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Plum Creek Timber (NYSE:PCL)

Q2 2011 Earnings Call

July 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

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

Peter Ruschmeier - Barclays Capital

Chip Dillon - Citigroup

Joshua Barber - Stifel, Nicolaus & Co., 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 Allie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. John Hobbs, Vice President of Investor Relations. Sir, you may begin your conference.

John Hobbs

Thank you, Allie. Good afternoon, ladies and gentlemen, and welcome to the Second Quarter Conference Call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the company. And today, we have on the line Rick Holley, President and CEO; and David Lambert, Senior Vice President and CFO.

This call is open to all members of the media and investors. 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. There you will find our press release and supplemental financial statements for the second quarter of 2011.

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

Now, Rick?

Rick Holley

Good afternoon. The business environment remains challenging. Domestic demand for sawlogs remains anemic by historical standards as lumber production is up only modestly from the lows experienced in 2009. The region impacted the most is the U.S. South, as a very dry winter and spring has increased log supply and pressured prices through the past quarter. As Dave will discuss, we believe Southern price's declines are weather-related and temporary. We have altered our harvest plans for the year, reducing our sawlog harvest further to protect their value. Northern sawlog markets have fared better.

West Coast sawlog prices have rebounded, thanks primarily to robust demand from offshore markets, primarily China. U.S. log exports to China are setting a pace to exceed 1.4 billion board feet this year, more than double the exports we saw in 2010. At the same time, lumber shipments from North America to China could reach 5 billion board feet or more, nearly 11% of the past year's North American lumber production.

During the second quarter, Plum Creek shipped 27% of our Oregon sawlogs to China, up 7% from the first quarter. While we expect that Chinese demand will exhibit some volatility from time to time, we believe their presence in the North American market is a lasting one that adds a relevant [ph] source of demand to West Coast log and lumber markets. We expect that offshore demand, combined with reduction in future Canadian supply, will transform the North American supply-and-demand balance in the future, which is a positive for Plum Creek.

Dave will now review our second quarter results and discuss our outlook for the third quarter. David?

David Lambert

Thank you. We reported second quarter earnings of $0.27 per share inside our guidance range for the quarter of $0.25 to $0.30 per share. Within our business segments, performance was mixed versus our initial expectations. Both our Northern and Southern Resources segments were weaker than we initially expected, primarily due to lower harvest volumes, while the Real Estate segment did a little bit better than we initially thought.

In the Northern Resources segment, we reported a $3 million profit, $4 million lower than the first quarter's $7 million profit. The decline was primarily a function of lower harvest volumes and higher logging costs in some areas. In the Northern Resources segment, harvest seasonally declined in the second quarter as fall and winter weather limits timberland accessibility. This quarter, the fall was protracted, limiting access to timberlands longer than normal. As a result, our Northern harvest volumes came in below our initial plan, and we're about 270,000 tons or 27% below the first quarter's harvest level. Most of the volume decline was from lower pulpwood harvest in the Lake States and Northeast operating regions. Pulpwood prices held steady at $40 per ton, and demand remained good throughout the Northern markets. Our average sawlog prices improved $3 per ton over the first quarter level to $72 per ton. Softwood sawlog prices in the West rose from the first quarter due to strong demand from export log markets, particularly China. Demand for export logs from Oregon remained steady throughout the quarter but seasonal increases in log supply and incremental downtime at regional lumber mills have resulted in some price erosion in May and June.

During the quarter, log prices in Montana improved, driven by temporary in-shortages during the extended spring thaw. Sawlog prices in the Lake States and the Northeast were stable. Log and haul costs increased due to a shift towards logging in some higher-cost areas and to a lesser extent, higher diesel fuel prices. These reduced operating profit by approximately $2 million.

During the third quarter, our Northern harvest will rebound from the seasonally low second quarter level to 1.2 million tons. Our sawlog harvest will increase to about 700,000 tons, with the pulpwood harvest at about 500,000 tons. We expect sawlog prices to soften seasonally and return to the first quarter levels as timber supply in that region expands and underlying domestic demand holds at recent levels. We expect pulpwood prices to be steady.

In our Southern Resources segment. Our second quarter operating profit was $15 million, down $4 million from the first quarter's $19 million profit. The decline in operating profit was due to a combination of lower log prices and the less valuable harvest mix compared to the first quarter. Southern sawlog prices were about $1 per ton lower than those in the first quarter, a 4% decline sequentially. Pulpwood prices also fell about $1 per ton, a 10% decline from the first quarter. A drought in the south expanded access to low-lying timberlands throughout the region and temporarily increased supply. This allowed both sawlog and pulpwood customers to easily maintain their log inventories.

