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Plum Creek Timber (NYSE:PCL)

Q1 2011 Earnings Call

April 25, 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

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

Mark Wilde - Deutsche Bank AG

George Staphos

Steven Chercover - D.A. Davidson & Co.

Mark Weintraub - Buckingham Research Group, Inc.

Gail Glazerman - UBS Investment Bank

Operator

Good afternoon. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek First Quarter Earnings Conference Call. [Operator Instructions] Mr. Hobbs, you may begin your conference.

John Hobbs

Thank you, Brian. Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2011 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 first quarter of 2011.

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

Now I'll turn the call over to Rick.

Rick Holley

Good afternoon. The first quarters of 2011 and 2010 have really highlighted the local nature of the timber business. Looking back at last year, we saw very strong log markets from both pulpwood and sawlogs in the U.S. South, while at the same time, we experienced weak markets in the Pacific Northwest, particularly in Oregon where sawlog prices were down. This year, the situation is completely the opposite with stronger markets in the Pacific Northwest and weaker markets in the South.

A geographically diverse timberland portfolio is an advantage. It reduces risks and enhances our operational flexibility. Having such a regionally diverse asset base Jakayla has shown us value and has given us flexibility. Through the depths of the economic downturn, we had no liquidity issues. We had a strong balance sheet, we maintained an investment-grade credit rating and we maintained our commitments to our shareholders. We've emerged from this period with a stronger balance sheet, a more productive timberland portfolio, lower SG&A costs and lower annual cash obligations. We believe the worst is behind us, but it remains a tough operating environment.

As I said in my letter to shareholders this year, I feel more optimistic about this company, our position and our future opportunities than ever before. As we look at the recovery, we couldn't be happier with how we are positioned to benefit.

Our harvest is growing over the long term in both terms of volume and value. This is the foundation for our sustainable long-term cash flow growth. With residential construction running at approximately 1/3 of the nation's demographic needs, pent-up demand for housing is growing.

Sawlog prices will recover as lumber and wood product demand improves. The current market conditions for softwood and sawlogs in the Pacific Northwest are a witness to that. The structural shifts playing out in the North American market, growing Chinese demand, Canadian harvest reductions and renewable energy demand will further improve log and timberland values.

Some of these factors are impacting markets today. Others will take a few years to fully develop. These changes will occur and form the basis of our outlook and the excitement we have for our assets and our company. David will now review our first quarter results and discuss with you the outlook for the second quarter. David?

David Lambert

Thanks, Rick. We reported first quarter earnings of $0.23 per share, within our guidance range of $0.20 to $0.25 per share. Examining our business segments, performance was mixed versus our initial expectations.

The Northern Resources and Manufacturing segment results were better than we had anticipated, while the Southern Resources segment was weaker than we had expected. The Real Estate segment performed as anticipated.

In the Northern Resources segment, we reported a $7 million profit, $3 million higher than the fourth quarter. The improved results were driven by higher sawlog prices in the Pacific Northwest and seasonally higher hardwood harvest volumes in the northeast. Our average Northern sawlog prices increased $7 per ton or about 11% during the quarter. Market prices in the Pacific Northwest continued to improve, with softwood sawlog prices in the region up 15% quarter-over-quarter and up 40% from the trough levels in the first half of 2009.

Pacific Northwest sawlog supplies remain tight as landowners continue to restrict harvest and China exporters compete for logs. Hardwood sawlog prices in the Northeast and Lake States remain stable at attractive levels. The strength in hardwood sawlogs has been driven more by scarcity within our operating areas than by any significant increase in demand. Northern Segment pulpwood prices improved modestly, up $1 per ton during the first quarter on good demand from customers in New England and the Lake States. Softwood sawlog pricing in the West should continue to advance in the second quarter as mills compete against strong export demand in the Northwest and spring break-up limits timberland supply in the Northeast and Rockies. We expect Northern sawlog prices to continue to improve with average prices up $4 per ton during the second quarter. We expect our average Northern pulpwood prices to be stable during the second quarter.

In the Northern Resources segment, harvest declined seasonally in the second quarter to their lowest levels of the year, as thawing spring weather limits timberland accessibility. We expect our second quarter harvest will be between 800,000 and 850,000 tons, similar to the harvest level at the second quarter of 2010. However, unlike 2010, we expect the harvest decline to come from pulpwood as we plan to maintain our harvest levels in Oregon to serve an attractive export market.

