Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Plum Creek Timber (NYSE:PCL)

Q4 2010 Earnings Call

January 31, 2011 5:00 pm ET

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

John Tumazos - Independent Research

Peter Ruschmeier - Barclays Capital

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

Joshua Zaret - Longbow Research LLC

Joshua Barber - Stifel, Nicolaus & Co., Inc.

Mark Wilde - Deutsche Bank AG

George Staphos

Richard Skidmore - Goldman Sachs Group Inc.

Steven Chercover - D.A. Davidson & Co.

Chip Dillon - Crédit Suisse AG

Mark Weintraub - Buckingham Research Group, Inc.

Gail Glazerman - UBS Investment Bank

Operator

Good afternoon. My name is Zerona, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek Earnings Conference Call. [Operator Instructions] Mr. John Hobbs, Vice President of Investor Relations, you may begin your conference.

John Hobbs

Thank you, Zerona. Good afternoon, ladies and gentlemen, and welcome to the Year-End 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. I encourage you to visit our website, www.plumcreek.com. There you will find our press release and supplemental financial statements for the full year and fourth quarter of 2010.

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.

Now, I'll turn the call over to Rick.

Rick Holley

Good afternoon and Happy New Year. Despite a challenging economic environment, with near-record unemployment and a very weak housing market, Plum Creek had a good year in 2010. Performance in our timber resource segments, our Manufacturing segment and our non-timber resource businesses all improved in 2010, as we were able to take advantage of marketplace anomalies.

During the first half of the year, unusually wet weather in the South and inventory restocking of both log yards and the finished products supply chain helped boost prices and income in our timber resource and Manufacturing businesses. In addition, we were able to take advantage of the disruption in medium density fiberboard and plywood markets caused by the Chilean earthquake to incrementally add to our Manufacturing earnings.

In our Real Estate segment, we completed the final phase of our three-year Montana conservation transaction. While total real estate income declined $98 million from 2009, all of the reduction is due to the smaller size of the final phase of the Montana conservation transaction. Income from the final phase was $125 million lower than the phase completed in 2009. We continue to hold our most valuable real estate, in such states as Florida and Georgia, off the market. We'll patiently wait for the value of these properties to rebound when the overall real estate market recovers.

Throughout 2010, we continued to manage our assets with an eye on long-term value. We invested $71 million in our businesses, using $65 million to replant trees and improve forest productivity, which will increase the future harvest and cash flow from this asset. Given weak markets and continued depressed prices for our sawlogs, we reduced our sawlog harvest more than 500,000 tons from our initial plans. Although this decision impacted our cash flow and earnings for 2010, it also allows us to plant and harvest these trees in the future and capture significantly more values as markets and prices recover.

We also focused on strengthening our investment-grade balance sheet by refinancing upcoming debt maturities at attractive rates. During the year, we reduced our total debt by nearly $100 million, and in November, completed a $575 million 10-year bond offering at 4.7%. We used the proceeds from this attractively priced offering to prepay $213 million of notes maturing in 2011. The average coupon on the notes retired was 7.71%. In addition, we prepaid in full a $250 million term credit agreement scheduled to mature in 2012. The remaining $94 million of 2011 debt maturities will be funded with our line of credit. Both Moody's and S&P reaffirmed our investment-grade credit rating and upgraded our outlook to positive during the course of the year.

We also renewed our line of credit for $600 million at favorable rates, which provides the company with ample liquidity. We continue to manage our portfolio of timberlands, selling some nonstrategic lands at attractive prices and using the proceeds to repurchase our stock at attractive values. During 2010, we sold 24,000 acres, that generated marginal cash flow, for $32 million. We used the proceeds to repurchase 1.4 million shares of our common stock at $36.37 per share. Over the last five years, we've repurchased $24 million shares, or 13% of our shares, at compelling values in attractive long-term investment and are saving $40 million annually in dividends in attractive short-term investment.

Importantly, our cash flow from operations was $449 million, which more than covered our annual dividend payment of $272 million. We ended the year in excellent financial shape with $252 million of cash, an additional $434 million available under our line of credit.

David will now review our fourth quarter results and discuss our outlook for 2011. David?

David Lambert

Thanks, Rick. We reported fourth quarter earnings of $0.37 per share. This includes an $0.08 per share charge on the early retirement of debt. Excluding this charge, earnings were $0.45 a share and within our guidance range of $0.40 to $0.47.

In the Northern Resources segment, we reported a $1 million operating profit, down from the third quarter's $5 million profit. As planned, harvest volumes during the fourth quarter were 13% lower than those of the third quarter. The lower harvest volumes drove most of the decline in operating profit.

Our average Northern sawlog prices were weaker than we initially expected, off about 6%, or about $4 per ton from the third quarter. Prices for softwood sawlogs in the Northwest drifted down through November and started recovering in December. Western sawmills have increased production in response to strengthening offshore lumber demand, particularly from China. Fourth quarter lumber production in the West Coast was up 18% compared to the fourth quarter of 2009.

Additionally, export log volumes to China from West Coast ports increased significantly. Northern pulpwood prices held steady at $39 per ton during the fourth quarter. Customer demand was good and prices remained attractive.

Northwest log prices continued to improve in January, driven by higher lumber production aimed at export markets, coupled with growth in export log demand. We expect to export 7% of our Oregon sawlogs to China in the first quarter, compared to only nominal volumes in the fourth quarter.

