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Plum Creek Timber (NYSE:PCL)

Q4 2011 Earnings Call

January 30, 2012 5:00 pm ET

Executives

John B. Hobbs - Vice President of Investor Relations

Rick R. Holley - Chief Executive Officer, President and Director

David W. Lambert - Chief Financial Officer and Senior Vice President

Analysts

Gail S. Glazerman - UBS Investment Bank, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Mark A. Weintraub - Buckingham Research Group, Inc.

Chip A. Dillon - Vertical Research Partners Inc.

Steven Chercover - D.A. Davidson & Co., Research Division

Operator

Good afternoon. My name is Kristen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek Fourth Quarter and 2011 Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to our host, Mr. John Hobbs, Vice President of Investor Relations. Please go ahead.

John B. Hobbs

Thank you, Kristen. Good afternoon, ladies and gentlemen, and welcome to the Year-End 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, plumcreek.com. There you will find our press release and supplemental financial statements for the full year and the fourth quarter of 2011.

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 R. Holley

Good afternoon. Despite a challenging economic environment and a continued weak housing market, Plum Creek had another good year in 2011. We produced $374 million of cash flow from operations, more than enough to pay an attractive dividend, fully reinvest in our business and maintain our strong balance sheet.

We ended the year with more than $0.5 billion available to us between our cash balance and undrawn line of credit, so we have ample liquidity, excellent financial flexibility as we enter 2012. While we're not anticipating a significant rebound in the economy or housing in 2012, we do expect our cash flow to grow this year by more than $50 million and provide ample coverage of our dividend and capital needs for the year. We expect cash flow from our Southern Resources segment to improve in 2012, while we expect cash flow from our other business segments to be generally stable.

The company is in very good financial shape, and we are looking forward to continued growth in 2012 and beyond. Over the course of the past year, we continued to manage all of our assets with a goal of maximizing the long-term value of an investment in Plum Creek. In our timber businesses, maintaining a nimble stance, quickly responding to changes in market conditions. In the south where prices were weak, we kept our sawlog harvest low and continued to focus on conducting harvest in stands that allowed us to maximize pulpwood output in market where prices remain reasonably attractive.

In the Pacific Northwest, we responded to increased sawlog demand, attractive pricing in export markets. As a result, we increased our sawlog harvest in Oregon, sold approximately 17% of that harvest to export customers in 2011.

Within our Real Estate segment, we protected and grew the value of our most valuable properties. We continue to hold onto our higher-value recreational real estate in Florida, Georgia and Montana. At the same time, we created value by pursuing entitlements with some of our development lands in Georgia and Florida. These properties will be well positioned when the real estate market recovers.

In our Manufacturing business, we focused on serving the needs of our specialty and industrial customers. Serving these demanding markets with premium products generates positive cash flow and has kept this business profitable when commodity manufacturers continue to struggle with red ink.

We also grew the value of our non-timber resource business. This business generates income largely from the collection of royalties from subsurface assets such as oil, natural gas, aggregates and industrial minerals. These assets are developed and brought to market by third parties. We made significant strides during the year to grow the future cash flow of this business. We leased approximately 64,000 acres in Louisiana for shale oil exploration and received an upfront bonus payment of $21 million. If the exploration is successful, these lands could make a meaningful contribution to the growth of this segment.

We also acquired $12 million of operating aggregate reserves in 2011. This asset is providing the company with very attractive returns already. We continue to evaluate growth opportunities from other construction material assets when they can be acquired at attractive return profiles.

We continue to fully invest in our businesses during 2011. Our $70 million of capital expenditures maintained all of our businesses. We planted 63 million seedlings and we improved the productivity of our timberlands. During the past year, we also repurchased approximately $25 million of common stock at about $35 per share. Over the last 6 years, we've repurchased nearly 25 million shares or 13.5% of our shares outstanding.

Finally, over the course of the year, we acquired 60,000 acres of productive timberlands, primarily in Georgia and Alabama. These lands will provide the company with very attractive financial returns.

As the largest and most diversified timberland known in North America, we have unique insights into timber markets and their relative strengths and weaknesses that no other timberland investor can duplicate. We believe this is a fundamental competitive advantage as we evaluate the relative merits of any timberland transaction, be it buy or sell. The attractive features of timberland investment remain in place biological growth, inflation hedge and a low correlation of returns to the equity markets. As a result, demand for industrial timberlands remains healthy, and investors continue to allocate capital to timberland assets.

Those of you who have actively followed the timberland markets know there hasn't been much industrial timberland offered for sale in the market over the past 3 years. The state of affairs is primarily driven by the fact that there are not many natural sellers of timberland in the market today. During the past decade, investors became accustomed to a higher level of activity in timberland transactions than we think will occur in the future.

The activity level in timberland markets from the mid-1990s up to roughly 2008 was an anomaly and driven by a fundamental restructuring of the forest products industry. Competition for the assets and a transitioning of the marginal buyer from a taxable C-corporation entity to a tax-efficient buyer increased the pricing efficiency of the timberland market.

