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

Q4 FY07 Earnings Call

January 28, 2008, 05:00 PM ET

Executives

John Hobbs - Director of IR

Rick R. Holley - President and CEO

David W. Lambert - Sr. VP and CFO

Analysts

George Staphos - Banc Of America Securities

Chip Dillon - Citigroup

Mark Weintraub - Buckingham Research

ChristopherChun - Deutsche Bank

Claudia Hueston - JP Morgan

Steven Chercover - D. A. Davidson & Co.

Gail Glazerman - UBS Warburg

Geoffrey E. Gilbert - Peak Investment

Richard Skidmore - Goldman Sachs

Peter Ruschmeier - Lehman Brothers

Ross Gilardi - Merrill Lynch

Operator

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek's Earnings Teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Mr. Hobbs, you may begin your conference sir.

John Hobbs - Director of Investor Relations

Thank you, Chris. Good afternoon, ladies and gentlemen and welcome to the fourth quarter 2007 conference call for Plum Creek. I'm John Hobbs, Director of Investor Relations for the company.

Today we have on the line; Rick Holley, President and Chief Executive Officer; and David Lambert, Senior Vice President and Chief Financial Officer. This call is open to all investors and members of the media. However, the Q&A portion of the call is intended for the professional investment community only. We ask that other participants please follow-up with any questions by calling me at 1-800-858-5347. I encourage you to visit our website, www.plumcreek.com. There you will find our press release and supplemental financial statements for the fourth quarter and full year 2007.

Before we begin today's call, 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.

Now I'll turn the call over to Rick.

Rick R. Holley - President and Chief Executive Officer

Good afternoon. We are pleased with our performance during the fourth quarter and for the entire year of 2007. During the past year, I believe that people of Plum Creek performed well in a challenging economic environment. We grew the contribution of our Real Estate segment and our non-timber natural resources and worked to position the company to benefit in the future from emerging opportunities in renewable energy.

In our timber business, we maintained our disciplined focus on long-term value creation. During 2008, you should expect us to maintain our disciplined focus. 2007 highlighted some of the attractive characteristics of timberland ownership and an investment in Plum Creek.

First; timberlands are excellent store of value. The values, the investment quality timberlands remained firm despite temporary lower log prices. These are extremely long-lived assets capable of producing recurring cash flows into perpetuity. Timberland investors recognizes and have demonstrated in several large timberland fractions over the last year, including our fourth quarter sale in Wisconsin.

Second, a disciplined focus on long-term value is absolutely critical when managing timberlands. Plum Creek has developed a culture, focused on creating and protecting long-term value, one that responds appropriately to market conditions. With sawlog prices down over the past year, we reduced our sawlog harvest to the lowest level it's been in 6 years; preserving and growing the value of these assets. At the same time, pulpwood prices have been strong. And we've increased our pulpwood harvest to the highest it's been in 6 years.

Third, geographic diversity reduces risk. While overall sawlog prices are down over the past year, this is not universally the case. In some local markets, sawlog prices are up year-over-year. With over 35o foresters over 40 distinct markets, we have the local knowledge and the market insight to respond appropriately to each market that we are in. Geographic diversity matters in world land markets as well. While activity levels in most markets were similar to what we saw in 2006, world land markets in our Gulf South region, in particular in Mississippi grew significantly, driving the year-over-year growth in our Real Estate segment.

Lastly, financial flexibility makes operational flexibility possible. Strong cash flows and an investment grade balance sheet, provide us with the financial flexibility to make the correct long-term value decisions, while maintaining our commitments to our shareholders. Dave will review our fourth quarter results and discuss our outlook for 2008, in more detail with you now. Following our prepared remarks, we will open it up for your questions, David?

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

We've reported earnings of $0.68 per share for the fourth quarter. These results include $0.25 of earnings from our sale of 100,000 acres of Wisconsin timberlands. Our guidance did not include the earnings impact from the sale.

In November... in our November analyst meeting, we discussed our plans to explore the sale of core timberlands. Through these sales, we seek to capture the full value of our core timberlands today and effectively buy timberlands in an attractive discount by repurchasing our stock.

In late December, we completed one such transaction, the sale of nearly 100,000 acres of core timberland in Northern Wisconsin for $70 million, or $750 per acre. The sale resulted in a $43 million gain and generated approximately $69 million in cash flow. The majority of the lands sold were acquired in 2002 as part of a 309,000 acre purchase from Stora Enso for approximately $460 per acre. These are investment quality timberlands that have a long history of sustainable, professional management. This sale demonstrate the continued interest in high-quality timberlands and provide some insight into the value of industrial timberlands in this region of the country. While well stocked and highly productive, the average stocking levels on these lands are lower than the stocking on our remaining lands in the state and suggest higher per acre values for our remaining core timberlands in Wisconsin.

Moving onto our ongoing business activities, the fourth quarter markets were much as we anticipated. Sawlog demand remained weak, the prices held steady in most markets with the exception of coastal Oregon. Pulpwood markets remained quite healthy across all regions. Our Real Estate segment completed the year as expected posting 200... 2007 revenues of $332 million from our ongoing world land sales efforts and another $70 million from the Wisconsin timberland sale, I just discussed.

