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Plum Creek Timber (NYSE:PCL)

Q2 2012 Earnings Call

July 30, 2012 5:00 pm ET

Executives

John B. Hobbs - Vice President of Investor Relations

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

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

Analysts

Mark Wilde - Deutsche Bank AG, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Anthony Pettinari - Citigroup Inc, Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

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

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Operator

Good afternoon. My name is Jamaria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. John Hobbs, Vice President of Investor Relations for Plum Creek. Please go ahead, sir.

John B. Hobbs

Thank you, Jamaria. Good afternoon, ladies and gentlemen, and welcome to the second quarter conference call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the company. Of course, we have on the line today, Rick Holley, President and CEO; and David Lambert, Senior Vice President and CFO. This call is open to all investors and members of the media. However, the Q&A portion of the call is intended for the professional investment community only. We ask that other participants, please follow up with any questions by calling me at 1 (800) 858-5347. I encourage you to visit our website, plumcreek.com. There you will find our press release and supplemental financial statements for the second quarter of 2012.

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

Now, I'll turn the call over to Rick.

Rick R. Holley

Good afternoon. Second quarter came in a bit better than we expected. Our Manufacturing segment continued to perform well with good demand and improving prices. Our Real Estate segment posted revenues just above the high-end of our initial expectations, and strong domestic demand translated into better-than-expected pricing for both sawlogs and pulpwood in our Northern timber operations.

In the South, markets were much as we expected. The Southern log price is just slightly higher than the first quarter.

Our outlook for the year hasn't changed much. At the margin, we're expecting a bit more from our Manufacturing segment, but we may not see at as much upside from Southern sawlogs as we had anticipated, so earning guidance for the year is unchanged.

Now, I'll turn the call over to David for a review of the quarter and our outlook for the rest of the year. David?

David W. Lambert

Our second quarter results of $0.22 were a couple of pennies above our guidance range. As Rick mentioned, business conditions were better than we initially projected for nearly all of our segments. Northern Resources' $4 million operating profit was $2 million lower than the $6 million reported in the first quarter due to the seasonal decline in harvest volume. The harvest declined about 160,000 tons, the harvest mix of roughly 2/3 sawlogs, 1/3 pulpwood was as planned. Overall, log prices were better than we initially expected. Northern sawlog prices increased $4 per ton to $71, while pulpwood prices held steady at $42 per ton.

In the Northwest, sawlog prices peaked at $73 per ton in April, driven by strengthening domestic demand. As spring progress, logging conditions improved, and the log supply expanded, and log prices retreated to $68 per ton. Log customers in the region were able to end the quarter with healthy log decks.

As expected, export demand was lower than in the second quarter of last year and did not command a significant price premium to domestic markets. We directed the vast majority of our harvest volume to domestic customers, exporting 26,000 tons of sawlogs during the quarter. We expect good logging conditions to prevail during the third quarter, so despite modestly strengthening export demand, we expect Northern sawlog prices to return to first quarter levels of about $67 per ton.

In the Northeast and the Lake States, pulpwood enjoyed solid demand, and prices held at attractive levels. As a result, pulpwood prices averaged $42 per ton during the quarter. We expect stable pricing and seasonally higher pulpwood harvest during the third quarter.

Overall, we expect Northern harvest volume to seasonally recover, a level similar to the first quarter, about 700,000 tons of sawlogs and 450,000 tons of pulpwood.

In the Southern Resources, Southern Resources' $22 million operating profit was $1 million higher than the first quarter's $21 million profit. Prices for both pulpwood and sawlogs were marginally higher compared to the first quarter, while our harvest volumes for both sawlogs and pulpwood increased. Our sawlog harvest increased 213,000 tons, but was about 100,000 tons less than we initially planned because sawlog pricing remained unattractive in some markets.

Pulpwood markets continue to present an opportunity with attractive pricing in many Southern wood baskets. Our Southern quarter harvest was nearly 100,000 tons higher than in the first quarter. We had initially expected a pretty flat quarter-over-quarter pulpwood harvest. However, our pulpwood yields from first thinning harvest are running higher than our expectations, and that has pushed up our pulpwood harvest.