Turning to our Southern Resources segment. Our first quarter operating profit was $19 million, down $9 million from the fourth quarter's $28 million profit. The decline in operating profit was due to a combination of lower harvest volumes and lower sawlog prices. An unusually dry weather pattern allowed easy access to timberlands for most of the quarter, allowing both sawlog and pulpwood customers to easily maintain their log inventories.

We reduced our sawlog harvest volume about 130,000 tons or 9% from the fourth quarter level. Sawlog prices declined between 4% and 10%, depending on the region within the South. We did find a couple of attractive spot market opportunities to sell small-diameter sawlogs during the quarter. As a result, we harvested about 100,000 tons more sawlogs than we initially expected, all of it in the less valuable smaller diameter sawlog class. So our mix shifted within the sawlog category to lower-value trees, and our average sawlog stumpage price declined $2 per ton or 10% from the fourth quarter level. We expect Southern sawlog prices to remain muted during the next quarter, but expect them to rebound in the second half of the year as we get into a typical wet weather pattern in contrast to this abnormally dry period we have experienced.

The pulpwood harvest was approximately 300,000 tons or 17% lower than during the fourth quarter level, and core pulpwood prices were generally stable during the quarter and we expect them to remain stable during the second quarter.

We are planning on holding our Southern harvest fairly steady during the second quarter. However, we will shift the mix away from sawlogs and more towards pulpwood. We expect to reduce our sawlog harvest between 50,000 and 100,000 tons and increase our Southern pulpwood harvest by a similar amount. As always, we will continue to adjust our harvest plan 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 $62 million and operating income of $38 million for the first quarter, just beyond the high end of our initial expectations. The first quarter results included a $43 million sale of large nonstrategic land in Northern Mississippi that captured a little over $1,400 per acre. The sales price reflects the specific stocking level and age of the timber on this property and is consistent with our view that the average Southern Core Timberlands are valued in today's market at approximately $1,500 to $1,600 per acre.

The balance of the sales consisted of approximately 2,500 acres of small, nonstrategic lands at an average price of just over $1,000 per acre and nearly 8,000 acres of recreational lands at an average price of $2,100 per acre. We also completed 335 acres of conservation sales at an average price of nearly $1,700 per acre. The prices we received in the first quarter are broadly consistent with the values we've captured within each category over the past several quarters.

Interest and activity in real land markets has continued to improve, and we see some early signs of recovery in some of the higher-valued regions like Georgia and Florida. The relatively lower-valued regions of the Lake States and Gulf South to be the most -- continue to be the most active, while activity in Montana remains quite low.

We expect second quarter real estate revenues to be between $65 million and $75 million. We expect land bases to be approximately 30% of revenue in the second quarter. We continue to expect full year 2011 Real Estate segment revenues to be between $250 million and $300 million.

The Manufacturing segment continued to perform well, reporting a $4 million operating profit in the first quarter, up $1 million from the fourth quarter last year. Both our plywood and MDF businesses are experiencing improved demand from industrial and commercial market sectors that we serve. Sales volumes increase reflect an improved demand for concrete forms, truck doors, recreational vehicles and furniture and store fixtures. Our sales price has also increased in lumber and MDF, while our plywood prices held steady. We expect second quarter performance in Manufacturing to be similar to the first quarters.

Looking at below the line, we expect not much change on our interest expense during the second quarter, and we expect to have a modest tax expense. In all, we expect our second quarter income from continuing operations to be between $0.25 and $0.30 per share and continue to expect to report full year earnings between $1.25 and $1.45 per share.

Now I'll turn the call over to Rick.

Rick Holley

Thank you, David. The devastating earthquake and tsunami in Japan is certainly a great tragedy for the people of that strong nation. Shortly after the news, the Plum Creek Foundation made a $25,000 donation to relief efforts in Japan, in addition to matching individual employee contributions to relief efforts. The Japanese are very resilient as a people and very industrious. They have an affinity for wood and wood-based construction. They will need lumber and wood panel products as they rebuild from this tragedy. Our experience with other natural disasters tells us that rebuilding will take time and will be spread out over a few years. So we would expect to see more activity in North American exports of logs and wood products to Japan over the next 2 to 3 years as a result.

