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Edited Transcript of BCC earnings conference call or presentation 7-May-19 2:00pm GMT

Q1 2019 Boise Cascade Co Earnings Call

Boise May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Boise Cascade Co earnings conference call or presentation Tuesday, May 7, 2019 at 2:00:00pm 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 Operations

* 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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* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Derrick Laton

Goldman Sachs Group Inc., Research Division - Associate

* George Leon Staphos

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

* Kurt Willem Yinger

D.A. Davidson & Co., Research Division - Research Associate

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Emily, and I will be your conference facilitator today. At this time, I would like to welcome, everyone to Boise Cascade's First Quarter 2019 Conference Call. (Operator Instructions)

Before we begin, I'll 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 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 you to 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, Emily. Good morning, everyone, I would like to welcome you to Boise Cascade's First 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.

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

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [3]

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Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on Slide 3. Our first quarter sales of $1 billion were down 12% from the first quarter 2018. Our net income was $11.4 million or $0.29 per share, down from $0.94 per share in the year ago quarter. The first quarter results reflected weaker performances in both businesses. Total U.S. housing starts declined approximately 10% compared to the same period last year. Single-family starts, the primary driver of our sales, decreased by 5%., and multifamily starts decreased 19%. In particular, single-family housing starts in the Western United States reflect significant weakness with the Census Bureau reporting year-over-year declines in that region in excess of 20%.

Our Wood Products manufacturing business reported segment income of $11.6 million in the first quarter compared to $26.1 million in the year ago quarter. These results reflect lower plywood pricing and lower volumes of the EWP and plywood, partially offset by higher EWP sales prices and lower OSB input costs. Depreciation and amortization was also lower due to the discontinued depreciation on manufacturing facilities curtailed and sold in 2018.

Our Building Materials Distribution business reported segment income of $17.5 million with quarterly sales of $908 million for the first quarter compared to the $32.4 million of segment income on quarterly sales of $992 million in the comparative prior year quarter. Lower average commodity prices and sales volumes caused a decrease in gross margin dollars in the quarter.

On the strategic front, we successfully completed the previously announced acquisition of American Lumber in Birmingham at the end of April. I want to welcome all the associates at American to Boise Cascade. They have a terrific reputation for customer service in their trade area, and we are delighted to have them as part of our distribution group.

Wayne will walk through the financial results in more detail, and then I will come back to provide our outlook before we take some questions.

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

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Thank you, Tom. I'm on Slide 4. Wood Products sales in the first quarter, including sales through our distribution segment, were $320 million, down 20% from first quarter 2018. As Tom mentioned, Wood Products reported segment income of $11.6 million in the first quarter. Reported EBITDA for the business was $25.4 million, down from the $43.7 million of EBITDA reported in the year ago quarter. The 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 Kettle Falls, Washington and Chester, South Carolina plywood mills. Chester's partial production outage is expected to continue into early June of this year. The negative earnings impact were offset by partially higher -- were partially offset by higher EWP sales prices and lower OSB cost used in the manufacture of I-joist.

BMD sales in the quarter were $908 million, down 9% from the first quarter 2018. Sales prices and sales volumes declined 6% and 3%, respectively. Excluding the impact of last year's acquisition, the sales decline in BMD would have been approximately 11%. BMD reported segment income of $17.5 million or EBITDA of $22.6 million. This compares to segment income of $32.4 million and EBITDA of $36.6 million in the prior year quarter. The decline in income was driven primarily by a gross margin decrease of $10 million resulting from lower average commodity prices and lower sales volumes compared with first quarter 2018 and a $4.1 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 first quarter 2019 compared with negative $6.8 million in first quarter of 2018.

Turning to Slide 5. Our first quarter sales volumes for LVL and I-joist were down 10% and 17%, respectively, compared with first quarter 2018. Our volume declines for EWP were roughly in line with industry production [weather] (added by company after the call) figures for the first quarter, so we believe the weaker volumes are reflective of the slow start to the building season this year. Pricing in first quarter for LVL and I-joist was up 9% and 7% from the year ago quarter reflecting pricing actions taken in early 2018 and ongoing management of our customer program.