We expect our average Northern segment sawlog prices to increase $3 per ton from the fourth quarter's level. In aggregate, we expect higher sawlog prices, slightly lower pulpwood prices and fairly stable volumes compared to the fourth quarter. For the full year, we expect our northern sawlog harvest volumes and mix to be similar to 2010, about 4 million tons, with 55% sawlogs and 45% pulpwood mix.

Turning to our Southern Resource segment. Our fourth quarter operating profit was $28 million, up $3 million from the third quarter's $25 million profit. The increase in operating profit was primarily a function of higher sawlog harvest volumes. Prices for sawlogs and pulpwood both declined 3% to 4% as favorable logging conditions, caused by unseasonably dry weather, kept customer mills well-supplied across the south. Pulpwood demand from pulp and paper customers remained strong, and pulpwood prices remained attractive by historic standards. We expect southern lumber production to increase during the first quarter, as a handful of mills in our operating areas have reopened or are increasing production.

However, logging conditions remained favorable across the South, and mills are in relatively good shape from an inventory standpoint. As a result, we expect first quarter southern sawlog and pulpwood prices to hold at fourth quarter levels. We expect our first quarter harvest will be approximately 200,000 tons lower than the first quarter of last year, as we anticipate there will be better pricing opportunities as the year progresses.

The reductions are split evenly between sawlogs and pulpwood. We expect the overall southern harvest in 2011 to be similar to 2010's level, about 11.4 million tons. We expect our 2010 southern harvest mix will be similar to the 2010 mix, roughly 45% sawlogs and 55% pulpwood.

As mills expand production in 2011, we expect existing contractor capacity may become a gating item that limits log supplies. However, Plum Creek is an excellent position to respond to market opportunities when and where they arise, as we have a solid base of established contractors. As always, we will continue to adjust our harvest plans in response to market conditions, deferring harvest in weaker markets to protect value and temporarily increasing harvest in attractive markets to capture value.

The Real Estate segment recorded revenue of $155 million and operating profit of $73 million for the fourth quarter. The final phase of the Montana conservation sale contributed $89 million to revenue and $37 million to operating profit. The balance of the fourth quarter revenue and income came from the sale of roughly 16,000 of recreation and higher and better use land at an average price of $2,000 per acre. About 2/3 of the acres sold during the quarter came from lower-value regions of the Gulf South and the Lake States.

Small nonstrategic land sales also contributed to the quarter's performance, with about 21,000 acres selling at an average price of $1,000 per acre. These lands are almost exclusively lower-productivity properties scattered across the South.

In addition to the final phase of the Montana conservation sale, we completed the sale of 8,200 acres of conservation land at an average value of $1,000 per acre. Individuals and family buyers remain cautious and value-oriented. Rural land markets were a bit better in 2010 than in 2009, and we expect an increase in interest and activity levels as the economy continues to recover. We expect 2011 Real Estate segment revenues between $250 million and $300 million. We expect to see a typical seasonal pattern in this segment, with the second half of the year stronger than the first half. For the year, we estimate land bases will be approximately 30% of segment revenue.

We expect first quarter Real Estate revenues to be between $50 million and $60 million. We estimate land bases will be approximately 30% of revenue for the first quarter.

The Manufacturing segment reported a $3 million profit during the fourth quarter, down $4 million from the third quarter's $7 million profit. This was better than we initially expected, due to stronger lumber prices. Our average lumber price increased 5% compared to the third quarter, while our lumber sales volumes declined about 7%, a typical seasonal decline. Our plywood and MDF prices declined 4% to 5%, while their sales volumes declined seasonally as well, both down about 18%.

As mentioned in our press release, we expect the Manufacturing segment to earn between $15 million and $20 million in 2011, a bit less than 2010. We expect underlying business conditions to improve gradually, but we are not counting on a repeat of the dramatic spring 2010 lumber inventory cycle or the tightness in global MDF markets caused by the Chilean earthquake last year. However, growing domestic demand, combined with incremental export demand, could provide stronger-than-expected lumber prices.

Rick reviewed our fourth quarter refinancing activities earlier. After considering the effect of these transactions, we expect our 2011 third- party interest expense to be essentially flat with 2010 at approximately $81 million. Lower Manufacturing segment results should result in a small tax benefit in 2011, less than $5 million. In all, we expect 2011 income from continuing operations to be between $1.20 and $1.45 per share, with the first quarter results between $0.20 and $0.25 per share. Now I'll turn the call over to Rick.

Rick Holley

Thank you, David. We remain cautiously optimistic as we enter 2011. Business conditions appear to be improving, albeit slowly, in each of our businesses. Lumber prices have been moving up over the past few months. We believe good production discipline on the part of lumber manufacturers, combined with growing export demand, is the primary driver of these improved prices.

Today, West Coast export log volumes are relatively small. However, they are growing rapidly and excellent long-term growth prospects.

In 2010, we started to see lumber production, the key driver for sawlogs, begin to recover from its lows. Regional lumber production data shows the relationship between lumber production and sawlog prices. On the West Coast, lumber production was up 33% compared to 2009. These markets also showed the strongest price movement for sawlogs, with our average price increasing 18% from 2009. In the U.S. South, where lumber production was only slightly above that of 2009, our average sawlog prices increased only about 2%.

We have planned for 2011 conservatively. We assume a fairly muted housing recovery, with residential construction activity growing from a 590,000 start level of the past year to about 680,000 starts in 2011. We also believe that increasing consumer confidence should lead to improved lumber demand from the repair and remodel sector.