However, Chinese demand remains robust and as we saw sawlog prices in Oregon rise 18% since the end of March, we have shipped 7%, around 15,000 tons of our Oregon harvest volume to China in the first quarter. We expect to grow that to greater than 20% of our volume in the second and third quarters of this year.

Overall, we feel pretty good about 2011, as well as 2012 and '13 as we look ahead. We are well positioned and have excellent operational and financial flexibility. Moody's recent upgrade of our bonds to Baa2 underscores our financial health.

On March 22, we held an Analyst Morning in New York City and reviewed in some detail our long-term outlook for each of our businesses and provided some analysis on a handful of the structural changes that are taking place in our industry. These changes, coming reductions in Canadian timber harvest, increased offshore demand for logs and lumber from emerging markets and increased global demand for biomass-sourced energy will all have a significant, positive impact on the value of our asset base and future cash flows. If you have not already done so, I encourage you to review the presentation materials on the Investor section of plumcreek.com.

Now we'll be happy to take your questions. Brian?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Staphos of Bank of America.

George Staphos

I guess the first question I have, you mentioned that you're seeing some initial signs of improvement in Florida and Georgia in terms of those markets. Is there any way to put some quantification around what initial signs you're seeing and maybe the kind of improvement you're seeing perhaps in land values or the narrowing of the bids and spreads within the market?

Rick Holley

I think what we're seeing are indications of interest. In other words, there's a lot more inquiries about lands generally there. As you know, over the last couple of years, we pulled many of our tracks off the marketplace. And now we have investors, both recreationalist investors looking for land in those marketplaces. They're down values-wise probably 30% from the peak. In my guess, we're starting to see some movement back on price, maybe as much as 10%, so start moving in the right direction. Not enough to get us excited to bring a lot back to market, but nevertheless is a positive sign.

George Staphos

I appreciate that. I guess 1 follow-on. When we look at the Real Estate segment performance, you mentioned that it was in line with your expectations. Was the nonstrategic sale contemplated to the size that it was in the first quarter guys? I don't recall.

Rick Holley

Yes, it was, George.

George Staphos

Okay. 2 last questions. 1, when I look at the performance in Southern Resources, both year-on-year and sequentially, the EBIT decline is not explained entirely by the price drop that you saw for your products, primarily Southern sawlogs. Was there anything else in either mix or volume that would account for the variance that's not explained by price in terms of your EBIT comparisons, either year-on-year or quarterly?

David Lambert

I mentioned in my comments, we did focus on a smaller diameter sawlogs. It was a weaker mix and then with the decline in price, we did see some marginally higher fuel costs here in the first quarter as well.

George Staphos

Okay, that's fair. I guess last question, I'll turn it over. Now looking at some of the data that we have for the market for 2010, it looks like harvest were generally up either in the South or in the West between 5% and 10%. That's a market commentary, not a Plum Creek commentary. You obviously are pretty flat as you deferred harvest. First of all, I don't know if you agree with the premise of that statement, but if you are seeing the market begin to harvest a bit more despite what you are seeing as still pricing, it's not as attractive as you'd like it to be. Does that at all adjust perhaps in the way you're thinking about your strategy for harvest down the road? Perhaps you start to bring more to market than you initially had anticipated, given what you're seeing elsewhere in the market. Thanks, guys. Good luck in the quarter.

David Lambert

I think some of the harvest in the South is a function of weather. Operators have stands that can only be harvested when weather is dry, and so if that happens once every 10 years, they tend to go in and harvest those stands when they have that opportunity. So I think some of the volume you see coming to market is a function of the weather, and it definitely had an impact on the pricing of logs from the South. We think this is not a trend, but a seasonal aberration. And last year, we kind of got a little bit of the flip side. There are some positive market features, but it was very wet weather at that point, and that explains some of the differential in pricing.

George Staphos

But looking at '10, you're not as concerned at all that the market participants are losing, if you will, discipline relative to your own discipline in the market?

Rick Holley

No, we don't think so. We just think, as David said, it's really a function of weather conditions and the opportunity to bring the wood to market, whereas we resisted that, and a lot of the other large -- larger landowners are resisting it as well. Whereas, if you look in the Western markets, particularly in Oregon, more volume came to the market because prices were up and demand because of China, in particular, were really good. And we're likely to bring more wood to the market in Oregon than we initially anticipated. And as we mentioned in the comments, we'll bring less wood into the -- especially sawlogs into the southern market.