For the third quarter, we expect prices for both sawlogs and pulpwood to hold steady. We expect the third quarter harvest volume to be about 3.5 million tons similar to the second quarter's harvest, but with a slightly richer mix of sawlogs. As always, we will continue to adjust our harvest plans in response to market conditions, deferring harvest in weaker markets to protect value and temporarily increasing harvest in attractive markets to capture value.

In the Real Estate segment, we completed $47 million of rural land sales during the second quarter, $2 million above our guidance range. The bulk of the quarter's sales consisted of small, nonstrategic sales and HBU recreation sales to private individuals. The price we received were unchanged from the recent quarters, with small nonstrategic lands fetching at an average of about $1,150 per acre and recreation lands capturing about $2,000 per acre. The balance of the quarter's results related to conservation activity and included the closing of a $10 million conservation easement associated with our Moosehead Lake Concept Plan in Maine.

The rural land market continues to be good, but remains very regional. The Lake States and Gulf South are our most active and attractively priced markets. Prices in all the regional markets are stable.

Third quarter sales are expected to be between $90 million and $100 million, and we expect land bases to be between 35% and 40% of sales. Our third quarter Real Estate expectations are anchored by a large nonstrategic timberland sale in the Lake States region. We will provide the details of this transaction in our third quarter call.

Our expectations for the year haven't changed, and we continue to expect Real Estate sales to fall between $275 million and $325 million, and land bases to be approximately 40% of sales.

Our Manufacturing segment posted a $9 million operating profit, up $5 million from the first quarter. We continue to experience improving demand from construction, commercial and industrial users for our lumber and panel products during the second quarter. Sales volumes in our lumber and plywood product lines were similar to the first quarter levels, while MDF volumes increased 17%. Our lumber price has moved up 4% sequentially, while plywood and MDF prices increased 6% and 2%, respectively.

With lumber prices down from their second quarter highs, we expect third quarter profits will decline slightly from the second quarter level. We expect our third quarter interest expense and taxes to be similar to the second quarter. We are maintaining our guidance for the year of $1 to $1.25 per share. Our third quarter results should be between $0.32 and $0.37 per share. Rick?

Rick R. Holley

As I've mentioned in the past, we're actively pursuing a wide variety of export market development opportunities, markets such as Turkey, India and China. For most of these opportunities, we are in the very early stages of market development, but interest is, in fact, there. As you know, on the West Coast, Chinese export market began cooling late last year and earlier this year.

As David mentioned, West Coast export markets were fairly quiet for much of the second quarter as Chinese customers work through log inventories that had built in their ports. We continue to field inquiries from the export -- for export logs for the second half of the year and expect demand to pick up as the year progresses.

We continue to see convincing market evidence that timberland remains an attractive asset class for long-term investors. Interest among institutional investment community and direct timberland investment remains strong, and capital continues to be placed in this asset class. We continue to valuate timberlands for both purchase and sale and will be purchasing when we find opportunities that create value for shareholders.

We are beginning to see real improvement in housing activities. Excellent affordability, positive moves in home values in many metro markets, growing housing starts and improving homebuilders sentiment, all point to improved residential construction in repair and remodel markets. As the economy and housing activity continues to recover, this will ultimately translate into higher prices for timber and growth in our income and cash flow. We continue to be excited about the future prospects for Plum Creek. Our unmatched geographic diversity, conservative balance sheet and excellent liquidity serve us well as we continue to execute on strategies designed to maximize value and investment in the company.

Now, we'll open it up for your questions. Jamaria?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

First question I had, just you mentioned this pickup in institutional activity. It seems like in the second quarter here, we've seen more TIMO activity than we've probably had in 5 or 6 years. And I'm also getting some hints that discount rates are back near historic lows. I'm wondering if you could talk about the pickup, talk about what you think is out there in terms of sort of a capital backlog. And any thoughts you might have on the discount rate?

Rick R. Holley

Well, clearly, as the large transactions last quarter, trade between 2 TIMOs and so, the activity is still there. We see, at least, here about a couple billion dollars still in the sidelines, at least, demand for timberlands, and clearly, there's not a lot of supplies, there's not a lot of other lands in the markets that we're aware of. And we've heard the same thing as you have about discount rates at some of these transaction trading around a 5% discount rate. And for some of these institutions be a long-term holders looking, in other alternative investments they might have, assuming that, that's acceptable to them, so clearly, that's kind of trades are being made today. And at a much lower rate than certainly we're willing to invest at.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Another question, Rick. I was kind of curious on this conservation easement. You've seem to have gotten somewhere between $25 and $30 an acre, which seems to me relatively low. And I wondered whether there were some other potential benefits to Plum Creek in agreeing to this easement?

