Plum Creek Timber Company, Inc. Q1 2008 Earnings Call Transcript

Plum Creek Timber Company, Inc. (PCL)

Q1 FY08 Earnings Call

April 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

Christopher Chun - Deutsche Bank

George Staphos - Banc of America Securities

Chip Dillon - Citi

Gail Glazerman - UBS

Ross Gilardi - Merrill Lynch

Steven Chercover - D.A. Davidson & Co.

Claudia Hueston - JPMorgan

Peter Ruschmeier - Lehman Brothers

Presentation

Operator

Good afternoon. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek's Earnings Conference Call. 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.

John Hobbs - Director of Investor Relations

Thank you, Michelle. Good afternoon, ladies and gentlemen, and welcome to the first quarter 2008 conference call for Plum Creek. I'm John Hobbs, Director of Investor Relations for the company. And today we have on the line, Rick Holley, President and Chief Executive Officer 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, following the conclusion of the call. I encourage you to visit our web site, www.plumcreek.com. There, you will find our press release and supplemental financial statements for the first quarter.

Before we begin, I would 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 will turn the call over to Rick.

Rick R. Holley - President and Chief Executive Officer

Good afternoon. The slowing economy and housing downturn are making for challenging markets in our business. The recent housing activity levels are clearly not indicative of long-term demand. We believe, long-term demographics suggest that housing demand in the coming decades should equal or exceed that of the past decade and the current weakness is cyclical rather than structural in nature.

Despite the current weakness, there have been bright spots in our business. Pulpwood demand and pricing is healthy, and it appears to be poised for long-term strength as demand for renewable energy grows. The competitive U.S. dollar has strengthened our customer's competitive position in world markets and that has helped as well. We recognize the current challenges, and we are adjusting our activity to serve our most attractive near-term markets, while preserving our most valuable land and timber assets for future opportunities.

Our 8 million acres of timber and land are unique assets of exceptional and lasting value. Regardless of the near-term market conditions that we face, we will maintain our patience and discipline. David will review our first quarter results with you and discuss our outlook, and following our prepared remarks, we will open it up for your questions. David?

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

During the quarter, overall market conditions were about as expected in most regions. Sawlog prices remained under pressure from weak lumber demand. However in Oregon, sawlog markets were a bit worse than we initially anticipated, as lumber production in the region was approximately 24% below 2007 production levels. Meanwhile, pulpwood across all our operating areas continued to be strong, providing a modest offset to weak sawlog markets. We continue to execute well in rural land markets although we were disappointed that too large transactions planned for the quarter were not completed.

We reported earnings of $0.22 per share for the first quarter, on the top end of our revised guidance for the quarter. We typically build working capital seasonally during the first quarter. This year's build was greater than typical as we placed $31 million in 1031 like-kind exchange accounts. As a result, our cash flow from operations for the quarter was essentially breakeven compared to $38 million during the first quarter of last year.

In the Northern Resources segment, operating profit was $14 million, down $3 million from fourth quarter's results. Our total harvest volume in the segment was similar to fourth quarter's levels. Our mix shifted towards pulpwood as we sought to take advantage of good pulpwood demand in every region. Average pulpwood prices increased 4% from fourth-quarter levels. We expect some modest upward price pressure, particularly in the Northeast, where pulp and paper mill log inventories are critically for this time of the year.

As mentioned earlier, lumber production is weaker in the Northwest and softwood sawlog prices continued to retreat. Pacific Northwest sawlog prices declined approximately 6% from their fourth-quarter levels, a bit more than we expected. We further reduced our Northwest sawlog harvest from fourth quarter's level in response to continued weak market conditions resulting in a 5% decline in the segment sawlog harvest volume. Our Northwest harvest is dominated by Douglas fir and we believe these prices bottomed during the first quarter as April prices have helped firm mars levels and we have seen some recent in Douglas for lumber prices. Other species such as hemlock are continuing to show some price weakness as a result of salvage logging supply.

We expect customers to continue to take significant downtime in an effort to manage through this difficult lumber market. As a result we expect to report slightly lower Northern sawlog prices during the second quarter. We expect Northern segment harvest volume to show a typical seasonal reduction during the second quarter as thawing spring weather limits access to timber stands [ph]. We are targeting harvest levels for pulpwood of about 400,000 tons and about 750,000 tons for sawlogs. It is these seasonally lower harvest levels that drive the expected sequential decline in our second quarter income.

In our Southern Resources segment, our first quarter operating profit was $37 million, up $2 million from fourth quarter's performance. Southern saw timber prices declined approximately 4%. The price of larger-diameter sawlogs came under pressure, as plywood and wide-dimension lumber mills reduced production. Smaller diameter sawlog prices remained fairly stable even increasing slightly in some markets. We expect our second quarter Southern sawlog harvest to be about 1.6 million tons, a little higher than the first quarter’s 1.5 million tons but remaining below 2007 second quarter harvest of 1.7 million tons.

As expected, pulpwood's prices continued to increase throughout the south. Our average pulpwood prices increased about 11% from the fourth quarter. In certain circumstances, we altered the initial thinning plans as particularly attractive pricing has allowed us to maximize the net present value of a thinning harvest. As a result, our pulpwood harvest exceeded our initial plans for the quarter. We expect pulpwood markets to remain strong with upward price pressure as the supply of residual chips from sawmills remains tight. We expect second quarter pulpwood harvest to be similar to the first quarter's level.

In real estate, this segment recorded revenue of $52 million and operating profit of $33 million. These results were lower than our initial estimates. As you may recall, from our year-end earnings call, there were a handful of large transactions that accounted for approximately half of our original sales projections of $75 million to $85 million. Two of these transactions with a combined value of $35 million did not close. The properties are currently listed and on the market.

