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Weyerhaeuser Co. (NYSE:WY)

Goldman Sachs Basic Materials Conference

May 21, 2013 1:35 pm ET

Executives

Daniel S. Fulton - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

We'll get started with our next presenter, Weyerhaeuser, a leading player in the wood products business, real estate and of course, the crown jewel of the company, the timberland. They also have exposure in fluff pulp. Very fortunate to have Dan Fulton, the CEO of the company, with us today. So I will turn it over to him to tell us more about the story. Dan?

Daniel S. Fulton

Thanks, Alex. We have a limited amount of time today. I want to thank everybody for being here. I'm going to start very quickly with a forward-looking statement and while you're memorizing that, just remind you, we had an analyst -- Annual Analyst Meeting about 1.5 week ago. The materials that I'm using today are excerpts from that, so you're getting a condense version of what was probably a 2-hour presentation. But all of that material is available on our website. So there may be times during my presentation where I may refer you to the slides that would have a little bit more detail.

I'm going to start very quickly with what I consider to be the primary reasons to own Weyerhaeuser company. Number one, we're an industry leader in all of the businesses in which we participate, starting with, as Alex described, that our crown jewel, which is our 6 million acres of timberland ownership in United States. Timberland is split between the Pacific Northwest and the U.S. south. I'm going to talk about that a little bit, and it's importantly held in a tax efficient REIT structure. In addition to our timberlands, we're also a large scale producer of wood products, cellulose fibers, and we're a homebuilder. I'm going to spend just a little bit of time on each of those. My focus today is really going to be on our timberlands asset.

Second key message relates to the housing market. We've got a lot of leverage to the housing industry through our Timberlands, our Wood Products manufacturing and our homebuilding business, and we're finally at the stage where I can say with a lot of confidence, housing recovery is on their way. We see it across our company, starting with sales in our homebuilding business, translating to orders into our Wood Products business coming from across the country and then finally, into the woods.

Thirdly, we've done a lot of work during the downturn. Adjusting the size of the company, taking out costs, seeking opportunities for revenue enhancement. And so we are positioned today to capture the benefit not only of the operating improvements that we've made, but the recovery itself.

Real quick overview of our corporate structure. So Weyerhaeuser company is a timber REIT. We hold our timberlands in the REIT parent company, and then we have a taxable REIT subsidiary that manages and controls our taxable activities. So there are some taxable activities that occurs in Timberlands, merchandising and logistics, once the timber is harvested. Our Wood Products manufacturing sales, fibers manufacturing and our homebuilding business are all held as part of the taxable REIT subsidiary.

Housing is important to us. As I mentioned, 3 of our 4 businesses heavily leveraged to housing. 75% of our revenue last year, if I were to include the intersegment sales from our timber business to our Wood Products business, are tied to those 3 entities: Timberlands, Wood Products and homebuilding. Recovery is underway. We see it with supply and demand fundamentals coming in the balance. Prices are beginning to rise, not just in resale homes, but in new homes. When prices rise, it creates increased consumer confidence, increases the traffic into our model home, complexes and then we start to see the flywheel of this recovery really start to take hold.

So homebuyers are reentering the market. I was asked a couple of weeks ago, where did I think we were in the recovery, and I use the baseball analogy and stuck my neck out and said I think we're in the bottom of the third inning. It feels about that way to me.

We're on our way to recovery towards long-term trend level of starts. As a long-term trend level, we use a factor of 1.6 million to 1.9 million residential units a year. That's a number that's been developed by the Joint Center for Housing at Harvard. They're a long-term forecaster. It's based upon population growth, demographics, household formation, immigration plus replacing of homes that are destroyed either through redevelopment or through weather events, such as we had last year with Sandy and unfortunately, such as we just had in Oklahoma.

Turning to our Timberlands business. I'm going to talk about 5 key points here. We really do believe we've got world-class timber holdings. Our 2 million acres in the Pacific Northwest, our 4 million acres in the south, I believe, are the most attractive, sustainably managed industrial timberlands in this country, certainly, and perhaps the world. Over time, the harvest that comes off our property will be increasing both through improving volume as well as the mix shifts a little bit more towards sawtimber. We add value in our Timberland business through our silviculture practices. We have scale operations. I'm going to talk about that a little bit. That's makes a big difference when you're going to market at the size that we are. And then we are uniquely positioned on the West Coast of the United States, and that's what I'm going to talk about here.