In the Northern Resources segment, operating profit was $17 million. Results were up significantly from the $8 million profit we reported during the third quarter. As you will recall, an active fire season reduced our harvest volume, we also incurred a $4 million fire loss during the third quarter. Our average sawlog prices declined about 6% to $71 per ton during the fourth quarter, a return to price levels we experienced earlier in the year.

Oregon log prices declined approximately 11% as specific northwest lumber mills continued to reduce production in response to weak residential construction demand. Lumber production in the coastal markets of Oregon and Washington was approximately 10% lower than third quarter levels, and approximately 3% lower than the same period of 2006, increasing hardwood sawlog prices in the lake states, in the northeast offset some of the decline in the West Coast sawlog pricing. We expect sawlog pricing to be fairly stable in the first quarter with some downward pressure, on Pacific Northwest sawlog prices, offset by firming hardwood sawlog markets.

Pulpwood markets in the lake states and northeast strengthened during the quarter. The average pulpwood prices rose nearly 5%, as customers sought to build log inventories from low levels. We expect northern pulpwood market to hold relatively steady with some modest potential upside during the first quarter.

In our Southern Resources segment, fourth quarter operating profit was $35 million, down $4 million from third quarter's performance. Our sawlog harvest declined nearly 15% from the third quarter level as we elected to defer the harvest of approximately 200,000 tons of sawlogs. These harvest deferrals were taken at specific markets where we believe there are attractive opportunities for meaningful price recovery.

The harvest deferrals were skewed towards higher value larger sawlogs and as a result, our average sawlog price drifted lower, down about 3% from the third quarter levels to $30 per ton. We've recently seen some production curtailments in plywood and larger dimension lumber mills in the south. These production curtailments have reduced demand for larger diameter, higher valued sawlogs and as a result, we believe our average sawlog prices in the first quarter could dip $1 to $29 per ton.

Lower lumber production in the south has created a shortage of residual chips available to pulp and paper producers and has continued to increase the demand for pulpwood. Southern pulpwood markets continued to be strong during the fourth quarter with some particularly attractive spot market opportunities in western portions of the south. As expected, pulpwood prices were flat to up in southern markets. With continued strong demand and a return of more normal weather patterns in some eastern portions of the south we are continuing to experience upward pressure on pulpwood. We expect pulpwood prices in the first quarter to average $10 per ton, up from fourth quarter's $9 per ton price.

Our 2007 sawlog harvest was the lowest in six years, as we focused our harvesting efforts away from the weakening sawlog markets. In response to strong pulpwood markets, we accelerated the pulp... our pulpwood thinnings, bringing to market previously deferred pulpwood harvest. As a result, our 2007 pulpwood harvest was the highest it's been in six years.

We benefited by these decisions in two ways. First, we captured better prices for our logs and second, the pulpwood thinnings boost the net present value of our forest by improving the growth of the timber stands we thinned as the remaining trees benefit from reduced competition. We expect our 2008 harvest levels for sawlog in both the Northern and Southern segments to be similar to 2007, as we maintain a reduced level of sawlog harvest.

Demand for pulpwood continues to be quite good and we've maintained an accelerated pace of pulpwood thinnings for the past 15 months. We captured attractive incremental value from the timing of these harvest. At this time, we've largely worked through our backlog of pulpwood harvest volumes and plan to resume the pace of our southern pulpwood harvest we established in late 2005 and early 2006, of approximately 6.7 million tons per year. Our total harvest for the year should be between 18.5 million tons and 19.5 million tons.

For the quarter, the Real Estate segment recorded revenue of $198 million and operating profit of $120 million, which included the Wisconsin sale. Excluding this sale, revenues from our ongoing land sales efforts were $128 million, and produced an operating profit of $78 million.

During the quarter, we sold 3,760 acres of development property for $29 million. Development properties contributed $50 million in revenues to the segment results for 2007. The properties sold during the fourth quarter ranged in value from $4,200 per acre for second home lots in Wisconsin to nearly $33,000 per acre for an 80-acre commercially zoned property in central Georgia.

Interest in world lands remains good and per acre values are stable. Our 2008 segment revenues were expected to be similar to 2007, excluding the Wisconsin sale. So we expect to generate revenues between $320 and $340 million for the year.

Sales from our development subsidiary are expected to be between $25 million and $35 million. We don't expect a significant change in the mix of property types sold during 2008, so we expect land basis to be approximately 25% of sales. Because of significant portion of our lands we sell are in northern tier states, fires often find a property during the spring and summer and close their purchases in the summer and fall. As a result, we expect a recurring seasonal pattern of high second half sales in this segment.

During the first quarter, Real Estate segment sales are expected to be between $75 million and $85 million, a handful of these transactions account for approximately half of the first quarter results. So if there are any delays in completing these sales, it would impact the segment's results in the first quarter.

The Manufacturing segment reported breakeven performance for the fourth quarter, down $2 million from the third quarter. The decline in profitability was driven by lower sales volumes for all products and higher raw material costs in the medium density fiber board and plywood product lines. We expect our focus on specialty and industrial markets will continue to limit our pricing volatility relative to the widely reported commodity grades of lumber and structural panels.

We expect the Manufacturing segment to post a small loss, but remain cash flow positive in the first quarter as lumber prices continue to be exceptionally weak and high raw material costs particularly residence reduced profit margins in our plywood and MDF businesses.

