largest owner of Timber in the state of Montana is U.S. Forest Service and they don’t cut a lot of trees and the Bureau of Indian Affairs and others who have a lot of timber on their land just were out of the market earlier in the year just for weather constrains.

So we’ve seen that pick up now and certainly have a lot better log inventory in our plywood plans and thus we’ll have a better second half of the year in that business.

David Lambert

We noted that in our first quarter comments that our plywood shipments were below kind of the norm and we saw again in the second quarter. Now we are kind of back and we would expect third and fourth quarter plywood shipments to be up a good measures compared to the first half.

Steven Chercover- DA Davidson

Go it. And then finally, would be willing to hazard a guess as why the housing recovery in so anemic; is it lack of lots of labor jobs or policy?

Rick Holley

All the above. We want to learn that from your guys, but no, I think it’s all the above. I just think it’s a jobs thing, it’s a housing formations thing, it’s still tough for young couples to get a mortgage and then they are trying to improve some of that. The outlook for most people and job out don’t feel good to people, so I think it’s why I can come up with a better word; it’s anemic. It’s just kind of, it’s not there yet. So it’s a combination of all the above.

Steven Chercover- DA Davidson

All right, thanks very much.

Rick Holley

As we look at the demographics though, that 25 to 34 year oil age class, some people estimate there is a couple of million of them that would like to do household formations, that have been held back based on the jobs. There is a 23 years old age class has the highest single age class if any across the United States. So as we look forward we are really positioned well but strong demographic demand for housing. But you really just need to have the confidence from jobs and the income for people to be able to make those moves.

Steven Chercover- DA Davidson

Well, some are speculating that after the debacle of the last decade, a lot of young people don’t view homeownership as a way to build wealth, and if that’s the case – so, everybody’s got to live somewhere, but maybe the composition of housing is very different. But you think we should get back to that $1.5 million mid cycle.

Rick Holley

I think you do. It‘s just going to take slower to get there and you make good point; there’s going to be a higher proportion of multifamily starts in that number in the future, just because if you know it all and you got to live somewhere, so it’s probably an apartment or condor or some other kind of, hopefully wooden based structure.

Steven Chercover- DA Davidson

Wood is good, okay thanks.

Rick Holley

Wood is good. Thank you.

Operator

Thank you. And our next question comes from Mark Wilde from Bank of Montreal. Your line is open. Please go ahead.

Mark Wilde - Bank of Montreal

Good afternoon.

Rick Holley

Welcome back.

Mark Wilde - Bank of Montreal

Thanks. Wood is good. I’ve got a few questions. First I just want to come back to the sort of the harvest volumes in the second quarter, because they were – you had been guiding the 4.2, 4.3, so you really came in 400,000 or 500,000 tones underneath what you had forecasted just back in April. That seems like a pretty big variance to me, like in the short term. Can you put a little more color on that, because you guys are usually pretty good at this stuff?

Rick Holley

Yes, we are pretty good Mark, but we also earlier in the year told you guys we expected to see southern log prices up even by now and we didn’t see that. So our discussion was just to hold back the volume from the market, even in the quarter and in certain markets and most of that reduction is in the Gulf South, where we really haven’t seen the pricing tension that we’ve seen more in the Atlantic South, where the lands were bought from MeadWestvaco. So the harvest was down, but mostly in the Gulf South, just because we don’t see the pricing tension there yet.

Mark Wilde - Bank of Montreal

Rick, is that unusual to be able to move that number by 10% or 12%, just quarter to quarter.

Rick Holley

Well that, if we are thoughtful about it, yes we can move it. I mean we have tons of contractors in place and so it’s a matter of moving them around the property a bit, maybe to a pulpwood standard versus a saw timber standard and that sort of thing. But that was a fairly high number to move in that quarter. But we chose to do that and our people executed very well in making that happen.

Mark Wilde - Bank of Montreal

Okay, the next question I had is, can you give us some sense of what the all in EBITDA is you expect from the MeadWestvaco lands this year.

Rick Holley

$80 million.

Mark Wilde - Bank of Montreal

Okay. So that’s in that sort of 560-plus number that you gave us, correct?

Rick Holley

Yes sir.

Mark Wilde - Bank of Montreal

Okay and then the last question I had Rick, just going back to this broader housing issue; if we think about 1.3 million starts this year, there had been a lot of recessions like the early 80s recessions, where something around 1 million starts was the bottom of the market, was the floor, and we are now sort on “in recovery” and we are at 1.3. This is like the seventh year of this downturn.