So some of our investors call this a west side story. So 2 million acres in the Pacific Northwest. I want to take a little bit of time on geography as we did a couple of weeks ago at our analyst meeting. You read a lot of reports, you listen to a lot of people talk about their timber. We talk about the west, we talk about the south. The west that shows up in many indexes and reports is a very broad geographic designation that would include Montana, Idaho, Washington and Oregon.

What's unique about us in the west is that our 2 million acres are located west of the Cascade Mountain range. So that has a couple of very significant factors related to it. Number one, it's primary Douglas fir, which is higher value species and what you'd find east of the mountains. The volume is greater per acre west of the mountains because of weather conditions, primarily. And thirdly, there's a unique aspect being on the west side of the Cascades because of the proximity that we have to export facilities, which give us an additional market opportunity beyond domestic consumption of our resource.

In the south, we have 4 million acres of Southern Yellow Pine spread across the south. We're in North Carolina, Alabama, Mississippi, Louisiana, Oklahoma, Arkansas and a little bit of timberland in East Texas. We also have about 300,000 acres in Uruguay. That's a forest that we planted. So we started with a range land about 15 years ago, growing into maturity. It is pine and it is eucalyptus. And also, in Uruguay, we have a plywood manufacturing facility, which gives us the ability to monetize that resource.

Over time, as our timber begins to mature and when we start to realize the benefit of our silviculture practices, we have increasing volume as well as we have an increasing shift in grade. This chart captures very quickly the projected increase in harvest volume that we would expect over the next 15 plus years, and then it also talks about the shift that we have to sawtimber.

So in the west, we're already at about 90% plus. But in the south, we are moving up from 60% to roughly 65%. That's a focus on sawtimber. It's a higher-value log as compared to a lot that goes into pulp and paper activities. Our focus for years has been to capture that higher value through thinning and pruning regimen in order to have that higher value available to us.

This chart goes out a long ways because we're in a long-term business. So we're talking about growing EBITDA here between now and 2032. There's a number of functions that contribute to that growing EBITDA. One is the volume that I talked about, one is the shift in mix; one is just what we're doing day in, day out in terms of operating excellence; and then finally, we have additional sources of income that come off every single acre.

With respect to our silviculture activities, we start with superior seedlings that we generate ourselves. We've been in the seedling business since the 1940s, started the first seed orchard in roughly 1943. What the seedlings do is they customize themselves to our sites for the unique growing conditions that we have and also focus on a final tree that will be higher-value sawtimber.

The scale of our operations is unique because of our size. We use technology in everything we do and because of the scale, we get to deploy that across all of our 6 million acres, makes us a cost effective harvester and hauler. In the south, we rely exclusively on subcontractors. In the west, we have about a 50-50 mix of subcontractors that do our logging and hauling, and then we have 50% that are our own employees.

Strategic port access, I talked about before, in the west, for us is really critical. We own our own port facility in Longview, Washington, along the Columbia River. So that positions us for trade routes to Asia, primarily Japan, China and Korea. To give you a sense of scale across our entire system, I like the statistics, 3,000 truckloads a day of logs are on route from some of our logging sites to our own conversion facilities to export facilities or to third-party customers. We talked about export. I'm going to discuss that a little bit further, but once again, in terms of scale, we have ships loading 24 hours a day, 7 days a week. It takes 1,200 truckloads, plus or minus, of logs to fill a log ship, just to give you sense of the scale of our activity.

In the west, as I said, we're uniquely positioned to take advantage of export markets, which give us an alternate market opportunity beyond what presents itself for domestic markets. This pie chart captures the split of our export revenue last year. To give you a sense from our western lands, we have about 1/3 of our volume is exported, about 1/3 is sold to third-party domestic manufacturers and about 1/3 goes to our own Wood Products conversion.

Japan is our biggest market, has been for years. They buy the highest value logs that come out of our woods and come out of the woods of others in the Pacific Northwest. They're Douglas fir. They go into traditional post-and-beam housing, primarily in Japan. We've got significant long-term relationships with our Japanese customers that extend back as far as 20 years. From our western lands to Japan, we have a continuous supply chain. There's a ship being loaded at any one point in time, a ship being unloaded in 1 of 2 ports in Japan, and then ships on route that are creating a continuous supply chain for the flow of that volume.

