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

Q2 FY08 Earnings Call

July 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

Hamzah Mazari - Credit Suisse

Ross Gilardi - Merrill Lynch

Gail Glazerman - UBS

George Staphos - Banc of America Securities

Richard Skidmore - Goldman Sachs

Christopher Chun - Deutsche Bank Securities

Chip Dillon - Citigroup

Steven Chercover - D. A. Davidson & Co.

Peter Ruschmeier - Lehman Brothers

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 second quarter 2008 conference call for Plum Creek. I'm John Hobbs, Director of Investor Relations for the company. Today, we have on the line, Rick Holley, President and Chief Executive Officer, and David Lambert, Senior Vice President and Chief Financial Officer.

This call is open to all investors and members of the media. However, the Q&A portion of the call is intended for the professional investment community. We ask that other participants please follow up with any questions by calling me at 1-800-858-5347. I encourage you to visit our website www.plumcreek.com. There, you will find our press release and supplemental financial statements for the second 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'll turn the call over to Rick.

Rick R. Holley - President and Chief Executive Officer

Good afternoon. No surprise to any of you, the cyclical weakness in the housing sector has impacted our financial results. It is the primary reason they are down year-over-year.

The significant reduction in housing activity has decreased lumber demand, which has impacted the profitability of our lumber manufacturing business and put downward pressure on sawlog prices. The weakness in sawlog prices has been offset somewhat by attractive pulpwood markets. Rural land markets that held relatively steady in our year-to-date results in our real estate mix... Real Estate segment matched those of last year.

There are lots of opinions about when the housing market will recover. However, there is no doubt that the housing market will recover from these cyclical depressed levels. In June, the Harvard Joint Center for Housing Studies released their annual assessment of the U.S. housing market. In it, they point out that demographic fundamentals still support average annual completions of more than 1.9 million units over the next decade, including multifamily and manufactured homes.

In the meantime, at Plum Creek, we're maintaining our value discipline and exercising our operational flexibility during this cyclical downturn. For example, we plan to reduce our Southern sawlog harvest during the second half of the year, allowing these trees to continue to grow and preserve their economic value for the future.

David will now review our second quarter results and outlook. Following our prepared remarks, we will open it up for your questions. David?

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

Overall market conditions were about as expected in most regions. We took advantage of attractive pulpwood prices in the South, harvesting more pulpwood than we initially planned. However, Southern sawlog prices remained weak, falling more than we initially anticipated.

We've reported earnings of $0.18 per share for the second quarter, on the high end of our guidance range. This includes the $0.04 per share or $6 million after-tax write-down of our lumber mill assets. Attractive pulpwood markets were responsible for much of our improved performance, relative to our initial expectations.

In the Northern Resources segment, operating profit was $7 million, down from the first quarter's $14 million profit due to typical seasonal patterns that limit the harvesting activity in the segment, during the spring thaw. Sawlog prices were generally stable to higher across the Northern markets. In particular, Northwest sawlog prices recovered from the lows they experienced during the first quarter, and values in the Northeast and Lake States improved due to tight supply conditions.

Northern pulpwood prices were up across all regions, as pulp and paper mills, pulpwood inventories remained lean throughout most of the quarter. Our average pulpwood prices were up 10%, compared to the first quarter.

For the third quarter, we expect our Northern segment harvest volumes to show a typical seasonal increase, returning to levels similar to last year's third quarter harvest. We're targeting harvest levels for pulpwood of about 650,000 tons and about 850,000 tons for sawlogs.

We are expecting the prices in the Northern Resources segment to hold firm during the third quarter, with some opportunity to realize higher sawlog prices, as customers seek to build their log inventories from low levels in several markets. Northern segment expenses are typically higher during the third quarter, as we spend approximately $2 million on summer road work.

In our Southern Resources segment, our second quarter operating profit was $37 million, matching the first quarter's performance. Southern saw timber prices continued to decline and were down approximately 8%, compared to the first quarter. Sawlog prices remained under pressure, particularly in Western regions of the South, as demand from lumber and plywood mills in the region remained weak and harvesting conditions allowed more supply to reach the market.

While Southern sawlog prices... with Southern sawlog prices this low, we plan to defer the harvest of some of our most valuable larger diameter sawlogs during the second half of the year. As a result, we expect our full year Southern sawlog harvest to be at the lowest it's been since 2001 for about 6 million tons. We expect our third quarter Southern sawlog harvest to be about 1.5 million tons.

Pulpwood prices remained attractive during the second quarter. We altered the timing of some of our planned pulpwood harvest for the year, to capture attractive pricing and serve customer demand. As a result, we harvested nearly 250,000 tons, more than our initial plan for the quarter. We expect pulpwood markets to remain attractive, but plan to moderate our pulpwood harvesting pace during the third quarter, to less than 2 million tons.

The Real Estate segment recorded revenue of $57 million and operating profit of $35 million. These results were in line with our estimates. The operating segment results so far this year are identical to those reported, during the six months up in 2007, with sales of approximately $110 million and operating profit of $68 million.

Similar to last year, we are expecting strong second half activity in our real estate segment. During the last conference call, we shared our observations on the state of the rural land market. Our experience during the second quarter reinforces these observations.

While casual inquiries are off in most markets compared to 18 months ago, individuals who are in the market remain serious. Those in the market are more value conscious, willing to trade off amenities for a property that meets their needs and fits their budget. As a result, land prices appear to be holding firm in most markets, with an apparent shift in interest towards lower valued properties and properties in lower priced regions.

Rural unentitled land accounted for nearly all of our 26,000 acres sold during the quarter. We received more than $1,200 per acre for the 13,000 acres of small non-strategic lands. This per-acre value is lower than we experienced last year as these properties are generally lower quality than we sold last year.

The quality of the properties we sold in the first half is generally representative of our remaining small non-strategic lands. The prices we are capturing are very attractive premiums to their underlying timberland values.

During the quarter, we sold nearly 12,000 acres of HBU or recreational lands, capturing average values of more than $2,700 per acre. These per-acre values are lower than we experienced last year, due primarily to regional mix. As was the case in the first quarter, we sold a greater proportion of our lands from lower price regions, such as Mississippi and Wisconsin.

So far this year, about 45% of the acres sold came from the Western regions of the South and the Lake States. During the first six months of 2007, the same regions accounted for approximately 30% of the acres sold.

In addition, the sales mix of some of our higher value markets in the West, shifted towards more affordable properties. Development quality properties remained a small part of our sales. We sold 700 acres at an average price of $9,600 per acre. The land sold included 9 rural residential lots, a 60 acre commercial property in Georgia, and a small residential property in Mississippi.

We expect a recurring seasonal pattern of higher second-half sales in this segment. During the third quarter, Real Estate segment sales are expected to be between $110 million and $120 million. Land basis is expected to be consistent with our first half experience of approximately 20% of revenue. We still expect full year Real Estate sales to be between $320 million and $340 million.

The Manufacturing segment reported an $11 million loss. As a result of the decline in the housing starts and the potential for continued weak lumber prices, we recorded a $10 million pre-tax write-down of the book value of our lumber mills. This, of course, is a non-cash item.

Excluding the effect of the write-down, each product line contributed to improve segment results. Average lumber prices were largely unchanged from the first quarter while lumber sales volumes increased nearly 20%, helping drive improved results in that business.

Profitability for both our plywood and MDF businesses improved during the quarter. Our plywood prices increased slightly from the first quarter, and sales volumes were relatively flat. Our MDF business continued to perform well. Our average prices increased slightly while sales volume increased 7% over the first quarter. We expect to report breakeven results in the Manufacturing segment during the third quarter.

We continue to make progress in growing the contribution from our non-timber resources. The contribution from this segment has grown from $7 million annually in 2003 to more than $20 million this year. During the second quarter, we received an $18 million bonus lease payment for natural gas exploration rights on a portion of our West Virginia lands. The receipt of this payment can be seen in our cash flow statement. We will recognize this income over the life of the 5-year exploration period.

In addition, we will receive an 18% royalty on any gas produced from this property.

For the quarter, we recorded an unusually large tax benefit of $8 million. $4 million of the benefit was the direct result of the lumber business impairment we recorded during the quarter. We expect to report about $1 million of tax expense during the third and fourth quarters of the year, due in part to improved manufacturing results.

Our earnings guidance for the year remains unchanged. We estimate full year income from continuing operations to be between $1.05 and $1.30 per share. Our third quarter results should improve and be between $0.38 and $0.43 per share, reflecting seasonally higher harvest volumes in the Northern segment, improved manufacturing results and seasonally higher land sales.

Our guidance does not include the impact of the Montana Legacy project, the conservation sale we announced in June. We will do so once the sale has cleared its contingencies.

For the year, we continue to expect capital expenditures to be approximately $80 million.

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

Rick R. Holley - President and Chief Executive Officer

Whilethe housing downturn is deeper and longer than initially anticipated, the value of the assets we manage remain resilient. The long-term investment characteristics of timberland, biological growth, non-correlation with financial markets, inflation protections, among others has attracted capital from a variety of investors seeking direct investment in the asset class.

As we previously discussed, we currently have approximately 450,000 acres of Southern timberland on the market. We are pleased by the level of interest in the properties. The process is on track and we anticipate announcing a new transaction before the end of the third quarter and expect to close any transaction before year-end.

In addition, conservation group remained very interested, in the acquisition of timberlands to protect sensitive properties for future generations. We are happy to work with these organizations to create win-win conservation outcomes. We are proud that these efforts have resulted in the permanent protection of over half a million acres of lands by Plum Creek since 1989.

As you know, at the end of June, we signed another such agreement, with The Nature Conservancy and The Trust for Public Land in which we will sell approximately 320,000 acres of Montana timberlands for $510 million. We currently expect to close this sale in three phases, over the next three years, starting in December of this year, with the first phase for $200 million.

Capital allocation remains our most important job at Plum Creek, and many investors have asked what we expect to do with the proceeds from the potential Southern timberland transaction and the Montana conservation sale.

We continue to believe there is a significant disconnect between the private market value of timberlands and the public market value reflected in our stock price. We believe this transaction will provide us with an opportunity to capture some of this value difference. We would expect to use 50% of the proceeds from these transactions to permanently reduce debt. We would likely use the remaining proceeds to acquire attractively priced timberlands through the repurchase of our own stock.

We also continue to evaluate other timberlands that come to market. As a management team, we understand that our job is to uncover and invest in opportunities that create excess returns for our shareholders. We've recently found two smaller opportunities with a combined value of approximately $50 million. We expect to close on these acquisitions before the end of the third quarter.

Markets remain challenging, and we don't expect that characterization to change much in the coming months. We are in excellent position with a strong balance sheet, good cash flow and an unmatched asset base. As a result, we have the financial and operational flexibility to continue to make long-term value decisions that grow the per share value of the company.

Michelle, we'll now open it up for questions.

Question And Answer

Operator

[Operator Instructions]. And your first question comes from the line of Hamzah Mazari.

Hamzah Mazari - Credit Suisse

Yes, thank you. Just a couple of questions. I am curious to see if there is a particular debt to GAAP or debt to enterprise value target you guys are comfortable with, at which point you probably won't pay down further debt.

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

Our position right now is pretty strong. Our debt to enterprise value at kind of our current share price is about 25%. And we believe that in this environment at stronger balance sheet we'll just endure and nurture the benefit of our shareholders. So we would anticipate paying down with proceeds, from this about 50% of the proceeds go to debt pay-down. At that point, we'd really look at it on a transaction-by-transaction basis.

Rick R. Holley - President and Chief Executive Officer

But the target to the extent we have one is to keep our debt to enterprise value below 35%.

Hamzah Mazari - Credit Suisse

Okay, got you. One other question, are you guys bringing down your guidance for real estate development sales? At the end of last year, at Q4 '07 you were expecting $25 million to $35 million of development sales. At Q1, I don't think there was any update at that guidance as I recall. And now you expect about $10 million to $15 million in real estate development sales. Is that just a function of timing or is that any incremental weakness you're seeing in that market?

Rick R. Holley - President and Chief Executive Officer

It's really more of the incremental weakness in that market. As you look at the rural real estate market generally, the higher end properties and development properties, there's just not a strong market there for those things right now. So we've chosen to do is just delay many of those projects. We're going to work on entitlements, on many of the development projects and get them ready for when the market recovers, which could be two or three years into the future.

Hamzah Mazari - Credit Suisse

Okay.

Rick R. Holley - President and Chief Executive Officer

So, it's just really the fact that the market is not very strong right now. And we clearly don't want to take these high value properties and sell them into a weak market.

Hamzah Mazari - Credit Suisse

Understood, one last question. Have you guys attempted to quantify the long-term benefit that you may see? I know there are a lot of moving parts from the mountain pine beetle. I know it's a long way off but --

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

Yes, well the long-term benefits clearly with the mountain pine beetle epidemic in Canada and British Columbia impacting some 70 million acres, the harvest which have been accelerated in British Columbia to try to capture that value before all those trees are well, dead and decayed, they've accelerated the harvest. That harvest is going to come down over the next three to five years. And clearly, that will impact the ability of the Canadian lumber manufacturers to produce product and bring it in to the U.S. market. So, at the same time the U.S. market hopefully recovers, U.S. lumber mill should be more competitive in the prices for logs that we sell to those lumber mills should be higher given the supply/demand situation. So we haven't quantified but clearly there should be some upside in the future.

Hamzah Mazari - Credit Suisse

Okay. Got you, thank you very much.

Operator

Your next question comes from the line of Ross Gilardi.

Ross Gilardi - Merrill Lynch

Good afternoon. Thanks guys. I just had a couple of questions. Rick, the roughly $1,600 per acre you were receiving for your Montana land and the conservation transaction, what portion of this acreage would not have been considered core timberland? And can you help us with which of the five real estate buckets, this land would have resided in? Would have it been in the conservation bucket of that you had previously outlined?

Rick R. Holley - President and Chief Executive Officer

Ross, it's really going to be in all the buckets. There are some that we would have classified as recreational land in the Swan Valley with some acreage there. There are some that is non-strategic, what we call, which is the lowest category at timberlands we have. And some will clearly be core timberlands and there are some that we would categorize as conversation. So, 320,000 acres falls really on all four buckets.

Ross Gilardi - Merrill Lynch

Can you give us a rough idea as to how much would be in the core timberlands category?

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

We think that this is a landscape transaction, and I think this transaction is fairly indicative of the values throughout state across all the value buckets. We'll be able to give you greater clarification on that as we approach, consummating the transaction.

Rick R. Holley - President and Chief Executive Officer

But 320,000 acres I think it's fair to say two-thirds, 200,000 acres plus or minus would be conservation or timberland, some of the core and some would be non-strategic as well.

Ross Gilardi - Merrill Lynch

Okay, thank you. And then can you just talk a little bit more about the funding for that transaction? Just in the original press release, going back and looking at it, you seemed careful to say that the funding for the transaction would come from a variety of sources. Has that funding... while being raised at this point, do you see any risks if the funds are not raised?

Rick R. Holley - President and Chief Executive Officer

Well the fund is coming, from what we understand... of course, we're not raising the money but from really three sources. One, as you know in the Farm Bill there was a conservation bond that allows funding for transactions like this. And clearly the buyers will apply for funds under that and hope to fund a major portion of it through that conservation bond. So, some of that will come from federal sources.

They also hope that the state of Montana and the state of Montana's interest in... will also participate in the funding for up to $100 million of the transaction. And the balance will be raised from private sources that The Nature Conservancy and The Trust for Public Lands tapped into similar transactions. In our experience with The Nature Conservancy and we've done several transactions is, as they always close. They're often put together like this in phases to allow time to raise the money and we're fine with that and it helps them. So we still have a high expectation that this, in fact, will close over the three-year period of time as scheduled.

Ross Gilardi - Merrill Lynch

Okay. And then Rick, you alluded in your closing comments, just about opportunities in the conservation area. More broadly, I mean, do you think this transaction is going to serve as a blueprint for other states to do similar things?

Rick R. Holley - President and Chief Executive Officer

Yes I think so. I mean it's difficult times in a lot of these states and certainly with federal funding. But I think with time, as many of these states start to improve their own funding sources and clear [ph] the federal government when we don't have to pay for other activities that we are involved in today, there will be more funding for conservation. And I think this kind of transaction, I think, sends a positive message across United States of ways to work together and conserve lands. And historically, the state of Florida has had a lot of money allocated towards conservation, and I think you're going to see that continue around the country. And we'll participate whenever we can because it's good for us as well.

Ross Gilardi - Merrill Lynch

Okay, thank you.

Rick R. Holley - President and Chief Executive Officer

Thanks Ross.

Operator

Your next question comes from the line of Gail Glazerman.

Gail Glazerman - UBS

Can you talk a little bit about the cost pressures you may or may not have seen in the quarter, and I guess what you would expect moving into the second half?

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

Yes, we have seen higher fuel costs. So when we look at kind of a log and haul cost on a year-over-year basis for the quarter, fuel cost probably contributed about $10 million higher cost alone. Diesel fuel is running at about $4.38 a gallon for the quarter, compared to $2.77 a gallon in the year prior. So it's up about 60%.

Gail Glazerman - UBS

Okay. And I mean just taking down into the Real Estate. When you think about either by geography or by various buckets, have there been any changes in market interest in land or other than this shift to kind of lower mix, really nothing to report?

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

It's more of a shift. If you look at some of our higher value regions such as the Atlantic South, Georgia and the Carolinas, the prices we've received in this first half of this year are identical to what we've got in the first half of last year or even back at the levels they were in 2006. We've even expanded some of our activity. And so, you see some of those things happening. We have increased as the HBU component has grown. We have more sales in lower value regions such as Wisconsin, where those per acre values might be 15 to 2000 an acre. So it's clearly below the average of the group. But the sales have increased there. It's dragged down the average a little bit. And also places in the Gulf South. We did see some lower levels of activity in Montana compared to earlier years in those typically with some higher value acre sales.

Rick R. Holley - President and Chief Executive Officer

And clearly this conversation transaction we are doing in Montana currently, some of the lands particularly in the Swan Valley, are some very valuable lands that will be part of this transaction, not a lot of acres but highly valuable. And they would have otherwise perhaps been in some of our real estate sales for the year. But given the fact that we've been working on that they were really... the activity was decreased. But the only market that seems to have slowed greatly is really the high end of the most valuable properties in Montana. And clearly given the desire for lands there, we think that will come back over the next couple of years.

Gail Glazerman - UBS

Okay. I'm just wondering if you could talk about the Southern pulpwood market a little bit any more details. Someone else talked about seeing a little signs of... some sort of signs of weakness there. I don't know if it's anything just seasonal or something more than that. Have there been any changes from what you can see?

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

Our average prices for the quarter were close to what we experienced in the first quarter. We had higher harvest volumes to take advantage of that, and we think we're going to be able to hold these prices for the next couple of quarters. It's been a very strong market as saw mill production has been reduced and their residual per chip production has kind of put pressure on pulpwood value. So it's been a good market for us.

Gail Glazerman - UBS

Okay. So then no real changes on. Okay thank you.

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

Thank you

Operator

Your next question comes from the line of George Staphos.

George Staphos - Banc of America Securities

Congratulations on the quarter. I just wanted to piggyback, first off, maybe Gail's question. You mentioned that the demand for pulpwood in the South surprised you, obviously, surprised your model and that you're now projecting a couple hundred thousand tons or so lower sequentially in the third quarter... second quarter, if I heard you correctly on the call. What are you currently seeing though in terms of demand trends? Are demand trends better than what's better in your guidance so far in pulpwood in the South?

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

No, I think they'll be kind of in line with our guidance. So in the summer pulpwood volumes typically are easier to procure. You have some drier weather and such. And so we just took advantage of the markets on a seasonal basis and we thought we'd get the excellent pricing.

Rick R. Holley - President and Chief Executive Officer

So George, some of the lighter volume you are going to see in the third quarter. That's because we took it in the second quarter seeing these higher prices that were holding up. Again we think prices are going to continue to hold up. And to the extent that they improve over time, we'll continue to look to maximize the value by bringing that product to market.

George Staphos - Banc of America Securities

Okay. And if we try to sell logs in the South, pricing you mentioned was a little bit worse than you had anticipated in 2Q, obviously deferring harvest of some of your larger trees. But why should we... or what gives you the confidence that price mix won't drop more than $1 per ton going into the third quarter? Obviously you don't see huge volatility. And related question, what type of demand are you seeing again early in the third quarter for your more valuable logs?

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

We're projecting the market prices of Southern sawlogs to remain relatively firm. We did indicate that we would expect our average sales realization to decline about a buck a ton as the harvest reduction is on some of the larger more valuable logs. And we haven't seen anything happen yet this quarter that would change that point of view. Lumber prices have been ticking up a little bit over the last three weeks. They still remain in a better level than they were in the first quarter overall, and housing starts have not turned the corner. So we're kind of caught up in a little bit of a rut, but this is still a better situation for lumber prices than we saw in the first quarter.

George Staphos - Banc of America Securities

And maybe summarizing to, as long as we see this seasonal bounce in lumber hold more or less that should give us more or less confidence in the guidance on pricing mix and from your standpoint as well in the quarter?

Rick R. Holley - President and Chief Executive Officer

That's correct.

George Staphos - Banc of America Securities

Anything last quarter, I'll turn over, anything we should be expecting on harvest cost in the South for the third quarter, I think you mentioned for the Northern Resources, but what about the South end, we should be projecting going forward?

Rick R. Holley - President and Chief Executive Officer

I think the harvest costs should be about the same as they were this last quarter, and let's just all pray the diesel fuel costs don't keep going up.

George Staphos - Banc of America Securities

Okay, fair enough. Thank you.

Operator

Your next question comes from the line of Richard Skidmore.

Richard Skidmore - Goldman Sachs

Good afternoon. Just one question for you Rick. As you look at the closures that are occurring throughout the wood products industry, you're seeing many of those closures happen in your wood baskets and as such some of that timber may be absent the customer when the market does return?

Rick R. Holley - President and Chief Executive Officer

And not really Rich, the closures have been kind of evenly spread across both the Southern and certainly Western United States. And we haven't had any single large impact at any operating region by any one customer or anything. So we've been pretty fortunate that customers like Georgia-Pacific and others who we've supplied a lot of wood to, are pretty good producers. And therefore they have kept their costs in line and continue to run, but we've not had any huge impact from anybody shutting down as of yet.

Richard Skidmore - Goldman Sachs

Okay.

Rick R. Holley - President and Chief Executive Officer

And we don't expect it.

Richard Skidmore - Goldman Sachs

And can you just talk about, as you look to the land sales over the next 6 to 12 months, which regions you'd expect to see those in? Are you expecting that the U.S. South will be sort of the heavy weighed or heavier weighed than what you've seen in the past?

Rick R. Holley - President and Chief Executive Officer

I think the demand for such products is still good in kind of the Southwest like Mississippi area. I think Georgia has done much better than we expected. The supply demand situation for land has improved there. So I would expect to see that stay pretty good. Florida may start to perk up a little bit and at least over the next 18 months we'll probably see some improvement in Montana as well.

Richard Skidmore - Goldman Sachs

Thank you.

Rick R. Holley - President and Chief Executive Officer

Wisconsin is always good.

Richard Skidmore - Goldman Sachs

Thanks.

Operator

Your next question comes from the line of Christopher Chun.

Christopher Chun - Deutsche Bank Securities

Yes, thanks, good afternoon guys.

Rick R. Holley - President and Chief Executive Officer

Good afternoon.

Christopher Chun - Deutsche Bank Securities

Hi, I was just wondering if you could tell us what the likely tax consequences are from the Montana sale.

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

There shouldn't be any tax consequences from that transaction, that's all historical Plum Creek timberlands. And there will be no income tax associated with the transaction.

Christopher Chun - Deutsche Bank Securities

Okay, how about from the prospective sale of the big log down in the U.S. South?

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

That transaction will be structured such that it will not trigger taxes either.

Christopher Chun - Deutsche Bank Securities

So substantially all of the sales price should be realized as cash to the company?

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

Yes.

Christopher Chun - Deutsche Bank Securities

Okay. David, can you talk a little bit more about what the other part of the income tax benefit was in the quarter?

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

Well, we had a positive income contribution from the tax of about $8 million; $4 million of that was from the write-offs as we discussed. We had lower manufacturing results generally that contributed to that. And we also had an accrual change from prior year audits on income taxes that helped about $2 million.

Christopher Chun - Deutsche Bank Securities

Okay, very good. And then I saw that you had a pretty solid per acre price on the development acreage this quarter. Can you tell us where that was?

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

Well, we had about 9 retail lot sales that were scattered in our normal states of Georgia, Wisconsin and Montana. We had one parcel down in Georgia, 60 acre commercial property that brought a really strong value as well.

Christopher Chun - Deutsche Bank Securities

Okay. How much was the value of that particular commercial parcel?

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

That was a strong value; that had approached $60,000 per acre.

Christopher Chun - Deutsche Bank Securities

Okay. And then my last question has to do with your harvest volume. You mentioned that you were going to hold back the sale of some of your largest diameter most valuable trees in the South in the second half. But I guess I am wondering to what extent there might be opportunity to benefit the company by holding back even more on the sale of some of your largest trees. Like how do we decide what the right amount is to sell in this market?

Rick R. Holley - President and Chief Executive Officer

Chris, what we do is we ask all of our operating managers to look in each one of their regions and what's happening to the marketplace. And we've seen weakness for these large diameter sawlog, which obviously are very, very valuable. And the weakness in those... in that has been disproportionate. So we pulled that product off the market.

We've also instructed all of our operating managers, to the extent they see continued weakness in any one of these markets to let us know, and we will, in fact, pull more wood off the market. So we are really doing it from a value perspective. If the values hold up we'll continue to deliver wood in the market. If values didn't fall off any more, we will pull more wood off the market.

Christopher Chun - Deutsche Bank Securities

Okay, thanks Rick. I will go ahead and turn it over.

Rick R. Holley - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Chip Dillon.

Chip Dillon - Citigroup

My first question is did you give us... and I might have just missed this... as an indication as to what you think the Southern sawlog realizations might do in the third quarter? I know you're cutting back on your harvest versus the second.

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

Yes they'll be down a bucket ton compared to our second quarter experience and that's based primarily on mix rather than market.

Chip Dillon - Citigroup

Okay. And then, looking at the... given that more and more of the cash flow, it seems like that the business is actually coming from large sales which of course makes sense given the disconnect Rick mentioned. How does that make you think about the dividend? Is that something that would make you more likely just sort to maintain at the current level or could the reduced debt prompt you to maybe consider an increase in the next year?

Rick R. Holley - President and Chief Executive Officer

Well, look, clearly we will... one of our focuses in this company is to continue to sustain and grow that dividend. So, the extent we see markets improving clearly with reduced debt levels that will help cash flow, if we buy stock back. That certainly helps decrease a burden that we have, which is to share the dividend on our shares we repurchase. And if as we see markets improve, we will focus again on, in growing the dividend, because that is something we think it's very important to shareholders.

Chip Dillon - Citigroup

And did I hear you correctly say that the land sale in Montana that takes place over three phases, that would actually be tax free, there is no either... I guess it would be tax free to corporation [ph] but will the visual distribution of that be taxed as capital gain income, well I mean taxed to the holders of the units?

Rick R. Holley - President and Chief Executive Officer

Yes so it will just be run through in tax as capital gains income to our shareholders when they get their dividend. So their dividend will have... their 10.99 will have long-term capital gains income from those sales.

Chip Dillon - Citigroup

And so, both that transaction and the potential transactions for the 430,000 acres might not really require you or put you in a position where you need to do a lot of 10.31 purchases to offset gains?

Rick R. Holley - President and Chief Executive Officer

We expect to do... have to do no 10.31 purchases to offset gains.

Chip Dillon - Citigroup

Got you. Thank you.

Operator

Your next question comes from the line of Mark Winthrop [ph]

Unidentified Analyst

Given the expense that you're continuing to see in that timberland valuations et cetera, assuming that the Southern sale goes very well, is there any potential that you would look to have follow-on transactions? Or is there something exceptional about the 450,000 acres that you identified this quarter around?

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

I think the 450,000 acres is a good cross-section of our Southern timberland holdings. It's a very attractive package to an institutional buyer. That's how we put it together. But what we are trying to do is close that value gap. And so we think this is a way to go do that by selling these lands at attractive prices and paying down debt and buying stock back. And if it doesn't close the value gap, we will do it again and again and again. So we will continue to do this, to really close that value gap because we think that's a way to deliver value to shareholders. So selling something that, if you look at the value of these timberlands in the marketplace, at a much higher level than the stock is trading at, so to sell at that price and buy our stock back at a much... at a deep discount is the right thing to do and we'll keep doing it.

Unidentified Analyst

And curiosity... a competitor of yours on their call when they were assessing the values that were being paid for Southern properties estimated that dirt values were being put at about $1000 an acre. And I don't know if you have... if you are willing to share but if you do, what do you... would you agree with that? Or do you have a different perspective?

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

It all depends. You'll get a good sense when we are able to announce the results for our transaction. But we think we'll be getting very strong values and there is a lot of value being recognized. It's not just the value of growing trees but the alternative uses of the lands.

Rick R. Holley - President and Chief Executive Officer

One of the things, Mark, I think historically investors who look at Southern timberlands or even other timberlands in other regions and put kind of a rogered [ph] value of $2 to $500 an acre and I think they've realized that the values that dirt is at a much level than that. So that's probably what's certainly helped investors see much higher value in buying timberlands than maybe you saw five years ago.

Unidentified Analyst

And do you have... what are the drivers for that higher dirt value in your opinion and what are the most important variables that they have --

Rick R. Holley - President and Chief Executive Officer

Alternative future uses. Different types of land use. One of the things we talked about in the past is bio-energy, cellulosic ethanol, or different uses of the land, in some cases sub-surface rights available and you have sand and gravel opportunities. So I think people are looking at only in an acre of land as not only the value they see today but values that may come along in the future. So I think that's why that one acre of dirt is certainly worth more, and it's a finite commodity.

Unidentified Analyst

Okay. And then one last thing, as we are talking about minerals et cetera and you had indicated there was another property that you were going to take advantage of. At these types of oil and natural gas prices, do you have any ballpark you could give us regarding how much additional opportunity you might have in your portfolio?

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

Now that's something we'll need to share with you in the future. We are going through the whole portfolio right now. We are looking at properties that we have in a come-off lease, that are expected to come off lease. We have our properties that are not leased and really try to get our hands around what the total opportunity just from a hydrocarbon standpoint. So, now hopefully that's something when we get together in New York in November, we'll have more information we can share with you.

Unidentified Analyst

I appreciate it. Thank you.

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

Okay. Thank you.

Operator

Your next question comes from the line of Steve Chercover.

Steven Chercover - D. A. Davidson & Co.

Thank you. I have three quick questions please. First of all, when you sell land, are you going to try and retain the sub-surface rights?

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

That depends on a sale-by-sale basis. If you're talking about the large transaction, I'll have to get back to you on that one.

Rick R. Holley - President and Chief Executive Officer

On the Montana lands, largely those were bought from Burlington Resources back when we went public in 1989. And they retained the sub-surface rights. And we have the surface rights which are rock, sand and gravel. But any oil and gas that might be in Montana we are not sure there is any, that they retain those rights.

Steven Chercover - D. A. Davidson & Co.

Thanks for that clarification. And switching gears with respect to the charge on the lumber assets, what's behind that? Is it just lower future cash flows? Is there any possibility that we are going to see some shuts there?

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

I think that is just looking forward at some lower expected cash flows based on the deepness and severity of the cycle that we are seeing. And we've just had to mark them down to kind of a market value.

Rick R. Holley - President and Chief Executive Officer

And again Steve, as you probably know, we need to go through an analysis of future value, net present value of future cash flows from those operations. And in any case, where the cash flows are less than the book value, you write down the difference and that's what this represents.

Steven Chercover - D. A. Davidson & Co.

But I think part of your reason for maintaining the operating the assets in Montana is really to make sure that your... that it's an inefficient market in that because it's not a very deep market.

Rick R. Holley - President and Chief Executive Officer

Right.

Steven Chercover - D. A. Davidson & Co.

That hasn't changed.

Rick R. Holley - President and Chief Executive Officer

Yes no, that hasn't changed. And again in Montana, those mill assets are very strategic to the value of our timberlands and our land assets there. So I think to the extent that it's strategically important to us but we're going to have to continue to look at our lumber operations. And if to improve their financial capabilities we have to consolidate operations there, we'll look at doing that. But right now we'll still run them as we currently haven't configured but it's some we look at all the time.

Steven Chercover - D. A. Davidson & Co.

But the transaction, the conservation transaction hasn't changed their status as an integral part of the business.

Rick R. Holley - President and Chief Executive Officer

No, it doesn't. In fact, 70% of the lands in this conservation transaction are down in Missoula county which are south of where our mills are. And even some of the lands closer to our mills we have a 15-year fiber supply agreement as part of this transaction to provide fiber to those mills, so that will continue.

Steven Chercover - D. A. Davidson & Co.

Yes, I love that part of it, it's like having your cake and eating it too. Okay final question, could you give us any hints on what states at least what geographical regions, approximately $50 million worth of land is going to be in?

Rick R. Holley - President and Chief Executive Officer

Some in the West and some in the East.

Steven Chercover - D. A. Davidson & Co.

Okay, thanks very much.

Operator

Your next question comes from the line of Peter Ruschmeier.

Peter Ruschmeier - Lehman Brothers

Thanks, good afternoon. Couple of questions, just a follow-up on the tax implications of the sales in Montana and the south. I think you've said in the past, it's not a 10.31, it's not instatement note. If it's not either of those can you help us to better understand why there is not tax leakage?

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

With respect to the transaction in Montana that will generate taxable income at the shareholder level. With respect to the Southern transaction that would be structured so that there is a tax deferral on a current basis, so that we don't trigger any built-in gains tax. And there is not a tax at the shareholder level currently either. We'll give more details when we are prepared to announce the transaction.

Peter Ruschmeier - Lehman Brothers

Understood, okay. And on the Southern sale, I think previously you said, you had six tracks you were preparing. But I thought you said it was one sale on the call. Can you elaborate, is it one track or multiple tracks?

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

There are six different tracks, spread out on five different states. So it is good a cross-section of our Southern ownership. But it will depend on if we end up selling them individually or if it goes to in a one bulk transaction.

Peter Ruschmeier - Lehman Brothers

Okay, it's helpful. And then you mentioned 50% of the proceeds to pay down debt, can you help us to understand the interest rate on that debt that will be exhausted?

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

Yes, we have about $300 million of private placement notes that are on our balance sheet. They will be coming due over the next twelve months. And so that's about 8.1% coupon, the balance of it is bank financing. And those rates on the bank financing are between LIBOR and 42 over and LIBOR and a 100 over. So it depends on we gets repaid.

Peter Ruschmeier - Lehman Brothers

Okay, that's helpful. Thanks. And just lastly, I think there were some headlines on some the news wires suggesting that you may be looking to sell more lands up in Washington state and Michigan. Can you elaborate on whether that's, in fact, being prepared or, any comment there would be helpful?

Rick R. Holley - President and Chief Executive Officer

Yes, we look at buying and selling lands all the time and really have no comment on what that wire said about either Michigan or Washington state.

Peter Ruschmeier - Lehman Brothers

Okay. And so just lastly if I could, can you comment, Rick, on the characteristics of the acquisitions that you're looking to make and is there something about those lands in terms of the age class distribution, and species? As you do look to potentially redeploy, what is it about the property that is attracted to Plum Creek today?

Rick R. Holley - President and Chief Executive Officer

Well, yes, on this $50 million that we mentioned on the call, the both properties are contiguous with current ownership that we have, and they are both negotiated transactions and they are both very accretive to value for our shareholders. So ones that are very attractive to us and will be attractive to shareholders. It's only $50 million, but nevertheless, it has some value.

Peter Ruschmeier - Lehman Brothers

Super. Thanks and congratulations.

Rick R. Holley - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Richard Peoli [ph].

Unidentified Analyst

Jus one quick follow up on the taxes. This is going to be such a hot button but, first, I think, I'm not sure, I caught what you said the piece in the previous question. The transaction that's being contemplated for the Southern parcels, you don't think there are any capital gains implications there. I know you can't go into more detail but just the big picture?

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

Nothing will be realized at this time.

Unidentified Analyst

Was that, nothing could... should be realized?

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

Nothing will be realized at this time.

Unidentified Analyst

And why... remind me of that, why is that the case for the legacy ownership of it?

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

No, this was former timber company property that we're structuring the transaction in a way that we will not trigger gain.

Unidentified Analyst

Okay. So those are deferred, what happens in that way?

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

Yes.

Unidentified Analyst

Okay, and then just another question on the tax, could you just remind us of the breakdown of the dividend this year, what...where that's selling to each of the buckets in terms of ordinary income and things like that?

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

Yes,we'd expect the dividend to be 100% long term capital gain.

Unidentified Analyst

100% long-term capital gain. Okay. Thank you.

Rick R. Holley - President and Chief Executive Officer

Thanks Rich.

Operator

And, at this time I am showing you have no further question.

Rick R. Holley - President and Chief Executive Officer

Well, thank you everyone and we'll talk to you on our next quarter. Enjoy the rest of your summer. Bye, bye.

Operator

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

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Source: Plum Creek Timber Company, Inc. Q2 2008 Earnings Call Transcript
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