Rural unentitled land accounted for essentially all of our 29,000 acres sold during the quarter. We received nearly $1,200 per acre for more than 17,000 acres of small non-strategic land sales. This per acre value is lower than we experienced last year as these properties are generally lower quality than we sold last year. The prices we are capturing have very attractive premiums to their underlying timberland values. The quality of the properties sold in the first quarter is generally representative of our remaining small strategic land.

During the quarter, we also sold 10,600 acres of higher and better-used recreational lands capturing average values approaching $2,900 per acre. As we mentioned in the press release, these per acre values are a bit lower than we experienced last year. The lower reported prices are due primarily to a regional mix shift. We sold a greater proportion of lands from lower-priced regions.

For example, during the first quarter, nearly 45% of the acres sold came from western regions of the south in the Lake States. During 2007, the same regions accounted for approximately 25% of the acres sold. When we look at the data within each region, we see that per acre values have been pretty stable in most areas. As expected, our development sales were modest. The 65 acres sold were for one rural residential lot in Montana and seven rural lots in Wisconsin.

We also completed a small conservation sale during the quarter of about 1,000 acres of wetlands to the North Carolina Land Trust.

During the second quarter, real estate segment sales are expected to be between $45 million and $65 million. Basis in the land sold during the second quarter is estimated to be between 25% and 30% of sales. As in the past years, the majority of our sales in the real estate segment are expected to be during the second half of the year. Buyers in our Northern states often find a property during the spring and summer months and close their purchases later in the year. As a result, we expect a recurring seasonal pattern of higher second half sales in this segment. We still expect full-year real estate sales to be between $320 million and $340 million.

The manufacturing segment reported a $9 million loss. We marked our lumber inventories to market during the quarter, resulting in a $4 million charge to segment earnings. Average lumber prices and sales volume declined about 10% from fourth quarter levels as housing activity slowed both seasonally and cyclically.

Both our plywood and MDF businesses were profitable during the quarter. Our plywood prices were unchanged from fourth quarter and our sales volumes increased nearly 10%. Our MDF business continues to perform well. Our average prices increased nearly 10% while sales volumes were down slightly from the prior quarter. With no inventory write-downs anticipated for the second quarter, we expect to narrow our loss in the manufacturing segment.

As you know, our manufacturing income is taxable, and as a result, we expect a smaller reported tax benefit. In total, we estimate full-year income from continuing operations to be between $1.05 per share and $1.30 per share. Our second quarter results should be the lowest of the year between $0.13 per share and $0.18 per share, reflecting the seasonally lower harvest volumes in the Northern segment.

We've reduced our capital expenditure plans for 2008. With per acre fertilization costs doubling over the past three years, we're revisiting the timing of our applications. As a result, we expect our traditional capital expenditures for the year to be approximately $80 million, lower than our initial plans of $90 million to $100 million.

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

Rick R. Holley - President and Chief Executive Officer

I am frequently asked if we are seeing an impact from the slowing economy on our real estate segment. Clearly, the housing contraction and economic slowdown has impacted our timing expectations for our most valuable development lands. We continue to pursue entitlements on a number of development projects with the goal of having these properties well positioned when the housing market recovers.

As you are aware, we have six joint-venture agreements for properties in Florida, Georgia, and South Carolina. We want to ensure that each project continues to move along at a pace appropriate for the current market conditions and be ready to move forward as markets recover. One of our partners has had a change in management focus and project priorities. As a result, we decided to terminate our relationship with this partner on four of these six joint-venture agreements. These projects are in various stages of entitlement and permitting and no physical improvements have yet been made. These properties' value has been enhanced by the subdivision and zoning entitlements obtained so far. Other potential partners have expressed interest in these particular projects. We will pursue new partners for each of these products. Our long-term plans for these properties has not changed.

In addition, we continue to have productive discussions with several prospective joint venture partners for other properties that present excellent long-term opportunity for Palm Creek. As most of you know, the vast majority of our real estate segment’s revenue comes from the sale of unentitled rural lands. We have rural properties on the market in most of the 18 states where we operate. Nearly all of these lands are bought for personal use, not for residential development. These sales have had a muted impact from the slowdown in housing activity. However, as the broader US economy has slowed, we have observed some emerging changes in buyer interest in behavior. Here are a general observations.

Interest from conservation and timber-focused buyers remains very good. However, casual enquiries from individuals has slowed in nearly all of our regions. Those looking at properties are serious and are more value-conscious. They are willing to trade off amenities to acquire a property that still fills their needs. For example, a buyer who is interested in acquiring 40 acres may be willing to trade off paid road access for a less expensive parcel with gravel road access. We’re watching each region to ensure that our property listings meet the markets with the most interest and activity. Our new listings are weighted towards our strongest regional markets and match up with what we see as an emerging buyer interest in smaller, more affordable properties. We have a wide variety of properties appealing to a wide variety of buyers with excellent geographic diversity.

We have deep deep-rooted conviction regarding the value of our lands and holding firm on our price objective for them particularly our best recreational and development lands. We feel good about the properties we have, their long-term value, and our strategy is for capturing these values in both 2008 and beyond.

As you are aware, institutional interest in well-managed timberlands remains strong. In our number analyst meeting, we discussed our plans to explore ways to capture the value of up to 500,000 acres of core timberlands. In December of last year, we completed one such transaction selling 100,000 acres of Wisconsin timberlands for approximately $70 million. We used approximately half of proceeds from the sale to pay down debt and about half to buy timberlands at an attractive discount by repurchasing our stock. During the first quarter, we repurchased approximately 1.3 million shares of common stock at an average price of about $40 per share.