Additional value streams that come from Timberlands. We're still not unique in the extensive mineral rights that we have. So we have mineral rights that run with our fee acreage, but we also have mineral rights that we retained when we sold land in the past. So 7 million acres across the U.S. That -- in the south, we have oil and gas reserves, some traditional oil and gas wells. Increasingly, in the last 5, 6 years, we have opportunities to monetize resources and shale gas and shale oil.

Last year, about $22 million of revenue from oil and gas. That is down from the prior couple of years just because of what's happened with natural gas prices. Our primary practice is to enter into operating leases with exploration and development companies. We get enough front lease payment. They take the risk. If they're successful, we collect royalties. In addition to oil and gas, in our business, we have opportunities for minerals and aggregates that go into building our own roads, but we also sell them to third parties.

Recreational leases is an interesting side business for us, once again because our scale. It adds up to a significant amount of revenue. So $19 million last year, primarily in the south. So what happened -- what we do is we enter into leases primarily with private parties, recreational leases, mostly hunting in the south. They pay us annual lease fees and in the process, we not only do generate income, but we receive security in the process because they help us to take care of our property.

In addition to the mineral rates and the recreational leases, we do have some sales of higher and better use properties, likely, a slower percentage than you might find with some other timber owners simply because we've been active over the years in monetizing those properties when we have an opportunity to trade out higher and better use properties. Normally, we'll do that in the 1031 Exchange and then in the process, increase our acreage.

A lot of talk in the last 5, 6 years, renewable energy, biomass. It's a developing market. It's an additional revenue source. Still somewhat tied up in the failure of the U.S. developer, real robust energy policy. So there's lots of demand coming at this point from Europe, still some environmental issues. We're active in the market, and I think we've done probably the most amount of research on what can and what can't be done as compared to anybody in the industry.

And then finally, we have a company called Weyerhaeuser Solutions. We formed it a couple of years ago. Its business, longer term, is providing management services to third parties. So taking the expertise that we have gained over the years, providing those services to others, primarily industrial companies that have determined that timberland is a good way for them to offset some of their carbon footprint in manufacturing areas such as South America. Not a significant income stream today, but one that we would expect to grow over time.

In our Wood Products business, we're also large scale. So we are a very large manufacturer of lumber in North America, with mills in the south, in the Pacific Northwest and in Western Canada. 18 mills that have capacity for 4.5 billion board feet. We're a large OSB manufacturer, 6 facilities, also U.S. and Canada with production capacity of about 3 billion square feet. And then finally, we're a large player in engineered wood products with the broadest product range of anyone in the industry, starting with I-beams, but then extending to a variety of solid wood, beam products that all go into the residential construction industry.

What we've been doing in our Wood Products business during the downturn is focusing on improving our own operational capability. We've made great progress over the last couple of years, especially in reducing cost, in increasing efficiency, in improving operating rates, in finding new markets for our product, ones where we feel like we have a competitive edge, ones where we may have a competitive product that no one else is able to offer, in the process optimizing our raw materials, all of which is focused on reducing cost as well as increasing top line revenue growth.

The chart that I'm showing here is one I'm particularly proud of. This compares the performance for our Wood Products business in all of 2012 as compared to the first quarter of 2013. So for the entire 2012, our EBITDA, as you can see here, $246 million first quarter, which was the best quarter that we've had in Wood Products since 2005. It was a $209 million quarter. I went back and checked the records because we had the data that said, okay, best quarter since 2005. So what was happening in 2005? 2005, 2 million housing starts, form an annualized basis, and we were producing twice the volume that we did on an annualized basis in the first quarter.

We're also a homebuilder. So this is the third leg of our housing-related businesses. We are top 20 builder last year, I think we're 17th largest homebuilder in the country. We have local brands with unique local value propositions operating in desirable regional markets. So this is a chart that shows -- a map that shows the location of each of these operations. I'm not going to take a lot of time going through it because our time is short. But you can see, we stretch from the Pacific Northwest with our Quadrant Homes operation; in California and Nevada, Pardee Homes, that's our flagship in the home building business, has been for years; Maracay Homes operates in Phoenix, Tucson; Trendmaker Homes in Houston; and Winchester, with a subsidiary brand, Camberley Homes, operates in the Maryland and Virginia suburbs of Washington, D.C.

We're noted in the homebuilding business, we're having a long land position, and this is the chart that shows where our lots are located. These are lots that have some level of entitlement. These are not all finished lots. But you can see here that we have a distinctive position in California, 17,000 plus lots. We've always been long land in California because it's a very challenging entitlement market. And then what we do in our business is we customize the amount of land development and the land entitlement work that we do based upon what is necessary in order to achieve entitlements in a given market.

