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Edited Transcript of BCC earnings conference call or presentation 5-Aug-19 3:00pm GMT

Q2 2019 Boise Cascade Co Earnings Call

Boise Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Boise Cascade Co earnings conference call or presentation Monday, August 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dean Michael Brown

Boise Cascade Company - EVP of Wood Products Division

* Nathan Jorgensen

Boise Cascade Company - COO

* Nick A. Stokes

Boise Cascade Company - EVP of Building Materials Distribution

* Thomas Kevin Corrick

Boise Cascade Company - CEO & Director

* Wayne M. Rancourt

Boise Cascade Company - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Brian P. Maguire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Reuben Garner

Seaport Global Securities LLC, Research Division - Associate Analyst

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Vincent, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade's Second Quarter 2019 Conference Call. (Operator Instructions) Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of the future performance, and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call.

For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce to you Wayne Rancourt, Executive Vice President, CFO and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [2]

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Thank you, Vincent. Good morning, everyone. I would like to welcome you to Boise Cascade's second quarter 2019 earnings call and business update. Joining me on today's call are Tom Corrick, our CEO; Nate Jorgensen, our Chief Operating Officer; Mike Brown, Head of our Wood Products operations; and Nick Stokes, Head of our Building Materials Distribution operations. Thomas is participating on the call remotely today, so Nate will step in and provide the executive summary comments and will wrap up with our outlook. Tom will be available for the Q&A session.

Turning to Slide 2, I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. I will now turn the call over to Nate.

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Nathan Jorgensen, Boise Cascade Company - COO [3]

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Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm at Slide 3. Our second quarter sales of $1.2 billion were down 13% from second quarter 2018. Our net income was $27.7 million or $0.71 per share, down from $1.06 per share in the year ago quarter.

Second quarter 2018 results included $9 million of net after-tax losses or $0.23 a share from noncash pension settlement charges.

Overall, the second quarter 2019 results reflected weaker financial performances in both businesses, principally as a result of lower commodity wood products pricing. Total housing starts were flat compared to the same period last year. Single-family starts, the primary driver of our sales, decreased 6% while multifamily starts increased 16%.

Our operating performance in both businesses was quite good considering the environment. Consistent with our strategy, the volatility of our earnings has continued to decline as we emphasized growth in distribution and engineered wood products. Our Wood Products manufacturing business reported segment income of $18.9 million in the second quarter compared to $36.5 million in the year ago quarter.

Our Building Materials Distribution business reported segment income of $33.8 million on quarterly sales and $1.1 billion for the second quarter compared to $47.7 million of segment income on quarterly sales of $1.2 billion in the comparative prior year quarter.

Wayne will walk through the financial results in more detail and then I'll come back to provide our outlook for -- before we take your questions.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [4]

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Thank you, Nate. I'm on Slide 4. Wood Products sales in the second quarter, including sales for our distribution segment, were $334 million, down 21% from second quarter 2018. Approximately 1/3 of the decline in sales is due to the asset sales or closures in the last 12 months. As Nate mentioned, Wood Products reported segment income of $18.9 million in the second quarter compared to $36.5 million in the prior year quarter. Reported EBITDA for the business was $33 million, down from the $55.9 million of EBITDA reported in the year ago quarter.

A decrease in EBITDA was due primarily to lower sales prices of plywood and lower sales volumes of EWP and plywood as well as higher per unit conversion costs.

The per unit production costs were impacted by capital project related outages at our Chester, South Carolina mill and market-related downtime due to weaker market conditions.

Commissioning is currently underway on the recently installed assets at our Chester facility. The negative earnings impact were offset partially by higher net engineered wood products sales prices, lower oriented strand board cost used in the manufacture of I-joists and decreased log costs as well as lower employee-related expenses.

BMD sales in the quarter were $1.1 billion, down 10% from second quarter 2018. Sales prices declined 12% but sales volumes were up 2%. Excluding the impact of the acquisitions made in the last 12 months, the sales decline in BMD would have been approximately 12%.

BMD reported segment income of $33.8 million or EBITDA of $38.8 million. This compares to segment income of $47.7 million and EBITDA of $52.2 million in the prior year quarter.

The decline in income was driven primarily by a gross margin decrease of $10.6 million, resulting from lower average commodity prices compared with second quarter 2018 and a $3.6 million increase in selling and distribution expenses.

The amounts for unallocated corporate costs and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $7.3 million in second quarter 2019 compared with negative $22.3 million in second quarter 2018.

As a reminder, second quarter 2018 results included $12 million of noncash pension settlement charges.

As we move through the balance of this year, our earnings comparisons to 2018 should be taken with due consideration of the restructuring activities we undertook last year.