Even as some of the timberland investment funds mature over the next decade, we think that the pace of timberland transaction will remain well below the levels seen during the restructuring period. In examining recent transactions, we've seen pricing of some deals that incorporate not only a cyclical recovery in the log prices, but also anticipate additional improvement in log prices from the structural changes in supply and demand that are expected to take place in North America timber markets. So some buyers appear willing to pay today for the full menu of cyclical recovery, inflation and structural supply and demand shifts.

With such a large timberland portfolio, we are regularly approached by investors seeking to purchase timberlands. And when the price was right, you've seen us sell some of these lands. We did just that in the fourth quarter with a sale in Oregon.

As we indicated in our last call, we completed a $60 million large, nonstrategic timberland sale during the fourth quarter. The timberlands sold were 18,000 acres of industrial timberlands in Western Oregon, which represent about 4% of our holdings in that state. These particular lands are good, productive timberlands, but generally have a lower value species mix than the rest of our Oregon portfolio. The sales price of approximately $3,300 per acre represents a very attractive value for these timberlands.

As we evaluate our portfolio today, we like what we see. It's a large and diverse portfolio of well-managed industrial timberlands. However, there continue to be some areas of the portfolio that are less strategic to the company. With demonstrated good levels of demand and intense competition within the timberland investor community, we plan to market some select properties over the next couple of years.

You may ask, does this signal that Plum Creek is a net seller of timberland? My answer is no. Today, we view ourselves as neither buyer nor seller. We are largely satisfied with the composition of our portfolio, but believe there may be opportunities to prune at the margin and capture values today, then incorporate the robust timber outlook we see in the future. Likewise, we continue to actively evaluate timberlands for purchase, and we'll purchase assets that create long-term value for shareholders. For us, it always comes down to a fundamental long-term value. We expect to transact on both opportunistic seller -- as an opportunistic seller and buyer of industrial timberlands, whatever brings the most value to the company. As always, asset acquisitions, share repurchases and debt reduction compete for our available capital.

We continue to look for unique opportunities to acquire assets with attractive return profiles, investments that allow us to create value for shareholders. Our third quarter purchase of 50,000 acres of timberland in Georgia and Alabama is a good example.

During the fourth quarter, we identified another timberland investment opportunity, this time in Mississippi, Louisiana and Arkansas. Last week, we purchased approximately 4.7 million tons of mature Southern Yellow Pine timber in a timber deed transaction valued at $103 million. This purchase is exclusively composed of standing mature and near-mature Southern Yellow Pine plantation timber, ranging in age from 24 to 32 years. It does not include any hardwood volume. With biologic growth, this timber will produce between 700,000 and 800,000 tons of annual harvest over the next 8 years that we will deliver to our customers. As these are mature stands, all logs will account for approximately 80% of the harvest volume.

This timber is located in the strong timber markets in the Gulf South, where we have a market-leading presence and a very broad and competitive customer base. As a result, we are able to bring this timber to market very efficiently and effectively with no additional fixed cost or personnel. Because we have purchased only the standing timber and are not acquiring the underlying land, the current owner continues to pay the property taxes, and will be responsible for reforestation following each stand's final harvest. This investment should produce an attractive internal rate return for Plum Creek over the 8-year life of the investment.

While this is not a typical acquisition of both timber and land, it's consistent with our commitment to value creation and another indicator of our flexibility and willingness to think outside the box. We believe the acquisition will be accretive in each of the 8 years. We've incorporated the harvest volume in cash flow from this acquisition into our 2012 guidance.

As we've always done, in 2012, we will continue to fully reinvest in the productivity of our timberlands. We expect capital expenditures for 2012 to range between $70 million and $80 million. This covers all our reforestation activities as well as our maintenance capital and our Manufacturing business and most importantly, advanced silviculture treatments that enhance the growth and yield of our forests.

David will review the last quarter's performance and discuss our expectations for the first quarter and full year 2012, and then we'll take your questions. David?

David W. Lambert

Thank you. Our fourth quarter results of $0.38 were in the middle of our guidance range. Earnings composition was largely as we expected. Compared to the third quarter, higher income from our Real Estate segment drove the $14 million improvement in our net income. Operating income produced by our timber resources, Manufacturing and non-timber segments were generally stable.

Northern Resources' $7 million operating profit was unchanged from the third quarter. Harvest volumes and mix were at planned levels and were similar to the third quarter. Prices for both sawlogs and pulpwood were slightly lower than we initially anticipated. Export log markets on the West Coast, particularly to China, slowed in early November and began recovering in December. As a result, sawlog prices declined nearly $4 per ton or 5% from third quarter's level. The variability in Chinese demand we witnessed in the fourth quarter is pretty typical of that market, regardless of the commodity in question. We are expecting moderate price improvement in the West Coast sawlog markets during the first quarter, driven by measured improvement in log export markets.

At this point, February contract prices are above those of January and we expect to see some recovery in the Northern segment sawlog prices during the first quarter, about $1 or $2 per ton above fourth quarter levels.