In this pricing environment, we continue to focus our harvest efforts on second thinnings that produce a combination of pulpwood and smaller-diameter sawlogs. These thinnings are a normal part of our silvicultural practices in the South and enhance the growth of the remaining trees as they grow towards final harvest. Focusing on these stands [ph] today allows us to increase our pulpwood harvest where prices remained attractive by historic standards and minimize the harvest of our largest and most valuable sawlogs protecting their value. We believe this is the right harvesting strategy to protect long-term shareholder value in this environment.

In total, our second quarter Southern harvest of 2.7 million tons was slightly lower than the first quarters. All the harvest reduction came from sawlogs where we reduced our harvest about 160,000 tons or 12% from the first quarter level. That's about 100,000-ton reduction from our initial harvest plan due to the weak sawlog pricing environment.

Our second quarter pulpwood harvest increased approximately 100,000 tons from the first quarter, in line with our initial plans for the quarter. We expect log prices to improve when weather patterns return to normal in the region. Absent a break in the drought, we don't expect much upward pressure on sawlog prices. On the supply side, log accessibility is as good as it gets and fundamental demand for lumber products appears to be stable but at very low levels by historic standards.

That said, Southern sawlog prices did end the quarter a bit above the second quarter average. So we believe the third quarter sawlog prices will be flat to up $1 per ton in the third quarter. We expect pulpwood demand to be higher in the second half of the year as mills seek to build log inventories in anticipation of wet winter weather. This should put some modest upward pressure on pulpwood prices in the region during the second half of the year.

Overall, we expect our third quarter harvest volume and mix to be similar to last year's 2.9 million ton harvest. As always, we will continue to adjust our harvest plans in response to market conditions, deferring harvest in weak markets to protect value and temporarily increasing harvest in attractive markets to capture value.

The Real Estate segment recorded revenue of $79 million, a little higher than our initial expectations of $65 million to $75 million. Second quarter operating income was $50 million. The second quarter results were dominated by some larger conservation transactions in Florida, Arkansas and Louisiana.

In the second quarter, we completed the sale of 30,000 acres in Florida for approximately $750 per acre. In 2002 and 2005, we sold the developments rights on this property for a little more than $400 per acre. So combined, the transaction proceeds were about $1,150 per acre. This property was typically wet with many sensitive areas, nearly 30% of the property is restricted from harvest activity of any kind.

The other large conservation sales were located in Arkansas and Louisiana and consisted of 26,800 acres of timberland associated with management of Red-Cockaded Woodpecker habitat, an endangered specie. We sold this for approximately $1,300 per acre. A portion of this property was purchased by the Nature Conservancy with the other portion purchased by Conservation Forestry.

The balance of the segment's sales consisted of approximately 2,700 acres of small nonstrategic lands at an average price of $1,125 per acre and just over 6,300 acres of recreation lands and an average price of $2,060 per acre.

Interest and activity in rural land markets has improved from the quarters -- from the levels of the last couple of years. Consistent with the past several quarters, interested buyers are value-conscious and willing to sacrifice some amenities to acquire lower-value properties. The relatively low-valued regions of the Lake States and the Gulf South continue to be our most active. We expect second quarter Real Estate revenues to be between $65 million and $75 million, up from the $39 million of last year's third quarter.

We expect land bases to be approximately 27% of revenue in the third quarter. We continue to expect 2011 Real Estate segment revenues to be between $250 million and $300 million.

The Manufacturing segment continued to perform well, reporting a $5 million operating profit for the second quarter, up $1 million from the first quarter. Sales volumes and prices were largely unchanged from the first quarter. Plywood profitability increased as its mix shifted towards more profitable industrial products. Our Manufacturing segment continues to perform extremely well in difficult markets, thanks to its specialty market focus and industrial end-use customers. We expect third quarter performance in the Manufacturing segment to be similar to the second quarter's.

Interest expense should be stable at $20 million during the third quarter, and we expect to have a modest tax expense.

In all, we expect third quarter income from continuing operations to be between $0.28 and $0.30 per share. We've lowered our guidance for the year based on our harvest plans in response to weak Southern sawlog pricing and now expect to report full year earnings between $1.15 and $1.30 per share.

Now I'll turn the call over to Rick.