We have included a summary of last year's items and the earnings impact in the appendix to our slides. Excluding restructuring-related items, Wood Products third quarter 2018 EBITDA would have been $43.7 million and fourth quarter Wood Products EBITDA would have been a positive $11.5 million.

Turning to Slide 5, our second quarter sales volumes for LVL and I-joists were down 5% and 11%, respectively, compared with second quarter 2018. Our volume declines for EWP were roughly in line with industry production figures for second quarter, so we believe the weaker volumes are reflective of the slower building season this year.

EWP consumption is also influenced by the mix of single-family and multifamily starts, medium single-family home size as well as the home foundation type. Starter homes in the southern U.S. using concrete slab-on-grade construction uses far less I-joists, for example, than a two-story home in Denver with either a crawlspace or a basement. Pricing in second quarter for LVL and I-joists was up 2% and 5% from the year ago quarter, reflecting pricing actions taken in early 2018 and ongoing management of our customer programs.

Turning to Slide 6. Our second quarter plywood sales volume in Wood Products was 343 million feet compared to 369 million feet in second quarter 2018.

The lower volume for plywood sales reflects downtime for facility capital improvements and in response to weaker market conditions, as well as the sale of our Moncure Plywood facility during the first quarter of this year.

The $272 average plywood net sales price in second quarter was down 28% from second quarter 2018.

July's plywood pricing in this year was more than 25% below levels experienced in third quarter 2018.

Moving to Slide 7. BMD's second quarter sales were $1.1 billion, down 10% from second quarter 2018.

By product area, BMD's sales of commodity products decreased 25%, general line products sales increased 9% and EWP sales decreased less than 1%.

The gross margin percentage for BMD in second quarter was 12.4%, 40 basis points higher than second quarter 2018.

However, the gross margin dollars generated in second quarter 2019 were $10.6 million below the prior year quarter because of price deflation.

BMD's EBITDA margin was 3.5% for the quarter, down from the 4.3% reported in the year ago quarter.

Looking forward, we anticipate that commodity products pricing in the third quarter of 2019 will remain low compared to historical levels.

However, we do not expect a substantial downward price volatility and gross margin erosion like we experienced in third quarter of 2018.

On Slide 8, we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items and accrued interest, decreased $33.2 million during the second quarter. Both businesses reduced inventories during the quarter in response to the lower-than-expected demand environment.

Accounts payable decreased from first quarter due to payments made on extended term payables and lower inventories. Accounts receivable increased with the seasonal increase in sales and accrued liabilities grew due to employee-related compensation and customer rebates. The statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory and accounts payable data broken down by segment for those that are interested in the detail.

I'm now on Slide 9. We finished second quarter with $202 million of cash. Our total available liquidity at June 30 was approximately $568 million, which reflects our cash as well as the availability under our committed bank line.

Our capital spending, excluding acquisitions, is expected to be between $85 million and $95 million this year as we execute strategic projects at our manufacturing operations in Chester, South Carolina and Florien, Louisiana.

We continue to expect our effective book tax rate to be approximately 26% going forward. I will now turn it back over to Nate to discuss our outlook.

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Nathan Jorgensen, Boise Cascade Company - COO [5]

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Thanks, Wayne. I'm on Slide 10. The July consensus for 2019 U.S. housing starts is 1.24 million, which is slightly lower than 2018. We believe important economic drivers behind the demand for new construction, like job formation, remained in place.

However, affordability issues in many metropolitan areas and the availability of construction labor continued to influence the pace of activity.

With housing starts expected to remain relatively flat in the second half of the year, we continue to focus on areas we can control to drive both revenue and earnings improvement.

In Wood Products, we're focused on successfully completing our strategic capital projects and reducing controllable cost through our operational excellence initiatives.

While considering the lower plywood pricing environment and also adjusting third quarter 2018 to exclude an $11 million of impairment charge related to asset sales, we expect Wood Products year-over-year financial comparisons to be negative in the third quarter of 2019.

For BMD, the team continues to make good progress and seeking acquisitions in targeted geographic markets, looking at product line extensions and pursuing other avenues to drive sales and earnings. With a more stable price environment, we expect BMD to report improved year-over-year financial results in the third quarter of 2019. We'd welcome any questions at this time. Vincent, would you please open the phone lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) You have -- your first question comes from the line of Brian Maguire.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Wayne, just a question on the plywood operating rates in 2Q and just in general, how much volume you might have forsaken given the pricing environment? And any kind of color or outlook for 3Q on any sort of economic downtime [planning] on (inaudible) having Wood Products?

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Division [3]

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Yes, Brian. This is Mike Brown, might address that. Yes, in the prior quarter, we certainly took outages, as Wayne indicated, for our capital and market-related issues. Year-over-year, I think that was approximately 50-yard million feet of volume that we lost.