The earnings outlook that we shared with you today assumes this slow improvement in demand over the coming months. However, with modest improvements in domestic demand, coupled with growing export demand, we could see a stronger price environment.

As David outlined, our 2011 harvest plans are very similar, in terms of both volume and mix, to those of the prior year. We plan to keep the harvest of our most valuable sawlogs low. Of course, we have the option of bringing more volume to the market, should log values return to attractive levels. And we are in excellent position to benefit from any temporary market dislocations that may occur.

In our Real Estate segment, we will concentrate on capturing attractive prices for lower-value properties, holding our most valuable lands for the future. We will continue to keep a close eye on our costs at the same time.

We continue to manage the company for long-term value creation. Disciplined investment and improving the growth and yield of our forests remains a top priority. During 2011, we are planning capital expenditures between $75 million and $80 million. Reforestation makes up the bulk of our $35 million of maintenance capital. We expect to plant about 60 million trees this year. The remaining capital is discretionary investment, primarily advanced silviculture treatments aimed at boosting the productivity of our forests.

Looking at the bigger picture, I remain as enthused about the prospects for Plum Creek and the fundamentals of the timber business as I ever have been. We have talked about the structural changes that are taking place in North American timber markets, and we are beginning to see some of their impacts today. Certainly, the change that has grabbed the most attention over the past six months has been the impact of Chinese demand on the North American lumber and log markets. West Coast log markets are benefiting from the increased competition for logs. We are seeing increased demand for logs, as lumber producers in the region boost production to serve Chinese demand. There's also growing competition from buyers of logs for the export market. Currently, the impact on log markets is region-specific and limited to the West Coast. However, continued export growth has the potential to impact North American markets more broadly. British Columbia has grown its trade relationship with the Chinese, with lumber shipments to China growing sevenfold over the past three years. It is estimated that Chinese exports accounted for 20% of British Columbia's lumber production in the second half of 2010. That's roughly 5% of North American lumber demand.

Disciplined capital allocation remains our top priority. We completed our refinancing activities over the past quarter, are in an excellent shape in both terms of our capital structure, liquidity and debt maturity schedules. We continue to evaluate the best uses for the excess cash we generate, searching out the best-value outcome for our shareholders.

Now we'll be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Rick Skidmore of Goldman Sachs.

Richard Skidmore - Goldman Sachs Group Inc.

Rick, can you just talk about what your mix of land currently is in terms of your total holdings? I see the acreage by state. But if you could break it down by mix of land and how you allocate it within the Real Estate business, small, large, HBU, development?

Rick Holley

Yes, at the current time, as you know, it's 6.8 million acres in total. Just less than 1 million acres would be in the higher and better use category. About 150,000 acres in the development category. I believe there's still a little over 100,000 in the conservation category and the balance of roughly 200,000 acres would be in the nonstrategic category. And roughly 5.4 million acres would be what's left, I think, and it would be in the core timberland category.

Richard Skidmore - Goldman Sachs Group Inc.

Can you talk about what you're seeing in the markets right now for timberland? You mentioned you bought back some of your stock in 2010. Are you seeing the spreads between the buyers and the sellers narrow? And are you seeing more opportunities as an acquirer of timberlands, as you go into 2011?

Rick Holley

Well, clearly, over the long term, we hope to be a net acquirer. But first, there's really nothing of note in the marketplace. There's no supply. At least, what little transactions we've seen, normally smaller than 50,000 acres, the prices are maybe off 10% to 15%. So it kind of held to the levels we've talked about over the last year or so. But quite frankly, there is just no supply, and there continues to be a fair amount of demand from institutional buyers for what does come on the market. But we remain, we think a long-term acquirer, because we like the asset and we think we manage it pretty well.

Richard Skidmore - Goldman Sachs Group Inc.

And just one last question. The CapEx you're spending on the advanced silviculture, is that primarily fertilization, or is that something else?

David Lambert

Yes, it's very heavy to fertilization, with some competition control as well.

Rick Holley

And it would be mostly in the Southern United States, in our lands there.

Operator

Your next question will come from Gail Glazerman, UBS.

Gail Glazerman - UBS Investment Bank

Speaking of land sales, or land markets, just briefly, there's a very large transaction announced recently in the state of Maine, kind of comparable [indiscernible] (0:33:30) your acreage there. Is there anything you know about kind of what was behind that? And anything on values there?

Rick Holley

Well, that piece of property has been on the market for some time, and I don't know what it traded for. We have not been able to find out. But it's north and east of our properties there. And quite frankly, the markets there are somewhat less developed, the lumber and pulpwood markets there. But it's a transaction, or at least a property we are very familiar with and, quite frankly, had no interest, even though we have a large ownership there. So it's probably end up being, as I think was reported in the press, more of a conservation play, as opposed to an industrial timberland play.

Gail Glazerman - UBS Investment Bank

I know you touched on a little bit on this in the prepared remarks, but can you talk a little bit more about the Northern sawlog pricing, the weakness in the fourth quarter and what's driven the rebound? Is there any more color there? I mean, I thought people have been fairly disciplined, and surprised to see that, that's come off that much.

David Lambert

We saw a little downdraft through the middle of the quarter. And, but we've seen, lumber prices firming really for the last four months. So the stronger lumber environment, it's really somewhat driven by the Chinese demand pull plus disciplined production. It's really started to take place in the West Coast. And we saw log prices jump up rather smartly in December, with strong follow-through in January.