Rick R. Holley

Well, this conservation easement really worked in concert with the large concept plan, the resource plan we did in Maine. So it's part of that whole transaction we agreed to do the conservation easement. And in that marketplace, $30 per acre is not out of line. But we agreed to give up the development rights on those lands on the form of conservation easement to help get, obviously, the entitlements or the development opportunities up around Moosehead Lake, which is really part of the larger transaction.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, that's really where I was getting at. And then finally, it seem like some of these areas, if I look year-over-year, your volumes are up even more than kind of the underlying markets, and then in the South, even if I just -- for the timber deed, can you give a little color on what's going on there?

Rick R. Holley

Well, I think part of the reason the volume is -- and David mentioned it, is we're doing a lot of first thins in many of these markets in the South due to a lot of silviculture investment. For instance, in Arkansas, we were expecting like 33 tons an acre in first thins, and we're getting 39 tons per acre. So what we're finding as we go into some of these stance [ph] are cutting out in a much higher volume than we anticipate because that's part of the reason. And in some other markets, as you do -- as we get into some of the [indiscernible], we're getting more and more chip and sawlogs so therefore, the sawlog harvest is a bit higher than we anticipated. I think it's just the nature of the investments we've made over the last 10 years in silviculture, which is roughly $500 million.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. And then finally, can you just give us an update on any changes or perspective changes in your nontimber revenue streams?

Rick R. Holley

I don't think we expect anything other than nontimber. We give guidance on the real estate market, which we still feel pretty good about. And the Nontimber Resource business, the energy and natural resources is still going to be kind of in that $20 million range for the year, more or less. And it's been a little higher in the past but it's all related to energy prices. With natural gas prices being down, this is largely a royalty business, therefore, the royalties are down, and therefore, the income and cash flow.

Operator

Your next question will come from the line of Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners Inc.

As you look at the your -- if you could just remind us your -- I noticed you didn't buy back stock in the quarter. Where is that authorization stand at the current time?

Rick R. Holley

Yes. We had authority for 200 million, and we bought back 25 million. So we're 175 million that's still available.

Chip A. Dillon - Vertical Research Partners Inc.

Okay, the 25 million was bought prior to the second quarter, right?

Rick R. Holley

That's correct.

Chip A. Dillon - Vertical Research Partners Inc.

Okay. And then, could you just let us know -- I know the timber deed you did, I think, in January or late last year, how much of the EBITDA and EBIT in the second quarter, if you could give us an idea of -- which is from that timber deed?

David W. Lambert

In the second quarter, we had EBITDA of about $3 million.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And then, I guess, the last question is, when you look at -- you mentioned that in the Northern segment, you had strength in logs and in April, and then I guess the supply decks got built up. But we still see lumber hanging in there. In fact, it was up last week, at least, on a random links basis. And do you a sense that maybe that there is -- there could be actually a later-in-the-year rally maybe in even in log prices because of the strength in lumber? And on that point, do you have a view as to why you think lumber prices are hanging in there so long this year when seasonally, they normally roll over?

Rick R. Holley

Well, clearly, we've seen capacity utilization rates up, production volumes in both the South and the West are higher than they were a year ago. So I think we're starting to see more and more demand for lumber, and therefore, better lumber prices. We haven't seen it translate as directly into log prices because, again, I know you guys hate to hear us say this all the time, but parts of the U.S. South continue to be dry, and therefore, lots of logs are available, and that's tempered some of the log pricing. And even in the West, in Oregon, in some of those markets is that as demand improve, we've seen a lot more logs in the market than we typically have. And so I think that's tempered a bit some of the log prices that we would see otherwise. But clearly, if lumber prices continue to stay through the rest of the year at the kind of levels we've seen now, we should see some more production increases, and therefore, higher log prices clearly higher than we're anticipating at the present time. So you're right, there could be some upside.

Chip A. Dillon - Vertical Research Partners Inc.