Going forward, in this quarter, we have a small amount of capital activity that we're going to implement. And of course, the amount of outage that we will take related to market really depends on what happens with pricing. So we don't have a specific plan that I could speak to for the next couple of months.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Okay. And then just bigger picture, I was sort of wondering, as others are taking some downtime, some permanent closures, some of those maybe not starting till later in the quarter, do you guys have a sense on how impactful that will be to the market supply/demand? And as you think we're getting enough announcements that we might start to see, Wood Products prices lift a little bit later in the quarter as some of that capacity does come offline?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [5]

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Brian, this is Wayne. I think the capacity withdraws particularly the 2 large OSB plants in Western Canada that are slated to come out this quarter, will be helpful. But kind of offsetting that I would say is the demand environment continues to be flat at best in most of the country. And the other thing is with the relative currency exchange rates and with the economic weakness in Europe, we are seeing increasing import activities on a number of products into the U.S. So we really don't see a lot of relief on the capacity utilization rates later this quarter and into fourth quarter.

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Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Okay. And then just last one for me. Obviously, really great gross margins in distribution given the volatility in prices. Just wondering if there's anything onetime or unusual in there? Obviously, the volatility was a little unusual. But thinking about that 12.4% margin going forward, is that something that you think you could be able to repeat? Or we might expect it to be a little bit lower going forward?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [7]

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Brian, again, this is Wayne. And I'll let Nick chime in, if he wants. A lot of it, frankly, is math. So if you look at our second quarter '19 sales mix, 41% was commodities, which is reflective of the huge deflation we've seen on lumber, OSB and plywood. If you go back a year ago second quarter, it was almost 50% of our sales. And as a general rule, commodities carry a lower gross margin percentage than the general line category and EWP. So with commodities, again, dropping about 8 percentage points -- 9 percentage points of the sales mix, that's part of the reason we're as strong as we are with a 12.4%. And likewise, that's why the operating costs are a little bit higher as a percentage of sales. So there's generally more handling activity associated with the general line or EWP category than there would be with the commodities.

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Operator [8]

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Next question comes from the line of George Staphos.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [9]

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Congratulations on the quarter, certainly better than we were looking for. Couple of things. Number one, maybe piggy backing off of Brian's question. So can you comment a bit further in terms of what you're seeing over the last 2, 3 months from an import standpoint on plywood? And if there's a way to size it versus what you were seeing earlier in the year or on a year ago basis? That would be helpful to start.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [10]

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So if I just look at Brazil, this is in thousands of cubic meters, just to give you a sense. We were at, in April 81,000, in May 92.4 and in June, 78.8. But importantly, if you look at what was exported out of Brazil through the first 6 months, the U.S. got 38.6% of Brazil's exports.

If I look at the number for full year '18, the U.S. got 32.8% of Brazil's exports.

So again, the relative economic activity and currency exchange rates, and by the way, this is true on lumber as well and increasingly on engineered wood. So I think to the extent we end up with a strong U.S. dollar and better economic activity here than what people are seeing in Europe or South America, we're likely to see inbound imports increase in a lot of our product lines.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [11]

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Is the EWP level of importation sizable now -- sufficiently sizable to actually impact your commercial strategies and your go-to-market? In the past, I wouldn't have thought that EWP would be that susceptible to imports. But if there's been any change there, I'd be curious.

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Nathan Jorgensen, Boise Cascade Company - COO [12]

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George, it's Nate Jorgensen. I think the -- what we see from Europe is generally tied to kind of a specific geographic part of the U.S., essentially the East Coast and more in the Northeast. And relative to the demand, it has -- at the margin we certainly see influence relative to volumes in pricing when material fills up at the port. So it's something -- I would say it's not material but nonetheless, it does have an impact on select markets. And as Wayne described, just given the currency and the opportunity that resides here relative to Europe, we continue to become an important part of that product mix.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [13]

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Understood. Two last ones and I'll turn it over. One, in Wood, you performed better than I was looking for from an operating standpoint. I mean that's not hidden there necessarily, but were your operations as you would have expected, was performance a bit better than expected? If you can talk about what the puts and takes in terms of manufacturing were for you in the quarter beyond the obvious downtime? And then one thing that we've been tracking in your commentary on veneer and obviously, you've got Florien, you've got Chester. Is there a way that you could size for us how much veneer you'll have available when you're done with the projects in the middle of next year available for the market, relative to what would have been the case a year ago and 5 years ago? In other words, how much external availability or supply do you have now of veneer? I remember that was once a strategic -- I think -- remember it being a strategic imperative for you guys.