Several recent timberland transactions attest to the interest level, long-term value, and liquidity of investment-grade timberlands. As part of our strategy outlined in November, we are currently marketing approximately 450,000 acres of Southern timberlands. This package is geographically diverse, portfolio of well-managed timberlands that we believe investors will find attractive. We expect to close any transaction by the end of this year. We believe this transaction will allow us to capture private market value for a portion of our timberlands to provide an excellent arbitrage opportunity through the repurchase of company’s stock.

As with our earlier Wisconsin transaction, we would expect about half the proceeds to be directed towards the pay down of debt and half towards opportunistic acquisition of company’s stock. In late March, we proactively moved to further our financial flexibility in today's uncertain credit market. We entered into a four-year $250 million term credit agreement. The agreement was priced at LIBOR plus 1%, an indicator of the strength of our credit and asset base even in these difficult market conditions. We used the proceeds to pay down our revolver in the near term in order to have a source of ready capital to pay the debt we have coming due over the next 12 to 18 months.

Plum Creek is well positioned with diversified assets and financial flexibility. We continue to work on efforts aimed at expanding sustainable cash flows from our timber operations including logistical improvements in emerging renewable energy markets. We will continue to manage this company for long-term value while maintaining our commitment to our shareholders.

Michelle, we would open up for questions now.

Question and Answer

Operator

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

Christopher Chun - Deutsche Bank

Yes, thanks. Good afternoon, guys.

Rick R. Holley - President and Chief Executive Officer

Good afternoon.

Christopher Chun - Deutsche Bank

Hi, Rick. I just wanted to... I was wondering if you could tell us a little bit more about the marketing of the 400,000 acres of Southern timberland that you mentioned, in terms of where the land is and how you feel about the stocking levels and the quality of the timberland that you're selling?

Rick R. Holley - President and Chief Executive Officer

Well, the timberland is actually in six different operating blocks around the southern United States. So, it's in states such as Oklahoma, Arkansas, Mississippi, Georgia, and North and South Carolina. So, it's a very diversified portfolio of assets, which we think that investors… institutional investors will find very attractive. The stocking is very representative although the transactions have been sold in the marketplace over the last couple of years. As you know, a couple of years ago, the IP land sold for about $1,250 an acre, and the recent TimberStar transaction was closer to $1,900 an acre, so it’s a kind of a… and this stock can be representative of those types of transactions.

Christopher Chun - Deutsche Bank

Okay, great. I think it’s an interesting strategic move, can you tell us how you came to the decision and how you decided that 400,000 was the right amount to the market at this time?

Rick R. Holley - President and Chief Executive Officer

Well, as we mentioned in our Analyst Meeting back in November, we see such a large disconnect between public and private market values for basically these assets. And if you look at Plum Creek's stock today at $42 or $43 a share, it really values our timberland portfolio at about $1,100 an acre. And clearly in the market, the private market transaction values are much higher than that. So, we just see it as a great arbitrage to sell assets at a very attractive price in a very strong market with lots of buyer interest and take a portion of that proceeds and buy our own timberlands back by buying our stock back. And it's really quite as simple as that.

As far as the size, the 454,000 acres to be exact, it’s… we look in different markets and try to find something that we thought would be representative of that market. These lands will not have a fiber supply agreement or other kind of burden for a buyer to deal with, and we just thought that this size and in these markets would get a very good price.

Christopher Chun - Deutsche Bank

Okay, great. That's very helpful. And then if I might, I wanted to ask you about what you are seeing in terms of the land market and obviously you are not going to want to do anything aggressive on the development side right now. But I was a little confused as to what you are seeing on the non-development side. I thought David mentioned that for the most part, he is seeing on a... at least on a quality adjusted basis that the prices are holding relatively flat, but then you mentioned, Rick, that the level of inquiries at least in the rural land market is a bit lower. So I was wondering if you could shed a little more light on what you're seeing there.

Rick R. Holley - President and Chief Executive Officer

Yes. Really, the interest… it's interesting, the higher value… if you look at HBU, the lower value HBU properties that would typically sell for say $2,500 an acre to $4,000 an acre and kind of in the Lake States, perhaps in the lower end of that or even down in the Mississippi, Louisiana area. There is still a lot of interest in that price point. But you get to the higher value HBU properties, into the $5,000, $7,000, $8,000 or $10,000 an acre which are more high net worth individual interest, that market is really slowing, enquiries have come down there.

So, one market kind of the small parcels, maybe the lower-value HBU market is still very good whereas the higher-value stuff is just not moving. And I think to a large extent, if you look at Montana, the buyers are coming from Texas and California and given the economic uncertainty even for high net worth individuals, I think they're just saying, I’m going to wait and see how things play out and I'll come to market later because I can postpone purchase of that rural land, that recreational land. So, that's really what we see.

And clearly on the highest-end properties we have, the development properties in Georgia and Florida, we’ve made remarkable progress in getting entitlements and that sort of thing in place. But, that market is going to be really quite until the housing market comes back in next year or so. But… so it's really kind of different parts of the country and different types of product. And as we bring more product to listing, we are going to focus on those markets and those types of buyers here in 2008 and 2009.

Christopher Chun - Deutsche Bank

Okay, very good. Thanks for your help.

Operator

Your next question comes from the line of George Staphos with Banc of America.