California is critical for our homebuilding business. It's critical for Weyerhaeuser company generally as we think about homebuilding plus Wood Products manufacturing in the Pacific Northwest as well as the impact on our Pacific Northwest Timberlands. I'd like to take a minute to talk about California because it's a market that got hurt so badly.

Peak to trough housing starts, just in the time frame shown here, $130,000 to less than $30,000 -- or $150,000 to less than $30,000. Our Pardee operation in California at the peak was building and delivering 1,500 homes a year; last year, 431. So it gives you a sense of the kind of decline we saw. The good news is you can see that the curve has turned upward. We are starting to feel and sense a recovery in California. It started in the fourth quarter and has continued.

So fourth quarter we had strong sales at a time frame when normally we don't see strong sales. That was the first indicator for me that things were turning. First quarter continued momentum, that momentum continues into the second quarter. Importantly, for us, we're seeing sales in some of the roughest markets that we encountered during the recession, the Inland Empire, L.A. and Ventura County and then actually spreading across the border into Las Vegas.

So as I talk about, the recovery and the importance to Weyerhaeuser company, I do come back to California because it is so critical, not just for this country -- or this company, but for the country. It's the largest economy in this country. And so when California turns a corner, it makes a big difference. And so we're starting to see not only volume rise, but also importantly, prices.

What we're doing in our homebuilding business is focused on opening new communities today. We expect to end the year at about 25% greater communities than we started the year. That ramp up is consistent with what we're seeing across the board in housing recovery. For us, that means about 2,800 closings this year.

I'm going close the loop here and talk about our Cellulose Fibers business. For our Cellulose Fibers business, we're focused primarily on fluff and value-added grades. We've got 4 pulp mills in the south, produce fluff pulp. We've got a pulp mill in Grand Prairie, Alberta, produces NBSK for their Premium towel and tissue market; and we've got a mill in Longview, Washington, that produces liquid packaging board.

Our focus is on growing with our global customers in this business. 2/3 of our sales roughly take place outside of North America because that's where the growth is. Our focus is trying to continue to stay up on the value chain. That's why we produce fluff, primarily, and we are innovating towards some higher grades. In the process, we've got to be a great manufacturer, and so we continue to focus on operational excellence in this business. And in this business, because of the export activity, the location of our mills is critical because we've got ocean access.

Let's talk about value-added grade a little bit. As I said, our primary product is fluff. We've got a significant global share of that market with large-scale customers that need us, we need them. And then in the towel and tissue market, we've got a 10% share roughly. In this business, as I said, exports are significant. This pie chart captures real quickly in 2012, the range of markets in which we sold this business. So last year, $1.8 billion in revenue.

I talked about the number of log trucks that it takes to fill a ship. I talked about the number of log trucks that we have underway at any time. One of the surprising statistics for me in this business is that collectively, Weyerhaeuser is about the fifth largest exporter of containers from the United States, and 90% of those containers are curing products from our Cellulose Fibers business.

We converted to a REIT and when we did so, we stated a dividend policy that commits us to a payout ratio of about 75% of funds available over the cycle. When we started, post conversion, we were paying at a higher percentage of that. And now as we start to see the housing recovery kick in with some momentum for our Wood Products business, our Timberlands business and our homebuilding business, we've been able to increase our dividend twice in the last 6 months. Last October, we increased it, and then just recently in April, another increase, collectively between those 2, a 33% increase since the time that we converted.

We were able to increase those dividends for 2 reasons. We looked at our own improvement and operating performance and had a lot of confidence in the improvements that we've been able to bring to the bottom line and we thought that we could bring to the bottom line in the future. And then secondly, some real confidence that this housing recovery is underway, and that we've got a lot of runway in front of us.

We've got a strong capital structure with significant liquidity. This chart captures that. There's more data that would be available to you in our analyst presentation, and I would turn your attention to that. We have some debt maturity this year and then after this year, no significant maturities until 2017. So a strong position, undrawn credit lines and most recently upgraded by Moody's.

I do want to take a minute on third-party recognition. Why do I bother with this? We got a long-term commitment in Weyerhaeuser Company to responsible stewardship of our assets, to accountability, to integrity, to good governance and to support of the communities in which we operate. We get a lot of third-party recognition for what we do. To me, this is important for you, our investors, because I think it matters to you. It matters to our customers, especially these larger global customers. They want to be doing business with companies that get this kind of recognition.