George Staphos

Okay. Thanks for the color, guys.

Operator

Your next question comes from the line of Gail Glazerman from UBS.

Gail Glazerman - UBS Investment Bank

Focusing at -- following up on that last comment a little bit, can you give some incremental color on what you are seeing from Asia? There have been reports that the situation in Japan has actually caused an inventory build. There's also been talk that domestic lumber inventories in the West are starting to build a little bit. Are you seeing impacts in your markets and if not, why not?

Rick Holley

We haven't seen any inventory build, either in lumber inventories or certainly not log inventories. If we had more wood available, we could ship more wood into China than we are today, so demand there is very, very good. As far as any inventory buildup, there could be some buildup of some chips and other materials that were heretofore going to Japan, and because of the situation there either have to be diverted to other ports or on hold temporarily, but we've not seen that with either logs or lumber.

Gail Glazerman - UBS Investment Bank

Okay. And just when you talk to your domestic-focused customers, what are you hearing these days? I mean, they're -- with lumber prices continuing to erode, they must be getting pretty squeezed. Are they seeing any sign of recovery or pick up?

Rick Holley

Well, they're not seeing any -- much sign of recovery or pickup. Again, these 2 markets are quite different. The southern guys are struggling a bit because the housing market remains slow, the do-it-yourself market, although improving, has not improved to where it was a couple of years ago, so they're struggling a bit. But log prices are down, so they're not getting quite the squeeze. But if you look at the western markets where log prices have gone up fairly significantly, yet lumber prices in the domestic markets stayed fairly low, there's a lot more squeeze there. Many of the western lumber customers are now cutting lumber to specs and selling it to the Chinese market to make up some difference there. But there're quite different markets for both lumber today and also logs because of the Chinese influence on the West Coast.

Gail Glazerman - UBS Investment Bank

Okay. And following up on the comment on the fuel costs in the first quarter. Is there something that you'd expect to see an even bigger hit, given what's been happening kind of going into the second quarter?

Rick Holley

Well, we would expect -- we still expect fuel prices, diesel fuel prices to go up a bit from where they are today, and it's kind of a $8 million to $10 million impact on Plum Creek's finance results. And we're working with customers to at least share some of that pain and many customers are willing to do that, but that's 1 of our key initiatives here is we need to make sure the contractors are financially stable, and we've got to pay for that higher fuel cost and we're just trying to get the customers to share that and hopefully we'll get them to share at least half of that net bill.

David Lambert

And that amount would be with respect to the entire year from what our initial expectations might have changed.

Gail Glazerman - UBS Investment Bank

Okay. And you talked a bit about some of the rural land markets. I'm just wondering if there's any comment update, activity that you're seeing on the institutional side.

David Lambert

No. Not any real activity other than they're all seemingly have a lot of capital and there's nothing in the markets, so they're probably calling every large timber owner, like ourselves, looking for product. So there's really a fair amount of demand for quality timber properties and really no supply. But they seem to be very active at least in looking at anything that comes on the market. Thus, our willingness to sell the lands in Northern Mississippi, which somebody approached us, these were less desirable, less strategic lands for us over the long term and we got a very good price. So hence why we sold the 30,000 acres in the first quarter.

Gail Glazerman - UBS Investment Bank

Okay, thank you.

Operator

Your next question comes from the line of Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG

Rick, can you give us your best guess as to where logs and lumber are exactly going into China? What markets are these going into?

Rick Holley

Basically, they're going into -- a lot are for concrete forming, crates, pallets. That's why out of Canada, the Chinese, they're not buying a high-grade lumber, they're buying number 2s, number 3s, number 4s. 3s and 4s, they're fine with. They're buying basically a lower-grade product out of both the West Coast of Oregon and Washington and also from Canada. It's going into those lower-grade applications. They're starting to see a little bit more home construction, wood and home construction. The Canadians have done a really good job of working on the Chinese on different building standards and codes and so on and so forth that I think will help that business grow over time. But right now, it's lower-grade applications.

Mark Wilde - Deutsche Bank AG

And are they buying from here because they're buying less from, let's say, Russia?