George Staphos - Banc of America Securities

Thank. Hi, everyone, good afternoon. I just wanted to say a little bit more again into the Southern acreage that you’re going to be marketing. Realizing that you feel that there is disconnect between public and private values for timberlands and obviously an opportunity in PCL stock, I got to imagine that given the environment perhaps even with the large institutional interest in parcels like those that you’re going to market that there is maybe downward pressure even as well for these types of acres, maybe you agree, maybe disagree. If that's the case, why not just borrow… perhaps you wouldn't be able to do as large of a buyback but why not consider financing a smaller purchase and then waiting for values to accelerate on timberlands and then market the Southern timberlands at a later day.

Rick R. Holley - President and Chief Executive Officer

Well, clearly, that’s still an option and as we take these lands to market and they’re out in the market, we found a tremendous amount of buyer interest and in fact, just this last week, I spent some time with a manager of one of the [inaudible] and he said, he has never seen as much capital as he sees in the marketplace right now and there is the asset allocations by numerous pension funds and endowments have been increased to buy timber. And given the limited amount of timber available and the strong buyer interest, we think we are getting very, very attractive price here. Now, for whatever reason if we don't, we’ll clearly not sell land at what we think it’s worth and we can do as you said, we could go to the credit markets and buy stock back if we thought that was the best use of shareholder capital.

George Staphos - Banc of America Securities

Got it, thanks, Rick. As far as the two large transactions that didn’t materialize in the first quarter, can you discuss at all what happened? It sounds like whoever the prospective buyers were, they’re not currently engaged with you in looking at the properties and sort of back out on the market. Could you give us a bit more color there?

Rick R. Holley - President and Chief Executive Officer

Yes, both properties were… it was the same buyer. It was a foreign buyer and he had difficulty putting the financing package together and that's why they did not close. The properties, as David mentioned, are back on the market and there is a fair amount of buyer interest in them and both properties are in the state of Florida.

George Staphos - Banc of America Securities

Okay, okay. I guess two last questions and I will turn it over. Realizing that you’re reaffirming the real estate sales guidance of $320 million to $340 million this year, should we expect given what we're seeing that perhaps the lower end of that range might be more likely? And if you had to consider where you were three months ago, how confident are you overall in that guidance, guys? And then separate question, can you quantify at all how you're managing against an increased harvest cost and what effect fuel and diesel have had on those costs so far this year? Thanks.

Rick R. Holley - President and Chief Executive Officer

Well, on your first question, we are very comfortable or we wouldn't put it out there of the $340 million or $320 million to $340 million range. As of the end of last year, we had about 190,000 acres on the marketplace listed of either non-strategic lands or the higher, better useful recreational lands. And by the end of this year, there will be over 300,000 acres listed. So, we have a lot of property in the marketplace and even this range we have of $320 million to $340 million, does not include that $35 million sale that didn't get done in the first quarter. So, if that were to come back to market, there is potentially upside. So, again we feel very comfortable and we're just going to focus our marketing attention on where the strength in the market is and the type of buyer profile that we have.

George Staphos - Banc of America Securities

Thanks, I reckon on the harvest cost?

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

We are seeing some pressures on log and haul associated with higher fuel prices and we estimate for every gallon, a dollar in increase in per gallon of diesel, we're going to say probably about a $1.30 a ton increase in our hauling cost in the southern United States and maybe $2 a ton in the northern segment where you have some longer haul distances. So this is impacting our results at this point.

Rick R. Holley - President and Chief Executive Officer

And if you look over the last three years, go back three years to today are the fuel cost, the burden on us is about $40 million. So, it’s had a huge impact on the company. But one of the things I mentioned to my comments is the logistics program we are working on and that's totally focused and how we’re more efficient on the moving of wood fiber and therefore help on that cost side.

George Staphos - Banc of America Securities

Yes, all right, guys. Thanks very much. Good luck in the quarter.

Operator

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

Chip Dillon - Citi

Yes, good afternoon. First question is on the sawlog situation, you gave us some guidance on the second quarter on pricing, I know another company in your business were saying that they saw the prices down 20% plus on average this year across the country versus last year on saw logs. Is that similar to what you think you will see in terms of your pricing?

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

No, that might be more indicative of the areas where are they operate, if they don't have as broad of national exposure. I think the area where prices had been more acutely pushed down is in the Pacific Northwest and with the recent bump up in lumbar prices, we are starting to see those log prices chase them back up a little bit.

Chip Dillon - Citi

Okay. And then on the 450,000 acres, did I get that right, that you are marketing in the six areas in the southeast, you mentioned half possibly for buybacks opportunistically and half for debt reduction, would there be no need to do a Section 1031 exchange to offset the taxes or is that something you are just not worried about?

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

No we are going to structure the transaction in a way that it won't be characterized as a sale for federal tax purposes.

Chip Dillon - Citi

Oh, yeah. Okay, al right. So… in installment note, I got you.

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

There won't be in installment note but we will be able to structure in a way that we won't be triggering the need to do a 1031?

Chip Dillon - Citi

Okay. And then speaking of the valuations I mean one hand it is "rough environment" out there and yet we do see the headlines that we saw with... I think you mentioned the TimberStar transaction. And do you see that as anywhere near indicative of where values are. I mean was there something special to get us up to the whatever it was $1,800, $1,900 an acre? Does that seem to you to be indicative of a sort of normally stocked acre of land in the southeast or was there something unusual in your mind about that?