Rick Holley

Thank you, David.

During the third quarter, we will complete a 50,000-acre timberland acquisition. These are Northwest Georgia and Northeast Alabama, industrial timberlands located just west of Atlanta and an excellent addition to our existing ownership in that state.

The stands tend to be a little older than our existing Southern timberlands. Over time, we will be able to boost the productivity of these properties, using our existing Southern silviculture practices. We purchased this property based solely on its timber economics and it will provide an attractive return for investors. Longer-term HBU options may emerge and could provide some upside to this investment.

I'm often asked if we are currently a buyer or seller in today's timberland markets. I say in the current market, we are both buyers and sellers as we seek to continually improve our timberland portfolio. Our goal is to maximize the value of the company on a per-share basis. Where we find opportunity to acquire timberlands that will provide our shareholders with above-cost-of-capital returns, we will do that. When we find that others place a higher value on a property than we do, we are happy to capture that value as well. Disciplined capital allocation is at the core of our timberland portfolio management strategy.

Now, Allie, we'll be glad to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG

I want to just come back to that last issue that you raised, Rick. Can you just talk generally about how you read the market for investment-grade timberland at this point? It sounds to me like a lot of the private asset managers have raised capital recently and that there hasn't been a lot of land on the market, so that this may be kind of bidding up the market. I'm thinking about a perspective sale in Louisiana in particular.

Rick Holley

Right. Well, I guess the way we see the market, there's still a lot more demand, as you've heard, than there are supply. I mean other than the 4-star transaction that we are going to close here shortly, the only other transaction marketplace I've heard about is the one in Louisiana you're referencing. The last I've heard there are still $3 billion, $4 billion, $5 billion, $6 billion of capital that's committed to get invested in the space. So clearly, there's a lot more demand than there is supply. It really hasn't changed. If anything, we're probably seeing values, at least what I hear in the marketplace about the Louisiana transaction, start to creep back up again, values.

Mark Wilde - Deutsche Bank AG

That's what I hear. Can you also give us a little color, more color on the Georgia transaction? Because it sounds like this was a negotiated deal rather than an auction, and that's kind of an unusual.

Rick Holley

Well, it was a -- the transaction was negotiated. It kind of fit our ownership and fit some lands that long term were not strategic to Forestar. The age class is a bit older than what we have on existing Plum Creek lands in the south, and its stocking is similar to what we have. So it was a very attractive acquisition for us. It's certainly accretive to our cost of capital, and it was attractive for Forestar. So I think it was kind of a win-win given it was less strategic to them and it fit our ownership very well.

Mark Wilde - Deutsche Bank AG

Okay. And then if we can turn to the Pacific Northwest just a couple of quick questions. One, can you just talk about the durability of this demand from China? Because I think back in the late '80s, they were big buyers of logs out of the Pacific Northwest and then it dropped off. So what is different this time and why might we not have to worry about kind of them starting to buy more from Russia again? And then as a follow on to that, maybe you can talk about what kind of log-price drops you saw in May and June, just a kind of ballpark percentage of the drop off.

Rick Holley

Well, I think, we do believe it's durable this time. And I think that the reason it's so different than it was even 10, 15, 20 years ago is the demand and the growth in China is so much more dramatic, with all the activities going there. So #1, I believe that they'll go back and buy more from Russia. They're still buying a lot of logs and lumber from Russia today. But I think their demand, the growth of their economy over the next 10 years is so great they have to be in the North American market. I think certainly, it'll be a bit volatile because the Chinese, like any smart buyer, is going to come in the market when prices are weak and exit the market when prices are strong. And I think some of the weakness that we see right now really is more a function, not so much where prices were. But if you look at the building season in China, it's kind of the rainy season. So you have a time when their demand is not great in their country because building has slowed. And now we have a lot of logs because we're coming out of winter so we have more supply and there's a little less demand, but I think that demand comes back as the year progresses. For Plum Creek, we were fortunate enough to get a commitment through the third quarter for all our pricing to China. So we're in pretty good state [ph]. But I'll let David talk about how prices have fallen off just a bit.

David Lambert

We have seen some seasonal weakness, which is typical in the cascade. If you will look back over a decade, prices were always stronger in the first quarter than as we -- what we call the "farmer wood" when kind of these small non-industrial privates come to market in the summer, you see prices soften a little bit. Kind of domestic prices, might have been up at $600, $1,000 and they're down closer in the 5.25% range, maybe off 10%.