Rick Holley

Yes, they are buying. They're still buying a lot of logs out of Russia, but they've decreased some of the amount they're buying from there and they've picked up their purchases both from Canada and United States. So part of it is Russian, but also a big piece of it is just their growing demand for the product generally as their economy grows.

Mark Wilde - Deutsche Bank AG

Okay. And just how do you think about kind of manage this going forward? Because I think the Chinese bought a lot of logs over here going back in the late 80s and it dropped off and now it's really picking up again. And just thoughts on sort of managing that volatility from China?

Rick Holley

Well, that was our first question, is this real long-term demand or is it just a spot market aberration? And once the availability from Russia becomes cheaper or more available that they leave the North American market and buy more wood out of Russia. I think what we're finding in spending time talking to people that we have relationships with in China, both the Japanese and others, that this is real long-term demand, that they're in the market, they've made their commitments to the market and they're here for the long term. So I think at least over the next 2 or 3 years, you're going to see their demand actually increase from where it is today. I mean, it's grown tremendously in the last year and I think it will continue to grow.

Mark Wilde - Deutsche Bank AG

Okay, and then Rick, how do you read this drop, this really kind of sharp drop that we've seen in lumber futures recently? And will a drop in domestic lumber prices start to ripple back into log prices here before long? Or what's the risk of that?

Rick Holley

Well, I wish I knew more about the lumber futures market like many of those things, so I can't really speak to that. But I think we're seeing lumber prices fall off a bit. Part of it is seasonal thing, part of it is weak housing. But I think in the second half of the year as you see maybe the economy slowly improve, repair and remodel pickup, more kind of that kind of activity, hopefully, lumber prices will firm up a bit from where they are today. But I think you're already seeing the impact of it on the Southern log prices. I mean, they're down $3 from where they were last year for us at the same time, and some of that is mix, of course. Some of it is the marketplace, just lumber prices basically and some of it is weather, but we're feeling it there. And the reason we're not feeling it in Oregon really is because of the Chinese market for both the demand for logs as well as lumber from that marketplace.

Mark Wilde - Deutsche Bank AG

Okay. And do I take finally on that guidance you gave us for kind of full year real estate sales versus what we saw in the first quarter and what you're suggesting in the second quarter that you foresee a little pickup in real estate sales in the back half of the year?

Rick Holley

Yes. As we've told everyone before, it's a very second half business. By the time you show properties, especially in the west or in the northern states kind of in the spring and summer and then by the time you ink the contracts, it's third and fourth quarter. So it's usually a second half business and you'll see the same thing this year.

Mark Wilde - Deutsche Bank AG

Okay. Very good, I'll pass it on. Thanks, Rick.

Operator

Your next question comes from the line of Dan Cooney from KBW.

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

I guess first question, if you could just talk about maybe sawlog pricing in the north, kind of how much more potential upside you guys see over the balance of the year? And maybe kind of at what point do you kind of ratchet up your harvest expectations for that region?

Rick Holley

Well, as David said in his comments, we expect to see another $4 a ton in the second and third quarters. A lot of that volume is already contracted for us, so we're pretty sure of the prices. And in the Oregon business, we'll probably ratchet our volume up 100,000 to 200,000 tons to the extent we can to take advantage of this market opportunity. Again, as you know in Oregon, over the last 2 or 3 years, we've reduced the volume over there because of weak markets. Now we're bringing that volume back to capture these higher values.

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

And then on the real estate side, if you could just maybe give us a little more color on the land sale in Mississippi just in terms of who is the buyer and maybe kind of why those lands are kind of nonstrategic for you guys?

Rick Holley

Well the buyer, which we can't say, but the buyer was a timber landowner basically, somebody who's going to manage the lands for timber long term. The lands, as you look out on the average age, was around 11. The stocking was on a per-ton basis, less than our average stocking for southern lands in that region. And the proportion of sawlogs in that land was about 1/3 less than we have on our other lands. That's why we say $1,400 an acre. When you take those other things into play to what our average timberlands are at Plum Creek in the South, that equates to $1,500 to $1,600 per acre price, which we find in this market still very good. But kind of a little bit weaker markets, little bit lower quality than some of our other lands, although not bad timberland, but certainly not something that we felt we need to own long term, especially with the markets there where it was.