And then just last, as you look out in the Northwest, it seems like it's been a good year maybe a little more than a year since China really backed off from the market. And is there any sort of intelligence you have in terms of maybe where their log decks are over there? And when you think we could see enough of an improvement to get prices moving the other way, at least, right along the coast?

Rick R. Holley

Well, in the first quarter, their log decks, as you've heard, were very high that the ports were all full. A lot of that has come down. They're probably running at about 50% of that inventory level today. That's why I think we see all the inquiries built up. But as many of you may know, there's a change in the Chinese government, which will happen in August. So there's not a lot of policy decisions being made now and a lot of those new policies won't be in place for a few months. So I think the economic climate in China is going to be a little flat, and I think that's why we haven't seen a little more activity than we would expect with inventories coming down a bit. But clearly, as we get towards the end of the year, we should see activity pick up again.

Operator

Your next question will come from the line of Anthony Pettinari with Citi.

Anthony Pettinari - Citigroup Inc, Research Division

You referenced log decks being built out with your Northern Resources customers. And I was wondering if you could just talk maybe more broadly about where you think inventories are in the lumber supply chain with lumber dealers, both in the West and the South? And where we kind of are heading into the third quarter?

Rick R. Holley

For all we've seen from field inventories, they're relatively modest. I think people continued to manage the supply chain. I know in the Plywood business, people are out several weeks as far as the orders, and on the lumber side as well. I think there's an opportunity, if demand really picked up, that you could pressure the supply chain a little bit.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, that's helpful. And then on the export side, I think last quarter, you had guided to 300,000 tons. And I'm wondering if you're still comfortable with that, and is there potentially a little bit of upside or downside versus that earlier guidance?

Rick R. Holley

Yes, we're still comfortable at 300,000 tons, 200,000 of it roughly will be out of Oregon, and about 100,000 tons will be out of the Southern United States.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, okay. And then maybe final question, obviously, we've got an election coming up. I'm wondering if there's any sort of major policy issues that you're thinking about as you plan for 2013 that could impact the year?

Rick R. Holley

I think the only policy issues don't impact necessarily just Plum Creek or our industry, but the economy is going to be tax policy and the regulatory policies that we see into next year. I think that's kind of an overhang of business today both of those things until we'd see more certainty with either. I think there'll be some hesitancy of American business to really make investments. But clarity on those 2 areas is going to help everybody in 2013.

Operator

Our next question comes from Gail Glazerman with UBS.

Gail S. Glazerman - UBS Investment Bank, Research Division

On the export side, can you just kind of explain how the recent currency is impacting it? You're not changing your view, but I would presume that the strength of the dollar on some of those exports are less possible than they might have been?

Rick R. Holley

Yes, I mean, we don't -- even with our customers and stuff, as we look at those markets, we don't get a lot of pushback over what's going on with the currencies, so it appears to be kind of a nonevent. It's nothing that we seem to get any pressure on it all. So I don't think it's had any major impact. And again, a lot of these are going to China, and their currency, obviously, has strengthened, so that helps them. And we're not selling logs into Europe, so the fact that U.S. dollar has strengthened against to the euro, that has no impact. So we really haven't seen any of that.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And in terms of the pickup in Southern pulpwood, is that all on or predominantly on legacy Plum Creek land, or are you harvesting more pulpwood off of the timber deed than you might have anticipated?

Rick R. Holley

It's mostly legacy Plum Creek land.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And just any developments in terms of the European energy market and subsidies that -- and change your view or impact your view at all in terms of how the tons may flow through in terms of your contract for next year?

Rick R. Holley

Yes. I think the only positive development, which happened last week is the U.K. government finally approved the ROC, R-O-C, which is Renewable Obligation Credit, which is the credit that they get. And that was finalized and the parliament will vote on that when they come back from summer recess. And that will get going, at least, in the U.K., so that's the most recent positive development. They finally have certainty on what the credit will be.

Gail S. Glazerman - UBS Investment Bank, Research Division

Okay. And is the credit in line with what might have been expected or a little bit lower or higher?

Rick R. Holley

No. I think it's in line with what's expected. And part of the credit, to get it you have to have out of a single burn or 90% of the furnish needs to be renewable energy basically, biomass, in this case. And at least the people that we're talking to can meet that requirement, so it's a net positive for the industry. So we're still in a timeframe of kind of late next year to start shipments against that contract that we have.