Mark Wilde - Deutsche Bank AG

Okay, all right. That's very, very helpful. One last thing, Rick, can you just talk at all about sort of the state of the logging and transportation infrastructure among your vendors? I get these periodic emails from guys in the logging and transport business saying, "We can't even replenish our capital with the way the business is right now."

Rick Holley

Well, I think it's tough for them as you guys have heard me say many times. The single-biggest issue this industry has is really contractor capacity. It's tough work, it doesn't pay a lot. Clearly, fuel prices have hurt them as we've seen fuel prices go up here the last several months. One of the things that Plum Creek has spent a lot of time is contractor initiatives, working with our contractors, making sure that we covered the extra fuel costs that they were carrying and try to work with our customers to get them to share in some of that, because we clearly know that their viability and long-term success are key to our success. But I think it continues to be a big concern across the country and not any one place, be it in Oregon or the South or in the Northeast, everywhere contractor capacity is tight. And when these markets come back, it's going to be a real challenge for people I think to get wood moved to their mills.

Operator

Your next question comes from the line of George Staphos.

George Staphos

Just a few housekeeping questions. I guess first question in the South, how long can you continue with the approach where you're doing thinnings and as opposed to more traditional harvesting so as to preserve the value of your more valuable logs? How much more, if you will, can you go with this? A couple of quarters, a couple of years? What would your view be?

David Lambert

Well, I think we can go a couple of years, George. This is David. Basically, we'd like to keep thinning the forest because you'd want to make sure you're not slowing the growth of those younger forests. Our more mature stands, they're still growing at a good rate and they're not overcrowded at this point. And so from an economic decision, the value of capturing price over the next couple years compared to harvest, it's an easy decision for us.

George Staphos

Okay. That makes sense, as long as you've got that amount of runway. The second question I had, maybe you'd mentioned it and I missed it, what do you think the extended breakup in the North actually cost you in terms of tonnage? Was it over 100,000 tons from your vantage point?

David Lambert

Yes, because that was a change compared to our expectation, and it really impacted in the in-land Northwest area and in the Lake States in the East, what they call "the mud season." out there. It was pretty pervasive across our total Northern segment.

George Staphos

So I mean was it closer to 200,000 tons, would you say, Dave, or more closer to 100,000 that I laid out there?

David Lambert

I have to get back to you on that, George.

George Staphos

Okay, just trying to do some analysis on the earnings variability there. I guess, 2 last questions and I'll turn it over, #1, what was the basis on the land that you sold during the quarter? The margin was a little bit better than we had been forecasting. I think at one point in time, you had guided to 30% basis. Was that what you actually saw in the quarter?

David Lambert

Yes. Basis involved the first and second quarters of this year was at 30%, and we think in the third quarter, it's going to be about 27%, just a little bit lower.

George Staphos

Yes, I'd gotten that. Okay. And then the last question, obviously, a very difficult environment for you right now. Are there any other levers that you can pull up at this juncture from an expense management standpoint? You're obviously doing a good job, but is there anything else that you can do that you could layout for us that we might be able to expect in the several quarters on the expense side, headcount side, et cetera?

Rick Holley

Well, George, as you know, a couple years ago, we took a pretty big chunk of our headcount out. We reduced over 120 salaried positions and cut our SG&A by quite a bit. I think if we see this recession, I still think of it that way continue, we'll clearly look for opportunities to cut more costs, maybe take some more positions out. But I think at this point, that's very difficult, given the needs of the business. Clearly, all kind of discretionary expenditures are still in the back burner. We have headcount freeze here, position freeze, only replacing the critical positions, that sort of thing. And on the log and haul cost side, and there was a question asked about contractor capacity and that's critical to our success, so we're going to incur a little extra cost and hopefully can share it with our customers for diesel fuel prices. Conversely, as fuel prices come down and they've come down a little bit, we'll get some of that benefit back. But we'll be tough-minded managing the company from a cost standpoint, but I think we've pulled a lot of the levers that were available to us.

Operator

And your next question comes from the line of Gail Glazerman with UBS.

Gail Glazerman - UBS Investment Bank

Just on the West Coast market. You talked about China. I'm wondering if you could talk a little bit about how you see domestic customers dealing with the relatively high log costs over there. I mean there's been some talks -- Potlatch this morning was talking about seeing some demand pull from coastal customers. I'm just wondering what type of response you're seeing in terms of downtime and demand.