We expect full year income from continuing operations to be between $1.15 and $1.40 per share, with our first quarter results between $0.26 and $0.31 per share. We expect total capital expenditures for 2008 to be between $90 million and $100 million. About $45 million is our traditional maintenance capital, primarily investments in reforestation.

Our Real Estate Group plans to invest about $15 million to develop a number of properties during 2008, mainly entitlement and permitting costs. The remaining capital was primarily discretionary silvacultural investments that improved the long-term productivity of our forest.

Now, I'll turn the call over to Rick for some summary comments before opening up the call to your questions.

Rick R. Holley - President and Chief Executive Officer

We view the current business conditions as a cyclical downturn rather than enduring structural change in the markets. We believe the long-term demographics of the nation will provide very attractive long-term markets for our timber. We will continue to make day-to-day operating decisions in each of our businesses that we believe will add to long-term shareholder value and position the company to benefit from a recovery in residential construction.

We have deferred sawlog volume that will be available to harvest as markets improve. We continue to pursue entitlements for our high-value development land, and we will continue to meet with experienced land development companies discussing long-term opportunities for our joint venture properties. And as many of you know we are working to realize the potential of our forest as a source of renewable energy.

We are well positioned with strong cash flow, and an investment grade balance sheet. Effective capital allocation remains our most important task. Over the past year, we generated $517 million in cash flow from operations and paid $294 million in dividends, increasing the dividend 5% early last year. We acquired just over $200 million of the company stock, increasing our shareholder's proportionate interest in the company by nearly 3%.

We also evaluated a number of potential timberland acquisitions, and we acquired nearly 70,000 acres that met our return criteria. We will continue to review all our capital allocation alternatives including share repurchase with a goal of growing the per share value of the company. Well, we'll have to take your questions now. Chris?

Question And Answer

Operator

Absolutely, sir. [Operator Instructions]. And your first question comes from George Staphos with Banc of America Securities.

George Staphos - Banc Of America Securities

Thanks and good afternoon. A couple of quick questions here; first off --

Rick R. Holley - President and Chief Executive Officer

George. You are breaking up.

George Staphos - Banc Of America Securities

[Technical Difficulty]. What's the key swings-back or two in your guidance range? Is it purely harvest or is it... are there other factors to watch as well?

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

Harvest levels do have a material impact on the outcome and we are managing those levels to be appropriate for this level of housing demand for lumber. Other considerations would be the level of activity in our Real Estate business. We are assuming that that level will be consistent with our 2007 performance. Manufacturing could be slightly lower than the earnings we generated this year, but we expect that to still remain... earnings just a slightly positive and a positive strong cash flow contributor to the company.

George Staphos - Banc Of America Securities

Okay. So basically the high end of your harvest range and $340 million of revenues will get you to the high end of your EPS range; is that correct then?

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

Yes.

Rick R. Holley - President and Chief Executive Officer

That'll be correct.

George Staphos - Banc Of America Securities

All right. Second question; of the projects that you have slated to begin in 2008, are there any that are looking perhaps be a bit slower in developing at this juncture, than you might have initially planned several months ago and if so, where and if not, what gives you confidence at this juncture?

Rick R. Holley - President and Chief Executive Officer

You are talking about the joint venture projects?

George Staphos - Banc Of America Securities

Correct.

Rick R. Holley - President and Chief Executive Officer

The joint ventures we have signed up to date are in Northern Florida and Coastal Georgia and several of them have been entitled. So they are kind of gone down that phase and gotten permitted or titled, but what we are going to do is just get them ready, get in position so that when the market improves which in that part of Florida may not be for a year or so; these projects would be ready to go so. We would have expected probably some joint venture revenue in late 2008 and clearly into 2009 and I would have to say that's probably off a year and that certainly there is no joint venture revenue in any of our guidance we gave today.

George Staphos - Banc Of America Securities

Okay, that's helpful Rick. Dave, one last question for you. What was the... for the record, what was the tax benefit on an operating basis for this last quarter? Thanks guys.

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

We had a slight tax benefit for the quarter, primarily related to just lower manufacturing earnings.

George Staphos - Banc Of America Securities

So if I strip out Wisconsin, what would that benefit have been for provision?

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

There is no provision related to the Wisconsin timberlands at all.

George Staphos - Banc Of America Securities

Okay, got you. Thanks guys.

Rick R. Holley - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Chip Dillon with Citi.

Chip Dillon - Citigroup

Yes good afternoon. First question has to do with the CapEx, I missed that. You mentioned $50 million for Real Estate, but what was the total for '08 going to be?

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

$90 million to $100 million.

Chip Dillon - Citigroup

$90 million to $100 million, okay. And then on the acquisition in Georgia, it looks like I... its around $2000 an acre if I saw that correctly, which is certainly a bit above what we have been seeing. Now you mentioned... yes, actually little more than that. You mentioned that you... there were some synergies with your other lands in that area. Is that may be a reason or main reason you might have paid a level that is above what we've normally seen or alternatively, is a land closer to maturity than the typical land you see in the some of the recent transactions?

Rick R. Holley - President and Chief Executive Officer

Chip, both; there were two transactions, both of them from industrial timberland owners and negotiated transactions. Both stands of timber are very well stocked, very productive lands, but we believe have a lot of HPU potential. So we think at the prices we paid, we got an excellent value; both from a cash flow accretion standpoint but also from a longer term value. And both properties were adjacent to current properties that we own.