Turning to Slide 6. Our first quarter plywood sales volume in Wood Products was 336 million feet, compared to 360 million feet in first quarter 2018. The lower volume for plywood sales reflects modest downtime in response to weaker market conditions and the sale of the Moncure plywood facility during the first quarter.

The $287 average plywood net sales price in the first quarter was down 19% from first quarter 2018. April 2019's plywood pricing was modestly lower than our first quarter 2019 average, and current pricing remains more than 25% below last year's second quarter average plywood price.

Moving to Slide 7. BMD's first quarter sales were $908 million, down 9% from first quarter 2018. By product area, BMD sales of commodity products decreased 19%, general line products increased 3% and EWP decreased less than 1%. The gross margin percentage for BMD in first quarter was 11.8%, flat with first quarter 2018. However, the gross margin dollars generated in first quarter 2019 were $10 million below the prior year quarter because of price deflation and lower volumes.

BMD's EBITDA margin was 2.5% for the quarter, down from the 3.7% reported in the year ago quarter. With commodity pricing for lumber and structural panels currently well below second quarter 2018 levels, we expect price deflation and distribution to make for challenging revenue and earnings comparisons again in the second quarter.

On Slide 8, we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items, assets held for sale and accrued interest, increased $77.1 million during the first quarter, representing a significant seasonal use of cash. The seasonal increase in accounts receivable and inventories was not fully offset by the increase in accounts payable.

As is normally the case, we also use cash to pay out incentive compensation and customer rebate accruals during the quarter, reducing accrued liabilities. 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 more detail.

I am now on Slide 9. We finished the first quarter with $136 million of cash. Our total available liquidity on March 31 was approximately $502 million, which reflects our cash balance and 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 the strategic projects at our manufacturing operations in Chester, South Carolina and Florien, Louisiana. Despite a lower book tax rate this quarter, we continue to expect our effective book tax rate to be approximately 26% going forward.

I will now turn it back over to Tom to discuss our outlook.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [5]

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Thanks, Wayne. I am on Slide 10. The April consensus for 2019 U.S. housing starts is 1.25 million, which is essentially flat with 2018. We believe important economic drivers behind the demand for new construction, like job formation, remain in place. However, affordability issues in many metropolitan areas, mortgage rate volatility and the availability of construction labor are all influencing the pace of activity. While we believe, housing starts could reaccelerate in the second half of the year, we are focusing on areas we can control to drive both revenue and earnings improvement.

In Wood Products, we are focusing on successfully completing our strategic capital projects and achieving operational excellence to drive improved returns. For BMD, the team continues to make good progress on seeking acquisitions in targeted geographic markets, looking at product line extensions and pursuing other avenues to drive sales and earnings.

We would welcome any questions at this time. Operator, 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) Your first question comes from the line of George Staphos with Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [2]

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I guess the first question that I had. Can you, to the extent possible, talk about what amount of downtime you took across your facilities in EWP and in plywood, either in units or qualitative terms? And I know it's kind of hard to talk about downtime on a forward-looking basis, but any thought that you could share with us on that? That would be helpful, and I had a couple follow ons.

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

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Yes. This is Mike Brown. I can take a stab at that, George. So the -- there really hasn't been any what I'd call either market or capital-related downtime in our EWP business. The way we run that part of the businesses is obviously related to the market demand that we experience at any one time. The -- on the plywood side, we have had some significant downtime in the, well, the latter part of last year and the first part of this year primarily related to -- in the Pacific Northwest, it was weather-related and some market-related downtime in total that may have amounted to a couple of weeks' worth of equivalent production.

In the South or the Southeast, I think, you're aware we've had a pretty significant capital project that's been ongoing now at the Chester plywood facility. That started in late February, in total, will run for about 12 or 13 weeks. And so the Chester plywood facility, that's going to represent a reduction in about 40% of the output for about 12 weeks. So there has been some recently significant amount of downtime primarily related to either weather; a little bit of market, primarily in the Pacific Northwest; and then the capital project in the East.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [4]

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And then if we consider Chester as well as Florien, what other strategic capital projects might you have ahead that would be required as you kind of get ready for whatever the market has ahead going forward?