David Lambert

We have seen a couple domestic customers taking some downtime. You're seeing high prices here on the West Coast. And so that does make it a little bit tougher for them. With some of the log prices moderating, we're getting inquiries from some of our domestic customers that really want wood and we're starting to move it more their direction. One of the unique things is if you look at lumber prices, West Coast lumber prices are relatively more attractive than Southern prices. And compared to where they were in the first quarter, it's a much healthier environment, reflecting what's happening in the China market as well.

Rick Holley

What happened, and it certainly helped the Northwest mills considerably is all of that lumber going from Canada to China. So a lot of these Western markets to the extent that there is some market presence in California, Arizona can be served by these Washington, Oregon mills where here before, they had to compete more head on with a lot of the Canadian mills for that business. So that's helped them keep their prices up a bit. Clearly, helping them pay the higher log prices, but probably nobody's doing better than cash flow break even.

Gail Glazerman - UBS Investment Bank

Okay. Can you just talk a little bit, I know it's early, but about what your demand outlook would be for 2012 given how the first half of 2011 played out?

Rick Holley

Higher. No, I mean clearly housing is -- the recovering housing is much more anemic than anyone anticipated. Whether we can get to 600,000 starts this year is a question but clearly, we believe next will be better and to be safe, I'll say the second half of next year, so maybe we're in kind of in the -- kind of 700,000, 750,000 starts next year. And a lot of it's going to depend on what happens in the other Washington here in the next month or so. But clearly, it will be better next year than this year. I think we're all surprised how poor this year has been so far from a housing standpoint.

Gail Glazerman - UBS Investment Bank

Okay, And then just last question. Can you give an update on your European energy contract? Is that something that's proceeding, they have the financing and you'd expect to see the volume flow through next year?

Rick Holley

Yes, that contract with European utility for 1 million tons of wood fiber is supposed to start in 2012. It's not a financing issue. What the Europeans are working on is always the pricing issue for the incentives they get for the renewable fiber, and that's in process and coming along very, very well so we feel very good about it. If anything, they're going to come back and want more volume than we've already committed to them, which is also a good thing.

Operator

[Operator Instructions] Your next question comes from Joshua Barber with Stifel, Nicolaus.

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

I was wondering if you could talk about your mix assumptions on your harvest levels and how that's changed from what you guys were guiding for at the end of the first quarter.

Rick Holley

Mixed assumption from a standpoint of sawlog, pulpwood?

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

Sawlog versus pulpwood, yes.

Rick Holley

I think the primary mix assumption clearly in the second quarter was we dropped our Southern sawlog harvest, 100,000 tons, and we increased our pulpwood harvest about the same amount. So overall -- so it was kind of a mixed thing, I don't know exactly the percentage.

David Lambert

Yes, those numbers are accurate.

Rick Holley

And some of the deferred volume -- we saw some lower harvest as we talked about due to the thaw, both in Montana and the Lake States but we also took advantage of the Chinese and the Oregon market and some of the deferred volume from a couple of years ago, we're bringing that back to market. Now obviously, a much higher price, which is the right thing to do. So in the Northern, you didn't see it off so much, but the Southern was just really a mix change, reducing sawlogs and increasing pulpwood.

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

I was wondering more what your mix outlook would be for the third and fourth quarters regarding that. Do you still think it will be more heavily weighted towards pulpwood?

Rick Holley

Yes. Probably 52% pulpwood, 48% sawlogs.

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

Okay. And when you're looking at the Forestar acquisition, first of all, did you get mineral [ph] rights with that deal?

Rick Holley

We did not.

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

Okay. And can you talk about how you, I guess, weighed the acquisition opportunity? These are geographically overall [ph] versus things like share buybacks today with your cash. In other words, what sort of return hurdle are you looking for when you're doing timber deals versus other financial deals that you can be doing with your cash?

Rick Holley

Well, clearly from a capital allocation standpoint, we look at share repurchases and we still find our share is undervalued and attractive to purchase. But here's an opportunity in a very good market where we have a lot of ownership, we like the economics of being in the South due to the energy and just the market forces there. At an investment today is above cost of capital investment [ph] for us, so we found that very compelling. And there was a comment earlier about the marketplace, not a lot of transactions come to the market, especially the quality of property like this. So we availed ourselves of that. But clearly, we still feel our shares are an attractive investment, especially at this price.

Operator

Your next question comes from the line of Chip Dillon with Vertical Research Partners.