Operator

Our next question comes from George Staphos with Bank of America Securities.

George L. Staphos - BofA Merrill Lynch, Research Division

I wanted to piggyback off Gail's question related to Europe. Are you seeing any discernible change in demand for biomass in the future, given, obviously, the problems on the continent in terms of economic growth. Is there anything that you could point to one way or another on that?

Rick R. Holley

No, George. And I think the fact the U.K. government came out finally with this credit and affirmed it, and once you apply for it and qualify, they've committed for a 20-year period. So even despite their economic woes in Europe, they're really kind of focused on getting and having more renewable energy. And their energy start, they don't achieve natural gas like we do here in the United States, so they need alternatives. And here, therefore [ph], most of energies come from burning coal and they have coal plants that generate a lot of carbon emissions. So they're really trying to get more in the renewable energy front, so they're committed to do that despite their economic issues.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Next question I had -- and you spent a lot of time covering this in terms of why you didn't see maybe more lift in South in terms of sawlog pricing this quarter despite the demand picture. Is there a level of start, instead of 750,000 starts, maybe 800,000 or 850,000 where you'd start to get a bit more pricing tension in the South from what you can see at the present time not to where we're at right now?

Rick R. Holley

Well, I think clearly, as we go into next year, and I think the blue chip can sense this it's like a 880,000, start number. As we start to get in the 800,000, 900,000 starts, I think you're going to see a lot more tension in the market particularly with some of the lumber fall off out of Canada, meaning some of the decline in lumber production there. And a lot of that lumber production, I think, will continue to got to China as well. So that clearly will help the situation here. We should start to see a higher level production of U.S. lumber capacity come on back online, which will clearly help log prices.

George L. Staphos - BofA Merrill Lynch, Research Division

Right, right. One question on capital allocation. Certainly, no one could argue with Plum Creek's repurchase history over the last number of years. But in the last quarter, obviously, it trended perhaps a little bit better than you'd expected, and yet you didn't use any of your capital to buy back stock, even though in answering, I think, one of the other questions -- I think it was Mark's question, the discount rates are lower than you would use for investing. So, I guess, the question is why didn't you do a bit more buyback here in this quarter? Was there anything that you were thinking about or was it your concern perhaps with the stage that you're seeing in the North in terms of fundamentals?

Rick R. Holley

No, I don't think it's the fundamentals. We're starting to see more clarity and the general market conditions improving. I think, as you know, the stock and the market bounce around a bit, and weren't going to chase it around. So -- but if we see weakness in the stock, we will -- we have the capital, we'll buy our stock we back. We still think it's still the best timberland investment there is.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Last one, I'll turnover. The $10 million on the easement for Moosehead Lake, was that expected in this quarter?

Rick R. Holley

Yes it was, and it was in our guidance that we gave at the end of the last quarter.

Operator

[Operator Instructions] Our next question is from Mark Weintraub with Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

You had mentioned how the timber harvest is probably going to move towards the 17.5 million that it kind of low above the prior guidance. Is that mostly in the South or the North, or combination of the 2?

Rick R. Holley

It's heavier to the South, Mark.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. And on -- when I look at the earnings performance in the South, relatively flat with the prior quarter despite the higher volume. And you had mentioned that weather conditions were very good. Why do you think costs seem to have gone up a little bit? Was that transportation, or what was going on there?

Rick R. Holley

A little of it is transportation. We saw diesel prices peak in the second quarter, and we have seen those come off. We're hoping in the second half to kind of see that translate into better hauling and logging costs for the company.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. And lastly, I guess, one of the other things that many of us have been wrestling with is the fact that with demand having been low for several years, there's probably more timber inventory in the ground. And how -- as you're kind of seeing a spike in demand or an improvement in demand, are you getting any better view as to whether that may or may not be an issue in terms of how it affects recovery?

Rick R. Holley

I don't think our point of view has changed on that. There is an adequate amount of timber whether you would have had growth in this past several years or not. In this lower-demand environment and with very easy harvesting conditions, it's easy to get timber to the marketplace. And so, for these modest increases in demand, we're really not seen anything translate through into pricing. As we see the economy pick up especially in next years, as we've talked about, the gating item, we believe will be more the ability to get the timber to market. So that's the pressure that will be exerted on the contractor work for us, not necessarily the supply of timber. And if we move into a more normal weather pattern combined with those things, that's where we're really hoping to see timber prices improve with the demand.