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Operations [5]

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Yes. Looking forward, George, as it relates to the Chester project areas, I think Wayne mentioned that will come to a conclusion and start the ramp-up phase in late, late May. And by the end of the quarter, I think, we'll be at full speed at Chester.

As it relates to Florien, that's a very big project. It really spans 18 months to 2 years. I mean in total, we're going to have, I think, a week or 2 this year, at the very, very most, but it won't be in one concentrated event. Sort of, we're going to take extended downtime as it relates to our maintenance days, maybe an additional day here and there around the holidays. And then we'll do the same thing, again, in 2020, when we start the ramp up with that new log utilization center. So the impact on Florien in total volume this year is going to be relatively negligible to be honest. We're going to try and minimize that as much as possible. After those 2 projects, we really don't have any really major outages planned at this stage.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [6]

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And then my last question, and I'll turn it over. Can you talk about what effect you're seeing -- or what you're seeing towards the end of the quarter in terms of imports of plywood into the market. The data is obviously reported at a lag, so it's kind of hard to say what's happening near term. But are you seeing much effect at this juncture? Or is the pickup in economic activity insufficient to absorb a lot of the supply that would've been coming out of South America otherwise?

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Operations [7]

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Well, I can have a stab, and so can Nick. I guess from the manufacturing perspective, the low pricing that they're willing to accept from -- coming in from South America sort of sets the low bar in the market. And the last time I looked at the data, which was comparing first quarter this year to first quarter last year, the total volume that has come in from Brazil was essentially equivalent, so not quite significant, but equivalent. So maybe, Nick, you'd like to make some comments around how you're seeing it from BMD side.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [8]

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Yes. Let me jump in for a second, George. The exports out of Brazil, just to give you some numbers, for the first part of the year, we were just below 35,000 cubic meters in January, 56.5 in February, March jumped up to 82,000 meters, and the data we just got in for April would say that there was 81,000 cubic meters that left Brazil, bound for the U.S. So in total right now, year-to-date, the U.S. has received about 34% of the exports from Brazil.

And if you contrast that with the year ago, Brazil exported just over 90,000 cubic meters in April to the U.S. And for the full year last year, we got 33% of Brazil's exports. So not a huge change in the overall volume from Brazil, but it still represents significant capacity particularly along the Eastern seaboard.

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Operator [9]

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Your next question comes from the line of Brian Maguire with Goldman Sachs.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [10]

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It's Derrick Laton on for Brian. Thanks for the details on the pricing, kind of where we stand now relative to 1Q. And it does look like since first quarter ended, at least the moderation in the decline that we've seen so far. Do you think there is any further outages that are needed in the industry for us to start really seeing any upward momentum in plywood pricing? And just maybe you could give us some sense of what you're seeing right now in terms of supply and demand in the market.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [11]

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Mike, you want me to take a shot at that? Or...

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Operations [12]

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Yes. I think we have the same answer, Wayne. If you'd like to take a shot at the supply-demand balance, why wouldn't you do that, Wayne.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [13]

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Yes. On plywood, I think, supply and demand are reasonably balanced. But I would tell you there's not a lot of lead-time issues if you're a buyer. And I think as opposed to '17 or '18, where plywood prices were getting a lot of support from the lack of OSB in the market, that has swung 180 degrees. And there's plenty of OSB around, and the price differential to plywood's quite wide. So our view right now is that there's a limited amount of downtime taking place across the market, and we suspect that there's a number producers that are operating close to cash cost.