Chip Dillon - Citigroup

Which means you can leverage some of the expertise you have in that area. And when you think about that Rick, are these lands that would be like more than 50% sold as HPU like in the next five years or is it something that would be longer than that just because... what's sort of the half life? I am trying to get a feel for how... because I would presume you would sell the HPU land as HPU land after a harvest event?

Rick R. Holley - President and Chief Executive Officer

Yes. One of the properties, probably the majority and I'll call it 80%. So, I am not saying a 100 would be HPU that could likely be sold in next five years. The other one probably half of it is HPU that could be sold in the next five years.

Chip Dillon - Citigroup

Okay. And then one other sort of bigger picture issue is, we've seen asset class out after asset class come under pressure with... in essence, higher risk premiums across every asset class and even in commercial real estate where there is no... there is no fundamental deterioration in rents from what I read, but the prices have come down. Have you seen any of that in timber? And if you haven't, is it mainly because most of the transactions that we hear about are done with relatively little leverage or is that this is not a correct perception?

Rick R. Holley - President and Chief Executive Officer

Well, I think we continue to see very good values for the real real estate that we are selling; smaller timberland transactions and even the larger timberland transactions. As you know there is a transaction in the marketplace now, Timberstar selling about 1 million acres and there is... seems to be a lot of interest in that, probably at higher prices than they perhaps paid a year ago. So... and I think probably is, it's largely due to the buyer types.

You look at rural lands and these smaller tracks, it's more a recreational or individual buyer, who is not borrowing the money, high net worth individuals and if you look at the larger transaction, it's still pension funds, endowments and other types of investors who are still attract to long-term to the fundamentals of owning timberland so. And they are all looking through the cycle which, you know, your guess is as good as mine how long this going to last, but they look through the cycle and say long-term biological growth correlation, you know, inflation hedge it's a good place to put money and there is still lot of money looking forward. So I think it's a different investment type and that's why it's holding up so well.

Chip Dillon - Citigroup

And then last question, we spend a little time I think in the meeting in November and also in the last call talking about biofuels and the potential there and what some of the increased revenue potential was there. Any update in terms of your thinking about that or any specific projects that might be that you might have learned about that are going up in land you could maybe supply that near your lands or you could supply that those facilities?

Rick R. Holley - President and Chief Executive Officer

Well, we are in decisions we firstly everybody in that space, one company we'd mention before is Range Fuels, which has the first commercially feasible plant being constructed in Georgia currently. They obviously are looking for different sites; we are talking to others as well. A positive development is certainly going to help gets this stimulated even more quickly is the farm bill currently in Congress and in that farm bill and it's not controversially although there is $1.28 per gallon cellulosic ethanol credit. And most people in this business they know... they think that they can do without lot of help that certainly going to get that whole industry jump started. So clearly, we are going to be well positioned giving our land holding throughout the south and even some of the northern states like Wisconsin and Michigan to participate in this. And again, we are talking to many of these development to producers to sight their plans on in your land.

Chip Dillon - Citigroup

Got you. Thank you.

Operator

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

Mark Weintraub - Buckingham Research

Rick, first, you'd mentioned that you've got several projects which have now been entitled and you wait for appropriate timing et cetera. Can you share with us roughly how many acres or how about the right way to be thinking about it, that you have entitled at this point?

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

That seems changed from a joint venture perspective. We saw six joint ventures for about 26,000 acres we are working on, all those are not entitled at this point in time. On total entitled acres right now, we have approximately 7,000.

Mark Weintraub - Buckingham Research

Okay. So that 7,000 not including what's in the JVs or including what's in the JVs?

Rick R. Holley - President and Chief Executive Officer

Yes, on the JVs about half the acres we're entitled currently.

Mark Weintraub - Buckingham Research

Okay.

Rick R. Holley - President and Chief Executive Officer

By our joint venture partners, who were working on the entitlements on those projects.

Mark Weintraub - Buckingham Research

Okay. When you categorize something as a development sale, are those necessarily properties that were entitled? For instance, this quarter, and you mentioned there were a range of different values ranged different types of properties. Would they all have been entitled properties or not necessarily.

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

A few of them might not have been entitled where we just had them schedules just having those development values and people were willing to pay strong values even before completing the entitlement process.

Mark Weintraub - Buckingham Research

Okay. And when you were acquiring these properties in Georgia, a little bit north of 2,000 acres or less than 3,000, what counties were those in, can you share that with us?

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

Some of the properties were on the border of Georgia and South Carolina was one of the acquisitions and the other was a block down by Brunswick, Georgia.

Mark Weintraub - Buckingham Research

Okay. And then lastly Rick, you had bought up the farm bill in one context and since you did bring it up, do you have a sense as to the status of the TREE Act and do you expect that to gain passage or not?

Rick R. Holley - President and Chief Executive Officer

Well, the TREE Act is currently in the farm bill, and we expect the farm bill to get acted on in Congress hopefully by the end of the February, early march, and it's certainly in their right now. And in Congress these days with all the pay force, meaning any time you have a tax credit, you need to have a tax debit of the same amount, and there is always some horse trading goes on, but I don't think either one of those portions of the farm bill is controversial at the present time, either the cellulosic ethanol tax credit or the TREE Act, but we will wait and see, I mean who can tell where it goes on back in our nations capital.