Rick Holley

So Gail, I think a lot of it has to do with the Chinese lumber demand. And the Chinese are starting to buy lumber from U.S. mills on the West Coast. Virtually every one of our lumber customers in Oregon is now cutting for the Chinese market. But that really started kind of in November, December. So obviously for 2010, it was a fairly small volume, but it's picked up smartly, and it should be much higher this year. So that's really what -- log prices were down a bit early in the quarter, but that's what helped them pick up, as David said, in December and in through the first quarter.

Gail Glazerman - UBS Investment Bank

And the mix of logs going to China is, recently, attractive enough to drive up the average price, I guess?

Rick Holley

Yes.

Gail Glazerman - UBS Investment Bank

And just one last question in terms of what you're hearing from your customers going into the spring. Do you have any read on what they expect in terms of spring building activity?

David Lambert

I think most of our customers are, probably as we are, somewhat cautiously optimistic. I think the tax bill at year-end that was passed by Congress gave people some certainty that -- it brings consumer confidence and some of that, which will certainly help the building side. And I think maybe a more friendly, regulatory environment, which was talked about by the President recently, is helping people feel better about investments they're making in their mills and production levels and that sort of thing. So I think people are generally coming in the year, saying, "You know, it's going to get a little better." But our housing start number is still pretty muted. We thought we'd see 750,000 starts in 2010, and we were wrong. And we may even be a bit high at 690,000 for this year. It's going to come back very slowly, but we're starting to see some positive momentum for the first time, I think, in a couple of years.

Operator

Your next question will come from Chip Dillon. [Crédit Suisse]

Chip Dillon - Crédit Suisse AG

First question is on the Manufacturing segment. It looks like your improvement was a lot more pronounced than many others in the business when you look at 2009 versus 2010. How would you allocate that, between maybe some of the cost cutting you did versus product mix?

David Lambert

I think it's a combination. Our mills focus on specialty products compared to normal industry mills. Our lumber mill is a specialty boards facility. Plywood plants all produce high-quality sanded specialty grades, and there's MDF as well. So we have been a little bit more resistant to price declines that some of the commodity producers experienced in the second half of the year. Our results have remained very positive. When we restructured our lumber business last year, it took out some capacity out of our plywood and MDF businesses. We have these businesses dialed in and a cost structure that's much more efficient. And we think we're going to remain, and these are going to be good cash flow producers this year as well.

Chip Dillon - Crédit Suisse AG

In your guidance that it might be a little bit down this year in that segment, does that assume that prices don't, for your grades, in particular, in geographies, don't really move much from here? Or are you building in a decline or an increase?

David Lambert

Well, it's hard to get a big increase off of last year. Last year's pricing, if you look at the data, was quite the roller coaster, with prices generally peaking in April and coming down quite a bit by August. We expect that prices are going to be more stable this year. But we're getting out of the box strong in January, with pretty good lumber markets, so we'll see if we can't do better than we think.

Rick Holley

And, Chip, the Chilean earthquake and its dislocation to the global MDF market was very significant. When there was a shortage of MDF, prices, of course, supply-demand went up. And we increased production from our MDF plant and generated, in that plant alone, an extra $5 million in cash flow. So there was -- that event, we don't expect to recur. So we think pricing for all of these is going to do reasonably well this year, but there were some of these anomalies last year that -- and we hope they repeat themselves. Not the earthquake, of course, but the buildup of lumber pricing. But we're certainly not forecasting it right now.

Chip Dillon - Crédit Suisse AG

And then could you give us a little color on the budgeted or expected Real Estate segment sales this year? I guess, obviously, it depends on what the mix is. But it would look like, in very kind of rough terms, you might be looking at selling, I don't know, a couple 100,000 to maybe 250,000 acres. Is that kind of what you're looking at?

Rick Holley

It's going to depend on the mix and what we bring to market. It'll be a combination of some higher and better use lands, clearly a lot of nonstrategic-type lands. And I think a better number is probably in the 175,000, 150,000-acre number. It could be slightly higher than that, but it will not be in the 200,000 to 250,000. But it really is going to be mix-related and, again, a lot of it's going to be in that lower-valued areas like, again, Mississippi, the Lake States and nonstrategic lands throughout the ownership.

Operator

Your next question will come from George Staphos, Bank of America Securities.

George Staphos

I guess the first question I had -- obviously, it's a nice problem to have, with the increase in Chinese demand for both logs and lumbers on the West Coast. But given that historically the Chinese have been so opportunistic in coming in and out of the market, what makes your customers feel that this can be a sustained trend well to, perhaps, maybe what might be a more volatile trend into the future?

David Lambert

When I look at Chinese demand, it's been growing quite robustly. And for them, they're only providing about 60% of their supply from internal sources. They're very dependent on imports to provide that. They are still forecasted to grow their wood products production significantly over the next five to 10 years. They will have to be looking to increase their imports of wood fiber. And so I think they have developed some new supply sources over the last two or three years. Part of it they started looking as a result of the Russian export tax. But part of it is just they fundamentally need more wood fiber if they're going to keep their growth curve.

George Staphos

There really is no guarantees. But from your vantage point, do you think that the Pacific Northwest and North America have permanently gained market share, say versus Russia, in terms of shipments to China?

Rick Holley

This is Rick. I think that is absolutely correct. I think that these changes we've seen are, unlike what we saw from the Chinese a decade or two ago, are permanent. They've put infrastructure in place. They've put in grading standards and stuff for North American lumber now, which they dearly need. And they've always kind of been in and out of the log market. But the change, by buying so much lumber from both British Columbia and also the West Coast is quite a significant change for them, and they've made an investment in that business.