Pulpwood markets in the Lake States and Northeast continue to experience good demand as mills in both regions struggled with low log inventories. Our average pulpwood prices declined less than $1 per ton, less than 2% due to a lower-valued species mix during the quarter. Many customers continued to be challenged by low pulpwood inventory, so demand remains strong, and we expect pulpwood prices to remain in the $41 to $42 per ton range during the first quarter.

Within the Northern Resources segment, we expect our 2012 harvest to be at or slightly above 2011's 4 million ton harvest. We expect the sawlog and pulpwood mix to be similar as well, roughly 60% sawlogs and 40% pulpwood. The first quarter harvest is expected to be between 1 million and 1.1 million tons.

The Southern Resources' $19 million operating profit was slightly lower than the third quarter's $21 million profit. As expected, prices for both sawlogs and pulpwood were stable throughout the quarter. We harvested about 250,000 tons more pulpwood than we initially planned. Our fourth quarter harvest was largely unchanged from the third quarter's levels.

As always, there's a variation in the relative strength of markets from one wood basket to another. For example, in parts of Mississippi, we are seeing some strength due to export demand from Turkey. In 2012, we expect this market will experience approximately 500,000 tons of incremental sawlog demand, roughly equivalent to adding a new sawmill to the region. Plum Creek expects to fill about 120,000 tons of this demand during 2012.

In other areas of the South, we're seeing local pulpwood markets tighten in reaction to growing European demand for wood pellets. These are signs that the U.S. South is among the most cost-competitive wood baskets in the world, and markets are seeking out this resource. As Rick mentioned, our recently completed timber deed will add significant volume to our Southern harvest over the coming 8 years and will be cash accretive in 2012 and beyond. A portion of this first year's harvest includes some thinnings to improve the harvest volume over the life of the timber deed. So the cash flow and earnings impact are more muted this year. We expect the harvest from the timber deed to add approximately $13 million of cash flow in this first year. However, we expect it to be earnings neutral because the incremental volume will have a higher book value than the rest of our timber. Earnings accretion and cash flow will grow in future periods.

In total, we expect our 2012 Southern harvest to be between 12.5 million and 13 million tons with approximately 48% of the total harvest composed of sawlogs. We expect the South's first quarter total harvest to be approximately 2.8 million tons, similar to the volume and mix harvested during the first quarter of 2011. We expect prices to improve about $1 per ton from their fourth quarter levels for both sawlogs and pulpwood as wet winter weather typically tightens the markets by restraining logging in the first quarter. 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.

Turning to our Real Estate segment. Our Real Estate segment performed as expected with $93 million of sales, generating $60 million in operating income. As Rick mentioned, our fourth quarter results included a $60 million large, nonstrategic timberland sale of approximately 18,000 acres in Oregon. The balance of the sale is consisted of approximately 5,400 acres of small nonstrategic lands capturing $1,345 per acre, approximately 7,300 acres of conservation properties that captured approximately $1,000 per acre and about 8,700 acres of recreation lands with captured values of $2,100 per acre.

We have not seen much change in the rural land markets over the past several quarters. The geographic mix remains largely unchanged with relatively good interest in the Gulf South, steady demand in the Lake States and markets in Georgia and Florida starting to exhibit greater levels of inquiries. Montana markets remain slow.

We expect our Real Estate segment revenues will approximate those of 2011, in the range of $275 million to $325 million for the year. We expect that land basis will be approximately 40% of sales in 2012. That's higher than the 26% of sales we experienced in 2011. You may recall that the lands we own are on our balance sheet at historic values, and these values can vary significantly depending on the specific tract in question. So while we expect to produce steady cash flow from this segment in 2012, the higher noncash land bases expense reduces our net income by approximately $0.25 per share. We expect first quarter segment revenue could be as much as $120 million, with a much higher than typical basis of nearly 60% of sales.

Our Manufacturing segment posted a $3 million operating profit, unchanged from the third quarter's results. Profits in each of the product lines were little changed. A 4% increase in lumber prices more than offset a 10% decline in lumber's sales volumes, while plywood and MDF prices and volumes were similar to third quarter's levels.

As mentioned in our press release, we expect the Manufacturing segment's 2012 income to be similar to 2011's $15 million level. We expect underlying business conditions to improve gradually, especially plywood prices to be relatively strong in the first half of the year as the market adjusts to the recent loss of a large plywood plant in Chile.

We expect in 2012 that our third-party interest expense will be similar to 2011's level of about $81 million. We anticipate a small tax benefit in 2012, comparable to 2011. We expect the resulting net income to be between $1 and $1.25 per share for the year, with first quarter's results between $0.20 and $0.25 per share.

As Rick mentioned, we expect our cash flow and fundamental financial performance in 2012 to be better than 2011. The decline in our earnings guidance is a result of the expected composition of our land sales during 2012. This has an impact on reported earnings, but no impact on cash flow.

Kristen, we will now turn -- open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Gail Glazerman with UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

I guess on the timber deed transaction, can you give a little bit more color there? Was buying in an option? Can you give a sense as who the seller was and whether it was negotiated or how competitive the deal was?