Chip Dillon - Citigroup

I was going to ask you, when you look at your customers, there aren't as good data, at least I've been able to find on the lumber side. On the panel side, we saw a lot of mills come out really early in the downturn, '06, '07, and it's not been as ferocious as the market has been in this depressed mode. But as you look at your -- at the future recovery, do you see the need to maybe recalibrate who your customers will be as you ramp up? And have you built in any expectation that maybe your cut-and-haul cost might be a little higher just because I would imagine there are fewer mills, at least there will be, at first?

Rick Holley

Well, clearly, we think about our customer base all the time, and we're fortunate with our exposure both on the paper grades and even in our sawmill and plywood customers are in it for the long term. Our biggest plywood customer, for instance, would be George Pacific, and there's probably nobody better today doing that business than they do it. They are also a large lumber customer of ours. West Fraser is our largest lumber customer and probably the best lumber operator in North America. So we feel very good about the mix of our customers. Clearly, the cut-and-haul costs in the future are likely to go up, especially as you get more tension. As we start to see these markets come back and more wood comes to market and we've had that reduction in contract or capacity, capacity there is going to have to get paid more and well should. So there could be some pressure on that. And again, these mills that are out procuring basically 100% of the wood because they don't have timberlands, I think are at the most risk to be able to find contractors to get as much to that gate within [ph] they need to continue to operate. So clearly, that's going to be a cost pressure for everybody in the future.

Chip Dillon - Citigroup

Got you. And then the second question is on the Forestar deal. Can you give us a range in your mind if you sort of looked at the value that you expect for Plum Creek and let's pick out a period, obviously, you're in a long-term business, let's say, 20, 25 years, could we see 1/2 of the value, 1/3 of the value actually come from sort of non-timber activities? Would that surprise you if a good 1/3 to maybe 1/2 of the value is actually from, if you had to break it down from HBU potential?

Rick Holley

We didn't factor any of that end ship but that is possible, especially in the Atlanta area when you go out. In the next 10 years, I'd say no. You go out 20 or 25 years, that's certainly possible given the huge growth in that part of the United States. So obviously, Forestar didn't look at it that way but clearly, given the proximity of these properties, just outside the Beltway at Atlanta there is that opportunity.

Chip Dillon - Citigroup

And then last one quickly. As your customers you mentioned, West Fraser, but as some of your customers on the West Coast are clearly likely to see more of a continual ramp of business with China. My impression is China basically is using a lot of lumber for non-residential purposes, and does that affect the kind of log that they are buying either from you or others and do you see that changing over time?

Rick Holley

Well, yes. They're using it for more industrial applications, pallets, crating and that sort of thing and scaffolding applications, not so much residential construction clearly. So they are somewhat species-ambivalent. They want a lower-value log, whether it's on the West Coast here at hemlock or Douglas-fir, they really don't care. But I think over time, as you start to see more wood-based homes in China, you're going to start to see them having affinity for a higher-value lumber product and maybe move more to Douglas-fir and some of those other species as opposed to maybe hemlock or some lower-valued lumber products that they're buying out of Canada today. So I think their tastes will change and they'll want a higher-value product in the next 10 years as they start to have more wooden-based homes there.

Chip Dillon - Citigroup

Okay. And last one quickly. David, you might have reviewed this, just real quickly. The new bank, when I say new, I know it's been several quarters, but the new bank arrangement you have, what is the cost of that? And did you, I imagine, you used that primarily to pay for the acquisition and I would imagine a pretty low cost of money?

David Lambert

Yes. We have cash on hand of $250 million plus $370 million available under our line of credit. So we have lots of financial flexibility. That line of credit now is at I think about 1 3/8.

Chip Dillon - Citigroup

So it's basically LIBOR and would that be LIBOR plus one in a quarter?

David Lambert

Yes.

Operator

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

Peter Ruschmeier - Barclays Capital

A couple questions. I'm curious in the Northern segment, I believe you had some benefit from some contract prices, stumpage prices were kind of locked up and may actually run into the second half. Can you elaborate if how much of your volume was actually under stumpage agreement? And how much of that continues in the second half?

Rick Holley

With respect to our exports, we had locked those prices for the second and third quarters, so we'll continue to benefit from that. On our domestic basis, we do pricing sometimes monthly with our customers, sometimes it's fixed for a quarter.

David Lambert

So basically, in the second quarter, it was 27% of our volume in Oregon, sawlog volume, went export and therefore was under kind of a quarterly contact and we have the same for the third quarter.