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

Okay, great. And then just finally on maybe just kind of an update on Moosehead Lake. There's been a lot of headlines recently. Just maybe kind of update us on the outlook for that development and just your kind of perspective on the situation.

Rick Holley

Yes. The plan there, the development plan we had for Moosehead Lake and Central Maine was appealed by 2 environmental groups. The judge that oversaw the appeal from the superior court found in favor of Plum Creek in the state Land Use Regulatory Commission on every issue except 1. He thought it was some of the final changes to the plan, it should have gone back out for public review 1 more time. We've worked with the state and both the State Attorney General as well as Plum Creek are appealing that decision, which we think is wrong, to the supreme court of the state. That will take a few months to hear, but we think we're in really good position there. The good news is given the development, business is slow anyway. It's not like we'd be doing a whole lot right now. But we think within the next year, we'll have this thing put behind us.

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

Okay, great. Thanks a lot, guys.

Operator

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

Steven Chercover - D.A. Davidson & Co.

Just want to go back to the wood products. Are you certified to produce Japanese grades? And if you are, do you believe that you're close enough to the market to actually sell to them for the reconstruction?

Rick Holley

Well clearly, it's not a grading thing, it's more of a size specifications. For instance, the Japanese buy plywood in 3 by 6-foot size versus 4 by 8, which is what we manufacture. So the question is could we, in Montana, manufacture products for the Japanese market and the answer is yes, and we've had some discussions with the Japanese about doing that very thing. Now in the Japanese wood products business, they had similar things to us. Their business was slow and they had a number of mills on the other side of the country that were curtailed. So some of that production get picked up by their own domestic mills versus trying to buy plywood or lumber from other countries. But clearly, their demand for logs and wood products will increase, and they will come to North America to get a fair amount of that.

Steven Chercover - D.A. Davidson & Co.

And your results in wood products, I guess I'd characterize them as terrific compared to what I'm expecting for some of the other people here on the coast. Do you attribute that to mix or is there something special that you're doing?

Rick Holley

It's really all mix. If you think about our lumber, it's a high end lumber product, basically a board that goes through home centers like Home Depot and Lowe's, and their businesses have picked up a bit. And in our Panel business, it's all industrial products. Look at our MDF business, a lot of those products are going for shelving and store fixtures. And the retail of the segment of the U.S. economy has picked up a little bit, so a lot of stores are remodeling. They have activities going on and so that business is very good right now. So it's really a mixed thing. We don't make a lot of strictly commodity-oriented products that are going directly to the housing market.

Steven Chercover - D.A. Davidson & Co.

Understood. And now if I could just switch gear, I did go through your presentation and I think you're going to just try and sell about 100,000 acres a year over the next 15 years. So I guess 2 questions from that. Will you draw down your inventory to approximately 5.2 million acres? Or do you hope to replenish? And also that 30% increase in harvest volume, is that incorporating the diminishing land base?

Rick Holley

That 30% increase in the harvest levels assumes that we sell all 1.5 million acres. All of the acres that are not coordinated, assumes those are gone and it still generates that harvest level, so that's correct. And we would hope over time to have opportunities to replenish the lands that we've sold. I mean, we think we manage this asset very well and would look for opportunities to increase our land holdings. And we, as everyone else, are looking at everything that's available in the marketplace and we'll continue to do that.

Steven Chercover - D.A. Davidson & Co.

Great. Okay. Thanks, Rick.

Operator

Your next question comes from the line of John Tumazos from Very Independent Research.

John Tumazos - Independent Research

Thank you. This question's been asked. Let me try to ask it a different way. Given the poor levels of some manufactured wood products and lumber, in what grades of logs or regions of the country do you anticipate production cuts by your customers or your customers' customers that might have vulnerabilities in your 15 to 16 million ton forecast?

Rick Holley

Well clearly, the weakest market is the U.S. South, not in paper, manufacturing and pulp wood basically, but in sawlogs because again, a lot of those sawmills down there gotten squeezed and because lumber prices are low and log prices have stayed at least at levels a little bit lower than they were last year. So they're squeezed so that's where you see some mills being curtailed or ships being taken off. If you look at a lot of the hardwood mills, their businesses are pretty good. Those are mills that would be in some of the northern states and clearly, the mills out west, because now they're cutting a product for the Chinese market or have that opportunity to do, so have a little more activity. So the biggest vulnerability clearly is U.S. South. That said, that's also the biggest opportunity as we see any improvement in the housing in repair and remodel market because that capacity is in place, a lot of it is very low-cost manufacturing capabilities from a cost standpoint and will be successful long term. But that's kind of the vulnerable part today, but will also be the part that improves the most in the future.