George Staphos

I only had one other question. if I go back to our model, and I think what you were commenting on during the third quarter reporting season, it looks like your fourth quarter pulpwood production, especially in the South, was meaningfully higher certainly than we were modeling, I think relative to what you were guiding to. If that's a correct assessment, can you remind us what was behind that, and why didn't that continue into 2011?

David Lambert

Our pulpwood harvest was a little bit higher. I think our sawlog harvest was, as well. It wasn't really a function of anything specific.

George Staphos

Dave, I seem to remember it was about 1.6 million that you were forecasting to in the quarter, and you came in close to 1.8 million. So that's what prompted the question. But...

David Lambert

About 200,000 tons.

Rick Holley

Yes, we're about 200,000 tons. And there was no particular reason, other than the markets still remain pretty good and we took the volume to our various customers.

Operator

We'll hear from Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank AG

A couple of questions. Three questions, actually. One is can you just update us, Rick, on the sort of alternative revenue streams that you've been working on off of the land?

Rick Holley

As far as our non-timber resource business?

Mark Wilde - Deutsche Bank AG

Yes, exactly.

Rick Holley

It's really a combination of oil and gas revenue that we get from royalties, basically from oil and gas leases, and that's the largest piece. We do have some construction materials revenue in there as well. And then any results that we have from that segment, oftentimes you see us actually sell or price another lease, which there were some of that in 2010.

Mark Wilde - Deutsche Bank AG

And I guess what I'm curious about, has that business grown the way you had anticipated, going back maybe three or four years ago?

Rick Holley

Oh, I think so. That was one of the businesses that we've continually mentioned to all you guys, is that we'd probably triple in size over the next five years, and we're still, I think, on line to do that. One of the things that slowed it a bit was the revenue from oil and gas, because gas prices are down significantly over the last three years, and that's hurt some of the royalties from that business. But clearly, with construction materials, some of the opportunities we have there, particularly with limestone for a concrete manufacturer, we've got some mines right now, they're in the process of being permitted. So when those come online, we'll see a lot more cash flow from construction materials. So it's the one thing we're quite excited about.

Mark Wilde - Deutsche Bank AG

Can you just talk about sort of regional fallout from either mill closures that have happened? I'm thinking particularly of Missoula. And also, I know there's this pending new page closure up in Wisconsin, and perhaps two or three more at some point out of Smurfit?

Rick Holley

Yes, we've been very fortunate. We spent a lot of time over the last five years in some of these land sales that we've had, these more nonstrategic -- we're really in markets where some of these mills existed. But we thought, long term, it was probably not a good place to own timberland. And in case of Missoula, we were right. So that large conservation transaction, we sold a substantial amount of our land down in the Missoula area, and in other parts of the country. We've sold some in Wisconsin, which would be -- certainly go to a new page to some of the customers there. So we really tried to focus on customers who are well-capitalized in grades of paper that we thought could compete long term. So we're really in pretty good shape. Even the Smurfit mills that we serve are some of the better mills in their system. And we think even with the merger that they're in the process of doing, the sale will remain open with the new buyer.

Mark Wilde - Deutsche Bank AG

And then the last question I had is can you just briefly give us sort of the puts and takes, as you think about sort of timber supply and timber demand over the next five or 10 years? Because it seems like that the depth of this downturn has probably put more timber on the stump, more inventory on the stump, than any of us would have imagined five years ago. At the same time, you've got this mountain beetle issue up in the Interior B.C., and now we've got this pickup in Chinese demands. So how do you sort all of those out?

Rick Holley

Well, the one thing we need to keep in mind, as you look at timberland ownership, a lot of these companies, like Plum Creek or Rainier Pollatch [ph], whoever it is, deferred some harvest. We represent such a small portion of total timber supply. If you look at the U.S. South, 80% of wood fiber there is owned by small non-industrials who are not necessarily acting the same way. So there's not as much inventory on the sidelines, as one might think, that's not been cut. But setting that aside, you make a really good point. Because on the demand side, with the whole situation in B.C., and we're starting to see the impact of that, with B.C. increasingly serving the Chinese market, with the Chinese on the West Coast market, so there's new demand sources and there's going to be a shrinkage of supply out of B.C., which is going to require that more of the lumber production ultimately come from the United States, especially as markets recover. And the other thing that you've heard us talk about is this whole energy opportunity, be it biomass or renewable energy. And it's a little slow on the take here. But eventually it's going to have an impact, we believe, on the marketplace, and that'll impact pulpwood. And at the same time, and David mentioned in his comments, is, really, we think one of the governor on this engine of timber supply is contractor capacity. And I can't even overstate how significant of an impact that's going to have as this market recovers. If you look at production being down 20% to 30% in the U.S. South, that means 20% to 30% of the contractors have been out of business for two or three years, and many of them will not be back. So as we see demand improve, it's going to be very hard to get that product back to market, and that's the governor on that engine. That's why we believe we'll see more price impact from a recovery than we might expect otherwise.

Operator

Your next question will come from Steven Chercover, D.A. Davidson.

Steven Chercover - D.A. Davidson & Co.

Can you gauge how big you think the Chinese market could ultimately be? I mean, it's up sevenfold over the last couple of years, but is it still fairly embryonic, do you think?

Rick Holley

It's up sevenfold from a very small starting point. But I think it's ...