Rick R. Holley - President and Chief Executive Officer

No, there was absolutely nothing unusual about that as many of you know even the TimberStar transaction had a 50-year supply agreement. So in our mind it had some handcuffs on it that clearly our lands go in the market do not have. But, we continue to see each transaction that goes to market, there is a higher price on it, and I think it comes back to huge amount of institutional interest in the asset class, and they're looking right through this cycle, they see it as a cycle not a structural change and if it's 10 year or 15 year old, from most of these buyers and they see price appreciation giving them significant… good returns or adequate returns over time, and there is just a lot of capital still looking at these asset class. So, and most of it is equity and they are not... most of these are not debt financed deals. So even the debt markets will effect most of these transactions getting done.

Chip Dillon - Citi

And Rick, would you change your mind about these transactions if your stock were to... I am not asking for a level but if it were to move up a lot higher, do you think at that point then you are going to... I guess the higher your stock goes, the more price sensitive you become as you look at the bids for these lands?

Rick R. Holley - President and Chief Executive Officer

Absolutely. We are looking at this as just a way to create value and if the stock were significantly higher than is today we think about this differently.

Chip Dillon - Citi

Got you. All right, thank you.

Operator

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

Gail Glazerman - UBS

Hi, just looking at pulpwood for a moment, if I remember correctly, you had talked about some needs to kind of scale back pulpwood harvest at some point because you have been harvesting pretty high. How sustainable are your harvest like over the next couple of quarters or when do we hit that wall?

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

We think we will be able to maintain in this year. I think it is the southern United States where we thought would temper it down a little bit, but with the prices that they are at we are looking at thinning operations and in some cases we can use some new techniques on spending and get excellent recovery and that really makes capturing values in today's' market and providing that fiber very attractive to the company.

Gail Glazerman - UBS

Okay. And I was just curious, you seem to be implying a pretty positive long-term outlook for pulpwood, and I'm just very curious that's assuming that the residual chips come back but you're still think pulpwood is going stay up and if so, just go over again what the drivers would be?

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

We just see a return of competitiveness to many of our US customers, much of it driven by the weakness in the US dollar. And even if residual chips become more plentiful, we're starting to see this new alternative demand coming against pulpwood in the form of bio energy. So, if that market matures over the next three years to five years, there is an alternative demand that could help support those even with the residual chips becoming more plentiful.

Gail Glazerman - UBS

Okay. And just switching to sawlog for a minute, you mentioned the stabilization, and possibly [inaudible] in the northwest, I am wondering what characteristics you are seeing kind of moving out of the first quarter into the second quarter in some of the other regions?

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

They're pretty stable from where they were at. They had not have been as acutely depressed as the North West prices in the first quarter. As we mentioned some of the small saw logs that had been under a lot more downward pressure in the south, they seem to be hitting some assistance as they get down to be closer price to some pulpwood values and people are starting to climb the pulpwood values. And it's the larger saw logs that had some weakness in the quarter. So, we need to see some firming in lumbar prices to get some better price momentum for the larger saw logs.

Gail Glazerman - UBS

Okay. And final question, it looks like we are getting down to the final stages of the Farm Bill and the [inaudible] Act is still hanging on, I was just wondering what your thoughts are there? Do you have any insight?

Rick R. Holley - President and Chief Executive Officer

Yes the Farm Bill is currently being looked at both the House and the Senate, at least we hear that may be something happens this week and there are some things in the Farm Bill that I think are important to the industry, one is the Tree Act and the other is some incentives for cellulose ethanol and we hope both of those make it in the final bill that goes to the President and get signed. And you probably know as much about as we do at this point that so far at least it's hanging in there.

Gail Glazerman - UBS

Yes, thank you.

Operator

Your next question comes from the line of Hamza Masri [ph] with Credit Suisse.

Unidentified Analyst

Thank you. Is it fair to say that most of the land that you are bringing to market is mostly legacy Plum Creek land versus GP Timber Company land, is that how you’re offsetting the [inaudible] gain.

Rick R. Holley - President and Chief Executive Officer

No, it would be more legacy Georgia-Pacific lands.

Unidentified Analyst

Okay. And over what timeframe are you guys expecting to close on the land that you're bringing to market 450,000 acres?

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

We would expect it to close before the end of year.

Unidentified Analyst

Okay. And are there any… you touched a lot on valuations and mix of land sales. Are there any of your markets right now where you are seeing a material slowdown in the base of activity or base of land sales?

Rick R. Holley - President and Chief Executive Officer

Yes. I think the higher-end markets where the more valuable lands are and that would be in Montana and clearly Florida, which everybody is aware of one and you have seen more slowdown. We actually seen a little pickup in Georgia, Mississippi is still a good market, Wisconsin is still a very good market, so it's really a mix, but the high-end market is where we’ve seen a little slowdown.

Unidentified Analyst

Okay got you. And last question, is it fair to say that you guys expect to makeup the negative drag on your cash flow from working capital for the remainder of the year?

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

Absolutely. We typically have a seasonal build in working capital in the first quarter. We’ve averaged about $30 million over the last three or four years. And this year it’s around $39 million. Just a little bit more. But we would expect that to reverse to normal course. We built some log inventories at are mills and we have just have a decline in our payables with some benefits are paid at the year-end and such that we would expect this to change.

Unidentified Analyst

Okay. Got you. Thank you very much.

Operator

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

Mark Weintraub - Buckingham Research Group

Thank you. Rick, just wanted to understand from what I heard, it seems that your expectation is that the properties that you'd be selling in the south could very feasibly touch the $1,900 per acre type of valuations. Did I interpret that correctly?

Rick R. Holley - President and Chief Executive Officer

Well, no, I didn't say that. I said that this is a... these properties are very representative of recent properties that have been sold in the marketplace and quite frankly have less of a burden since we don't have a supply agreement but we would hope that we would get that high. But we clearly think they will get a very good price.

