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Plum Creek Timber Company, Inc. (PCL)

March 06, 2012 8:00 am ET


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

Thomas M. Lindquist - Chief Operating Officer and Executive Vice President

Larry D. Neilson - Former Senior Vice President of Business Development

James A. Kilberg - Senior Vice President of Real Estate

Russell S. Hagen - Senior Vice President of Business Development

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


Chip A. Dillon - Vertical Research Partners Inc.

George L. Staphos - BofA Merrill Lynch, Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Gail S. Glazerman - UBS Investment Bank, Research Division


Rick R. Holley

Good morning, ladies and gentlemen, and we'll go ahead and get started. Just a little housekeeping. Anybody has a cellphone or BlackBerry, if you want to turn that off because it will affect the recording of this. We're being webcast today. But I want to thank all of you for joining us today for to the 2012 Plum Creek investor morning, as we call it. And I think we have some interesting things to present to you today. And hopefully, you get a lot out of this. So what we're going to do is go through a presentation. And then at the end, obviously, a Q&A period, and the management team and myself will stick around for any individual questions anybody might have after that.

You're all familiar with the Safe Harbor so we won't dwell on that particular piece.

I'm going to give a strategic overview, and then I'm going to have members of the management team go through the presentation, then I'll wrap it at the end.

So let me just introduce who’s up here with me today. We've got Tom Lindquist, Executive President and Chief Operating Officer. Tom's going to talk about the structural things that we see going on in our industry. Larry Neilson, Larry has taken on some additional responsibilities recently. Larry is now responsible for our resources and manufacturing operations, and he'll discuss that with you. And Jim Kilberg, who you know runs our real estate business and our real estate development business, and he'll take you through that. And then Russell Hagen. Russell is a Senior Vice President. He's in charge of our kind of non-timber resource businesses, basically oil and gas, construction materials or wind and other activities and also has responsibility for business development today. And of course, David Lambert, our Senior Vice President and Chief Financial Officer, he’ll talk to you a bit about our financial situation and also timberland markets at the end.

You always see this map. First slide we've show in every presentation we do. And I think it's important because it shows you the diversification of our timberland ownership. And I think diversification is key success in this business, like any real estate business. Being in different markets with different industry and different, in our case, weather dynamics, environmental issues, even local supply demand has huge impact, and this has served us very well over the last 2 or 3 years. As you know, a couple of years ago, we saw a very strong market due to wet weather in the South, we're able to take advantage of that and cut more saw timber, bring more pulp with the market.

Last year, we saw dry weather in the South. We held back on our sawlog harvest. We saw very good demand in the Pacific Northwest, demand particularly from the Chinese and, therefore, accelerate our harvest of timber in Oregon. So it allows us to go in and out of different markets and capture value, which is a key component of what we do at Plum Creek. So it gives us a lot of financial and operating flexibility.

As you think about the assets, we own 6.6 million acres, these are the common attributes. First of all, they're highly productive, and as you'll see a few minutes, is our harvest curve going forward, that shows the productivity of forest. The investments that we've made over time.

Attractive customer base, we spend a lot of time looking at each one of our micromarkets, seeing who's in the marketplace? How well capitalized are they? If they're in the paper business, what kind of product do they make? Does that compete globally, which in many cases, it needs to today? So we spent a lot of time thinking about the customer base.

So when you see Plum Creek divest in a certain area, a lot of times it has to do, even though the timber may be pretty good, is we're not comfortable long term with that marketplace. Maybe the customer base there, so we've divested in certain areas of the country, even from Core Timberlands, and redeploy that capital elsewhere, either with buying our stock back, paying our debt down or buying timberlands elsewhere.

And the other thing we want is significant market presence. You saw us do this timber deed at the earlier this year, we talked about it on our last conference call. And that was an area where we had significant market presence, lots of customers. So we're able to acquire that timber deed over the next 8 years, generate a lot of cash flow and add no additional overhead to Plum Creek. We have people in the area, we have customers in the area and we think we can add [ph] a lot of value doing that. So significant market presence is important as well.

Then high-value alternative attributes. I want to talk a lot of that today. Not just timber, not just land and real estate, but other attributes that we look at. Because you've heard us talk about at Plum Creek, our focus is maximizing the value of every single acre, whether it's growing trees, whether it's doing conservation and easements, whether it's selling a land for conservation or other recreational attributes, or given subsurface rights, seizing the opportunity, take advantage of what the value of every single acre is. And we’re going to talk more about that today.

One of the things that's increasingly important when you own assets in this business is sustainable management. And we're a part of the Sustainable Forestry Initiative. We're one of the early entrants in 1995. Since 1999, we've had all of our lands, 100%, third-party certified under the Sustainable Forestry Initiative. This is really important. It not only gives us, as the management team and our employees comfort, but it gives the communities, our investors and our customers comfort. Increasingly, investors are looking for companies that are managed on a sustainable basis. And increasingly, customers are looking to buy wood fiber where they have a chain of custody that it shows them that, that wood was procured, harvested from a source that is sustainable.

This is going to become increasingly important in the years ahead as we look at such things as the energy business and biomass and other things because again, the U.S. Government, if they have regulations around that, are going to want to make sure that, that wood or that biomass comes from sustainable sources.

You've seen these strategies. We've had the same strategies in place for probably 10 years. The first one is going through our portfolio and evaluating the highest use. Again, the best value per acre wins at Plum Creek every day. Whether we buy an acre, whether we sell an acre or how we manage an acre, long term. And Jim Kilberg, in a few minutes, is going to show this slide as to how all the lands at Plum Creek are categorized.

One thing that's important to know, we spent a lot of time understanding the value of every one of those acres. Even the acres that are part of a recreational portfolio, the HBU lands. We know every one of those marketplace. We know what transactions incurred in those marketplace. And we can tell you, acre by acre, what we believe the value is. We spend a lot of time on that and that's an important part of what we do.

Secondly is growing the value of our core timber business. As you know, the last few years, we've sold a lot of lands. But I think today, the value of our land on a per acre basis are more than they were before. And the reason for that, the lands that we've sold, are we think are lower productive lands, lower productivity lands and also lands in markets that we didn't think would be good long term. Therefore, the cash flow profile wasn't very positive.

And then during that same period of time, we bought over 200,000 acres of land. We're think in very good markets where they have the attributes we're looking for. And capturing lands with higher value alternative uses. That's our real estate business. And it's not just a matter of selling an acre of land. It's understanding the value of that acre of land. And when do we capture that value? How do we capture that value? And Jim Kilberg will talk some more about that in a few minutes.

And then capital allocation is everything. It's not just buying and getting bigger. It's not selling and getting smaller. It's how you allocate the capital you have to the highest, long-term, best value alternative for the company. As you know, over time, we've bought a lot of stock back. We paid a lot of debt down. And we bought some high-value timberlands. So we think, today, that we've done the right thing but capital location at Plum Creek continues and will continue to be job 1.

If you think about innovation, you certainly don't think about a land and timber company or anybody in this business for that matter. But if you think about the things that we've done over time, John Hobbs remind you, we have been very innovative. The first pure timber investment vehicle. First timber REIT from a public standpoint, the first to have all of our lands third-party certified and how we think about our portfolio. And even today, as we look at, we're going to talk about that today is the energy business, kind of an evolving opportunity for pulp wood and biomass both here in the U.S. as well as in European markets.

So we're always thinking about ways to get more value out of this asset we have, both the trees and the land. When we started to see, after the Timber Company merger, opportunities in real estate, we went out and hired new expertise to do that. We went out and found Tom Lindquist who brought in Jim Kilberg that understood the real estate business, so we could maximize the value of what we're doing there.

After the Timber Company merger, we also had lands suddenly in the U.S. South that had oil and gas opportunities, coal bed methane, coal assets. We're starting to see opportunities in construction materials, wind, and we went out and found experts in those areas too so that we could understand those assets and find a way to maximize the value of those assets.

And we also had people in the environmental arena, where we’re looking at mitigation banking. We're looking at such things as ecosystem services. If you think about a precious today, it is not oil. It's water. And what do you have under your forests? You have aquifers. So we have great opportunities in freshwater. So that's something that we are looking at over time, how do we maximize the value of that asset as well. So it's always looking for different things and making sure we're have experts on the Plum Creek team that understand those businesses.

As you all know, about 15 years ago, there's a major transformation in kind of the integrated manufacturers, paper and wood products. At that point in time, many of them had large ownerships of timberlands. And then they all identified an opportunity to free up their balance sheet by selling their timberlands and taking that capital and putting it in their core paper or wood products manufacturing businesses. And I think that was a win-win. I think it was a win for them, because I think they are more efficient going forward. And clearly it's a win because I think the timberlands are better managed today than they were otherwise.

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