And it's important for the communities in which we operate, and it's important for our employees and the people that we are trying to recruit as new employees. One of the things we find as we are now growing our business, again, coming out of this recession is as we talk to young people, as we talk to potential new hires, this matters a lot to them and it gives us a competitive advantage when we're hiring.

So I'm going to close where I started, 3 primary reasons to own Weyerhaeuser. Number one, we're an industry leader, starting with our, what I call, our crown jewel of 6 million acres of timberland, with a special focus on the Pacific Northwest and our 2 million acres of coastal [ph] timberlands stock with valuable Douglas fir. We are in a position now where we're beginning to capitalize on this recovery in homebuilding. And then thirdly, we're going to be enjoying increases in volume in our businesses that come with that recovery, but we're also capturing the benefit of operational improvements that we've made over the last 4 to 5 years during this recession.

And with that, I'd like to open up for your questions. Yes?

Question-and-Answer Session

Unknown Analyst

I guess I agree that the housing market is clearly moving on a positive, but I was a little bit surprised by the minus 15% housing start number that just came out. I wonder if you could add any color to that. And then secondly, the other question is I realize your exposure to China is much smaller than Japan, but if you can characterize how small China is from your perspective.

Daniel S. Fulton

So I don't get concerned by 1 month statistics for housing starts. I mean, I see the activity everyday. I see the sales taking place, and so I think there are some month-to-month adjustments that we perhaps want to go through the numbers and understand where it happened, but we are in a long-term trend recovery. So last year, 870,000 housing starts. This year, we entered the year with a forecast of about 1 million. Seems like the general consensus out there today would be 1 million to 1.1 million, with another plus 25% next year. At this point, the demand seems to be coming back and the challenge is going to be more on the supply side: the ability of the industry to be able to turnaround and respond, hire new employees, train them, get the materials, get the permits issued. So there's a lot of constraints in the system that will be a bit of a break on that recovery. But the demand is sure starting to emerge as we start to see households being formed again, population continues to grow. And when prices start to move up, that's a big factor because it restores everybody's confidence or restores our personal balance sheets and I think everybody feels better. With respect to China, it's a component of our business in our Timberlands, also a market for us with our Cellulose Fibers business. So in China, we actually do more sales probably through our Japanese customers or our U.S.-based customers that are establishing plants in China. Now we would report those as Chinese sales, but most of that is through global companies that are now operating in China, and we see a lot of growth in the future. In the back.

Unknown Analyst

Can you just perhaps provide some color with respect to the disconnect we're seeing in lumber prices recently over the last several weeks in spite of what appears to be a continued housing -- a continued strong housing market? And then secondly, any color that you can give us in terms of the impact of the depreciating yen in your export business? Is that impacting your customers' buying power?

Daniel S. Fulton

So real quickly on lumber prices. Lumber prices and OSB prices shot up to just near record levels in a short period of time because of a lot of constraints in the supply chain. So I think what's happening, we won't know until we have several more months of this is that I think that there's a bit of a pullback just because prices were so high, more capacity come on line, not new mills per se, but more shifts, more hours and it's just there's an adjustment period that takes place. The channel is much thinner than it used to be, there are fewer participants. And so with prices having moved up as quickly as they did, I think there was some caution on the part of wholesalers in that chain to take a significant inventory position because they didn't want to get stuck with it. And so we saw a little bit of that in the fourth quarter of last year. Normally, inventories would run down in the fourth quarter. No one wants to carry a lot of working capital over the year end, but the orders kept coming in, and so then they came back into the market and pushed prices up. So I think you'll see some fits and starts as we really rationalize and balance supply demand. With respect to your question about the yen, is that the second question? We haven't seen an impact yet in our business. I think in general, what we're seeing is a more vibrant Japanese economy, which should help everybody with more demand. What we've tracked in terms of the activity that we've got with Japan is really a 3-way exchange between the U.S. dollar and the Japanese yen and the euro because there are competitive products that come into Japan from Europe and with a little bit stronger euro, it seems to have balanced that a bit. Another question?

Unknown Analyst

Are you currently or have you considered integrating a water asset or water rights component to your business?