So in terms of pricing for here on plywood, I think a lot of it will be driven if we get any pickups in industrial or repair-and-remodel activity. I don't see changes in housing demand or construction driving a lot of the, call it, plywood behavior. I think we're back to the fundamentals where we've got specific home building markets that have a preference for plywood, but I think what you're seeing on downtime and on pricing on plywood is very much driven by plywood fundamentals and the cost position across the industry. And we, like others, I think are managing our production where there is cash margin. And otherwise, I think, to Mike's earlier comment, we will use downtime as a mechanism where appropriate if we don't have orders or if we're finding ourselves running cash out of pocket at times.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [14]

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Derrick, I would -- this is Tom Corrick. I would add that fundamentally, until we see a material rebound in OSB pricing, I don't think we're expecting any material upward movement in plywood pricing.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [15]

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Got it. And maybe just get your sense for plywood inventories in the channel. Are we starting to see that clear out at all? Or maybe any change during the last few weeks?

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Nick A. Stokes, Boise Cascade Company - EVP of Building Materials Distribution [16]

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Brian (sic) [Derrick], this is Nick Stokes. I think plywood inventories are very similar to some of the other commodity products. As you know, there's not a lot of data around that. But in conversations with customers and observations from conversations with suppliers, we have a belief that inventories are sufficient, maybe on the fall side across all those product lines.

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Operator [17]

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Your next question comes from the line of Mark Wilde with BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [18]

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Well, Nick, you just answered one of my questions right there on the supply and the distribution channel. Sounds like there is plenty of inventory out there.

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Nick A. Stokes, Boise Cascade Company - EVP of Building Materials Distribution [19]

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Yes. I think you've articulate it fine, Mark. I mean certainly a different dynamic than a year ago. On Wayne's earlier comment, from a buyer standpoint, there's plenty of availability.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [20]

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Okay. Is it possible for you guys to give us a sense of what you've seen so far in the second quarter in terms of April activity?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [21]

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I think it's been decent, Mark. We're continuing to see some weather disruptions, mostly around rain and flooding. But I think where things are drying out, the activity level's picking back up.

I think the biggest question we have as we move through spring and into summer is there's a pretty decent backlog of builder activity and activity at the retail lumber yard level. But our view is that we're not going to be able to catch up on some of the weather delays that occurred in the first quarter just because of labor availability and the constraints around job site construction. So we think that the pace of business is decent in April and going into May and June, but we're not looking for, in essence -- 40% pick up in activity just because we don't think the labor availability is there, in essence, start to build and make up some of the deficits that occurred in the first quarter.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [22]

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But -- and Mark, this is Tom. I would add, the pace certainly feels better today. The last 45, 50 days has felt more normal than what we saw after the first 2.5 months of the year, which was pretty slow for a whole bunch of reasons.

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

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Okay. And then just turning to the engineered wood business. I'm just curious, pricing has been good there, but we're seeing costs come down, demand's been fairly static, and we're conscious of a new competitor moving into the Southeast next year. I'm just -- like to get your general thoughts on maintaining EWP prices against that backdrop.

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Nathan Jorgensen, Boise Cascade Company - COO [24]

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So Mark, it's Nate Jorgensen. Specific to EWP pricing, what we're experiencing today is a pretty good balance in terms of demand and supply across most markets. So we aren't expecting any real change in terms of pricing as we go for the balance of this year relative to the new capacity coming on later this year or at some point next year. Really not a lot of discussion in the marketplace around that. So I think as we look at the balance of this year, we feel supply/demand on EWP's in pretty good balance and as result, pricing should reflect that.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [25]

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Okay. Right. And then last thing for either Wayne or Tom. And it just seems anecdotally, when I will kind of keep an eye on the trade press, that maybe there's been a pickup in building products distribution, M&A in recent quarters. And I wonder if you would agree with that. If we're seeing kind of more consolidation taking place in distribution? And maybe also get some thoughts on just sort of valuations on distribution businesses.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [26]

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Mark, I'll take a shot at it. I -- my sense is, part of what's going on, certainly in the transactions that we've worked on, it's been driven partially by consolidation. But I would tell you more than anything, it's been driven by people with succession planning and looking at their time horizon and I think the slowdown in the back half of '18 may have reminded people of what the last slowdown looked like. Valuations are -- probably haven't changed a lot, but I think concerns or the expectation that we're going to get back to 1.4 million and 1.5 million housing starts and that there's substantial runaway from here forward, I think some people have -- with a decade since the recovery really started, I think, some of them are aging into their 60s or 70s and concluding that this is a good time to do an orderly hand off of their business.

