Plum Creek Timber Company, Inc. (PCL)

PCL 
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Plum Creek Timber (PCL)

Q2 2011 Earnings Call

July 25, 2011 5:00 pm ET

Executives

David Lambert - Chief Financial Officer and Senior Vice President

Rick Holley - Chief Executive Officer, President and Executive Director

John Hobbs - Vice President of Investor Relations

Analysts

Daniel Cooney - Keefe, Bruyette, & Woods, Inc.

Peter Ruschmeier - Barclays Capital

Chip Dillon - Citigroup

Joshua Barber - Stifel, Nicolaus & Co., Inc.

Mark Wilde - Deutsche Bank AG

George Staphos

Steven Chercover - D.A. Davidson & Co.

Mark Weintraub - Buckingham Research Group, Inc.

Gail Glazerman - UBS Investment Bank

Presentation

Operator

Good afternoon. My name is Allie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Plum Creek Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. John Hobbs, Vice President of Investor Relations. Sir, you may begin your conference.

John Hobbs

Thank you, Allie. Good afternoon, ladies and gentlemen, and welcome to the Second Quarter Conference Call for Plum Creek. I'm John Hobbs, Vice President of Investor Relations for the company. And today, we have on the line Rick Holley, President and CEO; and David Lambert, Senior Vice President and CFO.

This call is open to all members of the media and investors. However, the Q&A portion of the call is intended for the professional investment community only. We ask that other participants please follow up with any questions by calling me at 1 (800) 858-5347.

I encourage you to visit our website. There you will find our press release and supplemental financial statements for the second quarter of 2011.

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

Now Rick?

Rick Holley

Good afternoon. The business environment remains challenging. Domestic demand for sawlogs remains anemic by historical standards as lumber production is up only modestly from the lows experienced in 2009. The region impacted the most is the U.S. South, as a very dry winter and spring has increased logs supply and pressure prices through the past quarter. As Dave will discuss, we believe Southern price's declines are weather-related and temporary. We have altered our harvest plans for the year, reducing our sawlog harvest further to protect their value. Northern sawlog markets have faired better.

West Coast sawlog prices have rebounded, thanks primarily to robust demand from offshore markets, primarily China. U.S. log exports to China are setting up a pace to exceed 1.4 billion board feet this year, more than double the exports we saw in 2010. At the same time, lumber shipments from North America to China could reach 5 billion board feet or more, nearly 11% of the past year's North American lumber production.

During the second quarter, Plum Creek shipped 27% of our Oregon sawlogs to China, up 7% from the first quarter. While we expect that Chinese demand will exhibit some volatility from time to time, we believe their presence in the North American market is a lasting one that adds a relevant source of demand to West Coast log and lumber markets. We expect the offshore demand, combined with reduction in future Canadian supply, will transform the North American supply-and-demand balance in the future, which is a positive for Plum Creek.

Dave will now review our second quarter results and discuss our outlook for the third quarter. David?

David Lambert

Thank you. We reported second quarter earnings of $0.27 per share inside our guidance range for the quarter of $0.25 to $0.30 per share. Within our business segments, performance was mixed versus our initial expectations. Both our Northern and Southern Resources segments were weaker than we initially expected, primarily due to lower harvest volumes, while the Real Estate segment did a little bit better than we initially thought.

In the Northern Resources segment, we reported a $3 million profit, $4 million lower than the first quarter $7 million profit. The decline was primarily a function of lower harvest volumes and higher logging costs in some areas. In the Northern Resources segment, harvest seasonally declined in the second quarter as fall and winter weather limits timberland accessibility. This quarter, the fall was protracted, limiting access to timberlands longer than normal. As a result, our Northern harvest volumes came in below our initial plan, and we're about 270,000 tons or 27% below the first quarter's harvest level. Most of the volume decline was from lower pulpwood harvest in the Lake States and Northeast operating regions. Pulpwood prices held steady at $40 per ton, and demand remained good throughout the Northern markets. Our average sawlog prices improved $3 per ton over the first quarter level to $72 per ton. Softwood sawlog prices in the West rose from the first quarter due to strong demand from export log markets, particularly China. Demand for export logs from Oregon remained steady throughout the quarter but seasonal increases in log supply and incremental downtime at regional lumber mills have resulted in some price erosion in May and June.

During the quarter, log prices in Montana improved, driven by temporary in-shortages during the extended spring thaw. Sawlog prices in the Lake States in the Northeast were stable. Log and haul costs increased due to a shift towards logging in some higher-cost areas and to a lesser extent, higher diesel fuel prices. These reduced operating profit by approximately $2 million.

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