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Division [14]

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Yes, sure, George. I'll have a stab at this, and I'm sure Wayne will chime in as well. On the manufacturing side, we've been concentrating now for quite a long time on our process improvement and reliability efforts and this is starting to pay dividends. So while we were down in terms of volume, which obviously doesn't help, the fact that we've started to bear some fruit from our concentrated efforts around process improvement is starting to pay around in our cost structure.

Now we've got a long way to go and we're going to focus our efforts on those particular locations that have the largest absolute opportunities.

So more news there as we move through the next year or 2.

The veneer availability. Yes, so I guess I'd summarize it like this, if you go back a number of years, we were probably all thinking that we would have housing starts in the vicinity of 1.5 million. So we were gearing up with such a life. And so if it turns out not to be the case, which is the way it's looking at the moment, we should have veneer available for sale if all things turn out to be proportional. Now I don't have the numbers right in front of me that I could tell you exactly how much more veneer we would have available for sale because that depends largely on what happens to our own internal demand for EWP. I think you're aware of the way we run our operations and we try and put as much veneer as possible into our EWP as opposed to plywood. There's about (inaudible) so if Wayne has some additional comments, maybe I could do some ciphering here while he's adding any color he'd like to add.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [15]

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Yes. So on the manufacturing costs, probably the biggest things that are favorable this year relative to year ago is we've seen obviously a big drop in OSB, which is the input cost for the I-joists. And we use roughly 1 square foot of OSB for every linear foot we put of I-joist. And if you do the math, certainly the first and second quarter relative to the year ago quarters, that was a big positive. And we've seen log cost fall in the Pacific Northwest, which we're getting some benefit from. We still have timber under contract that we're working through. But those are a couple of the big positives on the manufacturing side as well as not dragging around some of the locations we closed and sold that really weren't adding positively to our EBITDA. On the veneer situation, couple of years ago, when we were tight around veneer, we were buying about 100 million feet of veneer and that has largely gone away. And to Mike's point, with the improvements we just completed at Chester and with the planned log yard improvements in Florien and the flow through into the and downturn through the dryers, we will have additional veneer. And to Mike's points, if housing starts to stay flat at $1.3 million, it's unlikely that we will need all of the internally generated veneer.

And the thing we're working on pretty strongly is to try to get more of our engineered wood products into the multifamily channel, and the light commercial construction. And with the changes in the building code where people will be able to do eventually 18 story wood structures, we're going to try to get more EWP-type products into markets other than single-family new res. And we're hopeful that over time, and it won't be immediate, I don't think it's second half of '19 or early 20 adventure, but if we can do that over time then we should get revenue and earnings growth by taking more of the veneer into engineered wood and not be solely beholden on to what's going on in single-family.

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Operator [16]

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Next question comes from the line of Mark Wilde.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [17]

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I'm wondering if we could start out just by giving some sense of how you guys see inventory in the channel right now kind of across the -- particularly the commodities?

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Nick A. Stokes, Boise Cascade Company - EVP of Building Materials Distribution [18]

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Mark, this is Nick Stokes. I think if you think about the general line business, inventories in those products, as you well know, it tend to not be volatile in terms of pricing. So generally, dealers have invested in enough to keep them busy, now that things are busier relative to the seasonal cycle.

I think in terms of engineered wood, it's much the same thing. Stability and pricing confidence in those price levels and so guys are pretty good in terms of those inventories.

I think on the commodity side, given the lack of confidence in price appreciation and the relative ease at which people can get those products, I don't think there's an abundance of those products in the market but I don't think there's any shortages either. So I think they're kind of matching the demand against the supply side in terms of timing, price and risk.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [19]

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Okay. All right. I wondered, Nick, if you could also just talk about the new entrant that will be coming into the southern market for EWP next year? Whether you've seen any impact from that yet? I don't know, whether they're feeding the market but just how you think that may play?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [20]

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Mark, this is Wayne. I think the latest timing we've seen on Roseburg, LVL facility in South Carolina is that it's a fourth quarter start and now will need to go through the APA certification process. So we don't think we're likely to see big price impacts this year as a result of that facility. And again, depending on what regional demand is, we would expect that supply to meaningfully come online in early 2020, the building season. And that'll really be the pace at which Roseburg brings that facility up and where the regional demand is, will determine how much pricing impact. But clearly, if you're thinking about potential headwinds in 2020, unless we get a reinvigoration at housing starts, that's capacity that the market essentially doesn't need.

The good news is that it's a nonintegrated facility, so they don't have a veneer production facility that they're going to feel obligated to run. They can buy veneer in the open market and pace the production through that facility based on market conditions.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [21]

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Okay. All right. That's helpful. And then just -- EWP pricing has been doing very well. I think you were kind of -- you were up on year-over-year basis pretty nicely. I just wondered between kind of demand being a little softer than any of us expected and cost for things like OSB having gone down, how you think about sort of maintaining price?