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Operator [27]

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Your next question comes from the line of Chip Dillon with Vertical Research.

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

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First question has to do with just to maybe review where you stand in terms of your footprint. I know that both in plywood and lumber, you've shed some assets in the last year or so. And are you pretty much done with that program? Or do you think there could be more to go, either in distribution or especially in Wood Products.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [29]

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Chip, this is Tom Corrick. I think that we went through a fairly diligent process, a structured process last year as we tried to address some of these opportunities related to noncore assets or assets that were challenged financially. And I would say that I'm not -- at this point, I don't think there's anything material on the horizon that we'd be looking at in either business.

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

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Okay. Okay. That's helpful. And then if you could review for us, in engineered wood, both LVL and I-joists, when was your last price increase? And is there anything going on in the marketplace in pricing that -- and hasn't? I would imagine that as lumber has stayed soft, that it would have more of a volume impact than a price impact. But any help along those lines would be appreciated.

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Nathan Jorgensen, Boise Cascade Company - COO [31]

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Chip, it's Nate Jorgensen. Just -- so on the EWP pricing, so that -- the announcement that we had on our last price increase was January of 2018. And so in terms of pricing expectations, kind of going forward, again, I think things are in relative balance. And so we're -- even though some of the raw material prices may have looked -- been lowered in terms of the overall marketplace, again, at this point, the balance is in relatively good balance. So that's kind of what we're expecting to see for the balance of, certainly, the building season and for this year. And again, we would expect pricing to reflect that.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [32]

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Yes. Chip, this is Wayne. Let me add in a couple points. The engineered wood for us, and certainly for our larger competitors, is a list-price business, a lot of long-term relationships and a huge service component down through the supply chain, including obviously, the wholesale alignment internally with Boise Cascade and down through the retail lumber yards. So if you'll recall the strong run in OSB and in lumber a year ago, we did not raise prices in EWP in response to input costs. It's much more on the supply and demand than what's going on with EWP. So we didn't -- we weren't able to maintain margins on the way up on lumber and OSB a year ago. And likewise, we're not retreating on list price simply because input costs have changed.

The other thing is we mentioned this morning the major downdraft in single-family starts in the West this year relative to early '18. And as you look at where I-joists are used, they are typically used in raised floor and in 2-story situations, particularly in our case.

So where you've got a disproportionate amount of construction going on in the U.S. South, Southeast, where there's a lot of slab on grade and in certain cases, single-story activity, you get less I-joist consumption because you have fewer raised floors.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [33]

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Actually, gosh, that's helpful. And then lastly, as you look at that -- your mill system and you think about CapEx next year -- and I know it's early. But at least directionally, do you see it more likely to be flat, up or down next year versus this year, assuming you don't make a big acquisition?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [34]

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I think it will -- CapEx will be relatively flat. It may come down modestly, but the major projects that we'll have going in 2020 is the completion of a log utilization center at Florien. As Mike said, that's really about an 18-month project that will start later this year in earnest and carry into 2020. But we'll be through the project at Chester. BMD's capital requirements outside of acquisitions are going to be reasonably flat. And then once we get towards the latter part of '20 and into '21, right now there's no substantial projects identified in Wood. So I would expect us to drop back down to the $75 million to $85 million level.

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Operator [35]

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Your next question comes from the line of Kurt Yinger with Davidson.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [36]

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Just starting off. I was hoping, you guys can maybe give some color as to margins in the Western plywood operations. And understanding you might not want to get into too many details, maybe just kind of talk about it relative to what you're generating in the South.

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

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Yes. Kurt, let -- this is Wayne. Let me do this, and then, Mike, you can add in. I think it's safe to assume that given our product mix in western Oregon, which is really using residual veneers that we don't take into engineered wood to make -- on a relative basis, commodity-type panels, that would not be a fun product mix if you were a stand-alone plywood producer. If you're producing plywood in western Oregon or western Washington, you really need to do a high-value product just given the relative log cost. And that is not what we're doing. We're taking the higher-value veneer and putting it in the EWP.