It just seems like every year this goes on. We have to think more and more about sort of what kind of saw timber inventor is kind of building up on the stump, because it seems like everybody in the industry is cutting more pulpwood now and kind of back-off on saw timber, and so the backlog of saw timber inventory that’s out there must just be getting larger and larger. Can you address that issue?

Rick Holley

Well, you know Mark, I suspect the inventory is up a little bit, 2014 from where it was a couple of years ago, but it’s still below where it was 10 years, 15 years ago. And what we have found and we have studied this and spent a lot of time with consultants in all these micro-markets we operate in, this is not going to be a supply issue.

We need demand and once we get demand and we’ve seen it in some micro-markets, particularly in the Atlantic South, where there is a little more supply demand tension, where you got somebody that came on and started a new mill or get some capital and prices are $4 to $5 a ton higher for sawlogs in the Atlantic side versus the Gulf side. And so there’s wood there too, there is inventory. There are people called back to harvest there. So as we start to see more demand, we are going to see price go and I don’t think it’s going to be supply issue whatsoever.

Mark Wilde - Bank of Montreal

Okay. All right, that’s helpful. Thanks very much. Good luck guys for the second half of the year.

Rick Holley

Yes, thank you.

Operator

Thank you. Our next question comes from Chip Dillon from Vertical Research. Your line is open. Please go ahead.

Chip Dillon - Vertical Research

Yes hi. Good afternoon gentlemen.

Rick Holley

Hi Chip.

Chip Dillon - Vertical Research

First question is, you mentioned and I probably just missed this. A $2 million gain, is that sort of on the whole insurance process with the fire. Is that what I heard?

Rick Holley

Correct, we wrote off $2 million of property, plant and equipment and we spent $4 million on replacement capital during the quarter. I said we are going to spend a total of $8 million to $10 million altogether, but $4 million was spent in the quarter and that additional $2 million over the book value that was written off gets brought in as a gain.

I think our results from operation might have been off about $4 million as a result of the first from our expectations. So I think that reflects my comment. I think our overall earnings were probably down about a new $2 million for the quarter and that would include the $2 million benefit.

Chip Dillon - Vertical Research

Got you. Okay, that’s helpful. And you guys were highlighting a particular sale in July that seem to have very attractive characteristics; the $21 million sale. What region was that in again?

Rick Holley

That was in South Carolina.

Chip Dillon - Vertical Research

Okay, so obviously some MWV relative lands, I see…

Rick Holley

Yes it was, yes it was.

Chip Dillon - Vertical Research

And could you talk a little bit -- I know I think one question touched on this, but Rick and David, what are seeing in terms of the timber land transaction market, because we are hearing on one had I mean there doesn’t seems to be a lot of activity, but we are also hearing there’s just kind of a lot out there to buy and it’s a little choppy and fussy. I mean anything changed in your minds and you think this sort of slower year has impacted people or said differently could the low interest rate environment that we still see, actually and brought in some people who are, you know have low cap rate requirement.

Rick Holley

There is still Chip at any point in time, two or three or four five transactions in the market place, generally kind of 40,000 to 60,000 acres. A lot of the TMOs are bringing some lands outs of the funds that they’ve had over time and bringing them back to market. So a lot these are in the U.S South and we look at all of them and as the question was asked earlier and the ones that have transacted generally been north of $2,000 an acre and I think it’s justifiable given the productivity, a lot of those properties that they have come to market.

I think one of the things that a lot of investors probably, or just even Plum Creek for a long time maybe we are behind on is how productive these land are with some of the silvicultural treatments that we’ve all put in place over the last couple of decades, and how much cash flow they are going to generate off that productive and then you start to see a better placing environment. You can clearly justify our per acre number with a two in front of it.

But there’s always a few things in the market place and I think they seemed to get snapped up pretty quickly, so there’s still lot of capital looking at those.

Chip Dillon - Vertical Research

I got you, and then just a quick one. Could you let us know what the EBIDTA was on the timber deeds and also on the aggregates activities?

Rick Holley

In the second quarter, yes from the timber deeds it was just over $2 million and on the aggregate side of the business it was just over $3 million.

Chip Dillon - Vertical Research

Got you, and as we look out at 2015, I know the timber deed, I think has about, I think there are one or two of them, but they have about five years left, but the aggregates are still in its very early days right and so should we think about the timber deeds staying pretty steady, but the aggregates number may be moving up over time.

Rick Holley

Yes certainly. We would expect the aggregates cash flow to grow. We are starting to see some pricing improvement in that. So our price per ton that the operators are realizing is up from the first quarter level to the second quarter and as volumes grow with the recovery in that business, we would expect the cash flows from that to grows.