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Nathan Jorgensen, Boise Cascade Company - COO [22]

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Mark, it's Nate Jorgensen. I think in terms of kind of the marketplace as it exists today, I think as Wayne kind of alluded to, good supply/demand balance. And so we're experiencing that today and are expecting that here for the balance of the quarter.

I think if you look at pricing in general, the 2018 price increase, that has been fully concluded. So that work is -- and those gains are in place and behind us. And as you described in terms of going forward, there has been limited issues in market in terms of competitive issues. But as we go through the course of the year, we would expect those likely to increase. That -- perhaps in combination with Roseburg's capacity certainly has some potential headwinds on EWP pricing. But as we sit here today, things are in pretty good balance, and we would expect that to continue for -- through the third quarter. As we get into fourth quarter, we'll see how Roseburg comes up along with general market conditions at that point.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [23]

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Okay. That seems reasonable. And the last one I had is for Wayne and that's really around the balance sheet. The balance sheet is very strong, you're -- you have a couple of hundred million dollars in cash. I just wondered how you guys are thinking about sort of potentially returning more cash to shareholders as you did through the additional dividend last year versus M&A. And I have to assume that if lower trajectory on the housing market might be starting to mend itself in valuations on potential M&A candidates. So maybe you could also kind of confirm or deny on that one?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [24]

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I guess the way I would describe it is, we think seller expectations have come down. There are a few things that we have seen come across in terms of potential's targets.

We are still looking for acquisitions, principally to fill in network for distribution and look at some adjacencies. There's been a couple of smaller things on the manufacturing side. So we are -- particularly as we go through the middle part of this year, hanging onto some cash just given what could be potential transactions. But having said that, as we get deeper into the year, it doesn't look like there are any transactions out in front of us that are going to use that capital.

As you noted, we've been pretty good stewards with shareholder money, we think, and we will obviously engage our Board on how best to return capital to shareholders if you don't have other places to put it. And we feel good about where we are from a leverage standpoint. But again, I think the deal sizes we're typically going to see, Mark, are going to be $15 million. And we feel good that we can obviously fund one or more of those off our balance sheet if they come in. Probably the only headwind on the acquisition front is the private equity guys are flushed with money at the moment. And so we will be thoughtful in terms of what we're willing to pay on multiples. But again if we don't find good uses for the money to grow the business organically and don't find acquisitions that we think are appropriate evaluations, we will find a way to give the money back to shareholders.

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Operator [25]

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Next question comes from the line of Chip Dillon.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [26]

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First question, not to pin you down, but just to make sure we're kind of thinking in the right zip code here. The second quarter, you did very well. I'm looking, for example, at the EBIT basis in BMD, you did $34 million, and you're saying you feel you'll be up year-over-year in the third quarter. I noticed most years though that sequentially the third quarter is a little bit tough to match -- sorry the second quarter tends to be the best quarter often and I didn't know if you had a shot at hitting or getting close to what you did in the second quarter of this year in the third quarter -- in BMD.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [27]

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Yes, and I think the guidance -- the reason we split the guidance between the 2 businesses is we really see them in different directions at this point. If I look at the $28 million we did a year ago on BMD and the $38.8 million of EBITDA, we did in this quarter, I think some of it will depend on commodity pricing but again, we feel really pretty good about the activity rate we're seeing from builders. I think we will have a pretty decent September and October.

So I wouldn't be too firm against the $39 million but feel really good about the volumes. And I think the volumes will be probably more supportive in third quarter than we saw in second quarter, just as the weather continues to improve.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [28]

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In BMD?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [29]

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Yes.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [30]

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Got you. Okay. That's very helpful. And then just to kind of update us on the moving parts of the plywood market. You mentioned, and thanks for the details about the activity, I think you just mentioned Brazil. I kind of thinking very round numbers that the plywood market North America is somewhere around 10 billion square feet, give or take. And so I would guess that the numbers you're talking about represent about 4% of the market. Is that the right zip code? That is when you convert the square meters into board feet and you look at sort of an annual rate of -- looks like it's about -- looks like a million square meters coming in every year?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [31]

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So the volume out of Brazil and Chile, if you add kind all of the imports, it's been bouncing around I have to pull the numbers, but it's been in the 15-ish percent range. I would tell you, Chip, that, that is not the issue for plywood this year. The big issue for plywood is we've come from $400 OSB to something that in a lot of cases is starting with a one. I think last time I just looked at prices in the south OSB is trading like $155. And so where we have in the first half of '18 plywood being drug up by OSB, this year the price differentials are quite large. And so we're seeing a migration back to the normal end uses for OSB and particularly new res, plywood is not typically competitive other than areas where there is a zoning issue. And as long as we see $150 price gaps between OSB and plywood, that's where you're going to see the biggest substitution of Brazil.