If you were to look at our mill in northeast Washington at Kettle Falls, it's exceedingly low cost, has very good throughput, and we've got decent cash margins at Kettle Falls even at the pricing we have. But again, if you were running a commodity plywood mill in western Oregon, given the log costs, you would not like the outcome, which is why a lot of the plywood industry that's running commodities is located in the U.S. South.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [38]

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Got you. No, that makes sense. And I mean just taking it a step further, I mean, there's obviously kind of a common thread between whats going on in the lumber side between some of that curtailments and closures and what you just referenced. And I'm sort of wondering whether your expectation would be that over time, you might actually expect capacity to come off line in the West. Or whether you think prices right now are sort of subdued, and that people will kind of wait it out?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [39]

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No, I think you've got -- go ahead Mike.

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Operations [40]

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Go ahead, Wayne. No, no, go ahead, Wayne. We probably have similar views about how this is going to work.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [41]

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Yes. I think -- again if you look at late '16 through '17 and into the early half of '18, I think the plywood industry in general got a bit of a reprieve given the shortages we had in OSB. So for a number of decades, we've seen substitution of OSB for plywood. And I think given the capacity overhang in OSB at the moment, you will see a number of OSB players trying to make a push into more value-added products in industrial. And I would suspect we'll continue to see modest structural decline in plywood where the attributes of OSB work and are readily substitutable. The cost of OSB is lower. So I think not unlike the GP announcement that occurred late in '18, I would expect that if we see log costs where they are, product pricing where it is, and if OSB continues to be at a discount, I think you'll see capacity removals in plywood take place in '19 and '20 on some kind of reasonable pace. And I think you'll see ongoing substitution for OSB into some of those end users as they make progress on the product development end.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [42]

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Yes. The other thing I would throw out there, Kurt, is that the log buying process is very much tied to the product price environment. And we obviously purchase logs in advance as well as logs at the gate. And so it takes time to balance our -- the cost of our log inputs back to the market. But certainly over some period of time, lower-cost producers can get back into a position where they will generate some margins simply by -- reflected by the fact they can buy logs cheaper when the market's soft.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [43]

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Got you. And no, that's helpful color. And then one for Nick. I know you touched on it a little bit earlier, but I was hoping you could talk about maybe the demand pull you're seeing from the dealers and the home improvement channel. And whether there's a big disparity there? Or if anything's kind of surprised you about actions or activity in the market over the last couple months?

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Nick A. Stokes, Boise Cascade Company - EVP of Building Materials Distribution [44]

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I think the way I think about that, Kurt, is the home center business for the last -- certainly in the first quarter had a little more stability to it. As you well know, home center business and the products that were involved with them have a large seasonal component particularly as they start to ramp March, April, some of the building season related to projects. And we've seen a nice -- to Wayne's earlier point, we've seen a nice increase in those kinds of dynamics.

I think from a dealer's standpoint, and if you contrast the first quarter of '19 against the first quarter of '18, very different dynamics in terms of price escalation; weather-related, mill-related supply challenges; certainly, housing starts activity in certain parts of the region in '19. And I think dealers just behave irrationally in terms of matching their purchases to their demand and their forecasts.

To your last question, have I seen anything weird or unusual? No weirder or no more unusual than any other year, so it's kind of steady as she goes.

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Kurt Willem Yinger, D.A. Davidson & Co., Research Division - Research Associate [45]

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Okay. And lastly I was just hoping you might talk about how you're thinking about your cash balance this year. And where ideally you think that would stand just given your available debt capacity as well.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [46]

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Yes. So on, kind of what we think of as capital allocation. First priority, obviously, is to fund the $85 million to $95 million we've got for internal capital towards growth and operational improvements. Nick and his team continue to look for tuck-in acquisitions, not dissimilar to what we just closed on, the Birmingham, Alabama opportunity. We've obviously got the regular dividend at $0.09 a quarter. And to your point, we feel very good on where our debt levels are relative to our EBITDA and certainly relative to our cash balances.