Mark Weintraub - Buckingham Research

Right. And if that does get passage, what impact does that have on you, if any?

Rick R. Holley - President and Chief Executive Officer

Well I think the challenge with the TREE Act is that it's a one year bill, and if it's only a one year bill, it really has very little impact on us. There are certainly some administrative things that we think are very positive for our REITs generally and timber REITs specifically, but most of those don't help you for one year period of time. So while we are in hopes by the time it gets passed, and we work with Congress to get some aspects that build to be more permanent nature, because there is really no cost to them. Things like getting the amount of assets, it could be held in a tax REIT subsidiary from 20% to 25%, and there is no tax cost to that in fact, many thing it's probably tax positive to our tax payer. So things like that will try to get to be more permanent nature, but if it's just a one year bill, it doesn't help any of this the whole lot.

Mark Weintraub - Buckingham Research

Okay. Thank you.

Operator

And your next question... your next question comes from the line of Chris Chun with Deutsche Bank.

ChristopherChun - Deutsche Bank

Hi, guys.

Rick R. Holley - President and Chief Executive Officer

Hi, Chris.

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

Hi.

ChristopherChun - Deutsche Bank

When I look at Southern sawlog prices, it seems to me that they are down compared to two years ago, a good 20% or so. I am wondering if that read is accurate or whether their mix issues make that misleading. And I am also wondering, what your outlook is for 2008, whether you see further weakening or whether we're sort of half the bottom already?

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

We see some weakening, some of it is mix where we are selling fewer large sawlogs, so the price change that you see reflects a portion of it mix and a portion of it market.

ChristopherChun - Deutsche Bank

Okay.

Rick R. Holley - President and Chief Executive Officer

And we are talking in 2008 being down in dollar ton, it's really all mix, it's not price, so just a higher proportion of smaller logs in the mix we're... what... a lot of the in harvest that we are deferring is the larger sawlogs which are obviously the more valuable, but the price is down more on them. So we are going to wait and cut them on different day. From three years ago, predominately the reason that the average price is down is really mix, going from a very large sawlog particularly in the Crosit area to a smaller log.

ChristopherChun - Deutsche Bank

Okay. And then on, in terms of your... the per acre values on your conservation land sale. They were just over $1000 an acre, which I know that was actually your guidance at the analyst meeting a couple of months ago. But they are a little bit weaker than they have been in the last several quarters, so I was wondering if you could comment on whether the conservation sales that we should expect going forward should be at around this level or slightly higher levels that we saw in recent quarters?

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

Chris, our fourth quarter contained one sale in particular, a 20,000 acre sale in the Rockies for almost $17 million, that was a little over $800 per acre. That is a sale that was originally contracted for back in 2003 and it was the last installment of the Blackfoot River sale, so it has a little bit lower price per acre than we would expect and as a result, you saw the price break up for our total conservation program pulled down in this quarter.

ChristopherChun - Deutsche Bank

And then on the development side, could you give us a little more breakdown in terms of the mix of where the land was?

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

It's scattered throughout most of our normal holding periods, a lot of the sales were parcels as opposed to retail lot, about 95% of the activity for the quarter was selling permitted parcels where people were eager to come in and buy those and the price per acre averaged almost about $8000 an acre.

Rick R. Holley - President and Chief Executive Officer

And it would have been Montana, Wisconsin and Georgia predominantly, little bit in Mississippi.

ChristopherChun - Deutsche Bank

Okay. Great, thanks for your help guys.

Operator

Your next question comes from the line of Claudia Hueston with J.P. Morgan.

Claudia Hueston - JP Morgan

Hi thanks very much. I just know to belabor about this issue of the guidance, but I just want to make sure I understand the low end of the guidance. Does that assume the sort of lower end of the real estate guidance and the lower end of the harvest guidance, or is that something worst that's factored into that sort of $1.15?

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

No, that's a fair depiction.

Claudia Hueston - JP Morgan

Okay. And then just in terms of the salvage opportunities of a Montana, I was just wondering if you could give an update, just about how much has been recouped and is there still more to go? I think last quarter you pretty much thought that you will be able to recoup a lot of that land.

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

Yes, so our activities are ongoing at this point in time and by next summer, we would expect to complete our salvage operations.

Claudia Hueston - JP Morgan

Okay. Thanks.

Operator

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

Steven Chercover - D. A. Davidson & Co.

First of all, I know you have been getting some publicity in Maine on your development at Moosehead Lake. Can you tell us how that stands and is that fully factored into your real estate numbers for '08?

Rick R. Holley - President and Chief Executive Officer

Yes, we just finished up all the public hearings in Moosehead Lake, which have been going over the last couple of months and we expect the land use... the regulatory commission or work commissioners to decide on the... our permit, our application here in the next few months and really we have no Maine land sales or development sales or anything in this guidance. In fact even the numbers that we've shared with all of you annually in our November meeting where we show the HPU numbers. None of those numbers include anything in Maine and obviously there is some of that Maine, which once we get this permit approved, we will add to those numbers that you have.

Steven Chercover - D. A. Davidson & Co.