To your point, the endpoints are noise relative to what OSB over hang is doing. And if you look at the volumes from APA, I think OSB was up couple of percentage points versus a year ago and plywood was off I think in the quarter about 5% on volume. And again, I think it's reverse substitution back into OSB with the pricing off as hard as it is and that's probably the biggest impression in plywood this year compared to a year ago.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [32]

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Okay. That makes total sense. That's very helpful. And said differently, if we see surge in OSB that could create a little more substitution back up in the plywood, if that happens...

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [33]

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Yes. You would have to see sustained OSB prices north of $300. I think before you saw any benefit in plywood. And I'm not putting my money on it.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [34]

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I understand. And can you just update us when all of sort of said and done at Chester and Florien, maybe '20, '21-ish, let's say, I would assume your plywood capacity is somewhere around 2.5 -- will be and is around 2.5 billion square feet. And just remind us how much you think -- if the housing market is healthy, and so you keep growing EWP and let's say we get to 1 million, 3 million for starts, how much of that 2.5 billion or whatever that capacity is, do you think would be sold on the open market versus what would be used in your -- internally?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [35]

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So I think for modeling purposes, I would model somewhere 1.4 billion to 1.5 billion feet on an annual basis in plywood. And I'm hopeful that any incremental volume in veneer that we get out of either Chester or Florien or some of the operational improvements that Mike described, that we can figure out how to get those into EWP and get them into an end market where we get paid better than plywood. Now this for us is really about trying to grow the engineered wood business, including different end applications. We're not sitting around structurally and viewing plywood as a growth market or something that's going to compete effectively against OSB in traditional residential for housing applications. So really it's about trying to get what used to be 25% or 30% of revenue into EWP. The more we can push that towards a 50% number or north of 50%, that does really good things for economics and really good things for our earnings stability.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [36]

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Yes, I get that. And last question is, there's been a lot of moving parts the last couple of years with the lumber and particleboard mill closure sale and buying more distribution locations. Your CapEx of $85 million to $95 million this year, directionally, where do you think that goes in '20 and '21? And please be as specific as you feel comfortable, I know it's before budgeting season.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [37]

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Well I think for '20, you can count on $85 million to $95 million. I don't see it going down given the project we project at Florien, Louisiana. And then forward from that, we'll evaluate obviously based on economic conditions and what we need to do in the business. Directionally, given the number of mills we have in wood, I would be surprised to see our base capital drop much below kind of $55 million to $60 million. And in distribution, just given the size of the franchise that Nick and his team have managed to build, that's probably 25-ish kind of number. And then we usually have a couple of million in corporate around IT. So I'll probably give you that for directional guidance. I think if we saw continued pressure on pricing or the economy were to go in a recession, obviously we can flex down from that as appropriate. But I think for the number of facilities we run in wood, $55 million to $60 million is probably a good placeholder number.

Much of that focused on maintenance and upgrades that keep us in the cost position we're currently in.

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Operator [38]

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Your next question is from the line of Reuben Garner.

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Reuben Garner, Seaport Global Securities LLC, Research Division - Associate Analyst [39]

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So I know that the past recent months have been kind of -- the starts have been disproportionate in the South and Southeast and that's kind of impacted demand in I-joists -- for your I-joist business. What is your kind of -- or what are your conversations with your customers telling you about the outlook for that? Or I guess geographically, where the construction's going to be over the next year, 1.5 year?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [40]

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So Reuben, I'll take the first part now and let Mike chime in. I mean part of the reason you're seeing such negative comps compared to '18 is we had an unusually warm winter in the west and in the first part of '18. And so the I-joist demand in the Western U.S. places like Denver, Oregon, Washington, et cetera, was exceptionally good in '18. So that's part of the reason you're seeing a step change down at '19 as we had a more normal winter in the west than a year ago. But as a general rule to the extent you're seeing a lot of housing activity in the U.S. South, Southeast, that's generally less favorable for I-joist. And if you have very low lumber prices, you'll see some of the guys who were doing a off-site framing move to lumber. But as a general rule, we feel very good about the efficiency of that product and what it does for builders in terms of quality and labor efficiency. And I think we feel okay about the I-joist volume holding in, maybe a couple of points below a single-family starts just given the geographic shifts in the regions where houses are being built. But we don't see a lot of reverse substitution once builders get used to using the product and get the labor savings and the quality advantages. We don't see a lot of reverse switching and most what we're seeing in the declines is geographic shifts and where housing is occurring.