Peter Ruschmeier - Barclays Capital

Okay, okay, that's helpful. And then shifting to the Real Estate sales, and I know this is very lumpy, I think you had 41,000 acres sold in the first quarter, 68,000 in the second quarter but most of that was conservation. If you provided more guidance, I missed it, but any guidance as you look at your pipeline for the second half of the year as to how you see some of the buckets playing out, whether you expect a similar level of activity? You mentioned better rural demand out there. So in aggregate acres, do you expect a similar amount in the second as the first half?

Rick Holley

We'd expect a little bit more -- I mean little less acres because the conservation acres kind of went for a less-than-average price given the nature of the property. But we're still expecting a good second half of the year. We expect the third and fourth quarter that are at least on par with our first 2 quarters.

Rick Holley

From a revenue standpoint and they'll be heavily -- more heavily to nonstrategic properties. There'll be a few HBU from the Lake States and Gulf South sprinkled in, there should be very little conservation, but mostly it will be nonstrategic acres and we still have roughly 300,000 acres of those left in our portfolio.

Peter Ruschmeier - Barclays Capital

Okay. And then in terms of the overall volumes, I may have missed this, but I think previously, you had given Southern volumes for the year at something like 11.5, 11.4 million tons. I think you ran at about 11 million-ton rate in the first half. So I just was hoping you could elaborate on that. And the same in North, I think originally, you were somewhere around 4 million tons. I think you're annualizing 3.4 million for the first half.

Rick Holley

With respect to the Northern, we talked about the spring breakup and second quarter being seasonally our lowest quarter, and so you can't really take an annualized run rate with respect of the Northern segment.

David Lambert

We're looking at overall harvest level down towards the 15 million-ton level, which is lower than our guidance we gave all of you last quarter.

Rick Holley

And so you probably have about 4 million tons in the Northern segment and closer to 11 million in the South.

Peter Ruschmeier - Barclays Capital

Okay. And again and not to get too precise on this, but the North, I would think, the harvesting gets impacted in the fourth quarter, so most of that would be the third quarter, heavy in the third quarter, is that fair?

David Lambert

Not really. The Northern segment keeps going as you get into the winter time. You can work as the ground starts freezing, it's just when it's thawing where the difficulty is.

Peter Ruschmeier - Barclays Capital

Okay, okay. And then maybe just lastly. Rick, I'm curious if you're seeing much in the way of inquiries domestically on the whole biofuel issue. It seems to be more of a back-burner issue for now. But with maybe most of the opportunity export pellet mills, but are you seeing or hearing much domestically and getting many inquiries?

Rick Holley

I think inquiries are picking up a bit. There is a recently announced IPO by a company called Keyor [ph], which has a kind of a liquid fuels process, which we're very familiar with, which sounds pretty interesting and they've gotten some supply contracts, and so they're knocking on the door and others are as well. So I think activity is slowly picking up but again, until there's some kind of energy policy on a national basis here, I mean in the other Washington D.C,, which is not likely to happen before the election, I don't think this thing is going to get real legs other than the Europeans being in the market, and they're very active.

Operator

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

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

Just on the Northern segment, I was wondering if you guys have done any work, you kind of estimating what the impact of the extended thaw may have had on the pricing during the quarter, with the supply getting pulled out?

Rick Holley

The main impact where the extended thaw occurred was in the inland region. We didn't harvest that much, so you didn't get much of a benefit. And there were some in the Northeast and the Lake States, and so I don't know if it really firmed up prices considerably, but demand remained robust. I don't think it was a material driver as far as any upside.

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

Okay, great. And then just on the kind of conservation market. Just from your guys' point of view, are the groups still getting capital? I mean were these deals that you guys kind of were working on for a long time and then finally came together? Just how do you kind of look at that market going forward just with the kind of budget constraints out there?

Rick Holley

Well, I think the conservation market's going to be very slow going forward. I think in the budget, which is obviously, we don't have a national budget yet, but the amount of funds in there is well below $100 million and the last several years, it was $300 million or $400 million. So the conservation community is looking for other ways to do these transactions through private investors and a lot of the states put up capital but the states are tight as well in and most of the state capital is tied to matching funds from other sources. So they're just trying to be more creative. These transactions, as you might expect, were in the pipeline for some time, and most conservation transactions take several quarters to complete. But I wouldn't expect a lot of conservation in the next couple of years from anybody.

Operator

Your next question comes from the line of Mark Weintraub with Buckingham Research.