Okay, so that that could be some upside. Would that materialize in '08, do you expect?

Rick R. Holley - President and Chief Executive Officer

Probably not till '09. I mean, we will have an update on the numbers in '08 I suspect when you come back and see everybody in November, but I don't think you will see any revenue from any of the HPU sales in Maine until '09.

Steven Chercover - D. A. Davidson & Co.

Okay. Switching gears, could you tell us how far you think sawlog crisis might fall on the Pacific Northwest, I might have missed that?

Rick R. Holley - President and Chief Executive Officer

Well, they are down for us probably year-over-year 10%, 12% and we kind of think they're dragging along the bottom, but that's an area where we look to reduce harvest and that would be in Oregon's because we think long-term it's a very attractive market and short term it's suffering like many areas are because of the downturn in housing and the curtailment of lumber production. But for us, kind of year-over-year, it's down about 12%.

Steven Chercover - D. A. Davidson & Co.

Got it. And finally, can you remind us what the authorization is at the stage for the repo and do you view this initiative to sell land basically at full value or full NPV right now and repurchase shares as an embryonic initiative?

Rick R. Holley - President and Chief Executive Officer

Yes, we have authority of $200 million currently outstanding to buy shares back and clearly, when we free up some capital from these timberland sales, we would use a portion of those proceeds, if it makes sense from a capital allocation standpoint, to continue to buy our stock back.

Steven Chercover - D. A. Davidson & Co.

Thank you very much.

Operator

Your next question comes from the line of Steve Chercover, I am sorry, just took that question, my apologies. Our next question comes from the line of Gail Glazerman with UBS Warburg.

Gail Glazerman - UBS Warburg

Hi, thank you. Sticking on the last question for a minute, the sale for timberlands, at the analyst meeting you had mentioned I guess 500,000 acres over the course of I guess, 18 months. Is that guidance still good? Or given the scope of what you accomplished in that fourth quarter, are you changing that at all?

Rick R. Holley - President and Chief Executive Officer

I think that number we gave in the November is still good. You could argue that 100,000 towards it, we gave the 500,000 as more directional as opposed to site specific. So we are going through the process now of identifying additional lands we want to sell. So could be at a slightly higher or slightly lower than that number.

Gail Glazerman - UBS Warburg

Okay. And another initiative talked about at the analyst meeting was raising your income from minerals, is that a long... again a long-term initiative or is that something that we would expect to see some impact in '08?

Rick R. Holley - President and Chief Executive Officer

I would hope that to continue to grow at 5% or 10% per year, but it's something that kind of doubles over the next five years as opposed to doubling in the next two years.

Gail Glazerman - UBS Warburg

Okay. Dave --

Rick R. Holley - President and Chief Executive Officer

And most of the growth will come from construction materials, which we have a number of sites currently in the permitting process, it takes a year to two years sometimes longer to get these sites permitted and then they generate fairly substantial cash flows.

Gail Glazerman - UBS Warburg

Okay, great. Thank you.

Operator

Your next question comes from the line of Geoff Gilbert with Peak Investment.

Geoffrey E. Gilbert - Peak Investment

Good afternoon. I am glad you guys can be so optimistic, given the data on the new home sales today. Can you hear me?

Rick R. Holley - President and Chief Executive Officer

Yes.

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

Yes.

Geoffrey E. Gilbert - Peak Investment

A couple of questions about acreage, end of 2006, do you have the total acreage you guys own?

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

At the end of 2006?

Geoffrey E. Gilbert - Peak Investment

Correct?

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

It was about 8.2 at that point and currently, we are closer to 8 million.

Geoffrey E. Gilbert - Peak Investment

Okay. So we've had a net acreage decrease, correct?

Rick R. Holley - President and Chief Executive Officer

That's correct.

Geoffrey E. Gilbert - Peak Investment

Okay.And I also and correct, just a rough calculation with real estate sales being less than 25% of revenues but accounting for nearly 59% of operating income?

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

Yes.

Geoffrey E. Gilbert - Peak Investment

Roughly speaking, okay. And back to the... I guess, you guys were more optimistic than I thought you would be in the price per acre at least the land values hoarding their pricing, but yet when I look on page 25 of the 8-K I see a pretty good decline in your development property price per acre, and I am wondering is that just because of the mix or it's also year-over-year all property classes have a decrease?

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

Let me give you a little color, prices held pretty constant year-over-year in all of our property types. We sold a lot more property in the Gulf South which has been a relatively lower value area and also in Wisconsin this year and so in the mix, we had a slightly weaker product mix, but prices per acre were relatively stable. In the development segment, in 2006, we did one particularly large sale in King County, Washington that had a very high per acre value and so values in '07 do appear to be trending down from that strong '06 level.

Geoffrey E. Gilbert - Peak Investment

Okay.

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

So we take properties on a market-by-market basis being very resistant and it's largely mix that you've seen in the change in the price per acre.

Geoffrey E. Gilbert - Peak Investment

Well, that's good to know. I guess, that partially answers my final question, but goes back also to just the share repo. My concern is that with lumber revenues sliding and you guys have for the last couple of quarters said they were dragging along with bottom by future contracts and lumber prices are pretty abysmal. If land values do begin to erode and earnings continue to decrease even with the share buybacks of over 5 million shares with the back drop of your increasing debt and decreasing acreage, I am having trouble justifying the increasing debt to buyback shares. Can you comment on that?