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Reuben Garner, Seaport Global Securities LLC, Research Division - Associate Analyst [41]

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Got it. Very helpful. And then secondly, recognizing, if you will, a longer-term question but you mentioned different end markets. Seen the -- some legislation path in the mass timber market. Anyway you guys can talk about the potential for that market and your participation, how you build out doing it? Is it something where you'd leverage your existing assets or you have to make investments to do so?

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Division [42]

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Yes. Reuben, so this is Mike. Yes, you're right. I mean it's -- in theory, it's a huge market equivalent sense of magnitude to the current markets that we play in terms of single-family and multifamily. So there's certainly a huge demand in the commercial area.

Now the rate of adoption of mass timber into that area yet to be seen. But it's certainly -- it's got a lot of attention recently. And the approach that we've taken is that we've set up our group within the company that's focused on that. And there are some products that we make today that I think that we can gain some share in, what I'd call, the commercial area and that's why we're focused on it. But there are some other aspects of mass timber that we don't play in today and Wayne amongst others, including Tom Corrick, have spent some time in Europe looking at how that market works and what the go-to-market approach is. So over the next 12 to 24 months, we'll be looking very closely at either opportunities that exist for us to get in quickly or whether we should take a sort of a more organic approach. But it is our intention to spend time and effort looking at how we can move into some of our existing products with the, I'll call them, the newer wood-based products into that particular sector.

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Operator [43]

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Next question comes from the line of Steve Chercover.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [44]

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So it's kind of late in the Q&A, so forgive me if some of these are follow-ons. But starting with the CapEx of Chester and Florien, can you carve out of the $85 million to $90 million how much is specifically at improving those 2 assets? And what type of returns you're expecting when it's all said and done?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [45]

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So those 2 projects on an annual basis, probably elevated the capital spending by about $10 million in wood. So instead of $55 million, call it $65 million. And in Chester, we bought that mill in late 2013, and we've been in a protracted rehabilitation process to get it up to a reliability and mechanical condition that we're comfortable with having that mill in and putting it in a lower cost position. So I would tell you the replacement of better equipment in log utilization center, the things we've done to improve the lathes in the green end and the new dryer are largely maintenance replacement of obsolete poor machine centers. So we are expecting labor savings, some better product quality and modest incremental throughput but that was replacing worn out tired parts of that mill. And again, we feel very good about the steps we've been taking over the last 5 years to recapitalize that mill. And in Florien, it's somewhat of a similar case. We put in a very large new dryer that's got high automation, better labor efficiency. And we've kind of put that overall mill and rehabilitation on hold after we made the Georgia-Pacific acquisition. And we hadn't made the improvements in the log yard and in the lathes to get the full amount of veneer through to the dryer that we put in.

So this project that we have underway that will finish up mid-year 2020 is really to allow us to get more logs processed efficiently through the front end of the complex and to the lathes and with that, we'll be able to get veneer off the lathes and into the new large dryer. And again, that will, if the market allows, meaningfully increase our sales efficiency as veneer going into Alexandria should we find ourselves in a position where we're back towards a 1.4 million or 1.5 million housing starts. And the return on it's pretty favorable but I would tell you that a lot of the return will be driven by getting more product out of the overall system. If we find ourselves at 1.3 million housing starts and for some reason we aren't able to penetrate multifamily and some of the other areas like commercial, we will have more capacity than we need based on current demand.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [46]

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So it's not so much large incremental EBITDA that we should be adding to our target but more like the ability to survive and/or participate?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [47]

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Well again I think as Mike mentioned, we may be able to sell veneer to other engineered wood producers or plywood producers. But my hope is that we can find outlets in the non-single-family arena that will allow us to suck up that veneer's incremental EWP production and if we can do that, the economics become pretty good but as Mike said, that's still in the development phase, yet to be proven and we can do that in a volume that is meaningful. And obviously, we're putting a lot of time and energy into it because we think it's pretty important and it's under our control but I wouldn't model it into your 2020 numbers, for example.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [48]

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Got it. And like many of us, I'm fascinated by this whole CLT explosion and I see it going up around here in Oregon. But when you talk about the incremental veneer, it's something that you, again, could help provide new entrants but it doesn't -- despite what Tom is doing over in Europe, doesn't sound like there's anything imminent where you're going to be a CLT producer.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [49]

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Well, and this will -- I don't want to overstate this, but the U.S. is late to the game. Europe -- if you look at Australia and the number of other countries have been building larger wood structures with timber for a long time. So part of it is, is the building code has changed here in the U.S, we were I think smart enough to say hey, those are couple of countries (inaudible) that have been doing this for decades. Australia has also made considerable progress and so we said rather than reinvent, well let's go see how they have done it, what engineering resources have been put through? What channels did they go through and then let's figure out how we can participate in the U.S. in a way that makes sense for our shareholders. And if you look at the number of the large landlords, Lendlease for example, there's a huge product that Google and others are trying to do up in Toronto. I think it's called Sidewalk Labs. So it's really other things coming out of Europe that we see getting adapted either through the landlord channel or people looking at what's been done in Europe and adapting it in North America given the changes in the U.S. building code and we want to try to be part of that mix and both in the manufacturing and distribution. We think there's a market opportunity there and we really want to figure out how we can play that make sense for our shareholders.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [50]