Daniel S. Fulton

We have not. I think water is one of the most significant assets that we have underlying our 6 million acres of timberland. And if you think about timberland generally in this country, it serves some very significant environmental purposes, carbon sequestration, but they're watersheds for this entire country. At this point, there are no -- there's no significant ability to monetize that. But I believe long term, that may be one of the most significant resources that we have along with those mineral rights that go with our 6 million acres, and it could be that the water will be worth more than the minerals at some point. Yes?

Unknown Analyst

You had mentioned that your upgraded listing [ph] by Moody's to investment-grade and at S&P, you already hold the IG rating. So I was wondering given where interest rates are right now, if you see value in either refinancing debt or just trying to get that cost down?

Daniel S. Fulton

Well, we look at the opportunity to refinance debt, but it's very expensive to buy our debt in, and so that's something that we monitor. It seem to me that the debt market was valuing us as an investment-grade company based upon the trading prices of our debt. And we would look for opportunities but at this point, our debt trades at a level that it wouldn't make sense for us to buy it in. Other questions?

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

I'll ask a question, Dan, maybe try to pull together all the information that you've presented to us, and we appreciate that. But now that the profitability in the business has clearly started to improve, the housing market has turned the corner, still we're in the third inning of the recovery, the EBITDA profile of the businesses and that $1.1 billion to $1.3 billion range in LTM basis, the dividend is now $0.80 per share, I mean, how do you think about the normalized earnings potential of Weyerhaeuser? As the cycle plays out over the next 3 or 4 years, what do you think the EBITDA profile of the company would be? Can you double that dividend if you think that the cycle plays out as you hope the way it does?

Daniel S. Fulton

I can't give you a future EBITDA number. But I will tell you that we are committed to the dividend policy that we've outlined, 75% over the cycle. As we've demonstrated over the last 6 months, as we have opportunities to increase the dividend, we will do so. We also commit capital to improve the effectiveness and competitiveness of our assets. And so that's one of the uses of cash that we have. We've been, I think, good stewards of our capital investments during this recession. We had a higher percentage of our spending go into our Cellulose Fibers business. Now I think you'll see a little bit higher percentage shift into Wood Products because there's an opportunity there with targeted investments to increase throughput and nominal capacity, and that's going to be our focus for our capital investments. Our primary growth objective that we've been clear about is that we hope to grow our Timberlands position over time. That's our core business, our primary asset. It is tax advantaged in the REIT structure. And so our focus for growth is to grow our Timberlands position where we can find opportunities to make smart acquisitions that will generate increased cash flow that will be complementary to our existing Timberland position and will give us yet another opportunity to increase dividends over time. And where we can bring this tremendous management resource that we have, the advantages that we have in our silvicultural practices, our logistics, where we really can create synergies for properties that maybe owned by others today that maybe more valuable in our hands.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

I think we have time for one more question if there is one.

Unknown Analyst

Could you talk about the long-term potential for margins in your Real Estate business and how it compares with what you see as the peer passage [ph]?

Daniel S. Fulton

Could you repeat it one more time? I'm hearing an echo inside.

Unknown Analyst

Could you talk about the long-term margin potential for your Real Estate business and how it compares versus peers as you see it?

Daniel S. Fulton

So the question is long-term margin potential for our Real Estate business. What we have shared in the past is that we would expect our gross margins in the home building business to be in the low 20s. And it really is a function of mix, and we talk about that a lot on our calls. Your margin may go up or down 1 point or 2, and the mix could be geographic mix, what market is that sale being made. Our highest margin market, historically, is San Diego. And so if we have a higher percentage of closings coming from San Diego, all things being equal, we would expect margins to be a little bit higher. There's also mix in terms of product that we build luxury homes in places like San Diego and in the suburbs of Washington, D.C., that would have general higher margins than we would have for townhomes and first time homes that are being built in the Inland Empire of California or in the suburbs of Phoenix. But on average, we expect low 20s. That number can vary quarter-to-quarter. And as you compare our margins today with what they have been historically, at the peak of the market, we had highest gross margins of any homebuilder in the industry, and that's marginally a function of where those houses were being sold and the land position that we had. Land values came down during the recession. So that -- some of that margin has disappeared and now as the market structure recovers, you'll start to see some recovery in those margins.

With that, I would like to thank everybody for your attendance, your questions. I encourage you to go to our website if you want additional detail that was included in our slide deck for our Analyst Meeting. Kathryn McAuley is our Director of Investor Relations. She's here today, and I'm sure she'd love to hear from you. Thanks very much.

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