On the timber deed basis there is still as good, 5 years to that and that will be brought in over that time period.

Chip Dillon - Vertical Research

Okay, thanks for that update. Good luck in the quarter.

Rick Holley

Thanks Chip.

Operator

Thank you. And our next question comes from Mark Weintraub from Buckingham Research. Your line is open. Please go ahead.

Mark Weintraub - Buckingham Research

Thank you. Just wanted to drill down a little bit into some of the MeadWestvaco land analysis that you are doing. If I understood rightly, you are estimating that there’s about 88,000 acres that might be worth in the 2,500 to 3,000 per acre range at least as a view to-date. Is it fair then if we kind of look at the original price, keeping the sub-surface to the side. So the remainder, did you get for order of magnitude a little over $1,500 an acre. Is that a ligament way to look at it?

Rick Holley

I think when we looked at the transaction we bought it all just for timber value and we knew there was a tremendous opportunity, but when we are running our own numbers, we are just trying to save that for the up-side case, so I think this is incremental to that.

David Lambert

But I think Mark, are you asking on a per acre value what we paid for vis-a-vis what we are selling these lands for.

Mark Weintraub - Buckingham Research

Correct. Again, the math that I do and then just is that effectively if the 88,000 is worth 2,500 to 3,000 and the balance, you pretty much got for little over $1500 in acre and I just want to make sure I wasn’t missing something.

Rick Holley

No. We’ve spent 1750 on average across all 500,000 acres, so if there was a premium for HBU that would push the average price down.

Mark Weintraub - Buckingham Research

Okay, great. And then, I think you’d also identified about $65 million of it for the sub surface rights and wind assets etcetera. Have you also done a little bit more work on that element and what’s your thought process, your updated thought process?

Rick Holley

Yes, I think our expectation was the wind and the coal assets. We generated about $6 million of cash flow a year. Kind of a 10% cash and cash return and we will meet or exceed that this year.

Mark Weintraub - Buckingham Research

Okay and then lastly, I think you also had suggested that the harvest over the next 10 years on average would be about 3 million tons from these lands. If I heard you rightly, was it 1.1 million to the first six month.

David Lambert

Yes, it was 1.2 million in the first six months and we would probably be shy of the three – well, we thought we’d get to 3 million tons this year. We’ll probably be shy of that, only because in certain markets we are going to be again, a little stingy with volume. In some of those MeadWestvaco was primarily focus on pulpwood, so they didn’t have a lot of sawlog customers, which we’re working with them and putting in place now. So we’ll be slightly less than the 3 million tons this year.

Mark Weintraub - Buckingham Research

Okay, but it’s a chosen deferral as opposed to…

Rick Holley

Yes. The wood is there. I mean as we said on our last call, we were excited when we closed this transaction and after we spent a lot of time on all the acreage, the HBU and other acreage, we are even more excited. This is a terrific timber property. It’s the best property we’ve seen in the South, period.

Mark Weintraub - Buckingham Research

Thank you very much.

Rick Holley

Thank you.

Operator

Thank you. And our next question comes from Anthony Pettinari from Citi. Your line’s opened. Please go ahead.

Anthony Pettinari - Citi

Good afternoon.

Rick Holley

Good afternoon.

Anthony Pettinari - Citi

Many of my questions have been answered, but following up on the question on real estate guidance, the magnitude of the revision around $0.18 was much larger than it has been in previous years and from your comments, is it accurate to say that was driven by – this is the first year that you had MeadWestvaco and there was an opportunity that maybe you didn’t fully appreciate that the beginning of the year or as we looked at 2015, 2016, would you expect your ability to forecast the book values for the full year. Would you expect that it would sort of improve as you add MeadWestvaco under your belt or did I interpret that correctly?

Rick Holley

Yes Anthony, I think that’s a fair interpretation. This large transaction we closed here in the month of July, it was not in our planning. We did not expect it, we had a buyer, it was a great price and it had like a 60% book basis or land basis as we refer to it. So that was a kind of a surprise to us. It’s a great transaction.

We pride ourselves on giving excellent guidance and so I would hope that next year we won’t miss again, at least by this magnitude. I mean we can be off 2% or 3% or 4%, but this was a large miss and we apologize for it. But again, what we want everyone to focus on, this was a great value transaction and from a cash flow perspective, we’re still going to grow cash flow even though we’ve lowered earnings guidance by $60 million this year or north of that.

David Lambert

And most of that impact on the real-estate is not tied to the $25 million of MeadWestvaco lands that would be sold this year. It’s still going back into the portfolio and depending on what’s chosen, you can have a broad range of outcomes as Rick articulated earlier.