John Tumazos - Independent Research

Thank you.

Operator

And your next question comes from the line of Mark Weintraub from Buckingham Research.

Mark Weintraub - Buckingham Research Group, Inc.

Thank you. Rick, I think you have mentioned, and maybe I got this wrong, but that China could represent as much as 20% of volumes in the second quarter. Was that specific to your Northern sawlogs? What was that a reference to?

Rick Holley

It's really our Oregon sawlog volume. Basically, it was about 7% of our Oregon volume in the first quarter, which is only 15,000 tons. But in the second half, it will be 20% and over 200,000 tons will go to the Chinese markets, so it will increase fairly dramatically.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. So roughly 200,000 tons, though. Because I think you also, in answer to a question, had indicated that if you could cut more for China than you would because the demand is there, what are the constraints that prevent you from selling more to China at this point?

Rick Holley

Well, in the first quarter, it was weather. We had a lot of snow in the Cascades, so we had some weather issues even in Oregon, so part of it was weather in the first quarter. And the other is making sure we have access to the lands, making sure they're all -- all the roads are ready and out of the winter season and contractor capacity. We're in a better position than anyone else with respect to contractors. But as I've mentioned to all of you in the past, that is going to be the governor on the engine going forward on any huge increases in timber volumes from anybody. It's just the availability of contractor capacity, but we're in better position than most so to the extent we can bring more wood to the market at the prices we continue to see, we will do that.

Mark Weintraub - Buckingham Research Group, Inc.

And now, is the Washington -- the timber you have access to, is it higher value than what the Chinese are typically looking for? Why is it mostly just coming from your Oregon properties at this point?

Rick Holley

I just think that the specie types and the availability of the logs, the log type they're buying out of Oregon appeals to the market much better. Our activity today in our Washington timberlands is pretty small, just given the location and the age of the timber here. We don't have a lot of harvest activity here so it's really Oregon focused. There's other companies, clearly, that are in the state of Washington with larger timberland holdings that would be selling logs to the Chinese from the lands here, their lands.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. So order of magnitude, for instance, in the first quarter, you had about 500,000 tons of Northern sawlogs. How much of that would be Washington, Oregon? Do you know offhand?

Rick Holley

Oh, 20%.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. And then lastly, I guess I'm just trying to figure through log prices, domestic log prices, too, have held up much better in Pacific Northwest. And it seems that lumber prices in the Pacific Northwest have come under some pressure relative to where they were. And it would seem that the spreads are pretty narrow now at the sawmills, yet in your commentary you were talking mostly about pressures in the U.S. South. So do you have a different -- have I been picking up misinformation or would you say -- how are margins at the Pacific Northwest sawmills looking at this juncture?

Rick Holley

I mean, they're struggling as well. I mean, lumber prices are down for them. And some of them were integrated and they do have some logs they can sell which help their business. Some of them are now cutting incremental volume for the Chinese market at maybe okay margins. But no one's having a good time in the lumber business anywhere in this country.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. Thank you, Rick.

Operator

And your next question comes from the line of George Staphos from Bank of America.

[Technical Difficulty].

Operator

We have a follow-up question from Mark Wilde [Deutsche Bank].

Mark Wilde - Deutsche Bank AG

Yes, just Rick, a little bigger, longer-term question. It seemed to me there was an awful lot of timberland that went into TIMO hands between, let's say, 2002 and 2006. It seems like a lot of those funds have about a 10-year average life. So should we expect to see an increasing amount of timberland kind of hit the market over the next, I don't know, 3, 4, 5 years, as a lot of those funds have to rollover? And how will that affect the market?

Rick Holley

Yes, I would think so. I mean, they have some discretion. If it's a 10-year fund, if the market's good, they may come back to the market a little earlier and sell it. Sometimes, they hold a little longer, but I think if you look at all the transactions with the TIMOs, as you've seen that transition from kind of the industrial timberland owner to TIMOs and REITs, I think the average age of the TIMO funds is like 7 years old. So over the next 2 to 3 years, you could start to see some of those come back to market. Some of them have come to market already and they tend to trade amongst themselves a bit, but there could be some opportunities clearly over the next 2 or 3 years as that product comes back.