David Lambert

This year, we expect them to import about 2 billion board feet of lumber from Canada and the United States. Over 90% of that is coming from Canada. If you look at the run rate just in kind of the fourth quarter, they're kind of importing at a 3 billion board foot level. So they're already greater than 5% of what North American production capacity is at this point. Their growth trends, which show them needing to almost grow by 50% over the next five to six years their total level of imports -- and so we think that this could be a very big opportunity. I'm somewhat surprised that it's manifested itself this quickly and rapidly. And it's starting to have an impact. But you still have to remember that sawmills here in North America are running closer to 60% of capacity. Housing's still awful. What I want to do is fast-forward in my mind five years, when we don't have the timber supply out of British Columbia, mills are running at full or capacity, the U.S. dollar remains relatively weak compared to where it was in the last cycle. I can see much higher lumber prices and very vibrant log markets in that scenario.

Steven Chercover - D.A. Davidson & Co.

The U.S. is still selling primarily logs. Are you directly participating or just enjoying the benefit of higher prices in the region?

David Lambert

Up till now, we have not been selling the volume to China, or it wasn't really that measurable. But as I indicated in my comments, we expect to sell 7% of our first quarter production to China off of our lands in our West Coast region in the first quarter. So as Rick indicated, we're just really starting to see dramatic changes in the markets in the last couple of months.

Rick Holley

And Steve, we're not selling any lumber directly to China. But virtually every lumber customer we have in the state of Oregon is now cutting for the Chinese market. So we're indirectly impacted, even with our logs that stay in the domestic market.

Steven Chercover - D.A. Davidson & Co.

Over the years, you've divested quite a number of sawmills in Southern states and you've closed facilities in Montana. Would you ever actually contemplate, probably not building but buying a coastal mill so as to capture additional value as you start to exploit the Chinese market?

Rick Holley

No. I think we'd rather somebody else own the coastal sawmills and we'll just provide logs to them.

Operator

Your next question will come from Joshua Barber, Stifel, Nicolaus.

Joshua Barber - Stifel, Nicolaus & Co., Inc.

In light of all your comments about China so far, have you seen any demand from the Chinese in actually buying some U.S. timberlands as opposed to just the lumber and logs so far?

Rick Holley

No, we haven't. And it's a question we asked ourselves a number of years ago. And I think there was a hesitancy on behalf of even some of the sovereign funds in China of doing that and how it would look domestically here. So, no, we've not seen them at all interested in buying timberlands here. Not to say that it wouldn't happen in the future, but so far, it is not.

Joshua Barber - Stifel, Nicolaus & Co., Inc.

Would you say most of the momentum that we've had so far in the log and lumber prices in December and January is driven by China? Or do you think some of that has to do with some people being a little bit more optimistic about spring building season?

Rick Holley

Probably more China than the spring building season, but really some of both, probably 2/3-1/3.

David Lambert

I think you can see a little bit of it manifested in that you have higher lumber values coming out of British Columbia and the West Coast, and they have shown that, where southern lumber values haven't participated as much. And so it is a little bit of a regional phenomena, as you see tightness in the overall markets improve than we would expect it to spread to the South.

Joshua Barber - Stifel, Nicolaus & Co., Inc.

Have you seen any, I guess, improvement in the quality of the logs that they're looking for now? Or are they still pretty much sticking to, I guess, the number two to number four grade lumber?

Rick Holley

Yes, they generally buy the lower-grade log and lower-grade lumber. And that's primarily what they're buying out of British Columbia is the lower-grade lumber products that -- a lot of it's being manufactured from beetle-killed timber. And they're using it for crating and that sort of application, not 2x4 homebuilding. Hopefully that'll come in the future.

Operator

Your next question will come from Mark Weintraub, Buckingham Research.

Mark Weintraub - Buckingham Research Group, Inc.

Actually, you've touched right on where I was hoping to go. So on the Chinese lumber demand, what are the uses, if you could expand on that a little bit more?

David Lambert

A lot of it is for concrete form support, dunnage and that. It's not going into final applications on a permanent basis. But they have a huge furniture flooring business, and they break down the wood and use it in all different applications.

Mark Weintraub - Buckingham Research Group, Inc.

And so are you displacing Russian wood on this? Or is this growth that you're taking advantage of?

David Lambert

The Russian wood has declined from where it was back in 2007 with the tax. At this point, I think we'd expect Russian imports of logs to be stable to rising. And so this is really handling the net growth in the market following that tax. So compared to 2007, yes, we have replaced Russian wood, but so has New Zealand and other countries as well.

Mark Weintraub - Buckingham Research Group, Inc.

And then two other quick ones. First, on the acreage that you are anticipating you'll be selling next year, I think you've mentioned 150 order of magnitude?

David Lambert

That's correct.

Mark Weintraub - Buckingham Research Group, Inc.

Can you break that into categories?

David Lambert

No. It will be a mix of our higher and better use and our nonstrategic land. There'll be some conservation, but it's going to be small compared to what it's been in the last couple of years.

Mark Weintraub - Buckingham Research Group, Inc.

And can we look at, for instance, what 2010 was to be indicative on a mix basis for 2011, most likely?

David Lambert

Yes, if you want exclude the conservation.

Rick Holley

Exclude the Montana conservation deal, and the mix will not be that dissimilar.

Mark Weintraub - Buckingham Research Group, Inc.

Then lastly, I recognize, obviously, the development markets have been kind of on hold, particularly in terms of any selling activity. But have you been able to do much in terms of positioning yourself for the future during this downturn, in regards to entitling activity or anything of that nature?