Mark Weintraub - Buckingham Research Group

Okay. And would it be… so this is by my calculation 11% or 12% of your Southern holdings, just dividing 454 by what you have in the south. Would it be fair to say that they were generating roughly 11% to 12% of the cash or the EBITDA of your Southern holdings?

Rick R. Holley - President and Chief Executive Officer

It's a fair proxy at this point. We'll give you further updates later. But there is not going to be a material differential.

Mark Weintraub - Buckingham Research Group

And because I guess if I take that $1,900 and I recognize you didn't say that that's necessarily the price that you would fetch on this. But if you take that $1,900 and you multiply it by the acreage that you’re selling and you look at the EBITDA that, again I am making estimates here, that it was generated, it's a 36 multiple of EBITDA or less than a 3% EBITDA yield. Can you help me understand and I’ve certainly seen this in other transactions too. Can you help walk through why folks are paying these types of prices and why you would sell more then if it's difficult to answer that question?

Rick R. Holley - President and Chief Executive Officer

Well, clearly if this is successful and we believe it will and we still see this disconnect in the marketplace, you could see us coming to the market with more timber later this year and next year. But Mark, your guess is as good as mine. There is just a lot of institutional interest, they are not worried about the near-term cycle. I think they have adjusted some of their… they must have some of their return requirements and they just look in their portfolios today and there is an increase in the amount of international buyers in the market as well. They are looking at our portfolio and see, this is just a nice risk diversification. And I think that's why the interest level is up and because there is so much interest there, so many buyers, the demand is so high. I think they’re obviously bidding the price up against one another.

Mark Weintraub - Buckingham Research Group

It certainly makes sense then for you to take [inaudible]. I guess the… I wasn't fully clear on… given the way you are going to structure the transaction, would there be any either current or deferred tax leakage or is that something that through the structures you can put in place, you can avoid that?

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

We would anticipate not having any current or deferred tax leakage.

Mark Weintraub - Buckingham Research Group

Okay, great, thanks a lot.

Rick R. Holley - President and Chief Executive Officer

Thanks, Mark.

Operator

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

Ross Gilardi - Merrill Lynch

Thanks, guys. Good afternoon.

Rick R. Holley - President and Chief Executive Officer

Hi.

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

Good afternoon.

Ross Gilardi - Merrill Lynch

Just had a couple of questions. Rick, it just seems like the weaker the saw timber market gets, you run the risk of timberland owners putting more smaller tracks on the market to generate cash flow. I mean is that a fair characterization of some of what you're seeing right now?

Rick R. Holley - President and Chief Executive Officer

We are not seeing that. Some of the tracks that are on the marketplace… timberland tracks are really some of these buyers of largely some of the International Paper lands a couple of years ago in the southeastern United States that are really flicking [ph] them back in the marketplace. But the more traditional owners of timberland, either the REITs and some of the TIMOs, and the small amount of industrial landowners, they’re in this for the long term and most of them are doing what we're doing and in weak markets are holding volume off and that's why timber… saw timber values have held up as well as they have compared to what's gone on in the general market, especially with lumber prices. So we don't see a lot of that saw timber being put back into market other than through some of these financial buyers at a very short term.

Ross Gilardi - Merrill Lynch

Okay. And then just if you could talk a little more about the… your non-strategic small track sales during the quarter, the lowest price per acre you’ve had in years. I know you attributed some of that to mix. But you’re also having to reduce your asking price to move inventory more than you’ve had to in the past?

Rick R. Holley - President and Chief Executive Officer

No, we characterize it more as just lower-grade property from what has been sold maybe in the earlier years and if you call our presentations where we had benchmarked these values. What we’re receiving now is still indicative of what we have indicated to you is going to repeat the value of the small non-strategic. And so I think going forward, you should expect it to be closer to where it is now as opposed to some $1,400 or $1,500 an acre price.

Ross Gilardi - Merrill Lynch

Okay. And then what are you guys assuming in your dollar, I think it's $1.05 to $1.30 guidance for saw timber prices in the second half of ’08 in the North and the South?

Rick R. Holley - President and Chief Executive Officer

In those areas, we're expecting prices in the South to probably continue to tick down just a little bit more, and in the Northern segment, we would expect to see prices maybe to weaken $1 a ton in the next quarter. But then it would be pretty flat.

Ross Gilardi - Merrill Lynch

Okay. And then Rick, I was just curious, why are you increasing the Southern sawlog harvest a little bit from Q1 levels of sawlog prices were down 9% year-over-year in the first quarter?

Rick R. Holley - President and Chief Executive Officer

It is up a little bit from the first quarter level. But it's down from last year's level by 100,000 tons. So I think if you look at it on a normal seasonal basis, it's down.

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

But if we continue to see weakness, we see more weakness than we expect and this market will pull more fiber off, be it in the Northern Resources segment or the Southern Resources segment. And we have plenty of capital and we're going to manage this thing for value wherever we can.

Ross Gilardi - Merrill Lynch

Okay. Guys, actually have one more, sorry about that. Could you just explain a little bit about the differences between the movement in the hemlock pricing that you referred to before versus Douglas fir? Why would hemlock pricing beginning to hit harder in the Pacific Northwest?

Rick R. Holley - President and Chief Executive Officer

I think Douglas fir prices, if you looked at green Douglas fir lumber, they went down to levels that were just uncomprehensible. And so people have cut back on production on that from a lumber basis and finally, those prices are rebounding pretty smartly on the lumber side. So we’re starting to see the log prices move up in sympathy. On the hemlock side, there was a large windstorm at the end of last year and so hemlock grows a little closer to some of the coastal areas and there were some blow down in some of those areas. So they are salvaging these hemlock logs and that's maintaining a little downward pressure on the hemlock species compared to the Douglas fir that doesn't grow as much on the... on the very coastal area.