Anthony Pettinari - Citi

Okay, okay, that’s helpful, and then maybe just shifting gears, following up on Northern Resources forecast for 3Q, I think you had indicated there’d be $1 a ton recovery in 3Q and apologies if you went over this before, but is that mix impact or is that stabilization and recovery of Northern Resources prices or can you give us a little color on those prices in 3Q or the expectations there.

Rick Holley

So this is the $1 a ton for Northern sawlogs?

Anthony Pettinari - Citi

Yes.

Rick Holley

Or the pulpwood, yes, I think Rick described the Northwest markets is relatively stable, so there’s a slight mixed impact there.

Anthony Pettinari - Citi

Okay, okay. That’s helpful. I’ll turn it over.

David Lambert

Thanks Anthony.

Rick Holley

Thank you.

Operator

Thank you. We have a follow-up question from Paul Quinn from RBC Capital Markets. Your lines open. Please go ahead.

Paul Quinn - RBC Capital Markets

Yes, thanks for letting me ask a bonus question here. Just, I know this isn’t the usual material, but just on export logs, that 200,000 that you expect to do in ’14. If you could give us an idea of the definition; is that all expected to go to Asia and then where is that volume coming from. You described it as majority in the U.S. South as opposed to the West and in the South is it more Gulf versus Atlantic? And then just as a bonus on the bonus, whether the idea is to tension the market to lift domestic prices or actually make money on the export side.

Rick Holley

Well, it’s both really. So I’ll answer your second most question first and by the way, you can have as many questions as you want, but it’s really a matter of both, putting pricing tension, so we’re looking to get more supplier, more demand in the marketplace and we make money on those logs when we sell them. We are not giving them away. So I mean it’s a combination of both.

And of the 200,000 tons, let’s call it 80% of its going to be in the south and over half of that will be in the Atlantic south, going out of Savannah, Charleston, those ports and then we’ll have some go out of the Gulf South as well so, well so but it’s both those markets, but…

David Lambert

And it’s going to China, as well as other destinations such as India and Vietnam.

Rick Holley

Yes, probably 90% China, but we are selling some logs to India, which is actually a growing market now and also some to Vietnam.

Paul Quinn - RBC Capital Markets

Great, thanks for that one.

Rick Holley

Thanks Paul.

Operator

Thank you. Our next question comes from Mark Wilde from Bank of Montreal. Your line is open. Please go ahead.

Mark Wilde - Bank of Montreal

Two other ones. I think if I go back Rick, you had some real estate development opportunities in Georgia and Florida that you backed off on over the last five or six years. Can you just update us on that and then secondly, can you just talk about any other kind of efficiencies or opportunities you’ve been able to generate with the MeadWestvaco holdings. I think at one point it was talking about sort of reduced kind of staffing in terms of just the forestry staff.

Rick Holley

Yes, on the real estate development we kind of referred to a little bit last quarter. We have a large project in Alachua County, which is Gainesville Florida, which we’ve updated people on. If you go to Envision Alachua, there’s a lot of information on that. We also have a couple of other projects in Florida and one that’s probably over the next two years will come to fruition in Georgia.

What we plan to do is on our next quarterly call is to give you more insight and information on several of those projects; what the project is? What’s the size? What we think the market timing is, what we think the values are, as well as the likely customer type if you will, because some will be industrial, some will be commercial, some will be residential, some will be a combination of all of the above. So we’ll give you more insight to that.

As far as efficiencies, I mean a lot of the MeadWestvaco lands were in our back yard. We hired 24 former MeadWestvaco employees. I think we brought on a couple of others. One, to kind of look after the coal business for MeadWestvaco and also a biologist as well, so we added less than 30 employees. So we think we are doing it very efficiently.

I think some of the efficiencies that we’re going to get here are synergies if you will, although we didn’t talk about synergies, because we don’t look at it that way, a really contractor capacity in some of these markets. We’ll help, we can add some value there and also customers that we already we had in place, having this additional volume. Including the stuff we’re selling to China out of the Atlantic south predominant.

That’s come over from the MeadWestvaco land. So the quality of those lands, the saw timber coming off those lands are ideal for that marketplace, which is helping us to really develop the Chinese market out of that region. So it’s really a combination of those sorts of things.

Mark Wilde - Bank of Montreal

Okay, very good. Thanks a lot.

Rick Holley

Thanks Mark.

Operator

Thank you. I’m showing no further questions at this time. I would like to hand the conference back over for closing remarks.

Rick Holley

Well, thanks to all of you and hope you enjoy your summer and we’ll talk to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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