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

In 2007 we repurchased about $200 million of stock that we found very attractive compared to the private market valuations of Plum Creek. Debt did grow by about $200 million for the year, but we brought back $178 million of timber... well, we invested $178 million in timberland and plus the attractive share price. We have a lot of financial flexibility and we think we are managing our capital structure appropriately.

Geoffrey E. Gilbert - Peak Investment

That sounds good. Well, I guess with 60% operating income from real estate, let's hope you are right. Thank you, guys.

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

Thank you.

Operator

Your next question comes from the line of Chip Dillon with Citi.

Chip Dillon - Citigroup

Yes, just a quick follow-up. Rick, you mentioned earlier about the... I think the farm bill has this ethanol, cellulosic ethanol credit, and I just wondered if you could give us a rough ballpark where I believe you guys would be competing with those who grow corn. And is there a sort of a range where you would see corn prices where that would make you feel very comfortable and is there a range where corn got low enough where it would make it more attractive to that cellulosic ethanol producer to not use wood?

Rick R. Holley - President and Chief Executive Officer

Chip, the thing is we believe that there is ample opportunity whether it's from corn, whether it's wood-based or whether it's from sugarcane, quite frankly. The U.S. today produces 6 billion or 7 billion gallons of ethanol every year and predominantly that comes from corn. Corn has limited capability is of increasing maybe they could go up by 50% or so, but there is some constraints on that as well I read about. And the U.S. has said that in the next 10 years we are going to grow ethanol production to some 35 billion or 40 billion gallons. So other sources are going to have to come in the play for that to happen. So we think there is... we don't think it is wood versus corn, we think there is plenty of room for all and so --.

Chip Dillon - Citigroup

Okay. And when they go to plant I mean, do they have to commit to one raw material or it can be plants switched off between various raw materials?

Rick R. Holley - President and Chief Executive Officer

Most plants are built run on one type of raw material, but for instance, a cellulosic ethanol plant could use wood chips, it could use biomass, it could use... some of them are actually built to use waste papers and things like that or even various types of garbage. So, you are not going to find a plant that can use kind of biowaste and corn, but you will find, one that could use wood, biowaste and other things as well so, one is going to be kind of wood and garbage-based, and other will be kind of corn-based.

Chip Dillon - Citigroup

Okay. And then one last thing just on the balance sheet, if the current trend continues, the cost of money is close to approaching zero, it seems like. And are there opportunities, I just haven't looked, but for you to refinancing of your debt at lower rates or alternatively, if land values don't go up, do you see the rates going down, do you feel like you might be more willing to use leverage to buy lands?

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

We've very attractively priced bank debt, which is variable rate based. They are long-term debts, traditional, where you have make whole premiums to call that in, we don't anticipate doing refinancing activity at this point.

Chip Dillon - Citigroup

Got you. Okay. Thank you.

Operator

Your next question comes from the line of Richard Skidmore with the Goldman Sachs.

Richard Skidmore - Goldman Sachs

Good afternoon, thanks. Just a couple of quick questions to follow-up; with the land sale in Wisconsin, and it looks like you bought back $7 million in the fourth quarter of stock, is it... do we expect to use the remaining proceeds to buyback stock in the first quarter?

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

We would anticipate using a portion of that transaction to buy some stock here in the first quarter, yes.

Richard Skidmore - Goldman Sachs

Okay.And then Rick, bigger picture question, as you see this downturn in housing and seems to be perhaps deeper than some of the anticipated and may be goes on longer. Are you seeing any risk to your customer base, some mills closing down that don't come back that ultimately impact the long-term outlook for any of our timberlands?

Rick R. Holley - President and Chief Executive Officer

Well, we've paid a lot of attention to last two or three years to all of our customer base, and clearly we have customers that had taken downtime, we've had customers that have curtailed shifts on mills or even taken a nose down, but we think most of our customer base is well capitalized enough and has a good enough market position that they are in for the long-term, particularly like these guys in Oregon and stuff where there is a little pressure right now. So you we feel pretty good about our customer base, but your guess is good as mineral, when this whole thing comes back, is it 2008 or later part of this year, probably not, probably 2009-2010. So, I think it's going to be tough a little while, but it think most of our customers are in reasonably good shape.

Richard Skidmore - Goldman Sachs

Okay, thank you Rick.

Rick R. Holley - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Peter Ruschmeier with Lehman Brothers.

Peter Ruschmeier - Lehman Brothers

Thanks, good afternoon. So a couple of questions; you mentioned that CapEx guidance of $90 million to $100 million. Is there any updated guidance for D&A for 2008?

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

DD&A will be a look down a little bit from 2007 just to primarily to reduce harvest level.

Rick R. Holley - President and Chief Executive Officer

So it would be about a $128 million, down from $134 million in 2007.

Peter Ruschmeier - Lehman Brothers

Okay, thank you. Did I hear you right that there were zero taxes paid on the Wisconsin lands?

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

Yes.

Rick R. Holley - President and Chief Executive Officer

That's correct. The timberland of Wisconsin transaction sold directly out of the REIT and as you know the REIT does not pay a corporate level tax.

Peter Ruschmeier - Lehman Brothers

Okay.