Ross Gilardi - Merrill Lynch

Okay. There is nothing in the end market application or anything like that?

Rick R. Holley - President and Chief Executive Officer

No, I don't believe so. I think it's a little bit more supply driven.

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

And to the extent there is any export log market if the Japanese or Chinese or others who are in the market when they are buying logs from the Pacific Northwest, Douglas fir has always been the preferred species and will generally attract much higher price than hemlock. So on the margin, that will certainly keep values at a differential.

Ross Gilardi - Merrill Lynch

Got you. Thanks, guys.

Operator

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

Steven Chercover - D.A. Davidson & Co.

Thanks, and good afternoon.

Rick R. Holley - President and Chief Executive Officer

Hi.

Steven Chercover - D.A. Davidson & Co.

These questions are a little more less feel than some of the previous ones, but first of all, does the spike in fertilizer pricing changed your long-term management? If the price remained high, will you change your whole approach to silviculture and could that change your volume projections?

Rick R. Holley - President and Chief Executive Officer

I don't think it’s going to change our volume projections long-term but clearly with fertilizer prices where they are today, the economics of that fertilizer application, especially in younger timber stands, goes from 15% to 18% IRR down to 8% to 10% or 11% or 12% and so we're going to watch that pretty closely and make sure there is a good return on that. But, what we hope as that fertilizer prices will come back down and that this is just more of a deferral as opposed to a curtailment.

Steven Chercover - D.A. Davidson & Co.

Understood. And secondly, with food prices also undergoing incredible inflation, is there any opportunity for you to perhaps lease some of the land that you've just recently logged for agricultural purposes?

Rick R. Holley - President and Chief Executive Officer

It’s funny, Steve. I think mother nature decided that trees grow good in some places and corn grows good in some places and that you don't grow trees where corn is and vice versa. So I really don't think you're going to see that kind of thing happen. We need to find a way to use wood for a food stock of some sort. So, we will have to do a little R&D on that, I’m just kidding. But, I don't really think you're going to see much of that happen. In the Southern United States where they have taken areas that had soybeans and cotton and taken that clock down and planted trees, you may see some instances where they’ll harvest the timber and put soybeans or something back out since the… it has grown there before but for the most part, you're not going to see much of that.

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

I think, what's more interesting with the acute pressure on food prices and people making ethanol from food sources, it really just points all out... all the much more towards wood being a viable alternative from an energy outcome and that's what we are excited about.

Steven Chercover - D.A. Davidson & Co.

Understood. But, actually just back to Rick's comment on mother nature, there is a lot of tree huggers out there who have no problem with seeing these nice fertile farms and they never now what they are actually, clear-cuts that aren’t coming back, but thanks for your answers.

Operator

Your next question comes from the line of Claudia Hueston with JPMorgan.

Claudia Hueston – JPMorgan

Hi, thanks very much. Just have a couple of questions, quick ones I think, you've guided in the past to 18.5 million to 19.5 million tons of total harvest, is that still the case based on sort of your revised projections here?

Rick R. Holley - President and Chief Executive Officer

Yes, it is and we could be more towards the upper end if we sustain pulpwood harvest at current rates.

Claudia Hueston – JPMorgan

Okay. And then I was hoping you could just comment maybe on the export market and if you've seen any change in trends in the export market in terms of demand?

Rick R. Holley - President and Chief Executive Officer

No material changes now, I think there is just… with the weaker U.S. dollar, it’s making paper producers much more competitive and we have seen shifts where imports of lumber from Europe had been reduced substantially. And then, on the margin, the U.S. is becoming more competitive exporting outside of its geographic boundaries.

Claudia Hueston – JPMorgan

Okay. And then just finally, I know it's a small part of the business as a whole. But, your fiberboard price realizations were up lot more than I had expected and sort of what I was sort of tracking. I just wondered if you might just provide a little bit of color as if there is a mix shift going on there, anything else that's providing [inaudible]?

Rick R. Holley - President and Chief Executive Officer

It's largely a lot of cost-push; we're seeing a lot of higher resin prices with higher energy values to make the resins and also higher wood, fiber values. And producers across the entire United States are experiencing the same phenomenon. So, prices have grown, as producers, they've pushed prices to maintain profitability.

Claudia Hueston – JPMorgan

Okay. Great, thank you.

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. Dave, I was curious if you could comment or expand on the rising silviculture cost? I may have missed it. But, did you give a CapEx number for the year?

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

We've revised our guidance to $80 million from $90 million to $100 million earlier.

Peter Ruschmeier - Lehman Brothers

Okay. And also on book tax cash… cash tax rate, do you have anything you can offer up as you look at the full year?

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

On the full year, we would expect to still have a slight benefit to income in the second quarter, and then pay higher taxes in the third and fourth quarter as profitability gets a little bit better for manufacturing, and as our real estate sales kick in, there is a number of these transactions that could have some tax implication. So, for the year as a whole, we would expect taxes to be pretty much about neutral, zero for the year.

Peter Ruschmeier - Lehman Brothers

Okay. I guess...

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

But a very good benefit that we've experienced in this first quarter.

Peter Ruschmeier - Lehman Brothers

Okay. Along the same lines, do you have any guidance on basis of land sold, ways to think about that for the full year as you look at the mix of what you're looking to sell?

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

Yes, I think, that's about 25%. And that's pretty consistent with last year's level.

