SEATTLE Jul 28, 2015 (Thomson StreetEvents) -- Edited Transcript of Plum Creek Timber Company Inc earnings conference call or presentation Monday, July 27, 2015 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John Hobbs Plum Creek Timber Company Inc. - VP of IR * Rick Holley Plum Creek Timber Company Inc. - CEO * David Lambert Plum Creek Timber Company Inc. - SVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Tyler Langton JPMorgan - Analyst * Anthony Pettinari Citigroup - Analyst * Gail Glazerman UBS - Analyst * Steven Chercover D.A. Davidson & Co. - Analyst * Mark Wilde BMO Capital Markets - Analyst * Marc Heilweil Spectrum Advisory Services - Analyst * Paul Quinn RBC Capital Markets - Analyst * Collin Mings Raymond James & Associates, Inc. - Analyst * Mark Weintraub Buckingham Research Group - Analyst * Chip Dillon Vertical Research Partners - Analyst * George Staphos BofA Merrill Lynch - Analyst * Alex Ovshey Goldman Sachs - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Plum Creek second quarter earnings conference call for 2015. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, John Hobbs, Vice President of Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- John Hobbs, Plum Creek Timber Company Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, Amanda. 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. Today we have on the line Rick Holley, Chief Executive Officer; and David Lambert, Senior Vice President and Chief Financial Officer. This call is open to all investors and members of the media, however, the Q&A portion of the call is intended for the professional investment community only. We ask that all 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, supplemental financial statements, and any reconciliations to non-GAAP financial measures for the second quarter of 2015. 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. Following today's prepared remarks, we will open up the call for your questions. Rick? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [3] -------------------------------------------------------------------------------- Good afternoon. Our second quarter financial results came in slightly above our guidance range. Our manufacturing and real estate segments reported better results than we had anticipated. Overall, our businesses are performing as expected in a slowly improving environment. The size and diversity of our portfolio continues to provide us with the operational flexibility to protect and grow long-term shareholder value, despite the uneven growth we've experienced. We are seeing encouraging signs in the economic data, and on the ground in our operations. Employment and consumer confidence is improving. Builder sentiment in July was at the highest levels seen in 10 years. Existing home sales were at an eight year high in June, and new home sales in June were up 18% year over year. The supply demand balance for housing is relatively tight, contributing to an acceleration in existing home price gains as reported by the National Association of Home Builders. We are encouraged by the trends, and what they say about future lumber and log demand. Although positive long-term trends are in place, lumber markets have experienced some disruption in the first half of the year. The stronger dollar has slowed US lumber and log exports, and more Canadian supply has been directed towards US markets. This, combined with slow demand growth, put pressure on lumber prices. Our customers recognize these market forces as temporary, and remain committed to their investment plans that will increase future production and log demand. We expect modest growth in the second half of the year, as domestic lumber production volumes gradually increase as some capital projects wrap up, and new production capacity comes online. Ultimately, as lumber demand continues to growth, the South will be called on to produce the additional lumber to serve North American markets. Pellet mills, especially those in the Gulf South region are working through their start-up curves, and are expected to increase their pulpwood purchases in the second half of the year and into 2016. We expect this incremental demand to add pricing tension in those local markets, as pellet production expands. David will now review the past quarter's performance, and discuss our expectations for the third quarter. David? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [4] -------------------------------------------------------------------------------- Thank you, Rick. The Northern Resource segment's $3 million operating profit was $10 million lower than the first quarter's results. Seasonally lower harvest volumes and lower sawlog prices drove the sequential decline in operating income. As expected, harvest volumes declined seasonally, and were slightly more than 700,000 tons. Northern sawlog prices declined approximately $7 per ton, or about 8% from the first quarter's level. The decline was $2 more than we had expected. West Coast export markets remain soft throughout the quarter, as domestic sawmills had no difficulty maintaining full log decks, thanks to unseasonably dry weather in the Pacific Northwest, and also reduced export log demand. Declining hardwood sawlog prices also contributed, as hardwood lumber prices have also declined. We expect our average third quarter Northern sawlog price will be stable compared to the second quarter. With extreme fire damage in many parts of the west, logging restrictions may limit the near-term timber supply. While domestic mills were well-supplied going into the third quarter, near-term log availability is emerging as a concern for western sawmillers. We have seen West Coast log prices stabilize the past few weeks, and Douglas fir prices are up a couple dollars per ton from their bottom in June. Our average pulpwood prices came in better than we had expected during the second quarter. They declined only a $1 per ton versus the $3 per ton that we initially expected. While our regional harvest mix did temporarily shift towards the lower priced West Virginia markets, the prices we achieved for pulpwood throughout our hardwood region were better than we expected. We expect to experience a rebound in Northern pulpwood prices during the third quarter, as our harvest activity shifts back towards our higher priced Northeast and Lake States markets. We expect our average pulpwood price could increase as much as $4 per ton quarter over quarter. Third quarter harvest volumes are expected to seasonally rebound to about 950,000 tons with a sawlog pulpwood mix similar to the second quarter. We continue to expect the Northern harvest volumes to be between 3.5 and 3.6 million tons in 2015. The Southern Resources $32 million operating income was $1 million higher than the first quarter's result. Harvest volumes of nearly 3.8 million tons were 4% higher than the first quarter, as we increased our harvest activity in the Gulf South region. As a result of this geographic mix shift, the Company reported slightly lower average sawlog prices during the second quarter of 2015. Pulpwood prices were stable during the second quarter, with good demand across the South. Pellet mills in the Gulf South region are continuing to work through their start-up phases, and are expected to add incremental demand in the second half of the year. Lumber mills in most markets of the South are carrying high lumber and log inventories into the third quarter. We expect that these conditions will keep prices from advancing significantly in the near-term. As a result, we expect prices for both sawlogs and pulpwood to be flat during the third quarter. Third quarter harvest volumes for the Southern Resources segment are expected to be about 4 million tons, with a sawlog pulpwood mix similar to the second quarter. We expect our full year Southern harvest to be towards the lower half of our 15.5 to 16.2 million ton target range for 2015, absent a meaningful price improvement in sawlogs. Second quarter real estate segment sales came in at $25 million at the high end of our initial expectations for the quarter. Operating income for the quarter was $11 million. Second quarter results included the sale of about 8,000 acres of recreation lands at an average sales price of $2,255 per acre, and the sale of about 6,000 acres of conservation land in Maine for $860 per acre, an attractive premium to the timber value in that region. The level of buyer interest in recreational properties has increased, and encouragingly has broadened to encompass more and more markets. Third quarter real estate sales are expected to be between $125 million and $135 million. We expect that land basis for the third quarter will be approximately 34% of sales. We expect real estate segment revenues for the year to approach $300 million. Our manufacturing segment reported operating income of $14 million, up $5 million from the first quarter. The second quarter results benefited $3 million from one-time adjustments, primarily to reflect lower workers compensation expense, and reflect the results of our excellent safety record. Profitability was higher in both our panel businesses, due to higher MDF sales volumes, and stronger plywood pricing. Lumber's results were similar to the first quarter. Going into the third quarter, we expect pricing for our specialty MDF and plywood products to remain strong, and lumber prices to increase from their second quarter lows. Commodity lumber prices bottomed in May. July average prices have rebounded, and are a little over 10% higher than the May average. Production volumes in each of our manufacturing businesses should be similar to the second quarter. Overall, our manufacturing segment should complete another very profitable year, as specialty panel markets remain strong and lumber prices have come off the low levels we saw earlier this year. Operating income from the energy and natural resource segment was $5 million, similar to the first quarter result. Energy commodity prices remain under pressure on excess domestic and global supply. Results from our construction material assets continue to perform in line with our estimates. We continue to expect that the segment's adjusted EBITDA will be about $30 million in 2015. Looking below the line, the third-party interest expense for the third quarter is expected to be $27 million, unchanged from the second quarter. Tax expense is expected to be $3 million in the third quarter, and about $6 million for the year. Total capital expenditures during the quarter were $24 million. We continue to expect ongoing capital expenditures for all business segments to be around $90 million for 2015. Our balance sheet remains strong. With a 4% cost of debt and $675 million of liquidity, we remain well-positioned to meet our commitments to our shareholders and grow the business. Rick? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [5] -------------------------------------------------------------------------------- In mid May, we received favorable news associated with our real estate joint venture in and around Charleston, South Carolina. Volvo announced its plans to site its first North American production facility on lands we own in a joint venture with WestRock, formerly MeadWestvaco,. Plum Creek owns a 50% interest in the site, and received $16 million in cash when the transaction closed in early July. The transaction is expected to contribute about $0.02 per share to our third quarter results, and is included in the guidance for the quarter. This transaction has important follow-on benefits to Plum Creek as well. The new plant is an obvious economic growth catalyst for the Charleston area, and bodes well for the volume of joint venture and fee ownership lands that we own in the region. To satisfy the environmental mitigation requirements for development, Volvo will be acquiring approximately 2,000 acres of conservation lands from Plum Creek in the region for approximately $6 million. This transaction is expected to close within the next six months. Improving the value and productivity of our timber land portfolio is a key component of long-term value creation at Plum Creek. As we discussed at Investor Day earlier this year, we've been successful in improving the overall value of our timberland portfolio through the identification and sale of non-strategic lands, and the acquisition of superior and higher productivity lands. As we've mentioned in our prior calls, our 2015 real estate plans and guidance call for the disposition of approximately $100 million of non-strategic land. Any 2015 sales of this type will not have an impact on our long-term harvest projections, since these lands have not been included in our harvest planning for some time. The proceeds from this transaction will be part of our capital allocation strategy to enhance long-term shareholder value. Effective capital allocation remains job one at Plum Creek. During the second quarter, we repurchased approximately $31 million of the Company stock, acquiring more than 750,000 shares at an average price of $41.16 per share. In 2015, we have now repurchased over $50 million of our stock. We view this as an attractive arbitrage, effectively purchasing our timber lands as a significant discount to their current market value. As we outlined on Investor day, we believe that our Southern timber lane portfolio is worth more than $2,100 per acre in today's market, given its characteristics and productivity. We continue to evaluate all our of capital allocation alternatives, with the goal of growing the value of our Company on a per share basis. Now we'll open it up for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Tyler Langton, JPMorgan. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- Good afternoon. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [3] -------------------------------------------------------------------------------- Good afternoon. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- Thanks for taking my questions. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [5] -------------------------------------------------------------------------------- Good afternoon. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- I just had a question on the northern sawlog prices. I guess, your realized price was down around $7 a ton. Could you talk a little bit about the price drop on the West Coast verse the hardwood regions? And I think, David, you mentioned that prices were stabilizing on the West Coast. Can you just talk a little bit about maybe what's driving that? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [7] -------------------------------------------------------------------------------- Yes, we have seen on a year-to-date basis, export shipments to China are off almost 50% on logs. We've seen lower lumber prices that impacted the mill margins on the West Coast. So you just have excess log availability. We had a favorable logging season early in the year with dry weather. That's making things difficult now. But we've been relatively over-supplied and made the prices come down. So I think it's just as fundamental as that. Because as we see inventories in China re-balance, and we see some improvement, we would expect those to get mitigated over time. In the hardwood region, lumber prices are off a little bit in that space as well. And we saw a drop in the hardwood sawlog prices that have reflected that as well. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [8] -------------------------------------------------------------------------------- Thanks, David. And just for the land sales, of the recreation land sales I think we're at $2,255. Are those regions, I guess, was that spread throughout the regular lands in any certain region? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [9] -------------------------------------------------------------------------------- Yes, that's spread throughout all of our areas. So there's some areas where they're lower value regions, and the price is well below that, reflecting that, and other areas where we're capturing well in excess of that price. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [10] -------------------------------------------------------------------------------- Got it, okay. And last question in terms of capital allocation. Is there a preference right now, given what the stock is versus buying back shares, any of the debt repayments potentially coming up? Just any thoughts there would be great. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [11] -------------------------------------------------------------------------------- Yes, Tyler. I think we're going to look at both, clearly where the shares have been trading, we'll allocate capital to buying shares back, as we did in the second quarter, and we will in third quarter as well at these levels. And we have a debt -- a bond due in third quarter. And certainly we take proceeds from transactions and look to a term loan. Probably do a bond and pay some of the it down as well. So a combination of all three. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [12] -------------------------------------------------------------------------------- That's in November. -------------------------------------------------------------------------------- Tyler Langton, JPMorgan - Analyst [13] -------------------------------------------------------------------------------- Okay, great. Thanks. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Anthony Pettinari, Citi. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [15] -------------------------------------------------------------------------------- Good afternoon. During the quarter there was some discussion on Calpers looking to trim its exposure to timberlands. And given, Southern's sawlog price recovery disappointing, relative to expectations at the beginning of the year -- for another year. Are you seeing any kind of difference in institutional interest for timberlands or maybe the level of price for land especially in the south. I wondered if you could update us on what kind of level of interest you're seeing in the market, and the transactions you're seeing? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [16] -------------------------------------------------------------------------------- Anthony, I think the level of interest from an institutional standpoint continues to be very high, whether it's in the Pacific Northwest or the South for timberlands. I think most of the institutions, again they're long-term owners. They see -- they're seeing as we are, that there will be a recovery in the market, especially in the US South. And we should see much higher prices in the future as we see the US economy, housing, and production levels recover to pre-recession levels. So I think there's continued to be a high level of interest. I think Calpers is going through their entire portfolio and try to trim costs and other things. They have been more than a bit disappointed in some of their timber investments of late, I think they've decided with those, as they have with many investments they've made, that they are just going to exit. I think their focus and maybe actions are quite different from what we see amongst any of the other institutions. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [17] -------------------------------------------------------------------------------- Okay. That's helpful. And then just following up on the mobile agreement. Your referenced I think $15 million in cash that you received in July, and then $6 million expected to close within the next six months. Is that the kind of totality of the cash flow that you expect this year or into 2016? And is it -- you talked about follow-on benefits for Charleston and maybe some of your adjacent lands. Can you just give a little bit of color there? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [18] -------------------------------------------------------------------------------- Yes, again, we have the Joint Venture two as we call it with WestRock formerly MeadWestvaco, and we're going to get proceeds of $16 million. So the total transaction with Volvo was a little over $6,000 an acre, $32 million on 5,400 acres. And then the follow-on, the 2,000 acres of mitigation, that's is Plum Creek fee land. So that -- those proceeds are all to our account. Those aren't joint venture lands. So I think with people like Volvo coming into that marketplace. You've seen Boeing come into the Charleston area, and I think just the general economic activity going there, we would think that both fee lands that we own, as well as joint venture lands will continue to benefit both in acres sold, but also, price appreciation on those acres. So we feel positive about those activities. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [19] -------------------------------------------------------------------------------- Okay. That's helpful. And then, just one last follow-up, regarding Southern saw timber prices. I mean, I guess in the beginning of the year, Atlantic prices were stronger than what you saw in the Gulf. Has that continued into 2Q and 3Q? Are you seeing any change in that pattern? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [20] -------------------------------------------------------------------------------- That's really continued, that's why David said, even though our sawlog price in the South, we're down net a $1, they really were pretty flat quarter-over-quarter. And that's due, that we had a higher volume in the Gulf South where prices are lower than they are in the Atlantic South. We continue to see that differentiation. We think over time as markets improve, a lot of that production capacity will come in the Gulf South, and we should see prices there improve at a more rapid rate than in the Atlantic South. But there is still that spread even in this quarter, and we expect that spread to really be the same in the third quarter. And if anything, maybe in the fourth quarter because a lot of capital being spent was in the Gulf South. And maybe we see the Gulf South advance at a higher rate. -------------------------------------------------------------------------------- Anthony Pettinari, Citigroup - Analyst [21] -------------------------------------------------------------------------------- Okay. That's helpful. I'll turn it over. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [22] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Gail Glazerman, UBS. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [24] -------------------------------------------------------------------------------- Thank you. Good afternoon. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [25] -------------------------------------------------------------------------------- Hi, Gail. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [26] -------------------------------------------------------------------------------- Maybe just on the last comments on Southern pricing. I guess, Timber Mart-South showed a bit of a decline in overall Southern pricing, which I would presume wouldn't have really been mix adjusted What do you think drove that? Was that just the weather shift, man shift, anything? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [27] -------------------------------------------------------------------------------- Well, I think from a seasonality standpoint. Southern logging, typically it's drier at this time of year, and you have the most pricing tension in the winter weather months. So this is typical to see a little bit of easing from that standpoint. We didn't really experience that from our perspective. We pretty much just had flat pricing on our per region basis. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [28] -------------------------------------------------------------------------------- Okay. And in terms of the fire activity and fears in the west. Is it more psychological, or are you seeing greater restrictions and curtailments than normal? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [29] -------------------------------------------------------------------------------- Well, it's very dry out here which all of you are certainly aware of. At least on Plum Creek lands, and knock on wood here, we've not had any fires. And there's not been any really serious fires in either in Montana or in the state of Oregon where we have lands. But both are on what they call, hoot owl, which means you have to be out of the woods by 1:00. So everyone is taking precautions, so that we certainly don't get any one of our activities by contractors causing any these fires. But we had a little rain here on the West Coast the last few days, and maybe that will help a bit. But we're just going to cross our fingers, because its going to be a dry summer. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [30] -------------------------------------------------------------------------------- Can you give some perspective on where you think Chinese demand and inventories are currently? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [31] -------------------------------------------------------------------------------- Well, the most recent data is that inventories are kind of 4-, 4.1-, 4.2-million cubic meters, a little -- still higher than they like. Their activity here recently, for lumber picked up a bit. Canadian lumber exports to China were better this last quarter, than they were in the first quarter so. But as you've seen, the Chinese GDP is going to be less than 7%, and they're doing all kinds of things to try to improve their situation there. But it's really uncertain right now, and I think that year is going to be ebbs and flow, and ups and down. At the same time, big competitors are both New Zealand and Russia, and given the currency shifts, Russian logs and lumber are much cheaper now than they were. And New Zealand logs are cheaper, and they have a transportation advantage. So in this market, I think to the extent they can, that the Chinese will buy more from those particular outlets, and less from North America. But over the long-term, they need to buy from North America, both logs and lumber be it from the US or Canada. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [32] -------------------------------------------------------------------------------- Okay. And switching to manufacturing for a minute, was there any mix issue in lumber, or is that legitimately the quarter over quarter kind of market decline on pricing. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [33] -------------------------------------------------------------------------------- I think there is a little bit of mix issue for our Company compared to our competitors. We have a board -- a pine board mill, and those prices don't go with more the structural prices go. I think if you look at our manufacturing results as a whole, people might be surprised that are flat to up, where generally that was a space that having some downwards pressure. But we tend to have really specialty grade products that have helped insulate us. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [34] -------------------------------------------------------------------------------- Okay. And just last question, I kind of again, touching on something asked earlier, in terms of land available in the market, it's not just Calpers, it's -- there's the Foley land, [Mulpas] lands. Do you feel like there is kind of an incremental supply of timberland on the market or are they getting maybe a little bit more headlines than they normally would at this stage? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [35] -------------------------------------------------------------------------------- The Foley land has been on the market for several months now, and doesn't appear to be a lot of activity, and part of it has to do with the quality there, and just not of interest to people. And the Calper's land that they've had a little challenge because of the supply agreement and other constraints. We just heard as you did, about the Mulpas, bringing 50,000 acres in the southern United States in the market, and I suspect depending on the quality, that will get a lot of attention. So you kind of see these 50,000 acre things in the market from time and again, and I think you're going to continue to see that. And a lot that has to do with the timing of some of the investments these people made with the TIMOs, and they are coming up for renewal. And it's just time to take them to market, or maybe a client wants some current yield or something. And so, they take some of these lands to the market, and we see that all the time. So that's not unusual, and I think you'll continue to see that this year and next. -------------------------------------------------------------------------------- Gail Glazerman, UBS - Analyst [36] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [37] -------------------------------------------------------------------------------- Thanks, Gail. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Steve Chercover, D.A. Davidson. -------------------------------------------------------------------------------- Steven Chercover, D.A. Davidson & Co. - Analyst [39] -------------------------------------------------------------------------------- Thanks, good afternoon, everyone. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [40] -------------------------------------------------------------------------------- Good afternoon. -------------------------------------------------------------------------------- Steven Chercover, D.A. Davidson & Co. - Analyst [41] -------------------------------------------------------------------------------- It struck me that the decline in the lumber realizations were extraordinary, I mean, more than a $100 So did you change grades from specialty to commodity during the quarter? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [42] -------------------------------------------------------------------------------- Not necessarily. We had -- did shut down our remanufacturing mill that was in Idaho in the first quarter. That does, by the time they process it and have that extra thing, that probably boosts some of our pricing, and that probably accounts for a portion of that decline in lumber prices. As you can see, it didn't really translate into kind of the bottom line per se. I mean, we were under pressure. Lumber prices were definitely lower, and the prices were lower out of our facilities, but there was a mix impact from the re-man facility. -------------------------------------------------------------------------------- Steven Chercover, D.A. Davidson & Co. - Analyst [43] -------------------------------------------------------------------------------- I think the re-man must be the answer. Because as you said, that if the profit on the segment was unchanged, and your pricing went from what -- you never had a price below $500 last year, and here you were closer to $400. So okay, it must be the re-man. Okay. And then, I was also surprised to see that China's lumber and logs exports were up in the first six months despite the weak first quarter. So it's mainly logs as opposed to lumber. You already alluded to currency. Is there anything you guys can do to regain access? I mean, could you use China as an outlet for lumber, or are you too far from the market, given that you're east side of the Cascades? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [44] -------------------------------------------------------------------------------- Yes, we're too far from the market. The West Coast mills will serve that, and more importantly, the Canadian mills which have served -- they have a tremendous amount of volume that goes to China. So I think that's where that volume will go. The volume that we have in Montana -- Dave mentioned a portion of it is pine boards, that will go largely to home centers and retailers. And then, we have the stud mill in Kalispell, and that product goes into Texas and some of the distributors, but really goes into more of the Texas market, kind of midwest. Not to the coast, and certainly not to offshore. We just need lumber to go from anywhere in the United States or Canada to offshore. Because again, it helps -- we don't have to serve the market. But the fact that somebody is serving, helps everybody. -------------------------------------------------------------------------------- Steven Chercover, D.A. Davidson & Co. - Analyst [45] -------------------------------------------------------------------------------- And kind of parlaying the color you have given us on these responses, the Softwood Lumber Treaty is going to expire in October, and I don't want to put words in your mouth. But I think you said that it served its purpose earlier this year. Is that still the case? Or have you changed your stance at all? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [46] -------------------------------------------------------------------------------- I think it's served its purpose. We would be fine, Plum Creek would just extend the current softwood lumber agreements in place. We don't see the need to go back to our government and the Canadian government, get them involved and try to create something new. So we're fine the way it is, and I think most of the Canadians are fine the way it is, to extend what we have, and we'll see. But given long-term the Canadian supply situation both in BC and Eastern Canada is going to be less of a problem in the future than it was in the past. So from a pricing standpoint and the amount of the market that the Canadians have, so we're not -- we're certainly not going to get upset about it either way,. I'd hate to say we're Switzerland, but we're probably more Switzerland in this whole debate. -------------------------------------------------------------------------------- Steven Chercover, D.A. Davidson & Co. - Analyst [47] -------------------------------------------------------------------------------- Just to clarify. It sounds like you're more in favor of a continuation of managed trade, than full blown free trade. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [48] -------------------------------------------------------------------------------- Well, what we are in favor of certainly the current agreement. I guess, that's managed trade to some extent. -------------------------------------------------------------------------------- Steven Chercover, D.A. Davidson & Co. - Analyst [49] -------------------------------------------------------------------------------- Okay. Thanks for that Rick. And then - that's good for me, I appreciate the answers. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [50] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [52] -------------------------------------------------------------------------------- Good afternoon, Mark. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [53] -------------------------------------------------------------------------------- Rick, I wonder if we can chase down the SLA a little bit more. How do you think the pending expiration is going to impact business for you guys over the next 15 months? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [54] -------------------------------------------------------------------------------- Well, I don't think it's going to impact us business-wise at all, the next 15 months. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [55] -------------------------------------------------------------------------------- Do you think that we are going to get an agreement anytime much before say, October of 2016? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [56] -------------------------------------------------------------------------------- You mean a continuation of the current agreement or a new agreement? I don't think you can get a new agreement. But I don't think you can get a new agreement. But certainly, I don't think you can get one that quickly, given how long the first took to put in place or the last one. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [57] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [58] -------------------------------------------------------------------------------- (multiple speakers) the current one in the next 12 months, and they can find a way for both parties to get them to extend it, absolutely, I think that's possible. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [59] -------------------------------------------------------------------------------- And if they -- -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [60] -------------------------------------------------------------------------------- (multiple speakers) -- a more likely outcome. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [61] -------------------------------------------------------------------------------- I'm just trying to understand what the implication might be, if we just kind of go on this standstill agreement, which as I understand it, would mean we'd have no duty or restrictions on Canadian lumber coming down into US. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [62] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [63] -------------------------------------------------------------------------------- And Canadians would have the ability to ship more without the duty. But I think they are pretty dedicated to the Chinese market and sustaining that position. Most of them have a significant presence in the US South. I think they are all in favor for having a strong and balanced North American lumber market. And so, while the risk exists that they could divert more lumber, I think that's certainly not the intentions of the parties at this point. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [64] -------------------------------------------------------------------------------- And if they did, David, would that -- could that become sort of a basis for any kind of further trade action that US lumber interests might want to pursue? Is that correct? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [65] -------------------------------------------------------------------------------- It would have that appearance, certainly. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [66] -------------------------------------------------------------------------------- Yes, okay. Next question I had, does the -- just this big drop we saw in Southern lumber prices, this spring. Typically, log prices kind of follow lumber prices. Now log prices didn't follow lumber prices on the way up, so I am assuming in your view, they are probably not going to follow on the way down? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [67] -------------------------------------------------------------------------------- I mean, that's our view. When you saw West Coast log prices go to new cyclical highs and lumber prices were at their very strong levels. When lumber prices went down, I think that put some pressure on log prices. In the US South, it was a totally different mix. Sawmillers were printing money. They had huge margins. Lumber prices have come down, but it's not to where Southern sawmillers margins are being impaired. They are just making less money. And I think in some ways, Southern log -- sorry -- Southern lumber prices were not impacted as much as West Coast lumber. You are further away from the trade shifts. Wide dimension lumber prices in the South are actually very good still right now. There is a little bit of pressure on the narrows. But the Southern mills have not been impacted the way the western mills have. And we don't see any need for lower sawlog prices as a result of where lumber prices have gone. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [68] -------------------------------------------------------------------------------- By our numbers, Southern saw mills ought to be quite profitable. Last question I had is just is a bigger picture question. I mean, you guys are generating on the range of about $60 an acre in EBITDA on the Southern lands. Can that kind of number continue to support $2,000 or $2,100 an acre, just from a longer term perspective? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [69] -------------------------------------------------------------------------------- Well, I think market participants are looking at not only the productivity of the lands and what they can produce, but what the expected pricing would be. I think if someone were to say, said, we're going to get stuck at 1.1 million housing starts and Southern log prices aren't going to go up, I think that would impact valuations in the South. But I don't think anyone that's in this business is looking at that, thinks that's a realistic outcome, and that's not the basis for the valuation. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [70] -------------------------------------------------------------------------------- So what would you -- David, what would you think that people are kind of assuming on sort of a cross cycle basis? Is it something in the range of a $100 an acre, if you had to guess? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [71] -------------------------------------------------------------------------------- Well, I haven't run the numbers kind of on an EBITDA per acre. I think you'd have to assume though that housing kind of at least moves back to a 1.4 million start level over time. And we at least move our Southern sawlog prices back to mid-cycle norms, rather than be where we're at. And certainly, that's going to significantly improve the cash flow from where it is, at least to that $100 per acre I would guess, just looking at it from a proportionate perspective. But I haven't run the numbers. -------------------------------------------------------------------------------- Mark Wilde, BMO Capital Markets - Analyst [72] -------------------------------------------------------------------------------- All right. That's good, thanks. Good luck in the second half of the year. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [73] -------------------------------------------------------------------------------- Thanks, Mark. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- Mark Heilweil, Spectrum Advisory. -------------------------------------------------------------------------------- Marc Heilweil, Spectrum Advisory Services - Analyst [75] -------------------------------------------------------------------------------- Yes, Rick, I would imagine that, or at least I would suggest that part of the discrepancy between the value of the stock and the realizable value of the Company comes from your development lands. And is -- has any thought been given to perhaps accelerating a little bit some of the value in that land? And along with that, could you comment on any developments particularly in the Alachua county land over the last -- this first part of this year? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [76] -------------------------------------------------------------------------------- Yes, as far as accelerating, I think one of the things that you all know that we spent a lot of time on in the recession, was taking what we thought were the most valuable development lands we have -- and again, most of these are in Florida and Georgia and South Carolina as well but in those markets. And do all the entitlement work or do as much as we possibly could in a downturn, when everyone was looking for economic development, in getting these lands ready for when the development activities picked up again. And also the lands we have on Moosehead Lake in Maine, and we've been doing that. And so we're starting to see the development lights come back on. If you look at the Urban Land Institute at their last recent meeting, they're were a lot of developers there, talking about opportunities, growing their business, capital flows coming in to their businesses and that sort of thing. So I think over the next one to three to five years, you're going to see a lot more activity in the development community and Plum Creek will participate. So I think we have accelerated to the extent that we're getting the lands ready to capture maximum value. One thing we didn't contemplate and we wouldn't do is, just dumping these lands in the marketplace to generate capital, because you'd be selling well below what we believe the ultimate value. One of the big projects, which we have talked about is in Gainesville, Florida, Alachua county, where we're a substantial landowner, the largest landowner in the county. And we submitted a plan there a couple years ago, and we recently re-submitted the plan., What we did, is we listened to all the stakeholders, the county planners, and the different participants in these activities, and we made some adjustments to the plan which got us pretty good reviews. So we took some lands out, we moved some lands out of conservation, we looked at taking some of the lands and annexing them to a neighboring community, Hawthorne. And I think these were well-received and hopefully, in the next year, we'll get that plan approved, at least the entitlements approved so we can move forward then. So we've got a lot that I think is going to be very positive here, in the next -- in nearer term than it certainly was in the past. So we're excited about those. -------------------------------------------------------------------------------- Marc Heilweil, Spectrum Advisory Services - Analyst [77] -------------------------------------------------------------------------------- Small scale question. Do you have any say in conserving some of your energy resources? Or is that out of your control at these low prices? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [78] -------------------------------------------------------------------------------- Certainly, at these low prices some of the lands that we have that have oil and gas opportunities, there is less drilling at these prices, so in that essence that conserves them. And even where some of the wells have been drilled, some of them will be capped in this market place because prices are low, and that again conserves that value until prices recover. So in essence, just the way the system works, and the ones that we see, the lands from for oil and gas production kind of serves their interest and ultimately serves ours as well. Clearly, there is a lot of reserves that are being held in the ground today that hopefully as energy prices recover in the next decade, we are certainly going to be recipient of the higher prices through our royalty programs. -------------------------------------------------------------------------------- Marc Heilweil, Spectrum Advisory Services - Analyst [79] -------------------------------------------------------------------------------- Okay, thank you. And good luck with the -- is it the Cascadia subduction or -- what's that called? Have you all read about that? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [80] -------------------------------------------------------------------------------- No, we've not. -------------------------------------------------------------------------------- Marc Heilweil, Spectrum Advisory Services - Analyst [81] -------------------------------------------------------------------------------- Okay. It's the latest issue of the New Yorker talks about it. Seems like that is going to be a problem. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [82] -------------------------------------------------------------------------------- Yes, the earthquake. Thank you. -------------------------------------------------------------------------------- Marc Heilweil, Spectrum Advisory Services - Analyst [83] -------------------------------------------------------------------------------- Thanks, bye. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [85] -------------------------------------------------------------------------------- Yes, thanks very much, and good afternoon. I just had a couple questions. One on just a high level, whether you guys are starting to feel a little frustrated with the pace of the recovery of the US housing market? It seems like builder sentiment remains high, interest rates low, and planning gains have been strong, except -- and the headline numbers seems to be coming back. But we have a persistently high percentage of multi-family in the mix. What is it going to take from this point, to get back? And are you still sort of comfortable with things changing in the USO in terms of log pricing, with housing starts somewhere at 1.3 million tipping point? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [86] -------------------------------------------------------------------------------- First of all, we're frustrated, and we've been frustrated, and three or four years ago we would have expected by now to be at 1.4-, 1.5-million starts. And here, we're at 1.1-million starts. So we, like many in our business have been a bit frustrated by the anemic -- I call it anemic recovery in housing. That said, if you look at demographics, if you look at interest rates, if you look at even the next generation down, they're going to buy -- the millennials, they are going to buy homes, it's going to be delayed a bit. Interest rates remain low. It's easier to get a mortgage today than it was a few months ago. So a lot of the activity is in the right direction. And a lot of home builders are busy now. They don't have enough lots, they don't have much land to build on, and they're working on that. So I think we're going to see activity continue to pick up, but it's going to be a slog, and it's going to be a lot slower recovery than any of us anticipated. But again, I suspect that we'll get back to that level, 1.4-, 1.5-, 1.6-million here in the next three years. Slower than we had hoped, but I think we'll get there. If you look at that, and everything else being equal with what's going on in Canada, and the Chinese market, and trade flows, the only place that production to build all those homes can come from is going to be the US South. And it will -- the production capacity will go in place there, and sawlog prices certainly will have to go up at that point in time. But we're very patient, this is a long-term business. We talk about our geographic diversity, it serves us very well, given pretty good markets in the Northeast, and decent markets from time to time in the West, and in the Lakes States. So it serves us very well. So you have to be patient, long-term business. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [87] -------------------------------------------------------------------------------- Okay. I appreciate that. And just you highlighted the Volvo sale on JV 2, just wondering if now that WestRock is its own company now, whether you've had discussions to change the structure of that JV? Or what's in Plum Creek's best interest, to have a majority position or a minority position, to change that at all or just keep it the same? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [88] -------------------------------------------------------------------------------- Well, we've certainly had conversation with WestRock management, just to make sure they know who we are. They are a big customer, and both entities were big customers of ours for pulpwood in the past. I think they're looking at the company. I think they like the real estate business that they're in, and I think they're very happy having Plum Creek as a partner. The Joint Venture 2 has worked out very well, and Joint Venture 1, this year we will have all our capital out of it, so that's worked out well also. So we've been pleased with it. And again, it's worked out to be a very interesting and successful part of that transaction with MeadWestvaco in 2013. -------------------------------------------------------------------------------- Paul Quinn, RBC Capital Markets - Analyst [89] -------------------------------------------------------------------------------- That's all I have. Best of luck going forward. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [90] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [91] -------------------------------------------------------------------------------- Collin Mings, Raymond James. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [92] -------------------------------------------------------------------------------- Hey, good afternoon. Just a couple of follow-ups here. I guess, going back to -- just the question about the debt coming due later this year. David, I don't know if kind of the $8 million to $18 million of potential savings is what you highlighted before. Do you think -- can you put any more refinement around that estimate? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [93] -------------------------------------------------------------------------------- No, we'll have to assess the markets as we get closer to the window in November. If we did it all on a fixed rate basis, at kind current markets, you save about $8 million a year. If we do portions of it on floating rate, then your -- the savings grow from there. So something that we're excited to be able to do. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [94] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [95] -------------------------------------------------------------------------------- It's nice to have our worst coupon in our debt stack of about 6%. We're fortunate that that's the case. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [96] -------------------------------------------------------------------------------- Okay. And then going back real quick, I guess Rick to the comments and questions about Alachua County, Florida. Just given that you have proposed this new kind of refinement as far as your development plans there, when -- I mean, could we see some monetization of that land in 2016? Or are we still talking 2017, 2018? Just think about when some of that might be flowing into the real estate sales? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [97] -------------------------------------------------------------------------------- Well, I think this is farther out than next year. We hope in the next year to get the plan approved, and then we'll start working with getting some development interests in, and start working on various aspects of the project. It's a lot -- it's a big project as you know, and it's going to be a very long-term one. But I think any revenue possibility is certainly out in the future, certainly not next year. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [98] -------------------------------------------------------------------------------- Okay. That's helpful. And then, just going back again to the US South. I think, starting the year, you were looking for a 5% lift in pricing, and acknowledged that it was probably going to be more towards the second half of the year it sounds like, taking all of your comments this afternoon. It sounds like you're looking for pretty much flattish pricing this year, and maybe a slight uptick in the fourth quarter. We clearly talked about housing, and some of the expectations there. We just need to be building more houses. But is there anything else that you are -- that has surprised you maybe over the course of this year? Are you seeing some more private landowners coming to the market with timber? Is there anything else that you feel like holding back any sort of price improvement, just in context of -- we are up, as far as we're building more houses this year than we built last year. Any reason why, beyond just we need to build more housing, that we're not seeing improvement? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [99] -------------------------------------------------------------------------------- No, I think -- we have been at bit surprised that we haven't seen a little bit more price movement this year. Again, as we mentioned in our comments, we think the fourth quarter will be better, and we're looking at a 3% to 5% improvement in Southern sawlog prices in the fourth quarter kind of numbers. Not significant, it's only one quarter, and not the whole year, but we're looking for that. Part of it is, there's a lot of this capital coming online in the South has been slow. A lot of these capital projects take 18 months, even through a start-up and given sawlog, are given lumber prices came off a little bit, nobody seemed to be in a big hurry. But these projects will get completed, demand for logs will go up because there's more capacity, and I think we're going to start to see them move in the right direction. And especially if we keep seeing housing continuing to gain a little momentum, and go from 1.1- or 1.15-million this year to 1.25- to 1.3-million next year, I think that all bodes well for those investments and more capital -- continued capital investment in the South and therefore more production. But it's just been slower to come online than we anticipated. -------------------------------------------------------------------------------- Collin Mings, Raymond James & Associates, Inc. - Analyst [100] -------------------------------------------------------------------------------- Okay. Thanks, guys. Good luck in the back half of the year. -------------------------------------------------------------------------------- Operator [101] -------------------------------------------------------------------------------- Mark Weintraub, Buckingham Research. -------------------------------------------------------------------------------- Mark Weintraub, Buckingham Research Group - Analyst [102] -------------------------------------------------------------------------------- Thank you. Following up a little bit on the last question, recognizing that it's probably different in all the different local wood baskets. But how much visibility do you get on what the private non-industrial landowners are doing and planning to do? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [103] -------------------------------------------------------------------------------- Well, we get some visibility because there, again they're our competition. So, they compete for contractors through the brokers they sell logs to and that sort of thing they're delivering, their brokers are who generally buy the [subedge] sales from them to the mills that we deliver to, and some of the mills buy subedge from those land owners. So we have some visibility. One of the questions we always ask ourselves, is there's so much wood on the sideline either at higher production rates, the wood will keep coming to market, and therefore you don't get any pricing. And we don't think that's really the case. Clearly there is some inventory on the sidelines, but we don't think it's a significant amount that if we see a real recovery here, that will impact pricing in a meaningful way or keep pricing down. I think we have a pretty good idea of what's going on. But in the US South, there's what, 10 million small land owners, so it's a very, very fragmented market. -------------------------------------------------------------------------------- Mark Weintraub, Buckingham Research Group - Analyst [104] -------------------------------------------------------------------------------- All right. And then also, you've made the case that there will be less wood coming in from British Columbia, which of course, makes lots of sense. But I think a lot of people have been frustrated how slow that's been to play out. Do you have any insights on when that -- from a timing basis, might start impacting sawmills again in British Columbia? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [105] -------------------------------------------------------------------------------- I think just over the next two or three years, we're expecting some further cutbacks. If we think of what happened last year, and even on a year-to-date this year, I mean, BC is only up kind of 1%. It's not that they're producing a lot more wood that's causing the issue. I think what we've seen is Eastern Canada's production is up a little bit, and the on the margin, we're getting more of it. But the BC production volumes have not been the big issue. -------------------------------------------------------------------------------- Mark Weintraub, Buckingham Research Group - Analyst [106] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [107] -------------------------------------------------------------------------------- Thanks, Mark. -------------------------------------------------------------------------------- Operator [108] -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [109] -------------------------------------------------------------------------------- Yes, good afternoon, Rick, and it's great to talk to you guys. If I could ask you Rick and Dave, sorry, if I could ask you about the manufacturing segments? Could you -- I think of the $14 million if I'm right about this, is it fair to say that $3 million of it was the reduction in the workman's comp, and $2 million was from the insurance settlement, and that those are likely to not recur? Is that a fair way to look at it? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [110] -------------------------------------------------------------------------------- Yes, I think we've highlighted that there's $3 million of nonrecurring income that you wouldn't expect to see next quarter. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [111] -------------------------------------------------------------------------------- Well, but what I mentioned adds up to $5 million, $3 million from less workers comp and $2 million from an insurance settlement. Do I have that right, or is that not correct? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [112] -------------------------------------------------------------------------------- The $2 million is from last year. And so, as we're looking quarter to quarter, our performance was $3 million better than the first quarter, primarily due to some one-time adjustments that won't be there in the third quarter. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [113] -------------------------------------------------------------------------------- Okay. All right. Thank you. And then, next question is, you mentioned your lumber realizations bottomed I think you said in May, and you mentioned the commodity pricing was up since then. And I guess, one of your competitors based over in Idaho last week mentioned that their realizations in lumber are down 10% in this quarter so far, versus the Q2 average. And random links has gone down for several weeks here in a row. So could you just, one, what the difference is in your experience versus either theirs or what their random length composite is? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [114] -------------------------------------------------------------------------------- Yes, what I was talking about was random lengths commodity prices bottomed in May. For the month of May, they averaged $313 per [1,000]. On a quarter to date basis, it's about $345 on average, so it's up about 10% from where it was at the lows. For the full quarter, it averaged about $327 in the second quarter, so we are running higher here in the third quarter, than it was for the second quarter. So there's been a little bit of lift-off and a little bit of benefit to the mills. It hasn't reversed all the declines that occurred. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [115] -------------------------------------------------------------------------------- I got you. So basically, what you are saying is some of the specialty items that have weighed down on the total random length composite I suppose, and that would not be hurting you all. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [116] -------------------------------------------------------------------------------- No, I think it's the opposite. I think it's some of the specialty items that we manufacture is why we hold our own better than the random length pricing, because of the board business we're in. So a portion of our business mix is really pine boards that go to the retail markets, and they have been -- they have not been beat up as much as the commodity market with our stud business, and what most [Southers] and our competitors. And certainly Canadians are making that product, and that's had a disproportionate push down in the market place. So the pine board business stayed up much higher, which is specialty business for us, and therefore it's kept our lumber prices on average higher. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [117] -------------------------------------------------------------------------------- Okay, And then, Dave, could you let us know how much of the EBITDA in the natural resources segment or from aggregates? And then also -- I guess, it's in Southern Resources, how much of that EBITDA was from the -- I guess the timber deed, which must be hitting close to it's halfway point. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [118] -------------------------------------------------------------------------------- Yes, Chip. With respect to the timber deed, in the quarter we had $4 million of cash flow. The deeds mature in early 2020, so we're about halfway through. We've only cut about 38% of our expected volume on that, so we still have a good opportunity over the next 4.5 years or so. In the construction materials arena, we recognized cash flow of about $4 million there. That's performing very well and in line with our expectations. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [119] -------------------------------------------------------------------------------- I see. And the last question is, I think we're a couple of years away. But, when some of the partnerships that were created I think in 2007, when you had some pretty sizable land sale transactions, which I would add were done at a great time and a great price. When those unwind, will that have any noticeable impact on either of the numbers in that particular quarter, or on an ongoing basis thereafter? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [120] -------------------------------------------------------------------------------- There might -- we still need to recognize from a book basis some of the gains associated with that joint venture transaction. Upon unwind, we would expect that book gain to run through our financial statements on a one-time basis. It should not cause a disruption on a quarter-to-quarter basis, going forward from where it's been. From a tax perspective, as we have disclosed in our periodicals, we wouldn't expect to recognize a tax gain at that point in time. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [121] -------------------------------------------------------------------------------- I see. Great. Thank you very much. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [122] -------------------------------------------------------------------------------- Thanks, Chip. -------------------------------------------------------------------------------- Operator [123] -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch. -------------------------------------------------------------------------------- George Staphos, BofA Merrill Lynch - Analyst [124] -------------------------------------------------------------------------------- Hi, everyone. Good afternoon, thanks for taking my questions. Hey, RIck, I want to come back. I think Colin teed this question up, in terms of what might have surprised you. I kind of remember back from a quarter or two ago, you were not expecting the Eastern Canadian production to offset decelerating or flattening production out of British Columbia. And did -- were you surprised at all with the Eastern provinces ability to supply into the market at all? Or is that not really a big event for you? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [125] -------------------------------------------------------------------------------- I don't know if it's a big event. But one of the surprises when we think of eastern Canada, it's really east of the Rockies, and Alberta as you know has increased production. So it hasn't totally offset what's -- the declines in BC. But certainly, if there's anything, it's probably the increase in production capabilities in Alberta that's surprised us a bit. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [126] -------------------------------------------------------------------------------- Okay. Appreciate that. One thing too, just touch the bases here on some last questions here, since most of mine have already have been asked. First of all, are we still waiting for 1.3 million from your vantage point in starts to be the tipping point, and in turn, an important if not there only mile marker, in terms of when you start looking at the dividend? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [127] -------------------------------------------------------------------------------- Our tipping point was 1.2 million, but maybe I should adjust it upwards. But in all seriousness, I think as we start to see housing move beyond where it is today, 1.2 million and further, our view is we'll start to get some movement in Southern sawlog price. And that is in fact the case, then we'll certainly take a look at changing upward the dividend. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [128] -------------------------------------------------------------------------------- Okay. I thought from the last call 1.3 million would be the somewhat adjusted tipping point, not that there's a lot of precision in this given what was happening with China. But fair enough. One thing, on the non-strategic land sales from the quarter, just where were the geographies on the -- I think it was like a little under $1,000 per acre. -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [129] -------------------------------------------------------------------------------- Let me get that for you. We only had 1,500 acres small non-strategic, and the lion's share of those were in the Lakes States region. And so, that accounts for what you say, below a $1,000 an acre average. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [130] -------------------------------------------------------------------------------- Very good. Last ones, and I'll turn it over. There have been reports of pellet oversupply. Now admittedly in the Northeast, that's not going to have much effect on the South. But are you seeing any effect of that or any reality to some of those comments we are seeing in the trade? Similarly, we've heard of some reports that pulpwood demand is picking up on the western side of the South, relative to the east. Would there be any reason that you're seeing that? Thanks, and good luck in the quarter, guys. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [131] -------------------------------------------------------------------------------- To your latter part of your question, we have seen pulpwood prices on the western side pick up a little bit, and a lot of it has to do with those two Drax plants, that have had a tough start-up. But they're doing better, and certainly we would expect them to be running at a much higher rate in the second half of the year, and that's affecting pricing. German Pellets has built a new plant in the Gulf South, and that's certainly going to have an impact on the market as well. So we're not aware of any backup in the supply situation or too much inventory of pellets As you may have read, there were two warehouses in Brunswick that housed pellets that burned. So -- and we don't hear from Drax or anybody else that is on the customer end of the pellet business having too much supply. So if anything, they are oftentimes worried about how quickly these mills come up, and being able to continue to have a high level supply to fill their needs. So that's not really been an issue. -------------------------------------------------------------------------------- Chip Dillon, Vertical Research Partners - Analyst [132] -------------------------------------------------------------------------------- Thanks for thoughts, Rick. -------------------------------------------------------------------------------- Operator [133] -------------------------------------------------------------------------------- (Operator Instructions) Alex Ovshey, Goldman Sachs. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [134] -------------------------------------------------------------------------------- How are you, guys? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [135] -------------------------------------------------------------------------------- Pretty good, thanks. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [136] -------------------------------------------------------------------------------- Just on the plywood side. We're seeing imports come in from South America. May not be as impactful, given you're more specialty. But I'm curious, if you have any intelligence of who from South America is bringing in the volume on the plywood side, and if you think it will have any impact on your business? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [137] -------------------------------------------------------------------------------- No, we haven't seen it in our markets. We make a really specialty grade western plywood. We have read where, part of it might be exchange rate driven. We are starting to see a little bit of increased imports of plywood. They'll probably compete a little bit more head to head with Southern plywood. Some on the west, but' s still early, and we haven't experienced that. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [138] -------------------------------------------------------------------------------- And we think most of, most generally the plywood comes out of Chili, from South America to this marketplace, and that's where we believe it's coming from. It's all commodity plywood, so it's really going to compete more with the commodity Southern plywood manufacturers. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [139] -------------------------------------------------------------------------------- Okay. That's helpful. And the, in early July, I think the UK government surprised the marketplace to the extent they removed their lead exemption certificates, that some of the biomass users like Drax were benefiting from. And any feedback that you've heard from some of the biomass players around that, having an impact on the medium term outlook for pellet demand? -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [140] -------------------------------------------------------------------------------- Not really. I mean, what was removed is just one of several different incentives, or in the case of the carbon tax, disincentives that's in place. And that particular thing that was removed, was not just for pellet users, it was renewable energy generally which meant wind and solar, and renewable products like wood pellets basically. So it was the whole spectrum across the line. When that was announced, Drax, which is a big customer of ours, stock price took a hit, and I think it recovered a bit. But that's just one of several different things. Again, for a lot of these pellet guys, especially in the UK, there's a huge stick in place which is the carbon tax, which is very punitive. And so, I think they will continue to grow their business, if nothing more to avoid the carbon tax which is in place. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [141] -------------------------------------------------------------------------------- That's helpful, Rick. Just a last, more of a nuanced technical question. Around the 1.2 million starts or 1.3 million that's needed to create tension for sawlogs. Curious, what mix are you guys assuming between single and multifamily? -------------------------------------------------------------------------------- David Lambert, Plum Creek Timber Company Inc. - SVP & CFO [142] -------------------------------------------------------------------------------- I think we saw kind of a record low mix this last time, where it was like 61% single family. And so, I think we are going to have two things happen. One is, you start getting closer to a 1.4 million, you are going to have higher percentage of single family So we're going to get a disproportionate push there. But we don't think that kind of the latest number is indicative of where we're going to settle out long-term on the single verse multi-family mix. -------------------------------------------------------------------------------- Alex Ovshey, Goldman Sachs - Analyst [143] -------------------------------------------------------------------------------- Got you. Appreciate it. Thank you. -------------------------------------------------------------------------------- Operator [144] -------------------------------------------------------------------------------- Thank you. I'm showing now further questions. I would like to turn the call back to Rick Holley for any further remarks. -------------------------------------------------------------------------------- Rick Holley, Plum Creek Timber Company Inc. - CEO [145] -------------------------------------------------------------------------------- Well, thank you everyone. Enjoy your summer, and we'll talk to you next quarter. -------------------------------------------------------------------------------- Operator [146] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone has a great day.
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