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

And there were built-in gain tax associated with that property.

Peter Ruschmeier - Lehman Brothers

Got it, okay. The other question is on the guidance for the real estate, the $320 million to $340 million for '08, can you comment on what do you have included the large non-strategic land sales in that number and it still worth --.

Rick R. Holley - President and Chief Executive Officer

Yes, that is not included in that number. So, if we sell lands in 2008, similar to what we did in Wisconsin in 2007, that would be an addition to the $320 million to $340 million guidance.

Peter Ruschmeier - Lehman Brothers

Okay. And I guess from Gail's previous question, I mean is it fair to infer that over an 18-month window, we should at least be thinking about 400,000 acres remaining and so shouldn't we incorporate that both in '08 and part of '09, knowing that its lumpy.

Rick R. Holley - President and Chief Executive Officer

Yes. Assuming that values stay where they are, what we believe they will for industrial grade timberlands, I think you can say that over the next two years we will sell a fair amount of core timberlands.

Peter Ruschmeier - Lehman Brothers

Okay, that's helpful. Back on Moosehead Lake, Rick, I was curious if you could comment on what do you see as a favorable outcome to that process and any way to quantify what that means recognizing it? It probably has little effect on '08.

Rick R. Holley - President and Chief Executive Officer

Well, you know as part of that transaction, clearly we hope to get two resorts designated for development up around Moosehead Lake; those would be longer term as far as development properties and revenue. We are also looking to get some 975 lots approved for sale over time, and again that will be more near term than the resorts. And as part of this transaction in Maine, there is some conservation lands that would be sold to the nature conservancy and to conservation easement and that will be more near term so if this transaction gets approved that can have... that potentially could happen in late '08 but certainly '09, as far as getting those conservation sales completed. And once this is signed, we will give more guidance on what that means to the P&L for this year.

Peter Ruschmeier - Lehman Brothers

Okay, very good. One last one if could, on the Wisconsin lands that you did sell, can you comment on the magnitude of EBITDA contribution that those assets have been throwing off over the last 5 to 10 years recognizing you only owned over a couple, but just looking at the cash flows, any indication as to either cumulative or kind of year-by-year roughly what kind of contribution it's been?

Rick R. Holley - President and Chief Executive Officer

Over the last five years, they did okay, but kind of in '07 and going forward '08 and '09 that was very little contribution from those timberlands. That's why it was such an attractive deal, there were from an ageing product and stocking standpoint, not as good as what we have. There is a fair amount of non-productive timberland or lands that's part of transaction. So the cash flow capability of this old land is not equal to what we have so in Wisconsin.

Peter Ruschmeier - Lehman Brothers

Very good. That's all I had. Thanks guys.

Operator

Your next question comes from the line of Ross Gilardi with Merrill Lynch.

Ross Gilardi - Merrill Lynch

Good afternoon. I'm glad to get in there towards the end. Most of my questions have been answered. I just want to ask you probably, just to understand rural land demand. Are you seeing weakness anywhere in the country outside of central Georgia, which you've talked about in the past?

Rick R. Holley - President and Chief Executive Officer

It's probably and is more of the larger properties would be Florida, especially in north parts of Florida we're just in. But, Florida generally, I think is struggling a quite a bit as everyone might expect. Pockets of Georgia, but not all of Georgia, but that's kind that every where else seems to be holding up very well.

Ross Gilardi - Merrill Lynch

Okay. And then, just curious, you guys talked about an 18.5 million to 19.5 million ton harvest back in November and as you alluded to, new sawlog prices have fallen pretty sharply in the Pacific Northwest in the fourth quarter. So kind of surprised you are not cutting your harvest expectation back a little bit, given what's happened there. Can you just comment on that, is that just because pulpwood is that much stronger than you would have expected?

Rick R. Holley - President and Chief Executive Officer

Well, the pulpwood clearly is the bright spark both currently and probably is the one thing that has upside in 2008. But I think we're going to give first quarter a chance to see how it plays out, see what the situation looks like and if it gets worse, particularly in the Pacific Northwest, we will reduce the harvest further and update everybody on the next quarter call.

Ross Gilardi - Merrill Lynch

Okay, thanks a lot.

Rick R. Holley - President and Chief Executive Officer

Thanks Ross.

Operator

Your last question is the follow-up from Mark Weintraub with Buckingham Research.

Mark Weintraub - Buckingham Research

Thanks. It's real quick and it's pretty technical. If you were to... can you acquire entitled properties and put them in the REIT and if you were not to do any additional work on them and to resell them; would that qualify as good REIT income?

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

If you bought them with the intention of reselling them, you'd probably have them in the tax for resale, if you wanted to buy them and hold them long-term for investment, there could be a place for them. There is a REIT hold.

Rick R. Holley - President and Chief Executive Officer

And in the long-term is usually viewed as at least two years. So if you really want to hold them for 2 years you could probably put them in the REIT otherwise you put them in a tax REIT subsidiary.

Mark Weintraub - Buckingham Research

Okay, thank you.

Operator

There are no further questions in queue. Do you have any closing remarks?

Rick R. Holley - President and Chief Executive Officer

Well thank you everybody and we will talk to you at the end of the quarter and good luck out there.

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Source: Plum Creek Timber Co., Inc. Q4 2007 Earnings Call Transcript
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