Rick Holley

There's one silver lining in this down economic environment, is the willingness of a lot of these jurisdictions to work with you on entitlements. So we spent a lot of time in 2010, and will again this year, getting properties entitled, particularly in Florida, where we have some wonderful properties near Gainesville and other places. So that's where we're spending a lot of time and energy today, and it's a lot easier right now than it would have been three or four years ago.

Mark Weintraub - Buckingham Research Group, Inc.

Are there any either overall numbers you can give us to give us a sense as to the scope of the activity, or any specific projects of particular note?

Rick Holley

Yes, I think we've got two or three projects in Florida. The one of the largest -- we have two projects near Gainesville, Florida, where the University of Florida is, which would be the largest and probably the most near-term. And we're going to spend probably $2 million to $4 million in 2011 on entitlement activities. Again, most of it will be there in Florida.

Operator

Your next question will come from Daniel Cooney, KBW.

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

I was hoping that you could talk a little bit about the dividend outlook. Is there a certain coverage ratio that you guys would like to see before you get comfortable with an increase? Or is it more based on kind of a sustained improvement in sawlog pricing and harvest levels?

Rick Holley

I think it's more a case of, as we said in the call comments, we more than covered the dividend in 2010, and will in 2011 as well. But as we continue to see the core business, that being our timber resource business, improve this year and next, I think then you could look to an increase in the dividend. We want to make sure that any improvement to that business, we can sustain, because you hate to go forward and never come back again. But clearly, we're focused, as business conditions improve, to grow the dividend.

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

And maybe could you talk about the $4 million conservation easement sale during the quarter? Just how many acres did that cover and whereabouts was that? And maybe, as a reminder, if you know offhand how many of the 6.8 million acres are under easement?

David Lambert

Easement was in the Lake States region, in Wisconsin.

Rick Holley

How many acres was it?

David Lambert

Don't have that offhand.

Rick Holley

We'll get that for you, Dan.

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

Just one final question. I'm not sure if this is in the release. But is there a LIBOR floor on the new credit line facility?

David Lambert

It floats with our credit ratings. And so it's currently priced at LIBOR plus 170, plus 30 basis point facility fee. There is no floor.

Rick Holley

Dan, you asked how much of our total land is under conservation easements. And it's probably only a couple of hundred thousand acres. But we'll get that for you as well.

David Lambert

That CE in Wisconsin was 8,000 acres, Dan.

Operator

And your next question will come from Peter Ruschmeier, Barclays Capital.

Peter Ruschmeier - Barclays Capital

You indicated, I believe, that nearly every customer in the Northwest was sending at least some wood offshore. I'm curious if you've seen any evidence in the U.S. South of interest in Chinese demand for U.S. South customers?

Rick Holley

We haven't seen that as of yet. I think the Chinese, they're comfortable with kind of the Douglas-fir and the hemlock species, and that's why they have focused their activities here in the Northwest thus far. But I think, to the extent their demand continues to grow and it can't be served by this market, they very well will look there. And the other good thing is, to the extent that they're buying a lot of product in this part of this region of the country and from B.C, as demand improves, that demand will have to be filled by the U.S. South. So they'll participate indirectly anyway.

David Lambert

Secondary story, Pete, but exports have been growing to many regions and not just to China. U.S. exports are going to be up 50% in lumber this year. And China just represents a small portion of that growth. So with the more competitive dollar, the industry's really positioned itself to be much more competitive globally.

Peter Ruschmeier - Barclays Capital

And Dave, I think you mentioned -- if you look out a couple of years, you highlighted some of the factors that appear favorable and could help lumber pricing. I don't know if Dave, or Rick, you care to comment on your expectation of the relationship on lumber pricing and sawlog pricing?

David Lambert

What we've seen is a strong relationship between lumber production and sawlogs over time. So as greater demand from sawmills grow, then we see it flow through into log values. You do need to have a certain level of lumber prices to allow the mills to pay. And it's been our experience over time that most of the value flows through to the land owner in the form of the trees, and that's, from a strategic perspective, why we have always positioned ourselves more as a land and timber company as opposed to a mill converter.

Rick Holley

We spent some time, Pete, actually graphing out lumber production vis-à-vis log prices, both in Northwest and also in the South. And they do correlate, more so than lumber prices and log prices.

Peter Ruschmeier - Barclays Capital

Also coming back on the silvicultural expenditure. I think you indicated that the maintenance CapEx is only for replanting and whatnot. I think you said it was about $35 million. So it looks like you've got about $40 million to $45 million of kind of opportunistic spending. What kind of returns do you expect on that? Or how can you talk about that in terms of improved volume or yield from your lands as a result of that spending?

Rick Holley

Yes, that $40 million to $45 million, there's probably around $3 million that will go into maintenance capital in our sawmills and lumber and plywood and MDF. And as I mentioned, $2 million to $4 million will go for entitlements in our Real Estate business. But the balance, the return for our silvicultural investment is kind of 15% IRR or higher for us to make the investment. And we go through an investment analysis in every one of those silvicultural expenditures.

Peter Ruschmeier - Barclays Capital

And I guess on a related point, I'd be curious, Rick, how you think about this. If you have a biologically mature acre today, how much more volume do you think you have off of that acre relative to what a biologically mature acre of similar site index would have 10 years ago? And is there much move in productivity over time, or do you view this as fairly static?