Mark Weintraub - Buckingham Research Group, Inc.

Two quick ones. One, I just assume on the conservation transaction, you're selling the acreage, not easement. Is that correct?

Rick Holley

Yes. That's correct on the Florida thing, which was $750 an acre. We sold the conservation easement, basically the development rights previously for $400 an acre. So those were already gone.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. And so you are classifying these as conservations because when you provided buckets of timberland, they were in those buckets is that why...

Rick Holley

Yes, that's correct.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. And just looking at the HBU sales, back in '08, '09, well really actually '07, '08, it was -- they were fetching like 2,500 to 3,500 and then obviously, Real Estate weakened a lot and it's been much more in kind of a $2,000, $2,200 type range. Is that kind of where what we should be thinking about your HBU in this environment being worth roughly per acre?

Rick Holley

Well, Mark, it's really a mixed thing. If you go back in those earlier periods at $3,500 an acre, a lot of those lands were in Montana and Georgia, much higher-value markets. Those markets fell out of bed here with the economy in the last 3 years. And so we basically pulled most of those properties off the market. And so these HBU guys you're seeing now are coming from the Lake States, primarily Wisconsin, and the Gulf South, which would be Louisiana and Mississippi. So it's just a wholly different market whereas in those markets, you see $2,000, $2,200 an acre, that's an excellent price for kind of HBU there. So we've just pulled out all those higher-end markets, which we believe when they come back, will still be worth the $2,500 to $3,500 an acre or what-have-you.

Mark Weintraub - Buckingham Research Group, Inc.

Okay. So this is, for instance, in this quarter, that was Lake States or all Gulf State-type of...

Rick Holley

That's exactly right.

Operator

Your next question comes from Steve Chercover with D. A. Davidson.

Steven Chercover - D.A. Davidson & Co.

I just had a quick variation on the question on Forestar. If I'm not mistaken, they place a lot of value on their water rights. Did you get any of the water rights on that 50,000-acre tranche?

Rick Holley

Water rights are kind of a whole different animal. I don't think you do or don't get water rights. I think there's ways through a utility you could perfect water rights, but so I guess the answer is we probably didn't get the water rights, but I don't know that anyone has the water rights per se on these properties. I'll find that out now because I hadn't asked that question.

David Lambert

They reserve the subsurface minerals, but not water, to my knowledge.

Steven Chercover - D.A. Davidson & Co.

Okay. If I'm not mistaken, water's a big part of their story, and I guess in that part of Georgia, it's becoming more and more scarce. So who knows you could be sitting on a water mine?

Operator

And your final question is a follow-up from George Staphos with Bank of America Securities.

George Staphos

Two quick questions related, and I'm not sure if you can answer this very precisely. But, if you look at the harvest you're projecting this year versus last year, we could be flat-to-down and certainly, I think last year was also a similar type of trend. Realizing this is very regional, what do you think your stocking levels might be up over a couple-of-year basis when we consider harvest and also biological growth? Could your inventories have moved up 10% to 15% over the last 2 years from what you can see right now?

Rick Holley

Clearly, I think as we've said, we're growing about 20 million tons a year and the harvest this year, last year, it was like 15.3 or 15.4 and this year's less than that. So arithmetically, I haven't done the numbers but clearly, the inventory is growing fairly rapidly and this will only add to that.

David Lambert

But given the huge amount of inventory, it's not a 15% to 20% increase in our inventory. It's more in the 1% growth in the total inventory.

George Staphos

Okay. I guess the follow-on I had is, are there any regions where you're getting to a point where from a practical standpoint, you can't defer harvest anymore where the stands are just getting overly mature and you're going to have to start harvesting on an accelerated basis? And if so, what region should we consider for the future as to perhaps that outcome being the case?

Rick Holley

No, I don't think that's the case. The one we would have probably been most concerned about would have been Oregon, where we're taking Douglas-fir down to say 33 to 35 years old. And if that market stays slow for 5 or 10 years, you'd probably get concerned the logs are getting too big and therefore -- unfortunately, as they get bigger there, they get less valuable because the mills don't cut big logs anymore. But I don't think that's the case, because we had this opportunity, obviously, this year to bring some of that wood back to market. But there's no area of the South that we're concerned about that at this time.

Operator

And there are no further questions at this time. Mr. Hobbs, do you have any closing remarks?

John Hobbs

Well, we thank you, everyone, and enjoy your summer. We'll talk to you next quarter.

Operator

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

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