Rick R. Holley

Well, the seller was an investment fund, timberland investment fund, and it was negotiated, and we didn't negotiate over buying the lands. It was merely about buying the mature standing timber. So...

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just changing gears a little bit, you've talked in the past about having contracts for pulpwood with the European utility. Is that coming through as expected, incorporated in the guidance or is that being pushed out again?

Rick R. Holley

Yes. We wouldn't expect any benefit from that agreement until sometime in 2013. This particular utility is looking to site 3 or 4 different pellet locations. We're working with them on that right now, the locations, and then they'll have to get those pellet facilities built so it's probably a 2013 impact.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just a little bit more on the markets. Can you talk a little bit more specifically about what type of U.S. housing forecast you're using? And also just the improvement that you're seeing in export markets today, one, the sale that you've referenced, how will that impact the export volume? Two, can you give a sense of how much is recovered from the flows and where current prices are relative to kind of the peak in export pricing last year?

Rick R. Holley

Okay. Well, our housing expectation is for 700,000 starts, and I guess if anything, we've been pleasantly surprised one month into the year. Again, one month is not going to make the year, but we're seeing a little bit more activity, we're seeing a little bit better pricing than we expected already. So if anything, we're probably more on the pessimistic side than we should be, and at least, the earnings guidance we've given, there's probably a lot more upside than downside so it's starting to look a little better, 700,000. I think the blue chip estimate is about 710,000, so we're kind of in that range. As David mentioned, the export market here on the West Coast slowed down in November and then started to come back in late December. And we would expect to sell more volume this year. In 2011, it's about 17% of our Oregon volume. Our Oregon volume will be higher in 2012, and we should do over 20% of that volume, maybe as much as 25% will go to the Chinese market. We're also seeing the Chinese looking at southern markets and we're seeing Turkey in the market in the south now and even some interest from countries like India, so there continues to be more and more interest in U.S. wood products, both raw logs as well as lumber products from different markets. So I think that's a net positive.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And it seems like your outlook for China is a little bit stronger than it might have been last quarter where you're kind of talking about a couple of years for Chinese activity to recover. Any sense what might have changed?

Rick R. Holley

Well, I think what's changed is that the government there, unlike our government, can turn it on or turn it off pretty quickly, and they've lowered interest rates and tried dispersing the activity there. So it's interesting because in November there was no interest and now there's considerable interest from several different exporters looking for volume here on the West Coast. So we would expect that the demand to be as good or better than it was last year, and then prices should continue to move up as the year proceeds. So it's -- I think it's going to be long term very, very good. There's -- when I was in China last year, there's lots of activity there. Whatever goes on with the Russian tariff, they don't think it's going to affect their buying patterns whatsoever. They need to come to North America and get wood for the economy in their country.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay, and just one last quick question. Pulpwood volumes in the south were stronger than you expected in the fourth quarter. Can you explain what drove that?

David W. Lambert

Just on a relative harvest mix, we were de-emphasizing our large sawlogs. We increased our chip and saw volume and got commensurate pulpwood with that. On a relative basis, we're just seeing better value for pulpwood. Values are down from where they were in the peak of 2010, but that's a better value opportunity for us than sawlogs so we've continued to emphasize that.

Operator

Your next question is from the line of George Staphos with Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I guess the first question I had, I think you alluded to it in terms of inventories being relatively low from what you can see on the customer side and that being a support for pricing. Rick, I was wondering could you ballpark roughly what you think customer's inventories and log decks look like versus last year or sequentially versus the fourth quarter, if you think that's a more meaningful statistic?

Rick R. Holley

Yes, I think as we mentioned in our comments on the quarter, they've built some inventories in the north so they're probably at normal levels, maybe a little higher than normals. They're in pretty good shape. In the south, they're pretty normal levels as well. So I think what every inventory building we saw happened kind of towards the end of the fourth quarter and even a little bit here in the month of January. Again, if we start to see more normal weather patterns, and we've seen more rain in the south, that's going to affect certainly log flows and price for pulpwood as well as sawlogs.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay, fair enough. So it's really more of the weather effect for the first quarter that you're expecting to lead to the price support and the tightness. One thing that we noticed, both for fiberboard and plywood, your production, your shipments were higher than our model in the fourth quarter and higher than, if I got this correctly, fourth quarter of 2010. Do you view that as an indicator as well that the housing market has finally begun to heal? Or do you view that as more of a factor of, say, production in Chile being offline as far as plywood goes?

Rick R. Holley

I think for plywood, at least initially, it had solely to do with the fire in Chile and that plywood plant going down. With respect to MDF for both our thicker board, both our lines, we're seeing much better demand than we anticipated. We're seeing it from furniture, which is a very strong segment, and also store fixtures, which a lot of MDF goes to that product. So I would expect that we're going to see slightly higher MDF volumes this year and probably more profitability in that business just due to improving demand. And that's a positive line, I think, generally for the economy.

George L. Staphos - BofA Merrill Lynch, Research Division

Rick, I think I know how you're going to answer this question, but I'll ask it anyway. If you look at some of the data that's been reported from some of the more regular news sources on timberland, certainly southern prices for timberland held up relatively well. Fairly fewer transactions this year than in the past year than you enumerated why you think that's going to be the case going forward. Land value and some of the other regions that were down a reasonable amount versus 2010. All else equal, would that make you more likely to be a buyer outside of the south in future years? Do you think, perhaps, there are better returns outside of the south? Certainly, the timber you've purchased suggests otherwise, but I wanted to probe that with you.

Rick R. Holley

Well, I think and I said this before, if I had $1 to invest, I'd probably invest it in the U.S. south. I think, long term, the markets are better there, there's energy opportunities there that don't exist in some of the other markets. There's alternative land values there that you don't necessarily see in some of the other markets, so we still like the south a lot. As far as values, I should say any transaction in the south is probably still off at 10% to 15% from the peak that we saw, but you don't see that in the west. I mean, this value we got in the Oregon market was an excellent value and certainly not a discount from the peaks when you look at the stocking level of those lands. So I think values out here have held up very well in the west. In the south, still off 10%, 15%. We really haven't seen any transactions in the other states to speak of. But our preference would still be on those timber-rich, lot of high, well-capitalized manufacturing facilities which are in the south or even in the west here in Oregon.

George L. Staphos - BofA Merrill Lynch, Research Division

Rick, one last question, I'll turn it over. Given now in fact the pickup that you're seeing in export markets on the West Coast and from China, I remember from a couple of quarters ago, one of the hindrances to shipments was available capacity at the port. Is there any ability for you to perhaps expand your participation in some of the ports, whether it's Cruz Bay or somewhere else? Is that even an option for you in the next couple of quarters or down the road?

Rick R. Holley

Well, the port in Cruz Bay, the owner of that facility was going to expand the capacity of that, and then the market kind of slowed last year so those plans went offline. We'll encourage that and I suspect other exporters will. So, hopefully, we'll increase the capacity there. And we've even looked at exporting logs out of Astoria from a haul standpoint offer, the lands we have in Oregon which are a little north, certainly north of Cruz Bay. So we're looking at other options to help us get more volume into that market because the prices are very attractive.

George L. Staphos - BofA Merrill Lynch, Research Division

Rick, if that happened, would you need to invest with the owners of these ports or how would that work if you can remind us?

Rick R. Holley

We would not invest with the owners of these ports. There might be ourselves along with the end use customer, Chinese customer, some kind of volume commitment to encourage that investment, but we would not make any direct investment.

Operator

Your next question is from the line of Joshua Barber with Stifel, Nicolaus.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

I'm wondering if I could go back to your timber deed a little bit and if you could give us a little bit more detail into your thinking behind going out and actually purchasing more land. I guess -- my guess is most investors will not be looking at Plum Creek today, saying you guys are not big enough on the timberland side. So I'm just wondering if you can tell us why you're preferring to use the cash today for this timber deed as opposed to, say, share buybacks or debt reduction?

Rick R. Holley

Well, Josh, I think when we look at use of capital, whether it's share repurchase or acquisitions, it's whatever has the highest return. So when this opportunity came upon us here in the south, clearly, it wasn't an opportunity by timberland, which would be our preference. But here, we had an opportunity in the end markets where we have very good customers and already have the infrastructure in place to buy a very attractive asset, which happens to be mature timber, in a market which is priced pretty low today. So you buy it at today's price and we expect those prices, and I suspect all of you on this call today, over the next 8 years are going to continue to go upward. So we saw that as a very attractive way to create value and had a much higher return we felt than buying timberlands or either repurchase our stock at the current levels. So we sit down and look at all those options each and every time.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

In broad strokes, would you be able to tell us what your expected IRR is on that deal?

David W. Lambert

We're not going to comment on that, Josh. But when we look at it on a relative basis compared to buying fee timberlands versus this timber deed, it's kind of a unique transaction for Plum Creek. We believe we are getting a return that was better for us than with getting a traditional fee purchase today, and so that's why we kind of took an advantage of this opportunity.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's fair. Can you just tell us, David, how many acres the timber deed covers?

David W. Lambert

It would cover about 50,000 acres of pure pine plantation. So if you were to think of normal ground including a 25% hardwood component, it'd be a lot more of a traditional ground. And if you look at the general stocking, I mean your over 90 tons per acre on this ground, it's very mature.

Rick R. Holley

So basically, it's 50,000 acres is just Southern Yellow, mature Southern Yellow Pine, mostly saw timber. There's no streamside management zones, there's no roads in those numbers. There's no where you leave those things and there's no hardwood volume, so it's just pure Southern Yellow Pine timber.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Okay, one last question. Can you guys comment on the Southern Pine design value changes that recently got put into place and how you think that ends up impacting the markets over the next few years?

David W. Lambert

They've been discussed and they have tested the 2 by 4 for strength, and there's about a 20% reduction in design values. They're going to extend their test to wider widths and see how that would impact the markets. It could have an impact in the trust markets where they might have to change some of their design specs, generally in the treated markets which is the largest kind of use, single use of Southern Yellow Pine. We don't anticipate much impact. But at this point, we don't anticipate a material impact on the markets.

Operator

Your next question is from Anthony Pettinari with Citi.

Anthony Pettinari - Citigroup Inc, Research Division

You discussed your expectation to grow cash in the Southern Resources segment in 2012. And I'm just wondering if you strip out the cash accretive impact of the timber deed, do you still expect the Southern segment business to grow cash year-over-year?

David W. Lambert

Absolutely. We're seeing higher prices for both sawlogs and pulpwood in our forecast, so that's just one of the components of the improvement.

Anthony Pettinari - Citigroup Inc, Research Division

And then, I guess, a similar question. In 2011, you harvested about 42% of the Southern timber sawlogs and I think you guided to 48%. What is the impact of the deed on that shift, if any?

David W. Lambert

That does contribute to it. As we indicated, this is largely mature timber. The first year of the harvest, we will be doing some thinning activity and so it will be a little bit more balanced, but that does account for some of the improvement in the mix.

Anthony Pettinari - Citigroup Inc, Research Division

So if you had to estimate maybe apples-to-apples, same land to same land, where would the 42% kind of go to roughly?

David W. Lambert

I'd have to run that number exactly, but it might be more similar to last -- the year before, 2010's 44% sawlog mix. It's a little higher.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, okay. And then just a follow-up. We've seen a major coated paper producer declare bankruptcy in the quarter that I think that you were selling volumes to. I was wondering if you could just comment on potential impact of that, if any? And then maybe beyond that, to what extent does the kind of continued secular decline in printing and writing paper, how could that impact your pulpwood business?

Rick R. Holley

Well, clearly in that particular customer, NewPage, that declared bankruptcy. It's a very large customer of ours in Michigan, our largest customer by far. We continue to deliver volume to that mill. We continue to get paid. And our view with respect to that particular mill is it's world class, it's pretty cost competitive, makes a good product. And so somebody will operate that mill. So we're clearly not concerned about a place to sell the volume we have in Michigan. With respect to that whole segment is we're exposed to not only there, but also with Sappi in the State of Maine. And again, we did a study a number of years ago to ensure that the customers we have, that we sell this product to, were world class as far as being able to be competitive. They were well capitalized, which Sappi clearly is in Maine. So we feel very good about the customers we sell that make that type of product.

Operator

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

Mark Wilde - Deutsche Bank AG, Research Division

Can you guys remind us of the tax situation on the Real Estate sales, whether there's a scenario in which you'll be paying tax on those real estate sales over the next 3 to 5 years?

David W. Lambert

Yes. We're in a situation where some investment timber REITs are in a built-in gains period still. We are beyond our 10-year built-in gains, and there is no tax on any disposition activity at any level of the company.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. Great. Second question, does the -- with the timber deed, does all that $103 million, is that all cash out now or does that -- some of that flow over the life of the deed?

David W. Lambert

It's all upfront. You'll see in our cash flow statement that we did pay $5 million of the deposit in 2011 at the end of the year, and the balance was paid here in January.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. Next question. Rick, can you talk at all about just what you might be doing in terms of kind of succession planning at Plum Creek and also just bench development? It seems like as we go around the timber community, it's pretty well seated with Plum Creek people.

Rick R. Holley

No. We annually go through a succession planning discussion with our Board of Directors for every, the top 20, 30 jobs in the company, every officers. We make sure we have at least 1 or 2 kind of people in the wings. We do a detailed development plan for each one of those individuals, so it's something that I personally and our board and our Human Resource group spend a lot of time on here. So we have -- you guys have met them. We have a very good team of professionals. Recently, we made some changes in our organization, where we put Tom Lindquist who had responsibility for Resources and Manufacturing and Real Estate. He still has Real Estate, but we gave Tom our policy area and also responsibility for all our business development activities, acquisitions, dispositions and the like. And Larry Neilson, who was doing acquisitions and disposition activities, is now responsible for Resources and Manufacturing. So we're trying to kind of get people more experienced in different aspects of the company and get them exposure to all of you, which we think is very important, and also to the activities that take place in the other Washington, which is frustrating but important. So...

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. And just to come back to Anthony's question about maybe regional pressures because of closures on the paper side of the industry. I just -- you addressed the issue of Escanaba, I think, up in the Lake States, but it looks like we're seeing a lot of other closures in that part of the country, whether it's specialty paper mills or other coated mills or that medium mill at Ontonagon that closed a couple of years ago. So could you just -- can you talk about that? And then, I think you are also a supplier of that Missoula mill that Stone had out of your Montana lands.

Rick R. Holley

Yes, we did. Going to speak to Missoula first. We did supply some chips to them from time to time and they did buy some pulpwood. But quite frankly, because we have a pretty big MDF plant there, the fact that mill is not running makes more wood available for us. So net-net, we're probably positive about that, although we hated to see the job losses in that community. But one of the things we do, as I mentioned, is look at every segment of the company, whether we're selling to people in containerboard or tissue or whatever commodity it is, who the customer is, how well capitalized they are, how they go to market with their product, people like graphic packaging, the position they have in their marketplace. And really to that particular segment of paper and as we're exposed both with NewPage there at Escanaba and with Sappi, and we feel very good about those 2 customers. And we're really not selling wood to a lot of these other customers that are maybe on struggling a bit more. So we're in pretty good shape from a customer standpoint.

Operator

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

Mark A. Weintraub - Buckingham Research Group, Inc.

Rick, I sense that you're kind of setting us up for some change in the land disposition, land acquisition bias. And certainly the last few years, you certainly sold a lot more land than you've acquired. Even last year, you sold, I think, it was 185,000 acres and you did buy some, but certainly not as much as you'd sold. And I think based on your guidance for this year where the revenue number is similar, I guess first question would be, would you anticipate the number of acres to be sold to be relatively comparable to the acreage sold last year? And then the second question would be, as the number of acres being sold and/or acquired become more similar, do you think it's going to be more that you're going to be selling less or you're going to buying more?

Rick R. Holley

Well, I would hope in the future we're buying more. And as I mentioned in my comments, we're still looking at the core timberlands and we're pruning some of them in markets that we find long term maybe to be less attractive or maybe the lands are not as productive or maybe the cash flow profile fits another owner better than it fits us. So that's some of these things that we're pruning. And then you have an opportunity to sell 18,000 acres at Oregon at very compelling price, so somebody comes to you and you do that. But I think next year that we'll sell between, in the entire Real Estate portfolio, maybe between 100,000 and 200,000 acres, it really depends. And you'll see us pruning off some, a few core acres, but I would hope over the next, certainly hope next decade we would buy more than we would sell. That would be our hope. We think we do it pretty well. We look at everything that comes on the market. And right now, we just don't -- and what others are willing to pay, we find it more compelling, generally, to buy our stock back or this timber deed transaction is much better return than just buying timberlands as they're priced in the market today. But we would hope over the next few years that changes. And certainly, we have the capital and the ability and willingness to acquire more lands.

Mark A. Weintraub - Buckingham Research Group, Inc.

You're certainly acquiring more lands. So clearly, you expect to continue to sell, pruning, finding opportunities. But would you expect that number to go down meaningfully from 100,000 and 200,000 acres a year to something a lot lower or not necessarily?

Rick R. Holley

Yes, I would think so. I think, over time, you're going to see us take really that -- those HBU, the development lands, the conservation lands, the ones we've categorized, and sell those over the next 15 or 20 years. And there's roughly 1 million acres of that, so you take 1 million divided by 20 and so you're going to sell 50,000, 75,000 acres. I suspect that's what's going to be more normal in the future.

Mark A. Weintraub - Buckingham Research Group, Inc.

Okay. And one point of clarification since you brought up development. I take it you do pay taxes though if you are selling development properties. And so if you're just selling undeveloped, unimproved properties that there's no tax leakages. Is that correct?

Rick R. Holley

That is correct.

Operator

Your next question is from Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners Inc.

You indicated, I guess, on the numbers about $13 million was used to acquire timberlands and minerals. Is it roughly in the ballpark that, I guess, $5 million of that $13 million went toward the timber deed, and therefore the other $8 million might be tied to the mineral opportunities you talked about?

David W. Lambert

No. In 2011, we spent a total of $12 million of capital on buying construction material reserves. We did reference a $13 million figure in the call script, and that is our anticipated cash flow from the timber deed in 2012.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. But I'm sorry, on the -- just in the fourth quarter on the cash flow statement, it just indicated that you acquired $13 million in that one quarter. And I think you mentioned just in the fourth quarter, you did spend $5 million on the timber deed. Is that right and that would be part of that?

David W. Lambert

That's not showing up in that component of it. If you look, the $13 million, that is -- it was all for timberland acquisitions and smaller deals.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And actually, I see above, I see what you mean, I see the $5 million above, absolutely. And then in terms of the timber deed itself, I guess the way to look at it is that you -- 2 questions. One is, you expect, if you harvested on the schedule, you've indicated 8 years, you would get all the cash back plus a return and then you would have nothing left, I would guess. You would basically no longer have rights to that land, so if you could verify that. And then secondly, let's say that the market isn't conducive so that you want to harvest it in 8 years. Could you -- do you have the right to kind of stretch that out with the owner over more years and how many years would that be?

David W. Lambert

To your first point, yes, we will harvest all the timber over the time period, and at the end of the deed, we have no residual value. So your statement was correct. With respect to harvest flexibility, we do have the ability to alter the harvest on an annual basis based on market conditions and we do have the ability to extend the timber deed beyond year 8 by paying a rent payment for the acres that have not been harvested. So we do have flexibility to extend that for a couple of years if necessary.

Chip A. Dillon - Vertical Research Partners Inc.

And just for what it's worth, if the market's really good, say in 5 years, and you wanted to accelerate it and do it say over a 6- or 7-year period, even though I guess you'd sacrifice a little growth in some of the logs, would you have the ability to accelerate it?

David W. Lambert

Yes. We could take it all at once and then the acres just revert back to the seller sooner.

Chip A. Dillon - Vertical Research Partners Inc.

Okay. And then the last thing is you mentioned and maybe you were addressing this before, but I know there's this reserve you mentioned. And there were some mineral opportunity you mentioned where you got a $21 million upfront payment. Did you receive that in 2011? And did you end up getting more cash back than you put into it during the year?

David W. Lambert

Yes. We have subsurface mineral reserves and we put these 64,000 acres out for bid and the development company acquired the operating lease on those acres and paid us a $21 million payment in 2011. They will then come in and do exploratory work and drill those acres going forward in which we'll be entitled to receive lease payments based on their gas and oil production over time. Of that $21 million we received this year, a portion of it is amortized into current period earnings and the remainder will be amortized over a 5-year kind of drilling and exploration window.

Chip A. Dillon - Vertical Research Partners Inc.

In the Real Estate segment or the Resources?

David W. Lambert

In the Resources -- in the Natural Resources, other category.

Operator

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

Steven Chercover - D.A. Davidson & Co., Research Division

Just 2 quickies. Forgive me, but when did you actually give 2012 guidance? Did it come out earlier or is it just compared to the consensus that's displayed in the first call?

David W. Lambert

We just gave it today.

Steven Chercover - D.A. Davidson & Co., Research Division

Okay. So really the new information was the $0.25 impact of the higher basis?

David W. Lambert

Right, Steve.

Steven Chercover - D.A. Davidson & Co., Research Division

And then secondly, I recognize that OSB Mills consumed pulp logs. But do you have any visibility as to higher volumes of those mills or either existing mills or any restarts in the OSB markets that you might serve?

David W. Lambert

That's been pretty flat. OSB production was flat to slightly down in 2011 compared to 2010 on a national basis, off like 1% from the figures I saw. So we haven't really seen that. Housing's been pretty flat for several years, and so that represents an upside demand source.

Steven Chercover - D.A. Davidson & Co., Research Division

Yes. But at present, you see no indication that your customers are preparing to ramp?

Rick R. Holley

No, we've not seen any of that. I was first in the marketplace, but we haven't seen it happen yet.

Steven Chercover - D.A. Davidson & Co., Research Division

Well, let's hope that when housing ultimately recovers that they are measured in their response.

Operator

Our final question is from the line of George Staphos with Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

Some quick ones to finish up here. Just on that lease payment, the $21 million that you're taking into incremental. I remember if it's the same payment from last quarter, you were saying you might amortize it really over 3 to 5 years. Now it sounds like it's 5 years. Is there any difference between or any reason why that'd be extended over a greater period of time?

David W. Lambert

No. It's -- if we've indicated 3 to 5, that's still a reasonable window. Each lease is different depending on the lease requirements, and this represented a couple of different opportunities.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. And I wanted to come back to the question on the paper demand that Mark was getting on, Anthony was getting at. I realize that you are obviously not selling to marginal players in the paper industry. You mentioned Escanaba, you mentioned, I guess, the Somerset Mill for Sappi. But ultimately, there's been so much demand destruction in paper overall, you must be confident that there'll be an improvement in demand for pulpwood that offsets paper longer term. So as you sit here today, do you think it's more likely to come from the improvement we'll see in things like OSB or is it -- is your confidence in the improvement in pulp with demand long-term coming from, basically, sources like biomass in that in the south?

Rick R. Holley

I think primarily, we look to the energy is going to more than pick up the capacity, the wood capacity left by the paper industry. And clearly, OSB is running at 50% of capacity so at the housing market, that will clearly pick up some of the slack. But I think energy is going to be the new demand source in that marketplace.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Rick, the last one and I'll turn it over. For a number of years, rightfully so, you've been pursuing a strategy of thinning as opposed to taking your available sawlogs to market in the south. If we exclude the timber deed purchase for a minute in your what have been your residual landholdings or your legacy holdings, would you have been reaching any kind of threshold where you could not really practically do much more thinning than you have been doing in recent years? Or could you have done that -- could you do that indefinitely for the next couple of years if the housing market doesn't yet come back?

Rick R. Holley

I think we've reached a point where we've done the majority of the accelerated thinning program, and that's why in our volume this next year you see a little bit higher volume of sawlogs, whether it's 44% versus 40%. And that's related to more chip and saw wood. There'll be some thinnings come with that. But clearly, you have some mature saw timber and where the markets will pay us forward, we're going to bring that to market. Clearly, Oregon is a case where we've deferred volume there. We're bringing that back to market at very attractive prices. Our thinning regime, we've done what we could do and it will be pretty flat from henceforth.

Operator

Mr. Holley, do you have any closing remarks?

Rick R. Holley

Well, I just want to thank everybody for your time today, and we'll talk to you next quarter.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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