David Lambert

I think with respect to well-managed commercial timberlands, you are seeing improvement. But I think Rick, in his comments earlier, talked about how 80% of the timberland is owned by small non-industrials. So there's a portion of the market that's doing this intense silviculture, starting with better seedling quality in the fertilization and competition control. So the yields off the lands today are better than what they were for 20 years ago, and we're starting to see that in our forests. And that's certainly part of the growth prospects, why we see our harvest growing to 20 million tons in the future from the 15.5 million tons we're at today. And that even includes downsizing our portfolio with the disposition of real estate. So we're getting about 1.5% compound annual improvement in productivity.

Rick Holley

So if you go back 10 years, it's like 16% to 18% more productive today than it was 10 years ago.

Peter Ruschmeier - Barclays Capital

Rick, you mentioned that biofuels has been a little slow out of the gate. Can you remind us what kind of volume off your lands you sold for biofuels in '10? And what kind of visibility do you have in the next one to two years?

Rick Holley

In 2010, it was probably 0.5 million tons that went -- and basically tops and limbs from trees, basically, that was sold for biomass, probably at an average margin of $4 to $5 a ton. So it's $2.5 million of net income in 2010. Should be up a bit in 2011.

Operator

Your next question will come from John Tumazos, Very Independent Research.

John Tumazos - Independent Research

Last year, there was an awful lot of mud in the spring. And my reference was five times one to two feet of snow out here. So far, we've got three times one to three feet of snow out here. How do you assess the risk that your harvest will come up short?

David Lambert

I think, John, what we had is last year very -- we don't really have -- the harvest up in the Northern segment, we don't really mind the cold and the snow. They work well. I think what we saw is last year, the U.S. South had a very wet spring and mills were tight on inventories, and we got some really strong pulpwood values early in the year. And you saw pulpwood values decline as the year went through. It wasn't really from lack of demand. It was just that we didn't have the same difficult harvesting conditions. Right now, we're having a rather dry fall and winter down south, and so we really don't have that difficult of logging conditions, and it's impacting pricing a little bit. We don't sense any risk into our harvest outlook with respect to weather at this point.

John Tumazos - Independent Research

So we should be watching rain in Atlanta?

David Lambert

We love rain in Atlanta. I mean that's one of the benefits of having such a diverse land base. When those really difficult weather events happen, we have land that can operate in that scenario and capture that kind of incremental opportunity, sometimes better than others.

John Tumazos - Independent Research

How much of your output do you estimate will be exported by your customers in 2011, given the roughly 1/8 export ratio of the containerboard industry and improving tendency for wood exports? 5%, 10%?

Rick Holley

Yes, it's probably 5%. If you look at this year, maybe our lumber exports from, for instance, Oregon and Washington, let's say it's a couple hundred million board feet, maybe a little higher than that. That's really two or three sawmills in full production, and they're not all doing 100% to the export market. So it's still 5%, 10% probably this year. And there's opportunity to grow some, but they'll always be wary of the Chinese market and still cut for the domestic market as well.

John Tumazos - Independent Research

Do you supply much pulp to container board mills that export?

David Lambert

Very much so. I mean we supply that. And containerboard is really an asset that the U.S. mills do a great job with on a global basis. And so we kind of have a representative position in that market.

Operator

Your next question will come from Joshua Zaret, Longbow Research.

Joshua Zaret - Longbow Research LLC

One question. Tell me what I'm missing here. I believe your guidance on third-party interest expense for this year was flat. And when you put out your release on your financing, I believe you said that when you prepaid the notes, that your interest expense would go down by approximately $14 million. So what am I missing?

David Lambert

We said that by prepaying that $13 million we would save $14 million in future interest expense. And so we have done that. But year-over-year, our total third-party interest is flat.

Operator

Your next question will come from Chip Dillon, Crédit Suisse.

Chip Dillon - Crédit Suisse AG

Maybe I heard this wrong. But David, I think when you were going through the outlook, you might have said $1.20 at the low end? You meant $1.25, right?

David Lambert

Yes, I meant it would be $1.25 to $1.45 for our earnings outlook for 2011.

Chip Dillon - Crédit Suisse AG

If you look at the acreage you're giving us on the last page, it looks like it's 6,771. And then you compare that to the 7,050 from the March 16 slides. The difference there is about 22,000 more than the 257,000 you reflect in the table. And I didn't know where those 22,000 acres went? Can you account for that difference?

David Lambert

I'd have to try to reconcile that.

Rick Holley

We'll reconcile it and get back to you on that.

Operator

Your next question will come from Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank AG

A follow-up, Rick. I'm just curious, with all of this pressure on state governments and on the federal government, does this have a material impact, you think, over the next few years on your ability to sell conservation easements and that sort of thing?

Rick Holley

Well, clearly, funding at the federal level should be -- well, the Obama administration and their budget actually had more conservation funding than the previous administration. But it's going to be somewhat at risk, I think. And clearly, any state funding is going to be down, so it's going to be harder to get. And our partners, like The Nature Conservancy, are working pretty hard on that, and The Trust for Public Lands. But I think conservation funding will be tougher the next couple of years than it has been the last couple of years.

Mark Wilde - Deutsche Bank AG

Are those NGOs seeing kind of pressure on their own budgets as well?

Rick Holley

Yes, absolutely. I mean, everybody's giving's down, so they are watching their costs as well.

Operator

At this time, there are no further questions. Mr. Rick Holley, do you have any closing remarks?

Rick Holley

Well, thank you, everyone. And we'll have our Investor Day in March. And we'll be getting the invitations out, and we hope to see you then. Thank you.

Operator

And this concludes the conference call. You may disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Plum Creek Timber's CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts