Kathryn F. McAuley
Good morning. I'd like to welcome everyone to Weyerhaeuser's Investor Day. Thank you for joining us this morning, both here in New York and also on the webcast. As you know, safety is very important at Weyerhaeuser and your safety is very important. At your seat, you'll find safety briefing information. Please familiarize yourself with the nearest exit in case of emergency.
During our presentation today, our speakers will be making forward-looking statements. There is information regarding forward-looking statements in our presentation material. Please familiarize yourself with that information.
And I do have -- could someone please bring the slide up on forward-looking statements. Thank you. So please familiarize yourself with it.
Our speakers this morning are Dan Fulton, President and Chief Executive Officer; Don Haid, Economist and Director of Industrial Analysis; and Patty Bedient, who is our Executive Vice President and Chief Financial Officer.
With that, I would like to turn the podium over to Dan Fulton.
Daniel S. Fulton
Well, thanks, Kathy, and good morning, everyone. Thanks for joining us today. I'm going to begin the morning with a few brief remarks and then, Don Haid, our Corporate Economist, will provide an economic outlook for our industry and what he is going to do is to highlight current and expected market conditions and more importantly, take some time explaining the connections between our Timberlands and our other businesses, Wood Products, WRECO and our Cellulose Fibers business. And then Patty and I will each review each of our individual businesses, then we'll have a brief financial update provided by Patty and then I'll close and will welcome your questions.
I'm going to start this morning and end with 3 key messages. First, we're an industry leader in all of our businesses, starting with the crown jewel of the company, our 6.3 million acres of unique and valuable timberlands held in a tax-efficient REIT structure together with our Wood Products, our Real Estate and our Cellulose Fibers businesses. Second, a strong housing recovery is underway and we're uniquely positioned to take advantage of the recovery in 3 of our 4 businesses, Timberlands, Wood Products and Real Estate. And third, we've done important work during this downturn, and we're focused on growing earnings and creating value for shareholders, taking full advantage of both the operational improvements that we've made, as well as capturing the benefits of the market recovery that's now emerging.
We believe that Weyerhaeuser's timberland acreage in the west and in the south is the most valuable privately owned soft timber in the world. In the West, we own 2 million acres of Douglas fir, timberlands on the Pacific Northwest coast and this morning, we'll tell you why our West Coast lands are so highly valued and why they differentiate Weyerhaeuser from other timberland owners.
In the South, we have over 4 million acres of high quality pine timberland, geographically diversified across the Southeast region, sustainably managed for higher value and in addition to our 6 million acres of timberland across the U.S., we have valuable mineral rights, 7 million acres, 6 million that run with the land that we own, as well as an additional 1 million acres of rights that we retain when we sold land in the past.
We're a large-scale manufacturer of wood products, with the broadest range of products in the industry and a leading position in each of those major products. Our assets are well-sized, strategically located and because of the work that we've done during the downturn, today, we're generating improving profits from our improvement initiatives, as well as from improving market conditions. In our Cellulose Fibers business, we're a large, cost competitive manufacture of absorbent fluff pulp and an innovative manufacturer of high-value, value-added pulp products. We serve strong, growing global customers through strategically located facilities.
And in our Real Estate business, we're a top 20 homebuilder and land developer. We have leading brands in desirable regional markets with a strategic land position. In 2012, over 70% of our revenue came from our 3 businesses that are tied to U.S. housing, that's Timberlands, Wood Products and our Real Estate business. Recovery is underway with a substantial upside ahead. Supply-demand fundamentals are stabilizing. Prices are starting to rise. And most importantly, homebuyers have reentered the market. Now I'm a baseball fan and so I'm going to make a bit of an analogy here and tell you that I think, number one, we're the home team because of all the businesses that we're in. And I would characterize our position in the recovery as being in the bottom of the third inning. So we've got lots of room in front of us as we move through this recovery and return to long-term trend start levels of about 1.6 million to 1.9 million acres.
In sum, I'm excited about where we are positioned today as a company, ready for the return to normalized housing activity with all of the things that we've done and I'm terribly optimistic about the future because of the prospects that are in front of us.
So what I'm going to do now is turn the stage over to Don Haid and Don will walk you through industry fundamentals, as I said, that will connect each of our businesses to overall macroeconomic factors. Don, why don't you join us?
Thanks, very much, Dan, and I really appreciate the opportunity to speak in front of such a distinguished audience. I guess what I'd like to do is go to my key messages just showing to you the build on what Dan was just talk about, housing is recovering and contributing to the economy -- economic recovery, and that's really helping drive strong fundamentals for Wood Products. And Timberlands will be benefiting from those fundamentals in addition to the export markets and the strength, which we've already been experiencing and expect to continue.
And then finally, that Cellulose Fibers, also a global business will be continuing to improve and experience the benefits of the global growth, especially in the emerging economies. Now Dan mentioned Timberlands being at the heart of this company. And in order to build on these messages, I'd like to make some of the connection. So when you think about Timberlands growing trees, produces logs, logs are used in various end users and it's really the drivers of those end uses and housing being sort of top among them that I'd like to get to.
So we'll start with the drivers of demand and that really is, like I say, the housing market. And Dan mentioned that we've begun our return to long-term trend. So the forecast shows and it comes from -- there's generally consensus around this, the rising level of starts and to get to trend, 1.6 million to 1.9 million units, we're still a long ways from there. So there's a lot of upside in front of us.
But why would we believe that. Well, it's really about the fundamentals, the housing market has corrected and is correcting based on those fundamentals. The inventories of new and existing homes have come down. We're talking about 5 months for existing homes, 4.5 months for new homes. Prices have started to rise, not really a surprise, that's connected to tightening supplies. And we're seeing improving employment prospects, and I'm going to go into some of that and how the growth in the housing sector is helping energize the overall economy. Household formations, which were at a low during the recession have started to rise back towards the trend's level. So as more people are employed, there's more households being formed. These are the people that demand eventually a shelter unit, and owned unit or a rental unit. And so when we think about the components of the housing recovery, we have seen more growth in multi-family at the beginning of this recovery but the single-family starts are also rising significantly. But the shares are a little different than what they were during like the credit bubble.
And then finally demographics, the echo boom generation is just entering and peaking in those prime years where home acquisition happens. So these are all very positive fundamentals driving things and when we look further at it, some of the problems of the past, the distressed hidden inventory, we see a sharp decline in foreclosures. So there aren't the units coming into supply that there were before, that's been a positive. And as I mentioned, inventories are way down and that's energized prices. We've seen significant upward movement in both new and existing home prices. And this is a really big deal because, particularly with existing homes, there's so many of more them than homes that are being added to the stock every year, the new homes, and the wealth effect that comes from the value of a home rising.
So people whose balance sheets were under significant pressure a couple of years back are seeing equity -- their equity increase, and that enables them to do things. We'd like them to invest in repair and remodel, buy some building products, but really they're consumers. So consumers account for 70% of GDP. So putting more money in consumers' pockets is very positive. Homes are affordable at a level that we really haven't seen. So one of the benefits of going through this massive correction is that home prices, and with the very low borrowing with that we have, are more affordable than we've seen in, really, history. So that is the driver of demand. And certainly, an additional boost.
Construction of homes and construction in general, of course, employs people. And if you look on this chart towards the left in the boom years 2005 and then as things were slowing down in 2006, you see a high contribution into total employment coming from the construction sector. We're starting to see that happen again, and that's the -- circled there. So we're employing more people. So it's the sort of the synergistic growth that comes with the housing recovery. And again, to talk about consumers, people who buy a home generally have to put stuff in it. So they go to the store and they buy furniture. That, again, has multiplier effects. So we're seeing how this builds and creates momentum and in fact, maybe one of the ways that instead of being in a backdrop, an economy that's in the 2% range, that housing and its continued growth can help accelerate the recovery.
Homeownership. It was at an unsustainably high level and that was an outcome of the easy credit, the credit bubble. But the good news here is that homeownership, the April number is 65%, it's come down and is really in line with the long-term trend level. And the really important message here is that homeownership rates do not need to rebound to those previous peaks in order for the recovery to sustain itself. The -- current market is -- the lenders are much more prudent and we would expect that to continue. And of course, government policy does, to some extent, play a role in moving this rate as well.
Multi-family. I mentioned that the beginning of the housing recovery was heavier to multi-family. We have seen the share rise as the share of total construction. But at 30%, 32%, it's within historic norms. It doesn't line up with the peak of 2004 and '05, that single-family and all that credit, a lot of people were owning homes. But when you think about the correction process, as people who were homeowners can't be homeowners anymore, foreclosures all that other stuff, they became renters, at least in the near term. And with falling vacancy rates, the incentive for builders to build rental units, which are often multi-family is there. But another thing that happened with all those distressed properties is they were bought up by investors and they became rental units as well.
So we have renters not just in apartments or multi-family units, but renting single-family homes. And for most Americans, ownership is an aspiration, and depending on your stage of life, even more so as people marry or settle down, have kids, look for school, they generally want to own a unit. So this multi-family share, it's a little higher than it was a few years ago but it's within the norms and really, as the economy recovers, we would expect a movement back towards home ownership.
So what does all that mean for wood products? We're recovering from the largest cycle, really, ever. And I've got some charts so you can see that. Wood products demand is very closely linked to housing. It's not the only source of demand but it's one of the biggest. And then the industry supply, the ability of the industry to supply that the wood product to meet that demand has really changed since the boom -- the bubble years. And I'm going to go into a bit of that detail as well. And the message here is that as housing recovers, additional production will be needed to meet that rising demand and that's a good news story.
So cyclic corrections, you can see the big dips that we fell into, this is lumber and OSB demand. But more importantly, when you look at the forecast for demands recovery, we've got, just as Dan said, a lot of -- we're in the third inning, bottom of the third, there's a lot more in front of us. And these forecasts come from FEA, forest industry analysis group, and their housing outlook is pretty similar to the ones you'll find from other mainstream macroeconomists or other forest industry analysis, they're talking about a $1.55 million in 2015 getting up to $1.9 million in 2017. So the housing starts underpinning these demand numbers are pretty mainstream. And by the way, those 2 points that I mentioned really fit into the boundaries of what we would call trend, the $1.6 million to $1.9 million. So we're not there yet and that's what those steep hills that we're heading up are all about.
Industry supply. I mentioned that a lot of has changed since the boom or bubble years. And a lot of that has happened on capacity. And I'll talk about that first. In terms of lumber capacity, 17 billion feed of capacity that ran in 2005 didn't run in 2012. And then of that 12 billion feed of it has been dismantled. The iron is not there. In terms of OSB, of 67 original sites plants, 44 are expected to run this year in 2013. And then of those remaining, 14 are dismantled, gone, the equipment's out. And then there are 9 curtailed facilities still.
In terms of where the lumber and wood comes from, British Columbia is a very large producer in Canada, a large regional producer. But this is a place that's had over 10 years of the mountain pine beetle infesting ecological pine forest and that's the dominant species there. So they have a lot of dead and damaged logs or trees and the supply, their ability to increase supply with this period of rising demand is extremely limited. So as one of the key supplying regions, they're not able to -- not expected to be able to flex upwards. And that really is beneficial to the other supplying regions.
And then finally, the supply channel, how our products go to market. A lot has changed there, too, Some of our channel partners are gone. But as importantly, the ones that remain are on a much tighter credit diet that they were in 2004 and '05. And what that's resulted in is much thinner inventories in the system. And that's a positive as well. There's less ability to speculate.
Pricing, I'm asked fairly often about pricing. It's sort of one of the key areas and in May, prices have started to come off a little bit and it's come up, "Is that something to be concerned about?" And when you look at these charts, it's not a really big concern, simply because in commodity markets, volatility is part of the story. So you can see these charts are jaggedy. They have peaks and that's the nature of the business. And as importantly, as housing has really gotten traction, we've seen significant increases. So I've called out of the year-over-year increases in the lumber, this is the framing lumber composite, almost 50% on a year ago basis. OSB, even more dramatic, almost 100%. So yes prices are off of those peaks but the mid-week prices, it looked like things were stabling. I mean, this is within the cyclic and the seasonal norms.
In addition, when we think about capacity, which I mentioned a moment ago, the additional capacity to meet demand at production, those are generally higher cost production units. So the market's telling us to bring those producers to produce that product and that raises the overall cost for it in the industry. So during periods of higher demand and that's what's called out with those averages, we see higher prices on average.
Another question that comes up often, well, wood products' prices have gone up dramatically. Doesn't that push the cost of home construction up to the point that, that may adversely impact demand or growth. And yes, wood product prices have gone up. But as far as the share that would occupies of the total cost of the home or constructing home, it's in the 15% range. So it's significant but not huge. But just as important, remembering those affordability charts, homes are at low, low prices relative to history. So the homebuilders have the ability, there's a lot of growth in home prices going forward as well, and for the most part, the inflation that comes with some of the input costs associated with higher levels of demand is consistent. So it's an issue but not a concern.
So let's talk about individual businesses -- wood products manufacturing businesses, and I'll start with OSB. And the chart on the left side shows both production -- the history of production, along with housing starts. And what's interesting about this one is OSB started off as a plywood substitute. So for the first 20 years of the chart up to the mid-90s, you see steady demand growth in OSB. And that's OSB capturing, substituting for plywood in that home in terms of the sheathing, the roofing and the flooring. But then, you see the future or the fortunes of OSB, for the most part, are tied quite closely to housing.
And so it's not a surprise that the housing cycle drove a cycle in the OSB business. But when you think about it going forward, the stacked bars show the components last year and so residential is the biggest component. But with the growth in housing, the demand for OSB is going to grow, as well as, to a lesser extent, the other segments, repair and remodel, and industrial. So a rule of thumb that works for the most part is for every 100,000 starts, more or less, you need another 1 billion feet of OSB production. So this demand outlook is consistent with the area chart earlier. But it really shows the additional production that's going to be needed as housing continues this recovery path.
Lumber. Similar set up, we've got the demand for lumber along with housing starts. And the 2 of them linked through their history. What's interesting is that lumber demand, only about 1/3 of it actually comes from housing starts or new home construction. The other segments, repair and remodel, is the next biggest one, and then industrial. There's a lot of lumber the ends up in industrial usage. But this covers a really broad range of products. Think about everything from a pallet that carries goods like to Costco that's made out of low grade lumber, there's furniture-grade lumber, that goes into those components. Then there's items like decking, those are all industrial lumber. So that segment is also projected to increase as the economy recovers and strengthens.
And then repair and model, similar story. As more people are in homes and as their equity rises, they generally want to improve those places. So we see growth now just from housing or new home construction, but also in the other segments. So again, a very positive story.
Engineered wood. This is a category that we referred to as being a little bit more of a late cycle product. And the reason for that is that engineered wood is the most dependent on single-family construction. So not just new home construction, but the single-family units. And that makes sense. Engineered wood fits into those large spaces where you need sort of the enhanced technical capabilities of the product, like an I joist. And because multi-family started recovering first, single-family is picking up, the demand pull on engineered wood is really just starting to gain some traction. And it's when that demand continues to rise and then the capacity utilization goes up, that this business will continue to improve. So we're in the third inning. But this is one of the later success stories.
So going back to kind of the overall markets for lumber and how prices have risen and that's in response to relatively tight supply. So we need more lumber to meet this rising demand. And when we think about lumber, sure, wood is wood is wood, but it turns out it comes from different parts of the continent, different species. They all work in more or less the same way, but they're all a little bit different. So this chart actually shows southern pine, which comes from the Southeast, not surprisingly; and then, spruce-pine-fir, which is the grouping that is the Candian lumber fits into; and then, Douglas fir green. So we've got Canada, we've got the West, we've got the South. And the prices all move pretty much the same but the lumnber comes from each different region. So as we think about rising lumber demand and how it's supplied, and I mentioned, the supply picture is a little different than it was in 2004 and 2005, where is lumber going to come from to meet this rising demand. And historically, one of the places where the U.S. got a lot of its lumber to meet that demand was Canada.
So in 2005, if you look at the bar chart, you can see the light green component was what went to the U.S. And that represented in terms of market share about 34% of U.S. demand. Now I told or mentioned the mountain pine beetle, the impacts on supply in Canada. Obviously, everything went down 2010, that's we're still in the down part of the market. But the ability of Canada to supply the quantities of lumber that it manufactured back in 2005 isn't there and that's because of the beetle primarily but also in the Eastern Canada, there were a number of mills that were associated with pulp facilities, their economics don't work without that pulp facility and in some cases, they're gone. And then there's some other environmental restrictions, northern boreal issues, which have also limited some of the supplies from Canada.
The main message here is that Canada will not be able to produce the 35 billion feet or so that it did back then. And with the growth in the export markets that Canada serves, the residual, the amount left to go to the U.S. is significantly smaller than it was before. So we see that market share -- Canadian share of the U.S. market tracking downwards to a little less than 20% by 2020. So that's a supply story. But it's also, well, where are we going to find that lumber? And if we look at what's happening now, this chart shows the yellow bars are shipments of Canadian lumber to the U.S. And those have been relatively flat since 2009, the bottom of the market. At the same time, lumber production in the U.S. South has a steadily risen, that's the bluish bar. So -- and housing's in there, just to remind us, one of the main demand drivers. So we're already seeing some of that switching, that shift from Canadian lumber being substituted with southern pine.
And so when we think about the ability of the South to supply more lumber and the mechanism, U.S. timber markets are a little different than Canadian markets because in Canada, that timber is owned by the public, the Crown, and these are more active, more responsive markets and what we see here is the relationship between lumber prices and log prices. And what has been consistent through history is when lumber prices go up, log prices go up, but not right away. There's a bit of a lag, so you need the signals to bring that additional supply in. And we've seen lumber prices currently rise in the South very dramatically, and log prices are just starting to tick up. So we've also seen harvest rise. I mean, higher prices, more demand, generate more harvest. And so we're on the way to supplying a new higher level here. But the market mechanism is at work.
Another thing to remember about the South and this is particularly relevant for Weyerhaeuser Company, is that sawlogs have the highest value. And not just by a little, I mean, they're consistently higher value than chip-n-saw, which is a log that could go to a stud mill, a small lumber mill or be turned into chips for pulp and paper or energy or OSB. And then pulpwood, which goes to pulp mills or OSB mills primarily. So the highest value is in the sawlog, really, at any point in the market cycle. And we're starting to see those sawlog prices edge up and this is what we, at Weyerhaeuser, manage our timberlands for, is for sawlogs, not pulpwood.
So a bit more on timber and the regionality that I mentioned. I was talking about regions in terms of lumber production, but let's talk about it in terms of the trees that supply that lumber production. So I talked about the South and that's obviously a pine region, with that species that I showed on the price chart. In the West, there are really 2 parts of the West. The inland West, so that is east of the cascades, if you will, and that's primarily a pine zone as well. So the pine lumber gets dried and it goes primarily for domestic end uses, domestic lumber.
The coastal region is a little different. It's dominated by Douglas fir. This is a higher-value species and it's higher valued because of its strength, its stiffness, its straightness, its visual appeal and it's highly sought after in some of the export markets. Japan, which has a tradition of posting beam, woodframe building and large components, really, really likes and pays for Douglas fir. So not only can Douglas fir go into domestic lumber, which it does, but it can also go into those export markets.
Another species in the West is hemlock, not quite as valuable as Douglas fir, but also a species that has export customers. So Korea and China consume hemlock in addition to Douglas fir. So that duality is pretty important. Why? Well, when we look at the markets and the recovery, if we look at the West, the recovery didn't start with housing, it actually started back in 2011 with a big uptick in export demand.
And I tell the story with the prices, there's a quantity chart that follows. But what you can see is starting at the end of 2010 and into 2011, the red line, which is the China export log price, started rising dramatically. So demand from China increased, the price of China sorts went up. And a China log is really not much different than a domestic log, and that's the blue line. So domestic sawmills needed to compete with that China export log demand and the price of domestic sawlogs went up. And so the Japan log, the highest quality, a little different log, was already at a higher price but also moved up. So with that export pull, we saw a significant movement on prices, and of course, quantities to supply that.
China went through a bit of a slowdown in 2012 getting their GDP from 9% or 10%, down to 7.5%, 8%, those are in great numbers for anybody else, but for China that's a decline. And we did see a little bit of softening in that China price. But this year, things are picking up that business. And by the way, that business is tied to all of the growth in the China, where the emerging middle class is needing housing, they're needing places and factories to go to work, and it's the construction lumber. By that, I mean, frame -- or forms and things like that this demand for lumber was associated with. So that China market is really picking up again in 2013 and if we look at quantities, you can see the big surge in 2011. And even of things slowed in 2012, still a significant market presence. And then the other be components and long-standing markets, Japan and Korea.
So I mentioned that Japan is a structural housing market. So it's a little different from that industrial use in China. And this is a market that has -- we've had a presence in for a really long time, it's a high-value market. We're associated with the largest sawmiller in Japan and they've been able to grow their market share. If we look at one of the primary drivers of demand, it's obviously housing starts. And what's interesting is how this is just wooden housing starts, not total housing starts in Japan. How stable wooden housing starts in Japan are. This is the more expensive dwelling, by far, in Japan, and it's pretty highly desired. But we have seen some increase, a little bit of a dip in 2009 and those markets are growing. So this has been a really solid market from a demand standpoint and from a premium standpoint.
Turning back to China, this one's a little more -- well, it's not more interesting, it's different. They're both interesting. What we've seen with China and it was how it was applied, at least up until around 2007 or '08, the majority of their imported logs came from Russia. And most people's perception of Russia, enormous country with enormous forest resources, cheap, close to China and that story worked for a while. But what we see through 2008 through the present is as China's demand for logs increased, Russia's ability to supply them, are at least in terms of the volumes that came in to China declined.
And what a I'd like to point out is how that's happened for economic reasons. Part of it is pure supply. In Russia, you hear a lot about infrastructure problems. Yes, they have a lot of wood but the wood that's near railways and roads has already been harvested and they use what is domestically called natural regeneration, which is really more like no regeneration. And as a result, when trees are cut down in Russia, the conifers, the soft woods, what grows eventually behind them is hard woods, which, through the process called succession, eventually, are replaced by conifers, but this process takes over 100 years. So where logs had been harvested in Russia, what's there now are hardwood species, birch maybe, or something else.
So in terms of their economic supply, it's a bit more limited. So what happened is Pacific Rim countries, primarily, have filled that gap. So that's New Zealand, the West Coast of United States, British Columbia Coast. And if we look at the Y, here's a little bit of the proof. What this is, is taking the log costs from the exporting country, delivering them, landing them in China, and then using Chinese saw milling, which is very low economics, which is very low cost, but the most expensive bar is actually the lumber produced from the Siberian logs. So those Siberian logs may start off cheap but to get them overland, across Russia, and then across China to the sawmill and pay the export tariff, it's more expensive on a lumber basis than anything that you would do comparably from New Zealand, the West Coast of the United States or British Columbia.
So the uptick in production or logs imported from those countries is happening for economic reasons, it's not just that there aren't logs anywhere in Russia or not -- aren't enough logs in Russia, so this is a rational result.
So that's kind of the wood product's connections and I guess what would I like to leave you with? It's that there's really attractive fundamentals for wood products and timber going forward. We've got rising demand driven by U.S. housing returning to trend. We've got robust export demand and anticipate anticipated growth there. And then that wood products demand drives log demand. And then finally, the supply dynamics are changing. So domestic log demand is going to be bolstered by the inability or the limited ability of Canada to supply product into the North American market.
So with that, I'd like to go from one export business to another export business. Our Cellulose Fibers business, which Dan teed up is an export business and the main product that we produce is fluff pulp.
So the demand for fluff, fluff goes into tissue, toweling, other personal care products, things we take for granted. The growth in demand for those products is expected to be on the order of 3.6% a year for the next 5 years. And that's driven primarily by the development, the economic advancement in those emerging economies, primarily in Asia and the Southern hemisphere. So demand from the developed world, Europe, Canada -- or Europe, United States, Japan, pretty stable. It's growing a little, but these emerging countries, and just as I talked about in China, the emergence of a middle-class, they're moving into their own homes and they're buying these products, things like diapers. That's where the growth is.
Now one of the things associated with this business, because fluff prices are tied to paper-grade pulp prices and because the tail of the supply curve for most softwood paper-grade pulps is actually in Northern Europe. The European or the euro-U.S. dollar exchange rate matters. And we've got this ongoing sovereign debt issue in the eurozone. And that, certainly, last year, impacted the value of the euro. We saw it at a weak point in about the middle of last year. And so in periods of weaker demand, and then we also had at that same time, the economies in Europe were slowing down, the economies in Asia were slowing down, so weaker demand and a weaker euro, pushing pricing more towards cost support levels. So we did see some weaker pricing in fluff during that time period. The good news here is, one, the U.S. South where most of the fluff is produced and Weyerhaeuser's fluff is produced, was competitive during that period of euro weakness. But we've seen through trying to resolve the sovereign debt issues, the euro has risen and stabilized, and the long-term outlook for the euro is to be even higher than it is currently. And all of that bodes well for both market pulp and fluff pricing. So when you look at the price history, you can see the bottom, the weak point in Q3 of 2012, and we've seen market pulp prices increase since then.
Fluff prices have the stable through the same time period and that's because there have been some capacity conversions to pulp, so the balance between supply and demand is pretty close. But we've still got this rising demand picture, which really bodes well for the future of fluff, both in terms of the strengthening euro and the growth in the demand coming from those emerging countries. So another really good story.
So with that, I'll just leave you the messages I started with. We've got housing as a an economic engine of flywheel and that's really improving market fundamentals for wood products, and Timberlands benefit from that. It's really the demand for those products that increases the demand for the raw materials. That's logs, they come from Timberland, and we have strong domestic -- or not only strong domestic markets, but also strength in the export markets. And that ripples through over into Cellulose Fibers where, again, we have a rising demand picture.
So with that, I'd like to turn it over to Patty.
Patricia M. Bedient
Thanks, Don, and good morning, everybody. I've got to say that it's great to see so many familiar faces in the audience today, and I'd like to welcome those who maybe new to the Weyerhaeuser story.
I'm going to spend some time telling you about Weyerhaeuser Timberlands because it is a very exciting time to be at Weyerhaeuser Company. When people ask me, Patty, why should I invest in Weyerhaeuser Company? I tell them that it starts with our over 6 million acres of very valuable Timberland. Now we are not the company that owns the most acres of Timberland in the country, but the total value of our Timberlands in the United States is, by far, the highest value compared to other companies. And I'm going to share with you today a little bit about why that is.
But over the course of the last couple of decades, Timberland ownership has undergone some pretty significant changes, whereas, today, if you are a public equity investor, so if you want to buy public stock in Timberland, your opportunities to do that are limited, really, to primarily a handful of timber REITs, and Weyerhaeuser's market cap is about the same amount as all of the other timber REITs combined. So we did convert to a real estate investment trust in 2010 and Timberland is the real estate asset that qualifies for that tax structure. So when you talk to people about real estate, what is it that they say is the most important attribute in determining its value? Location, location, location, and that's no different with Timberland. But it's not just about location. We start with location and then we combine that value with our knowledge and our competence in growing trees, what we call silviculture, to grow high-quality trees in the fastest amount of time at the lowest costs. And then once these trees reach harvest stage and they're ready to convert, we log those trees and sell them into their highest end markets, utilizing our scale and logistical advantage. And we've continued to do that in a repeatable way and in a way that into the future, our EBITDA in our Timberlands business will continue to grow. What this chart shows you is how the EBITDA, over the course of time, from Weyerhaeuser Timberlands will continue to grow, and this assumes there's no increase in our current acreage.
So the green bar here starts with the base of our 2012 EBITDA and grows it over time in increments of years, and a very important increment, and that's why Don spent so much time with you this morning sharing the background of the very attractive demand supply characteristics as we go forward. So we will see the cyclic recovery in pricing as housing continues to recover. And just as importantly, as that demand continues to increase, the supply of fiber that comes from north of the border in Canada, that has been very important historically, will not to be able to serve that demand in the same way. One of the things that that Canadian supply has done because, as Don said, these trees, which have been devastating to the forest in British Columbia, needed to be harvested because they were infected, and they were still salvageable. So the Canadians have been harvesting more than they otherwise would have, given the economic downturn that we've been under for the last few years. But if they didn't harvest them, then the value of those trees would deteriorate. So they have done a good job of responding to those export Asian markets, that Don also talked about, as a form of supply, so -- or a form of demand. So as that demand continues to grow, as U.S. housing continues to grow, the supply will be constrained when it -- as it relates to how it comes from its traditional sources, Canadian sources. But for Weyerhaeuser Timberlands, our over 6 million acres in the United States will be there to help to meet that supply.
We are also growing our harvest through our silviculture methods. I'll talk a little bit more about that. And we're improving our mix, focusing more on high-value sawlogs. We utilized our logistical capability, our execution capability in terms of our operational excellence, not only in how we apply silviculture regimes, but also how we harvest and merchandise those logs. And then there are other important income sources, one of them Dan referenced in his opening remarks, in our minerals income that comes from our timberland holdings.
So where are these timberlands located? Well, they're located in some of the most productive regions across the country for growing timberland. Starting with the U.S. West, and I must give you a little bit of a geography lesson if you'll allow me this morning. The orange blotches that are on these maps, to note Weyerhaeuser Timberland, and you'll notice that on the West, we are very much along the West Coast, sort of evenly split in those 2 million acres in between the states of Washington and Oregon. And the reason that we're on the -- that particular area, is there is a mountain range that runs just to the eastern side of our holdings, the Cascade Mountain range. And that's important because that mountain range is what controls the climate that makes it so attractive for growing our very valuable Douglas fir. A lot of water that comes in the West. Living in Seattle, we often do complain about the amount of rain that we get in Seattle. But the trees love it. So a lot of water that comes, temperature is important, and soil and site index for where we grow our land. And so over the course of time, as we have a blocked up our timberland holdings, we really focus on the acres that will grow the most productive lands. They're are also very well-located for that export market off to Asia, that we'll talk about a little bit more here in a minute as well. Across the U.S. South, then we have 4 million acres across 7 states that, again, you can see better here. And in this case, we are focused on growing, primarily, Southern yellow pine or sometimes you'll hear it referred to us loblolly pine. And the reason we grow Southern yellow pine in this region is because that's the species that grows the best in this particular climate and soil type.
Now in addition to building products, in terms of what gets produced from the trees that we grow here, this is also the fiber that is important for its absorbent qualities, and goes into fluff pulp across the South, that Dan will talk to you a little bit about later on this morning.
In addition to our U.S. holdings, we also have about 300,000 acres of Timberland in Uruguay. These are lands that when we went to Uruguay at the end of the 1990s and into the 2000s and started to purchase land, there wasn't a forest there, great growing land, but this is what we did. Lots of times you'll here people talk about reforestation, that's when you harvest and then you replant. A forestation is when you plant trees where they weren't trees before. These were grazing lands in many cases. We've planted a mixture of loblolly pine and eucalyptus, and these trees are now just starting to come into harvestable age. And we are focused on, in Uruguay, converting those trees to plywood and appearance-grade panel, if you will, for interior, appearance-grade and the furniture market.
Our lands are 100% certified to sustainable forestry standards. That's important to us at Weyerhaeuser because in addition to resonating with our own values of good stewards, environmental stewards of the lands that we own, it's extremely important for our customers to know that they are getting their raw material from sustainable, renewable sources.
One of the things that we have been recognized for, in terms of our sustainability, is not only listing in the U.S. Dow Jones Sustainability Index, but also in the world index, which is a harder designation than just the U.S. index.
So I want to talk a little bit about our improving volume and mix. So again, we are growing trees faster in all geographies. But importantly, to that volume, we're also focused on the higher grade of logs. Now in the U.S. West, over the course of time, as we measure the final harvest from the acre, we will increase into 2030 about 25%, that's because those trees that we're harvesting in that age are another round of genetic improvement.
The sawlog capability that's in the U.S. West is about 90% and that will stay fairly constant into 2030. In the U.S. South, 15% volume increase in 2020 or 2030. And today, we have about 60% sawlog. And we are growing that proportion of sawlog as we go forward, another 10%. So we're about 60%, a little north of 60% today. And that would compare to an industry standard that would be closer to 50%. Again, that's important to us because of that pricing chart that Don shared with you, where he showed the line graph of sawtimber, chip-n-saw and pulpwood.
So how we do all of this? Well, as I mentioned before, we focus on our silviculture, the science of growing trees. And then our scale operations. We do a lot of research on the seedlings that we plant. We measure every application that we are applying to our lands. And again, 6 million acres. So we are applying and measuring -- what is the response that we get from every application that we will do, investments, if you will, in the land that we're measuring. So sometimes, I'll get the question about our fertilization and people will say, well, gosh, over the course of time, you tell me that you fertilize a little later in the cycle. Why don't you do that? Why don't you fertilize sooner? Wouldn't you get a faster growth, if you fertilized sooner? And yes, that tree would grow faster, but you're holding that cost for a longer period of time. So we measure what is the response that we would get, relative to the cost. So this is a financial optimum, not just growing trees fast. It's trees fast in the shortest amount of time at the lowest costs.
And then when we're ready, as I said, to harvest those trees, we deploy technology in the way of mechanized harvesting. We are merchandising every tree that we harvest to its best end markets. An example of that would be in the Pacific Northwest, from a Douglas fir tree, that tree may be merchandised into 3 different log segments. And each log segment could go to a different market. So our highest quality log would go to the Japanese market, the next may go to China or to a domestic saw mill. It could then -- another one could either go to pulpwood or to a lower-grade sawmill grade as well. So very important that as we harvest that tree, we sell it into its best, highest market and understand the importance of that and the measurement, and how we do that in deploying our scale. Because again, as Don showed you on the price chart, a big difference between a Japanese export log and a pulpwood log.
We also deploy our very cost-effective methods, in terms of our dispatching the trucks that will haul these logs to their end use. So on any given day, because of the scale that we have across our acreage, we will be dispatching up to 3,000 truckloads of logs. Now we don't own all these trucks. But the owners of those trucks who haul logs for us allow us to dispatch for them because we are optimizing their trip in terms of where they are going to haul those logs. So that they can get the maximum amount of loads per day, so they get paid on load basis, they get paid more, better utilization of the equipment, and just as importantly, traveling fewer miles means less people cost. So all of these things add up when we're talking about what is the cost that comes into play when we're doing our harvesting. And then, our port access. Off the West Coast, we own our own port in Longview, Washington. We can load 2 log ships at a time. And we have a very developed infrastructure at all places in the supply chain, to enable us to do that.
Now I want to come back and talk a little bit about the ownership of Timberland. What you see on this slide is the public timber REIT ownership. So I mentioned that if you want to invest in stocks, these are your opportunities in the public equity market. And I said that we didn't have the most acreage, well, we're just a few acres shy of the most. But importantly, as I said before, what's really important about Timberland is its value, not just the number of acres. And so you can see that compared to the others, not only do we have a significant amount of acres, but there's a lot of acres that Weyerhaeuser owns, about 2 million acres, in the Pacific Northwest, but on the Westside of the Cascades.
So as we think about who else owns timber in the Pacific Northwest on the Westside of the Cascades, you can see our 2 million acres here. And then also, you can see some additional names in addition to a couple of the timber REITs that you saw from the previous page. And these are lands that are managed by timber investment management organizations. But again, Weyerhaeuser, in terms of the size of our acreage, is double the next largest.
And why do we care? Well, we care because the location of those Timberlands, very much speak to the value of the Timberland. One of the ways that people sometimes go out and get information on Timberland values is through an organization called, NCREIF. That's the National Council of Real Estate Investment Fiduciaries. Members of that organization are many of the t-mills that I showed you on the previous page. And they report their timber values, the market value of their timber, quarterly because of their fiduciary nature.
So what we have in the brown bar here is the result of that information. So yes, you can see that the Pacific Northwest at between 2,535 and -- or 3,000 is about what's the increased number on the Pacific Northwest. But that's the culmination of both the Westside of Oregon and Washington, as well as the Eastside. And back to the map that Don showed you, the Westside is the side where ours are located and where you get the very high value Douglas fir. Now we've added a few more things here to this map. We've increased the size of the bar because we've taken some Timberland transactions that are just individual transactions, that admittedly there aren't a lot of them and they are smaller in comparison to the overall amount of acres. But just to give you an idea for the variability of the value that happened, and these are all Westside, not diluted by the combination of Eastside and Westside, which is what you get in the increased data.
Now importantly, one of the reasons that the acreage in the West Coast is much more valuable is that the standing inventory volume on an acre, so not all acres are created equal in terms of where they are located, where the species is, but also how much volume grows on that particular acre. In the West, it's a much higher volume, double these other geographies. And if you were to take the Westside and the Eastside of the Pacific Northwest, that's about -- the Westside is about double the Eastside, according to U.S. Forest Service inventory data. Now importantly, again, not only because of the volume, but also because of Douglas fir, and Don touched on this a little bit in his remarks, of why is it that people like Douglas fir lumber? Well, it's because of its strength and its stiffness, and because the Japanese market really highly values Douglas fir because of the way they build with houses and they like the color, as well as the grain.
So talking a little bit about the export markets and their importance to Weyerhaeuser Company. So in the West, we do have the markets of not only the domestic markets, our own domestic sawmills, and we also sell to third party sawmills in the West, but also, the very valuable export market. And Weyerhaeuser, as I said, is strategically located to those export markets.
The infrastructure that I noted earlier and the sales relationships. So in Japan, not only do we have the largest sawmiller but we have additional customers as well. But for this very large sawmiller that Don was referencing, we are his sole source of Douglas fir lumber or Douglas fir logs, that he didn't convert into lumber in Japan for that very important marketplace. His log inventory is on ships between our dock in Longview, Washington and his in Japan. So you can imagine that if you were a sawmiller in Japan, the importance that you would place on the consistency of supply and the infrastructure needed to make sure that that happens, and we've been doing this for over 20 years. So if you think about a log ship, I told you that you could -- we could load 2 ships at a time in Longview, that was really important, not only today but in 2011, when the China market was really heating up and a lot of people wanted to export logs. We had our own docks that we didn't have to worry about getting dock space in order to do that export activity. But each one of those log ships will hold about 1,400 log truckloads of logs. So think about 1,400 log trucks lined up to load one of those ships. We will load that ship, stage the logs, load that ship so that it can come in at one-stop, load and be off back on its way to Japan. Again, very efficient utilization of the infrastructure.
Off the West Coast, including primarily out of Longview but some of the other ports, we loaded close to 100 log ships in 2012.
21% of our Timberland revenue, that includes the revenue in the Timberland segment that goes to our own when we sell logs to our own sawmills. So by reference, we had just around $2 billion of revenue in the Timberland segment last year, including both third party, as well as internal. And we were a little over $1 billion. So probably about $1.8 billion in total. And a little over $1 billion of third-party export -- or third-party sales. So a much even higher percentage. You can see that the percentage of where we send those logs are a little less than 80% to Japan, China at 15%, and you might wonder why we spent the amount of time talking about China if it's only 15%. But as Don showed you, it's the China market that is a very much, a growing market. Japan, very stable, so will continue to be important to us as we go forward into the future. But we are focused on growing the pie in total in terms of our export market capability.
I mentioned we had additional value streams, our minerals, oil and gas. Last year, that contributed about a little over $30 million in total at very low natural gas prices. We do lease out our lands for recreational and hunting leases. So that is about just under $20 million, especially in the South. Our higher and better-use properties, over the course of time, we actually trade out of higher and better-use properties through various tax-efficient exchanges of Timberland. So we don't have a high percentage of higher and better-use properties. But it is an important element as well. And then additional sources, such as energy and biomass, more as we look to the future. And then Weyerhaeuser Solutions is a very small part that we are building to explore, exploring the opportunity in a bigger way to provide some of our expertise to third parties, especially companies like mining companies, other manufacturers who are really interested in the value of managing forests to help lower their carbon footprint.
So again, just closing with Timberland, it is a truly amazing asset class. It is a sustainable and renewable resource that will be very important to Weyerhaeuser and its shareholders as we go into the future and this morning, we wanted to share with you a little bit more about that unique position that we have, relative to our West Coast holdings.
I'm going to move quickly then to Wood Products, and I won't have as many slides here. But it is a very important story that I want to share with you today. And that is the improvements that we've made in our Wood Products business, not only capturing the value of the housing recovery, but just as importantly, the work that we've done in that business to improve our own performance. Through all parts of the P&L and all parts of the operating improvement area, whether it's reducing costs or it's improving our manufacturing reliability and uptime, which does lead to cost reduction, our operating rates at our manufacturing sites are increasing, and we are getting more throughput in through our distribution centers and more work to come there. And then also optimizing our raw material source. So those logs that we talked about are the biggest raw material and the biggest costs for producing lumber, so getting the best recovery and grade out of every log that we process is important.
Just as important as reducing cost is growing the top line. So growing revenue as we go forward, not only just because housing is recovering but actually broadening and diversifying our customer mix and entering new markets, upgrading the product mix and innovating with new products. So today, and we have been benchmarking very rigorously across this business, we are a top-quartile performer in lumber and OSB, measured as return on net asset value. This will tell you a little bit more about our Wood Products business, in terms of our product mix, a little less than 1/2 in lumber. OSB and -- is our next largest. And then engineered wood at 15% and specialty products, our specialty products for resale that we purchase through the distribution center. And it goes into a variety of a markets. But the most important is the residential markets, and Don took you through the economics of those markets earlier.
In 2012, we had about $3 billion of revenue in this business and in the first quarter alone of 2013, we have $1 billion of revenue.
So as I said, we have been improving efficiency across the system. What you see here is the improvement of the utilization rate against our capacity. Lumber and OSB, operating at the highest of the utilization against the products that are listed here. But also, not only improving the utilization by getting more from what we are operating. Our engineered wood, TJIs and solid section, that's that late-cycle recovery product that Don referenced earlier. And you can see that the percent of capacity utilization is lower as it relates to lumber and OSB. But we are, as I said, increasing throughput, increasing productivity enhancements.
One of those ways would be in our drying capacity across our lumber system. So we are focused on understanding how to really optimize the drying process more than what we have already, to not over dry or under dry. Most people in the industry will tend to over-dry lumber because they want to make sure they get the moisture out. And actually, if you over-dry lumber, 2 bad things happen. One, you use too much energy in producing that drying effect. And it actually can degrade the recovery. So we are increasing the recovery, lowering our energy through some of the work that we're doing in drying, improving grade recovery, which really speaks to higher-value products. And then, new high-value products, things like our Framer Series in lumber, where we have lumber that is straighter and is resistant to mold and stains, here are some of the applications that we put on the lumber. We also have products in our oriented strand board business. One example of that would be our downpour product, which is a flooring product that allows water to drain off the floor when it's open to the elements before it -- it's framed and framed-in in the construction process.
And so a lot of things, again, across the system to improve the results in this business. So is it working? Well, these are the results that you can see from 2012 by quarter in the 4 different businesses. Certainly, OSB and lumber have recovered faster because of the housing effects. But again, because of the efforts that we have put into place to increase our own operating performance, in addition to capturing the value of the housing recovery.
In 2012, EBITDA in this segment, was just under $250 million. And in the first quarter of this year, a little over $200 million. When Larry Burrows was here with you, Larry who runs our Wood Products segment, was here speaking with you a year ago, we had just finished reporting our first quarter results. And we didn't make money in this business in the first quarter of 2012.
We just had our best quarter in the first quarter that we just reported. We had the best quarter since 2005. That's a pretty long time ago. But in 2005, housing starts were twice what housing starts are today. We manufactured a lot more product in facilities than we had today. But our EBITDA is about the same this quarter, as it was the first quarter of 2005. So we've got more work to do, and we're really excited about the further improvements that we can make in the business, to continue to not only maintain the improvements that we've gained but also to take advantage of other opportunities, growing the top line by aligning with customers who will value the scale that we can deliver and will pay, importantly pay for the consistency and the quality of service. And then we will strategically deploy capital to optimize our operations and to do some de-bottlenecking as it relates to additional capacity. Things that we haven't -- wouldn't have really paid to do in the past because we didn't need the additional capacity, but as the market recovers, we will have that additional supply to come into the demand.
So all of the businesses are driving operational improvement and really focused on generating more cash flows to fuel the growth of Weyerhaeuser Company. And with that, I will turn it back to Dan to talk about Real Estate and Cellulose Fibers.
Daniel S. Fulton
Thanks, Patty. So Don Haid walked us through a chain of events that I think is helpful to reflect on, and that is when we look at the U.S. housing market, we start with a purchase decision that is made by a perspective homeowner. They enter into a contract to buy a house, the builder then pulls permits, initiates construction, which then triggers an order for wood products to build that house and ultimately, those wood products then flow back to a demand coming from the woods. So although there are multiple markets for a lot of these various products, if you go back to the woods and the ultimate use of logs that come off our Timberlands, the primary use is for housing. And so that's why we spend a little bit of time taking you through the state of the housing market and in particular, focusing on where we are in the recovery. So Patty, started her remarks talking about our core asset, which is our 6 million acres of Timberlands, then moved through to the Wood Products segment. I'm going to talk about our Real Estate business.
And I'm going to do that actually by advancing the slide rather than going backwards. Okay. So I would characterize our homebuilding business as one where we have local brands with unique local value propositions that are customized for the competitive environment in each of those individual markets. We're also a land developer, and our land development strategy is critical to our homebuilding business, but it also is customized by local market conditions in consideration of where one needs to be developing land, and where developed lots may otherwise be available from third parties. And so that's an important consideration. We'll talk about that a little bit this morning.
And then importantly, in our business, revenues and earnings flow from both our homebuilding activities, as well as our land and lot sales. I'm going to start, perhaps, as we did with our Timberlands discussion, with a geography lesson. So I'm going to use the map as a tool here to describe where we operate, talk a little bit about those markets and then, we'll shift to a discussion of our land position. So starting in the Pacific Northwest, this also happens to be west of the Cascade Mountains. Quadrant Homes is a homebuilder that builds in the Seattle and the Puget Sound area. Moving south, Pardee homes, our largest operation, which operates in both Southern California, in the markets of San Diego, L.A., Ventura market, in what we call the Inland Empire. And then they are also a homebuilder in Las Vegas.
Continuing moving into the southwest, Maracay Homes is a builder, primarily in Phoenix, but also has a significant share in the Tucson market. And then we continue to move east to Texas, Trendmaker Homes is our homebuilding operation based in Houston. And then finally, moving at the East Coast, Winchester Homes, which has a subsidiary brand called Camberley Homes, builds in the Maryland and the Virginia suburbs of Washington, D.C.
In our earnings package on the first quarter call, and in our 10-K, we defined and disclosed our lot position on a market-by-market basis. And I think this is a good tool for me just to talk about the market dynamics. So you can see that the largest single position we have is in California, that's to support our Pardee operation. It's the function of the fact that they are our largest single operation. But more importantly, it reflects the entitlement and the regulatory environment in California.
There's been a lot of questions about that and so just to go back a few years, we had combined the various businesses under the umbrella of our eye level brand and then a couple of years ago, we split it up again. So we have a lumber business and OSB business, an engineered wood products business and a distribution business. Running separate P&Ls, that was the information that we presented to you as we had talked on earlier calls and even talked today in Don's discussion about the various uses for those products. So lumber has the broadest utilization. About 1/3 of it goes into new construction, OSB about 50%. And then the latecomer to the new construction would be engineered wood products. Our distribution business historically had been a diverse one. So we distributed our own products, as well as third parties when we went into our eye level restructure. We focus that activity as a channel for primarily our engineered wood products. Today, it's still a significant channel for that business. It's important because of the high touch nature of those products. Most of our competitors that sell engineered wood products have some a function of consultative sales activity and so it is important for that. But we are also carrying some of our other products that we distribute, some of our higher-value lumber or value-add lumber through distribution, and some of our OSB. Plus we have now gone back and added more third-party products that are complementary to our own that a home builder or that a distributor or a repair and remodel store would value. We've got a scale issue that we've struggled with in our distribution business. And with this recovery, we are now seeing the benefits of that scale, bringing down our costs on a variable basis. And so we are encouraged at the amount of recovery that we've made, but that's an area where we still have room for improvement. And so that's an opportunity for us. I'm really pleased with the progress we've made. Year-over-year revenue growth has been significant. But I think that we'll need some more of this recovery in order to see some of that revenue improvement translate into significantly higher margins. But we're focused on it and I think it does give us a good access into the market. Yes? Mark?
Two questions. One, can you just help us think about sort of the impact of the policy changes and potentially currency that are going on in Japan right now? And then secondly, maybe Patty could help us think about how you think about the earnings power of the wood products business in light of the restructuring that you've done? And then you've also sold a lot of assets out of that business since the last cycle. I think you did about $1.2 billion or $1.3 billion in EBITDA in that business back in '04, '05.
Patricia M. Bedient
Daniel S. Fulton
Okay. So I'll take Japan. Current policy changes have been relatively positive for us. The biggest impact for us seems to be the housing market, which is relatively strong. Some of that is a pull forward, we believe, of activity because of the increase in taxes that are anticipated in about a year. But it seems to provide some additional encouragement throughout the Japanese economy. The currency issue has not significant factor to us. So at least that for us at this point, it's a net gain and we see continued increased activity in our exports to Japan.
Patricia M. Bedient
Yes, and Mark, to your question about wood products and the earnings potential of that business, that's why I gave you a couple of those markers this morning that even though at half the housing starts, our first quarter of '13 was as profitable as the first quarter of '05, which was not our most profitable quarter, but it was a strong quarter. And as we look forward and continue to leverage. So in the first quarter, we had EBITDA of about $200 million and almost $210 million so that's a quarter. Annualizing that, you get a much larger number now. There will be those and I think appropriately so, who might say, well yes, but we had great pricing for OSB and lumber, which we did. And prices had softened a little bit, but softened from a very high level. The other thing that I would call your attention to is our opportunity to continue to optimize the facility set that we have, not building new facility, so -- but optimizing the facility set that we have to produce more with what we have. And you get a lot more leverage from optimizing your existing footprint in as opposed to a total new footprint, because that incremental value becomes much more costly. The other thing that George rightly pointed out was didn't get much contribution from those 2 other businesses of distribution and engineered wood in the first quarter. So as we look forward, we do have more work to do across all 4 businesses. But we will get more leverage from those 2 businesses as well, not only in distribution just because of market. And I think that's important that because also as Mark referenced or as a George referenced, there are others who are doing better in distribution, some obviously that are doing worse, but some that are doing better and I want to be one of those that just does better. But the restructuring that we've done in that business as a result of that strategic change that took place back in about 2005, 2006, right before the earnings or the housing downturn. So there are things that will improve that business even at the rate of recovery that we have today or at the level of housing starts that we have today. So all of that focused on growing that EBITDA as we go forward.
Daniel S. Fulton
I think we've enjoyed very strong prices for OSB and lumber as we've talked about in the distribution and the engineered business. As housing starts to pick up, we really will see fairly significant operating leverage from new starts that will benefit those irrespective of what's happening in pricing for the commodity products. Josh?
Okay, I also have 2 questions. The first one I want to leverage off, your answer to Mark on the first question and it has to do with Weyerhaeuser wood products supply. And you paint a picture of very optimistic with housing, a 50% plus in 2 years, you're operating at 90% in lumber -- still it's focused on number, not OSB, 90%. And so the question is, you talk about debottlenecking to get capacity, and is debottlenecking sufficient to get the kind of capacity you'll need in 2 years given your housing start forecast?
Patricia M. Bedient
Well, that's the place that we'll start, Josh. So will we have the -- if you said, well gosh, the housing starts increased by this percentage, will you get that same percentage in capacity from the debottlenecking? No, no. That's not at all what I would want you to take away from this. But what we will do is as we deploy capital, do it in a very disciplined way so that we will continue to get that kind of earnings power out of the business that we have. So we will not increase if we're at 90% today, we won't get another 90% from the debottlenecking. But as we go forward, that will also just underscore the supply-demand trend going forward. So we can't get another 90% utilization of the $4.5 billion of lumber that we have. But it will be very profitable debottlenecking that takes place. So what we have really focused on, and I hope you took that away from the remarks this morning is bigger is not necessarily better, growing revenue is not necessarily better unless you can drop it to the bottom line. So it's margin that we're focused on as we think about where we add capacity?
Daniel S. Fulton
Chip A. Dillon - Vertical Research Partners, LLC
A couple of questions. One on the homebuilding business. You mentioned you had about just under 18,000 lots in California. And I know that's not a stacked number, of course. But could you give us just a rough idea of kind of how -- what the weighted average ages those? And kind of how long do you think it'll take you to work through those? I'm sure it's a number of years. And then secondly, on Slide 39, you talked about how making lumber in China is, with Siberian logs, is about $20 higher per thousand board feet. And how much of that is tariff and can you give us your best guess and update as on what's going on with the tariff?
Patricia M. Bedient
So Chip, you're looking at me for both of the answers to those questions? I'm going to do a Dan and say, Dan, you get the retail question and -- oh, that's an easy question. That's an easy question. And Don, I think we'll call you back up and have you answer the Siberian question.
Daniel S. Fulton
The California land position, I don't have the aging, again. There's some of this that is very long, 20, 30 years because of the entitlement process. And especially, we have our longest land position in terms of the length of time that we've owned it in San Diego. San Diego is a pretty good place to own land. But the entitlement process is difficult and we have entitlements that we've achieved but there is a some dating in how quickly you can bring them to market. Some of it is permits a year, some of it is contingent on some improvements that may need to be made for public facilities, some of it may even relate to neighbors needing to complete some improvements. But as I look at that position for California, it feels like about 10 years of pipeline. But that also assumes that we will be a seller of some of those lots to others because that's always been part of our strategy in those large master plans. We will build on some of those lots. We will sell some of those to others. Specially, will do that on our opportunistic basis as a values come back from where they've been. And we have optionality with those lots because we have the ability to build the house ourselves or to sell it to a third-party and that's more of a, quite frankly, net present value kind of a consideration, how much do we make by selling a lot, how much more would we get if we built the house and what the timing of that would be. So obviously, you accelerate sales by selling to others, takes you longer if you're building it yourself and it's a tradeoff on margin. Russia?
Russia. Well, so the issue with the those Siberian logs is the cost of getting them to that Chinese sawmill. So the terrace in Russia have come down. You might recall there was rising scale and they're we're going to hit 80% and that never got implemented and then as Russia was seeking entry into the WTO, they adjusted the log tariff scale and they are in the 12% to 15% category. But given that, that cost component in the bar is more than half of it is the transport, the overland transport. We're talking about $10 or less of that cost being the good tariff driving it. So it's really the handling and you might have seen studies anything that showed in the past where the rail gauges between Russia and China are different. So even if you're shipping by -- by rail, you have to unload at the Russian border and then reload at the Chinese border. So there's all these handling steps that are really the cost driver there, not the tariffs. Yes?
Gail S. Glazerman - UBS Investment Bank, Research Division
I guess a couple of questions on homebuilding I guess more on, Dan, can talk to us generally about the competitive environment? During the downturn, there was a lot of talk on what would happen to private builders. Now that we're starting to recover, how are you seeing that? And plus, how the publics have responded? And then also there was a chart in the deck showing kind of new home prices versus existing home prices, and that gap looks pretty wide and I'm just wondering if you can talk a little bit about the implications of that. Does that ultimately kind of tap out your ability to price the new homes or is that a new normal?
Daniel S. Fulton
Well, normally, I would start with the second question, Gail. There's is normally a spread because existing homes captures a very wide range of age, class. And in today's this environment, existing homes would include distressed properties that have been going to market. So normally, you'd expect to spread. That GAAP does not trouble me, new home sales. I think existing homes actually dropped off of new home sales a bit. And so the key is level of demand, affordability and ultimately, as we talk about the flywheel, people going back to work, one of the questions has been, well, what happens when the rates start to move because rates are so low now. And the general theory would be, well, rates are going to move up when the general economy is improving so there ought to be greater wealth out there. And so I think as prices do start to move, we have improved balance sheets for individual households. So there is a greater ability to pay, and I would not be expecting prices to rebound to pre-depression levels in short order. But there surely is some pressure that's been somewhat surprising in submarkets where prices have moved up relatively quickly. Your question regarding private builders. In this country, most of the homes are built by private builders. The public builders over time have increased share but it's less than 50%. So most of the homes are built by small, local builders. They had been really challenged in this environment. A lot of them have disappeared. They went out of business. There's some builders that would build 1, 2, 3 homes a year. A large private builder would build 100. And the challenge for them will be construction lending. So there needs to be a rebuilding of the infrastructure for construction loans in this country in order for the private builders to come back in any significant amounts. That will happen over time. But I believe that the public builders have 18- to 24-month runway in front of them or they would be advantaged cost of capital access to land and one of the challenges in the recovery will be land because land prices have moved up relatively quickly in the last 12-plus months as the REO or the real estate-owned land has dried up. And there were lots that were sold at the depth of this recession for less than improvement cost. So negative land residual. And once that land and once those lots are gone, the next lots that have to be improved, you have to earn a return on the improvements, let alone a return on the land itself. And so there is a bit of a jump shift on a regional basis depending upon where those lots are. So lot prices are moving up and so that's a good thing if you're a landowner. But it'll be -- that's the challenge right now, both for public and private builders. It's land. Anthony?
Anthony Pettinari - Citigroup Inc, Research Division
Dan and Rico, you talked about kind of a slight step up in margins from '12 to '13, and I was wondering if you could talk about maybe the potential for a more significant step up in '14, '15 maybe as you bring some lots to market or maybe just generally how we should think about normalized gross margins or EBITDA margins in the homebuilding business?
Daniel S. Fulton
Well, I still believe that our gross margins are in the low 20s or the sustainable basis. I can't really speculate about margins in '15 and '16. It's too far out. I struggle with '14. '13, we're starting to -- the book of business is coming in. And so we see some slight improvement in margins at the back half of the year based upon current sales activity. But also, as I've explained before, there is some cost exposure out there. So we enter into sales contracts, commit to build a house. There has been some upward cost pressure. Some of that seems to be backing off a bit. And so we've been moving prices up at a fairly even rate in order to stay ahead of the cost increases and what we anticipate those cost increases may be. So I would not expect today a significant increase over those low 20s but it's going to depend on a market-by-market basis and what the land we're building on. Mark?
Some use of cash questions. First off, on the dividend, it's over the course of the cycle, 75%, do you -- if your earnings do rise quite rapidly particularly if we have strong pricing, et cetera, are you going to be willing to aggressively increase that dividend or are you going to attempt to meter it up more slowly given always existing uncertainties on how a course of business can go over a period of time. And then secondly, it sounds like buying timberland will be a focus and what, if it's a fair question, what are the return on capital hurdle when you look at buying timberland, that has to be cleared?
Daniel S. Fulton
Do you want to tackle one and I'll tackle two?
Patricia M. Bedient
Okay, great. The first one was I was focused on Timberlands.
Daniel S. Fulton
Patricia M. Bedient
So the first one was, use of cash in the dividend, right? Okay. So as I've said in my remarks, we've increased to 33% over the last 6 months. I wouldn't necessarily plug that into your model that every months, the dividend will go up by 33%. Having said that, one of the reasons why we are continuing to push that dividend off at that rate is because we are generating significantly improved cash flow, both, as I said, because of our own performance, but also as housing recovers. And if you think about that policy, we said where we are even today, we are at a low point in the cycle. So we do continue to intend to increase that dividend. I wouldn't want to go get ahead of the board in terms of how fast that will be. But it will really be relegated by how quickly we can improve cash flow and the outlook looks pretty good as we sit here today. But it is a cyclical business. One of the things that sometimes other people will ask me is, well, when do you know when to stop? And I say, it's not yet. So I think we've got lots of runway to use Dan's term from earlier today. Timberland.
Daniel S. Fulton
Timberlands. We are actively looking for timberlands. We said that it's our #1 priority in terms of capital and growth. We -- is our -- we described earlier, we think we've got the most valuable timberlands in the country. We are a great manager and that's our core business. That's why we converted to a REIT to put that core business in a advantaged position, not just to manage it but to grow it. So as we look at timberland acquisition opportunities, we look for opportunities where we believe we can bring value through our management, through potential synergies that we may be able to bring to it. And those synergies may come from operations but they also may come from logistics and just the scale that we talked about in Patty's presentation, we're focused on acquisition opportunities that would generate near-term cash. So as compared to the afforestation example that Patty talk about, in Uruguay, our focus would be on acquisition of existing timber lands, ideally ones that have a high percentage of marginable timber where we can bring them to market and enhance the cash flow and the benefit of being in our REIT structure. So our primary focus is on that near-term cash, Mark, and what that would be. And so if you think about our dividend level, we're going to want to be sure that we have the ability to benefit our shareholders in any of those acquisitions and then longer term, what that does it gives us a greater footprint and umbrella for all of the TRS activities that we have beneath that. Mark?
Dan, two questions. First, China is not traditionally been a big Doug fir market, are you seeing a significant increase or expecting significant increase in there versus the Doug fir? And the second question, to your comments on existing home sales, there's a view in the market that the lack of existing home supply has been the driver of new home construction. So do you see a risk that before this flywheel kicks in, we might skip a couple of gears?
Daniel S. Fulton
I'll answer the second question first. There's a lot of the inventory that has been taken out of the market through acquisitions by investors, usually small investors, people buying individual homes and maybe their neighborhood or the market. And then that led to some of the more extensive investment activity who Wall Street funds buying big blocks of homes. But for the most part, they've been rented, and the rental models for a lot of those are 3 to 5 years. So the key for me is that they're occupied now with renters, whereas some of those homes were vacant. And so as you look at the overall demand that Don lays out, we have been underbuilding in this country for some period of time. If you just look at population growth, headship rates, our household formation rates have been a very, very low during this recession as kids have stayed with their folks or they've moved back in with their folks and they've doubled up and tripled up with friends in apartments. And so as this market starts to pick up, that's where some of this demand is coming from. It's just the rebound in household formation as whether it's a renter or a buyer and so I believe that there's plenty of demand for new homes and it's not just a function of the fact that the resale homes are not available. Feels to me like somewhat different market, and because a lot of our home purchase relates to location and community and schools and where people are moving to and where they're living today. So it's one big market, new versus resale, that I think that the pickup in new home construction has just that renewed consumer confidence and people wanting to buy a new home having deferred some decisions from for some period of time. Question about Doug fir going into China. We're shipping some Doug fir, and initially when this resurgent activity picked up it, was more heavily weighted to hemlock lower quality logs because they're not going into high-grade uses. One of the things that they've begun to appreciate according to our timberlands group is in fact, that if you use Doug fir for some of this construction framework, you get to use it more than one time, you get to use it 2 or 3, 4, 5x. And so even though it may be a more expensive log to begin with, there may be more utilization long term. So I think it's still to be determined. I think the high-grade Doug fir is still going to go to Japan. They pay the highest value. We were surprised at how quickly prices were bid up in 2011 with that very significant spike in demand from China, and it started with low-grade logs just as it started with beetle-impacted lumber from British Columbia. But demand has picked up and now that their economy seems to be turning around, we're seeing some optimism that, that demand will come back. You'll be next, yes.
Dan, just an extension of the pricing question. I mean, one thing we've heard from a lot of homebuilders this spring is kind of trying to optimize assets as far as price versus pays. Can you maybe talk a little bit more about how you think about that, are there any markets where you feel like you're ratcheting up price just to kind of control absorption all?
Daniel S. Fulton
Well, some of my people criticize me because whenever they report a really great sales week, I question them about prices. Our focus over the last couple of years has been to improve sales velocity in every community in which we operate. So to get greater capital efficiency by having fewer communities, higher sales per community. So we've actually, we've been operating at the high range of sales per community. One of the things that's happened over the last couple of years is that the move-up market has come back first. And so builders that may traditionally not have built move-up have moved upscale a little bit and the question is when do they move back down for that first-time buyer. First-time buyer has been slower to come back because of qualification problems. They've been more challenged to get through the mortgage approval process. So each of our homebuilding operations look at that issue of pace and gauge margin versus velocity. Fundamentally, we're trying to make smart decisions about return on investment. And also some calibration of where we think prices may be going in the marketplace. So if you thought there was going to be a big surge in prices, you might be able to be a bit more cautious push for margin at the expense of velocity, and I think that's a calibration that takes place ideally at a local level because the local people are the ones that can really feel the pace of the local demand. Back there.
Thanks for all the color this morning, Dan and Pat. A couple of questions. One on the wood products business, specifically in lumber, again going back to the utilization rate being around 90% and being in the late then the second part of the third inning for the housing recovery. It fills like as the housing recovery plays out, you'll start to lose share in the lumber business and if you -- first part of that question is do you agree with that premise? And if you do, would you consider building greenfield capacity in the U.S. South in response to that? And then the second question, as no one's asked anything on the pulp business, but it's pretty clear that there'll be a lot of capacity that we'll see on the hardwood side in pulp as all the new Brazilian of those ramp up. And I'm curious if you think they'll have much impact on your business on the softwood side.
Patricia M. Bedient
So I guess I'll take lumber and you can take pulp.
Daniel S. Fulton
I'll be the pulp guy.
Patricia M. Bedient
All right. So to your point, in terms of concerns about losing market share, there is not a concern about losing market share in the lumber business. The lumber business is a very fragmented business, even at the level that we own today, we own a small percentage of the overall market. So back to my comment earlier about just being bigger in order to stay up with market share is not something that we're interested in. Would we look at opportunities to build greenfield mills in the South or some place else? We really have better opportunities for that with our near-term capital and that's really what we're going to be focused on as we look forward.
Daniel S. Fulton
Pulp and concern about hardwood coming from South America. To date, softwood pulp, fluff pulp from the Southeast still has significantly higher characteristics, performance characteristics for our customers and I don't see a near-term threat. Not to say we're not nervous about it because you're always concerned about some breakthrough in technology. But the fiber that comes out of the U.S. South goes into fluff pulp, I believe, and our customers believe is the best in the world and that's why we're shipping it all over the world for their needs, whether it's going to Asia or Europe. And so there's certainly a factor in terms of overall pulp demand and pulp supply. But the hardwood in South America is not a suitable alternative today for softwood pulp going into absorbing products. Chip?
Chip A. Dillon - Vertical Research Partners, LLC
A general question. Just when you look at your portfolio today, which is heavily geared, obviously, to housing and related businesses, if you go back a few years, as you all became a REIT, you did some interesting and I think very value-creating deals that helped other people consolidate businesses whether it was the Reverse Morris Trust uncoded in Domtar or the sale of Containerboard to IP. And as we look at your portfolio, there are pieces that really aren't either tied to housing or maybe kind of are but not tied to a sawtimber. And our -- there are chances that we could see something happen there, especially if and as you continue to see the homebuilding business recover and you need to protect that balance to remain a REIT.
Patricia M. Bedient
Well, I will tell you that we don't have concern about the REIT test so any portfolio changes that we would make would not be over concern on the REIT test and I'll let Dan address the others.
Daniel S. Fulton
Well, you point out they were heavily leveraged to housing. That feels good today. 2 years ago, that wasn't feeling so good. And actually the balance in our portfolio has been helpful. We were very happy to be in the cellulose fibers business in 2009 and 2010, when we were still in the depths of the housing recession. That's a high-performing business with great customer relationships, and it does give us good global exposure, as well as a counterbalance to some of the cyclicality that comes with housing. So we made a very strong point that timber is ultimately tied to housing. But timber also has other alternatives and it does go into fiber and so there's a complementarity there with pulp business whether it's ours or someone else's. And then the other benefit that we have with our timber business is that export market. Now for the most part, that export market, that's going into somebody else's housing, but that's would be tied to the cyclicality of the U.S. housing market. So we like the position that we have today, but I think to the question that George asked initially, it's always a consideration of how we maximize the value of all of the assets in our portfolio and that's a focus, as well as the day-to-day activity of continuous improvement, doing everything that we do today better, cheaper, more efficiently and at the same time, seeking other ways to enhance our revenues and enhance our margins. That's our focus. All right, George, I singled you out, I'm going to go back to you now. You are #1. We're making the rounds here.
George L. Staphos - BofA Merrill Lynch, Research Division
Don, 2 questions for you on housing, and for Dan and Pat, I guess, as well. You mentioned at one point that you -- we were now seeing household formation coming back to more normal levels. But my sense from your comment was that we could still see some recovery there. If I'm not mistaken, household formation last year was actually, at Timberland [ph], is about 1.2 million. Clearly, the prior 5 years, we're half that level for the reason that Dan was seeing doubling and tripling up. Are you saying that we might be, from your data or from what you're seeing, we could see household formation at a greater rate than 1.2 in the years ahead? Why, why not? I have a follow-up.
Sure. I mean, you're right, we've started, we're close to trend at present and it's really, what about that deficit that was created in those down years and we do refer to that as sort of an overhang that there may be some catch up. And this is where being tied to a 2% economy isn't anywhere as good as being tied to a 3% or 4% economy. But if we can see accelerative growth in the other sectors, notably employment, then some of this catch-up seems likely to happen. And I'm not the only person speculating on that. So that's the dynamic for leading to it. And so the opposite side of that same card is that we sustained ourselves at 2%, 2.5% indefinitely, then getting to trend and staying there is still a pretty good place. But the catch-up won't happen as easily.
George L. Staphos - BofA Merrill Lynch, Research Division
The other question I had, I forget what slide it was, but you were showing the repair/remodel impact or penetration, if you will, across the various wood products and it was hard to tell from the scale but it didn't look like repair/remodel was actually increasing that much. And so my question is, over the next 5 years, what would you peg the growth rate in repair/remodel to be, because from what we've seen in our research, you've seen some pickup and a smaller tick in the repair/remodel. And people are painting, people are putting in new plumbing fixtures. But the big ticket stuff is still -- it's not dead, it's certainly not alive. So what's the growth rate you can see over time?
Yes. And the growth rates, obviously, speculative to pin down, but let's talk for a minute about that potential drivers of repair and remodel spending. There was an earlier question about the differential between new and existing homes. The reason why existing homes are sitting at a lower level as the number of distressed properties going into that mix. Well, a distressed property is financially distressed but in many cases, it's got physical impairments as well. So there's potentially some catch-up -- there was a lot more impact on that statement than I was expecting -- potentially some catch-up in improving the rundown housing start, if you will. So how would that happen? Well, we need to see continuing appreciation so that the equity is there either for the investor owner or for the individual owner. So repair and remodel growth rates, currently spending growth rates have been relatively weak and we would expect that to increase simply because of the rising equity. And then there's this second order effect of the physically impaired properties needing upgrades. Now, the other part thing I was going to point out is that repair and remodel expenditures happen for two reasons. One, you believe it's a great investment or two, you're simply upgrading your living space. And for people that used to trade up because they had rising equity and easier lending standards and all those kind of things that they're staying in their existing property but they want to -- they have enough money to improve their surrounding bedroom because the kid is getting older, those kinds of things, that's going to happen. So I would really see a return to normal R&R spending with a potential upside for some of this catch-up. I think we've got a time for one more question. Mark?
Since you guys acquired trust choice in the engineered wood business about 10, 12 years ago, it seems like its kind of relative position in the market has slipped in terms of share. Can you just, can you comment on that and could you also just, as a follow-in, can you just comment on that Longview joint venture that you have, the big newsprint mill and sort of what the future is for that?
Daniel S. Fulton
So talking about trust choice, I would put all of our engineered wood products into that bucket. Trust rates product that has the most visibility is the I-beam business and we have lost some share in that business, part of that is the loss of some of the original intellectual property and through this downturn as we've talked before, it is a function of new housing more than repair/remodel. My sense is that shares have stabilized. It's been a very competitive market with some of our competitors through this downturn and our focus has been to maintain margin rather than to give it up just to chase volume. Now we've got a number of initiatives underway in that business to improve our competitiveness, our cost effectiveness, our marketing. So I'm encouraged, actually, that we are on a path of improvement and I think we'll see the benefit of that and you can measure us against how well we do in this recovery. Your second question?
Just on that Longview joint venture.
Daniel S. Fulton
The Longview joint venture. That's a company called. NORPAC. It's a joint venture between ourselves and Nippon Paper. The mill was originally built as a newsprint mill. Today, production is at 50% newsprint and 50% publishing papers. We've been a survivor by shifting grades, and actually have a relatively stable share in the newsprint business today. There seems to be some stabilization, at least for now, in newsprint. So they are part of our -- on our property in Longview, we have some shared services. That gives us a window. A lot of that product goes to Japan. We're also seeing some new markets for the newsprint. It is profitable and I think it is one of the survivors in that newsprint industry. Some of that comes from its advantaged locations in Longview to access not just U.S. markets but also Asian markets. I'm going to take one more question from Anthony and then we'll wrap it. Okay. Anthony?
Anthony Pettinari - Citigroup Inc, Research Division
Don, you had a helpful slide on wood products where you referenced cost floors. And I'm wondering given we've seen a little bit of weakness in lumber and OSB markets if you could give any color on maybe the high-cost North American lumber producer, what his average costs are right now or maybe where we would actually see some cost support for lumber, assuming we see a little bit of weakness as we go through the year?
Daniel S. Fulton
Well, current prices are significantly above cost support levels and there's a fair amount of regional -- if I wasn't nervous before, now I am, right? So it's very difficult to say where those cost floors are. I would begin by parsing them differently and so we haven't seen raw material prices rise as much in the South as in the West. So cost floors there are different than they are up on the West Coast, for example. Canadian cost floors a little different picture and driven by exchange rates. But suffice it to say that with more production coming on that those cost floors are rising, but I don't think they're rising that significantly because we are still in the early part of this recovery. I mean, the closed capacity is, for the most part, still closed.
Daniel S. Fulton
Okay. So just a couple of comments as we wrap. First of all, I think I had missed statement when I was comparing our export volume and containers and I had decimal point very significantly misplaced. I think 300 trucks a day, try 3,000. 300 trucks a day is not going to get your attention, 3,000 should.
Patricia M. Bedient
You said 100 truckloads.
Daniel S. Fulton
I know and that's a decimal point issue also. I want to thank everybody. Our message today, I want to be real clear about focusing on the value of our timberlands and as I said, we spend a lot of time on the geography, which is really important for you to understand as we think about how we differentiate ourselves from other opportunities that may exist for investment in timberlands. The housing recovery, underway, it's strong. We've got a lot of runway. But then thirdly and importantly, we continue to be focused on ongoing operational improvements across the system so that we'll benefit from that, as well as the recovery. I want to thank you for all being here today. It's a real treat to see you. I appreciate your taking your time to spend your morning with us. It's helpful for us. We appreciate the feedback and wish you the best. Thanks very much.
Patricia M. Bedient
Thank you, Dan.
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