Peter Ruschmeier - Lehman Brothers

Okay, good. Rick, any comment on updating us on your mineral rate strategy and maybe some of your other non-real estate, non-timber businesses and what you're seeing?

Rick R. Holley - President and Chief Executive Officer

That business, especially with oil and gas prices being high, our royalty income should be up for the year, year-over-year and we're clearly continuing to look at properties and trying to get potential exploration companies on those properties and once it haven’t been developed yet. And our mineral strategy really is to take some of this high-value construction materials and get them to market. And we’ve had a number of companies on our land and we're going in a couple of instances through a permitting process, could take two years to three years to permit some of these areas. So, we can start realizing some of that income. So, it's coming along very nicely and has not been impacted at all with the economic downturn.

Peter Ruschmeier - Lehman Brothers

Okay, that's helpful. And maybe lastly, if I could, Rick, you mentioned one of the team of contact suggested, clearly a lot of money looking for timberlands. Do you care to share one person's estimate as to how much capital is out there? And when you look the kind of loan-to-value numbers people have thrown around, what do you think we’re likely to see on that front?

Rick R. Holley - President and Chief Executive Officer

Well, I think the loan-to-value... I think most of the capital out there will be 100% equity, it’s coming largely from pension funds and endowments which we’ll generally not elaborate. And I’d just throw out a number, I just always hear this $10 billion number and he says, yeah, it's probably right. So --.

Peter Ruschmeier - Lehman Brothers

Okay, very helpful. Thanks, guys.

Operator

Your next question comes from the line of Laura Lu [ph] with Neuberger Berman.

Unidentified Analyst

Rick, do you want to give us an update on the Moosehead property in Maine and also what your... I noticed that you put this into 1031 account. Does that mean you have some potential purchases in line?

Rick R. Holley - President and Chief Executive Officer

Yes, Laura [ph], what's going on Moosehead Lake property up in the state of Maine, we've gone through all the hearings and all the public meetings with the state process that was in place. And we would expect sometime this summer to get a ruling from the Land Use Regulation Commission on our application, and we remain very optimistic about it and it's a beautiful property and should bring a lot of value. So, it's taken a little longer than we thought. But I've had people telling me, geese, if you didn't get this done in three years, that's really pretty short-term for a project this large. So --.

Unidentified Analyst

So, will this be the final decision?

Rick R. Holley - President and Chief Executive Officer

Yes, it will be the final decision. Yes, with respect to the $31 million, it's in the 1031 like-kind exchange account. When we sell lands, we put money in that to buy 1031 land. So, I would expect that every quarter, we will be buying some level of lands and it's probably anywhere from $75 million to $100 million worth of land for the year. And these are small parcels anywhere from 20,000 acre track we bought last year in Oregon to a 6,000 acre track we bought last year in Georgia.

Unidentified Analyst

Thanks.

Rick R. Holley - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Richard Payoly [ph] with APG Investment [ph].

Unidentified Analyst

Hi, guys. Most of my questions have been answered. I just have a couple of quick ones on the debt capital structure at this point. Just give us an update on what's outstanding on the senior notes and on the line of credit? And then I have a follow-up?

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

We have a revolver for $750 million and then two term credit lines that total about $600 million and those are all variable rate pricing. We have a series of notes that will be coming due over the not-too-distant future.

Unidentified Analyst

Could you give the… and what I was asking for is just an update on the outstanding balances, not by just unsecured notes that will lump and then sort of short-term borrowings as a variable rate debt?

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

So, the short-term borrowings of the $750 million revolver, only about half of that is drawn. So, you take the $600 million, you have about a little less than $1 billion of variable rate financing. We have a little over $2.5 billion of debt outstanding. So fixed rate debt is about 62% of outstandings at year-end… I am sorry, at quarter end.

Unidentified Analyst

And how much debt is in total set to mature this year?

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

We have another $100 million that's due in the fourth quarter of this year and another $50 million due in the first quarter of next year. And then we don't have anything more due until late in 2009.

Unidentified Analyst

Okay. If you guys in the future could include an updated schedule with the supplemental, that would be great, because my follow-up question is that with respect to presumptively, you're able to close the sale of the 450 million acre... 450,000 acres this year and you said approximately half of the proceeds would go to pay down debt. I am just curious that what type of coupons you would be retiring? Is there any yield maintenance on any of the items that if you're retiring more than the current maturity, what that would be? And then the last question is, do you... with respect to your revolvers or your term loans, do you have any type of, I guess, borrowing-based calculations or debt-to-book value or something like that, a covenant that we should be thinking about?

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

In the Q, to answer some of your questions, we detail by year the amount of maturities and break it out by fixed rate debt.

Unidentified Analyst

The Q is not available yet, right?

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

Right. It will be available shortly, but last quarter's Q is going to look like this quarter's Q. And so you can get that type of information from that perspective. We anticipate that we would be repaying variable rate debt with no make wholes or any premiums associated with debt retirement. And so we are very well positioned from that perspective.

Unidentified Analyst

And then with respect to borrowing-based calculations, or any other covenants that… along the lines that we should be thinking about?

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

We have two maintenance-based covenants on our bank lines that are just typical maintenance-based covenants that we don't have… that we have a lot of flexibility with at this point.

Unidentified Analyst

Great. Thank you.

Rick R. Holley - President and Chief Executive Officer

Thank you.

Operator

And there are no further questions at this time. Do you have any closing remark?

Rick R. Holley - President and Chief Executive Officer

Thank you, everyone, for joining us today, and we will talk to you next quarter.

Operator

And this does conclude today's conference call. You may now disconnect.

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

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