Mark Wilde - Deutsche Bank AG

And do you have a sense of sort of what the flow of capital into the TIMOs might look like recently? I mean, it seems like probably a couple of years ago, available capital for them really dried up. I've heard some speculation about a lot of those guys out raising capital recently, but just maybe smaller amounts than they had 4 or 5 years ago. What's your sense of that?

Rick Holley

I think it's less than it was a few years ago, but I think if you add up at least the larger ones, it's still about $2 billion in total. Now how much they have discretion of that money or they have to go back to their clients, I'm not sure. And sometimes that gets double counted but we know of 1 TIMO in particular has $800 million commitment today. So I mean, there's still a fair amount of money there. But not -- a few years ago, it was like $10 billion, so it's quite different.

Mark Wilde - Deutsche Bank AG

And do you get the sense, with the U.S. dollars so weak and kind of we're seeing a lot of commodity inflation globally right now. I mean, it would seem like U.S. timberland might look like an interesting sort of hard asset play for offshore buyers who can also take advantage of a weak dollar right now.

Rick Holley

Well, one would think so. I mean, you look at TimberWest, which was purchased by 2 Canadian pension funds and if they're looking for the asset class, you would think they'd look here because given the strength of the Canadian dollar, that would make more sense. So I think you could see that. Clearly, Europeans, over the last 2 or 3 years, have been in the market in a bigger way. And you look at Australia and other places where there's a lot of that institutional capital, you may find those individuals in the market in the future as well.

Operator

And your next question comes from the line of Laura Sloate from Neuberger Berman.

Laura Sloate

What have you seen in the trends in the home centers? They seem to be doing better this spring, given the very damaging winter and now all the tornadoes. And did any of your timberland get hurt by this recent spreads of storms in the Arkansas area and also in the South?

Rick Holley

To answer your second question first, we had no damage from any of the tornado activity. And we're crossing our fingers, because it's still early in the season. But basically where our lands are located, we've not really ever had any tornado issues. With respect to the home centers, we have seen activity there pick up a bit. In fact, Home Depot and others have come back to us looking for more product and so their sell-through is at a much higher rate. And given, if you start to see the economy or consumer confidence improve a bit, people starting to fix their homes versus buy a new home, I think the home centers are going to have a pretty good summer.

Laura Sloate

All right. Thanks.

Operator

And we do have a follow-up question from George Staphos of Bank of America.

George Staphos

Just a quick 1, sorry about the technical difficulties before. I hope you can hear me now. Were you inferring, I think in answering Mark Weintraub's question earlier that you are beginning to see the impact of contract availability in terms of sawlog prices in the Northwest.

Rick Holley

Well, clearly in Oregon, where you've seen activity pick up and so that's probably the pacing item is contractor availability. And so I think what that is somewhat, as we've talked about in the past, you're starting to see activity pick up in the south with an improving economy, everyone worries that you're going to see a flood of wood in the marketplace and that's just not going to happen because there are not going to be enough contractors to deliver it at real high levels. And people ask all the time what we worry about. Long term, we worry about that more than anything else because if there's no contractor workforce, there's no wood going to be delivered to any mill. We spend a lot of time on that.

George Staphos

Perhaps you mentioned in the past, if you have I apologize. But just to go back over it, do you worry more about the availability in the South or in the Northwest in terms of contract availability?

Rick Holley

Everywhere. It's a national problem. It's a generational type thing. It's a family business. It's a third or fourth generation, it's expensive to own the equipment. That's why we at Plum Creek have these initiatives, these core contractor program to work with our contractors to help give them -- commit so much volume to them, so much wood so they can go out and get capitalized and go to the bank, and that's why when they have higher fuel prices, we pay for the higher fuel prices. We need them out in the woods working with us every day. So they're very important to the future of, certainly, Plum Creek but of the industry.

Operator

And we have no further questions at this time. Do you have any closing remarks?

Rick Holley

Thank you, Brian, and thanks, everyone for joining us in the call and we'll talk to you next quarter. Goodbye.

Operator

This concludes today's conference call. You may now disconnect.

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