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Got it. Last one, with respect to the bolt ons you've done in distribution, I don't think these have been particularly material in and of themselves. So is the real opportunity to expand your product lines through those facilities and maybe reduce freight because [I've been] thinking about big otherwise.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [51]

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Yes, if you look at -- I'll take Nashville, for example, because that was one of the first ones we did. They had been selling Boise Cascade EWP for a long time but relative to the national market and relative to the presence we see in our system like in Denver, Salt Lake, Houston, Dallas, they were under penetrated. So Nick and his guys have been spending a lot of time with the Nashville location alongside what we've had historically in Memphis and Atlanta targeting the right growth opportunities in Nashville. And, to your point, with the right working capital investment and investment in property, we think we've got an ability to dramatically ramp up the activity levels in Nashville. And the same would be true in the acquisition we made in Cincinnati and our intent would be to do that in Birmingham as well. I think Medford, Oregon, very small location. It operates in some ways more as a satellite branch of our Vancouver, Washington. But clearly Cincinnati, Nashville and Birmingham, we went into those with a view that we could significantly expand their revenue footprint and frankly do more in traditional commodities than what any of those 3 were doing on their own and get more big box and some of the national players into that customer mix.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [52]

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Are there any other glaring holes and I'm looking at one of your presentation just [making] a sense something where you'd want to be?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [53]

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Yes. So the most glaring hole that I always talk to Nick about is I look at like Austin, San Antonio. And again, we service those markets today out of the combination [of] Houston and Dallas and occasionally Albuquerque. But if you look at West Texas and given the economic activity and there's an opportunity for us there. Gulf Coast region, there's a couple spots. And again, we -- in our investor deck and we'll put a new one up here shortly that we actually have a map that shows housing start activity in proximity of our BMD branches and we've made it fairly easy if you go look at the color coding. You can figure out where we are underrepresented relative to housing starts. But it's really important for us when we go in, particularly for when we do it through an acquisition, and we have really good alignment with the key vendors and that the management team and the culture fits. The last thing we're going to do is buy somebody who's got in some ways the wrong set of vendors, and we certainly aren't going to bring anybody on the playing field that doesn't want to behave in a culture consistent with the way we behave.

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Operator [54]

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The next question comes from the line of George Staphos.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [55]

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Just a quick one to finish up here for Wayne and Mike. If you look at the areas the mill that you're targeting for the next level of investment and just piggyback a little bit on the prior question. How much of the benefit to earnings do you think is volume independent? And how much would actually show up almost irrespective of the single-family start environment if you had a size? And in total, what kind of pick up should we expect to see to normalized cash flow and results from those investments?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [56]

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You may or may not appreciate this answer. I would say without volume, we would get if you were looking at...

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [57]

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(inaudible)

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [58]

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Yes. It's maybe $25 out of $100. There's way more leverage on the earnings if we get incremental volume, particularly we can get it through EWP. But again, we think it's important that we do that for cost structure on those mills and market position. And one macro issue that we're paying a bit of attention to is obviously a lot of activity east of the Mississippi from a housing standpoint generally economic activity and the one thing I would point out on lumber, OSB and plywood is as production capacity in North America migrates to the South, that is largely a truck-ship market. And if you think about Western Canada and particularly the upper reaches apart from the border, almost exclusively a rail market with very long lead times. So we think for the distribution business and our manufacturing footprint, it is increasingly important that we pay attention to the manufacturing costs and pay attention to the fact that down through the channel, this behavior of being just in time on inventories may become more prevalent as more of the industry becomes a truck market versus rail market. And again that's a long migration of capacity that we think it's been underway for a number of years and it's likely to continue. So low-cost capacity in the South is really important for our company.

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Operator [59]

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There are no further questions, presenters please continue.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [60]

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Tom, you want to do the close?

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [61]

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You bet, I'd happy to do it, Wayne. So I want to thank everyone for joining us today. As we discussed earlier, we're really pleased with our results in the second quarter as our efforts to reduce our exposure to commodity pricing by growing EWP and distribution are beginning to show real impact. As we look forward, we see more of the same flat housing and pricing compared to current levels, at least for the remainder of 2019. I want to close up by just saying thanks again for calling in, we really appreciate your interest in Boise Cascade. I hope you have a great day and goodbye.

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Operator [62]

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This concludes today's conference call. You may now disconnect.