Operator

Our next question comes from Joshua Barber with Stifel, Nicolaus.

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

I may have missed this before, but looking at your implied guidance for the third quarter and extrapolating that towards the fourth, there's still a pretty wide variation on what your fourth quarter guidance is. Is that due more to sawlog prices and the demand, or would that be basically fully a function of Real Estate?

Rick R. Holley

I think it's a little bit of where sawlog prices will be in the fourth quarter. We're still expecting a very good quarter for Real Estate in the fourth quarter as well.

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

Okay. And I may have missed this before also, I apologize. But you had mentioned that you saw some pretty good pulpwood demand in the second quarter and expect that to continue. Is that -- you guys take an additional share from Southern mills or is -- there's just a very large pickup in pulpwood demand today? And what's that stemming from?

David W. Lambert

I think that's just a very -- the pulpwood markets have been good on a relative basis compared to the sawlog markets. And the behavior of Plum Creek's been pretty consistent over the last couple of years where we have been trying to emphasize pulpwood. We'll look at -- if you're looking at a clearcut, we'd rather cut stand B that had a little bit more pulpwood than stand A that had a little bit more sawlogs. So we're catering to that market. And Rick alluded also to the fact that we're getting exceptional yields off of our first thins. So in this environment, we're doing that. So I guess on average, we are taking share in the marketplace. But the paper companies have been performing well through the market cycle, and that's the product that we have emphasized.

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

Okay, that's helpful. Last question, I guess we have seen, as you mentioned some increased demand for timberland itself. Have you seen -- I guess in a partially related thing, any additional demand or reverse inquiries from some of the TIMOs that are looking to cash out, but not quite liquidate all their properties to do similar timber deeds with you into the second half of the year?

Rick R. Holley

No. We've not seen that yet but, clearly, it's something that we -- we're still very pleased about the one that we did in the first quarter of this year, and we'll have discussions with others to look to do some more of that because it works very well for us, and seemingly works well for them to providing some liquidity to their clients.

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

One quick follow-up on that. Do timber deeds actually counts as good read income?

Rick R. Holley

Yes, yes they do.

Operator

Our next question comes from Alex Ovshey with Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

A couple of questions. As you mentioned, there was a big transaction in the marketplace there in the second quarter between 2 TIMOs. I'm curious if there's any read across -- in terms of per acre valuations for some of your lands based on some of the information you may have on that transaction?

Rick R. Holley

Well we don't have a lot of information other than what you have. And that's -- depends on what the transaction price was and we've heard $2 billion, we've heard $2.3 billion and $2.5 billion. So once we determine what that is, we can kind of imply some values. But it seems to be even at the lower end of that range, $2 billion a very good value for kind of the Idaho lands they had, the Minnesota lands as well of some of the West Coast lands. So I think that Forest Capital did a very good job and gotten really good values for what they did.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Understood, Rick. And then, can you comment on the demand pool you're seeing for sawlogs in the North and South through July relative to the second quarter trend?

David W. Lambert

I think, as we mentioned in our call, log inventories of most of the mills here in the West are pretty good. So we don't see a lot of new demand. Pricing is pretty flat so far in the third quarter. And I would think the same is for the South. Again, the South's so weather, I mean, we had some wet weather and the coast of Georgia and Florida, which helped that market a bit. But Louisiana and Arkansas have been very dry, a lot of logs in the marketplace, and therefore, prices have been pretty flat. So it's really kind of a within the region. That's a very regional business.

Operator

Our next question is from Matthew Van Cleve with John Tumazos.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

This is John Tumazos. Could you give us a little review of the domestic and overseas wood energy biomass market, maybe elaborating on George's earlier question? Clearly, in the U.S., the coal and natural gas prices fell, and their cheap alternatives, and there's a little bit of that sun and land green energy. Are there any things that you have to write off on the U.S. initial work on pellet plants or anything? But overseas, natural gas is still $9 in Eastern Europe. And is there an appetite there for wood for energy?

Rick R. Holley

Well, John, in the domestic market, I think the -- what -- a couple of years ago, there was a lot of interest around the bioenergy market. I think that is certainly gone by the wayside due to low gas prices. If people are going to shut down a coal plant, they're probably going to build a new gas plant as opposed to biomass plant. However, there is a company called, KiOR, who is building a large plant that will actually make crude oil out of wood. And so if that works and they're building a pretty a large-scale plant in Mississippi, I think that bodes well for, at least, that type of interest here domestically. Overseas, we're seeing interest in wood pellets from Japan, from China, from different markets now. And clearly in Europe where they have this renewable energy policy already in place, they have to go that way. And as you've mentioned, the alternatives are very expensive. And now you have Germany going to do away with all their nuclear power, and they don't have a lot of choices. They got expensive gas or they're looking at green energy or biomass as well. So I think what -- at least in the near term, we're going to see is a lot more interest out of Europe for this wood fiber supply. And again, some of you have seen our presentation, and if you look all over the world, the cheapest pulpwood in the world is from the U.S. South. And Europeans like that because it's sustainably managed, it's reliable, it's politically stable, it grows plentiful, it's long term, so that's why the Europeans are looking so hard at the U.S. now.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

How many times, if I could follow up, are your current export sales for energy biomass purposes? And how much do you think they might grow to in a couple of years?

Rick R. Holley

Well, for example, they're very small today, but we are selling pulpwood to people that make pellets which get exported. But we do have a contract with the European utility to sell 1 million tons of wood a year, 80% pulpwood and 20% biomass. And that will start at the end of next year, 2013, as we'll start deliveries under that. But even that particular customer, is they need 6 million tons. So this could grow rather substantially as these European utilities contract for pellet producers here. We're not going to be the pellet producer, so we have no investments in that business, but these utilities will either build directly or contract for somebody to build a pellet plant, hopefully in our backyard,and we'll deliver pulpwood there and we'll get pelletized and shipped to Europe.

Operator

Our last question is a follow-up question for Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Rick, is it possible to get any kind of an update on any activity in terms of development properties?

Rick R. Holley

Yes. I think, Mark, clearly, we've talked about Maine before and that's probably a bit out still. It's going to be a great recreational development property, but that's probably, at least, 5 years away before we see much activity. But the -- most exciting project we have right now is in Gainesville, Florida adjacent to the University of Florida there. We have envisioned Alachua. We've been working with the county there and leadership in the county. We own about 16,000 acres there that we're looking for kind of a multi-use type of a project. So that's kind of what's probably within the next 5 years, very near term, something happening there to try to attract a very large company kind of almost an Austin, Texas type thing if you will, just because of the university being there and the growth opportunities that county is looking for, we're very excited about that particular opportunity.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then just to back on sort of the institutional interest pickup that we're seeing for timberland. You mentioned hearing about a -- like a $2 billion perspective capital backlog. How would that compare with what you're hearing about in sort of '05 and '06?

Rick R. Holley

Well, I think at the peak, we started hearing numbers $5 billion to $10 billion. Now, I think as you probably know, most of that stuff it was double counted, but probably half of what it was at the peak. Increasingly, we see -- so a lot of this capital is coming from outside of the U.S. A lot of it is being committed out of Europe, more and more committed out of Canada as well. So it -- there's just a lot of interest in owning this hard asset and United States of America, politically stable, that sort of thing. So just continues to be interesting, and into these 5% discount rate, that appears to been okay kind of return given the stability of that investment over a 10-, 15-, 20-, 30-year timeframe.

Mark Wilde - Deutsche Bank AG, Research Division

And I guess just kind of following along on that. I mean, I've always been impressed by these Forest Capital guys, really sharp guys. And the fact that they're sellers and now there's a story out that Brookfield is looking at selling some of its timberland portfolio. Also pretty smart guys, what do you make of that, if anything?

Rick R. Holley

Well, we've sold some land as well, and I think it's just good business where you have so much demand and so little supply and you see very good prices. If you can, you capture some of that value as we have, and I think that's what Forest Capital did. And if I haven't heard about Brookfield, but my guess is that's what they might do is take some off the table and redeploy the capital in an area where they can even get a higher return. So I think it's just good business, good capital allocation.

Operator

And at this time, there are no further questions. I would now like to turn the call over to Rick Holley for any closing remarks.

Rick R. Holley

Well, thank you, everyone, and we'll talk to you next quarter. Enjoy the rest of the summer.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.

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