So really, the question is, if we don't find good opportunities in distribution or adjacent opportunities on the manufacturing side, we will look at some combination, likely of share repurchases and/or other ways of returning cash to shareholders if the balance sheet's in good shape.

But we're comfortable running at $120 million, maybe $150 million in cash. And if we get meaningfully above the $150 million number, we're probably going to look at various ways of getting cash back to shareholders just because we think it's inefficient from a return on capital to sit on excess liquidity. But our preference would be to grow the business if we can find the right opportunities.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [47]

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Yes. And I would note there's at least a couple of things we're aware of that will be coming at us. And whether we do anything or not, I don't know. But certainly, I think for the balance of the next several months with -- we will be in probably pretty steady-state position as we look at these potential acquisitions.

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Operator [48]

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(Operator Instructions) Your next question comes from the line of George Staphos with Bank of America.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [49]

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Tom, when you talk with your builder customers, what do they say weather took away from demand this year? Or if said differently, if we could hold the same economic growth, the same wage level and all the other fundamentals that go into housing, what kind of demand pickup could we see in '20 relative to '19? I know that's a really hard question. I'm not going to hold you to it. But what are your customers saying was lost that could potentially come back next year?

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [50]

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Yes. I think I would hand that one over to Nate, George. He's a little closer to the market than I am on a day-to-day basis, and certainly had some impact. But Nate, if you could provide some color?

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Nathan Jorgensen, Boise Cascade Company - COO [51]

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Yes, George, I -- so as I think if you look at kind of the fundamentals of -- most home builders, as we exited 2018, obviously, there was a lot of headwind relative to cost of money, some concerns in terms of the economy. And I think as they transitioned into the early part of this year, and including feedback from the International Builders' Show, I think there was a right level of optimism in terms of what was in front of them. And obviously, the challenges at that point in time were largely weather-related.

The feedback that we get from the builders, ranging from the custom builder to the national builder, and of some it is geographically based in terms of kind of local economies and local trends. But there's a belief that housing should continue to improve. And I think one of the things that we continue to hear from builders is that affordability is a key driver in terms of what that demand will look like. And so they are attacking that in various ways, including the size of the average square foot for single-family construction, the continued focus on multifamily construction as well.

So I think the conditions overall from an economy and from unemployment, cost of money, those are all, I think, quite favorable. But it's clear that the builders that we talk to are -- they continue to be focused on affordability and making sure that, that first-time [homebuyer] (corrected by company after the call) can actually get into the home. So I guess we're -- we see continued growth opportunity and housing start improvement as, again, as long as those conditions remain in place.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [52]

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But there isn't any common denominator or view from your customers in terms of what amount of volume was lost this year that will return next year, but it was lost due to weather and other disruptions. And if that's the case, that's fine. I just want to confirm that.

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

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Yes. And I think the way I would describe it, George, is if we were at 1.250 million or 1.260 million a year ago, I think we will be challenged to hit that based on what we're hearing from our customers in '19. Not because the demand will be weak in the back half of the year, but just trying to catch up with the volume that was lost in the front half of the year.

Having said that, I think we will be on a build pace that's in the 1.280-plus million range by the time we get to the second half of '19. And I think a lot of the builders are viewing low to mid-single-digit improvement in single-family starts as we go into '20. So I think the odds of being at 1.3 million or somewhere north of 1.3 million are pretty good in 2020 as long as mortgage rates hold them where they are, and certainly, again, where commodity costs are. And more of the builders shifting towards first-time buyers and dealing with the affordability issues, I think, I'll give kudos to Horton. And I think they were a couple years ahead of other people in addressing that market opportunity. And several others on the national side has started to move towards more entry-level homes and are making progress on the affordability issues.

So I think our view is that 2020 may look considerably better than '19 because of the weather disruptions on the front half of the year. And if we get a normal weather pattern in '20, you could see us pushing towards 1.3 million, which will look pretty good compared to full year '19.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [54]

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Wayne, does the affordability issue and the need to rightsize the new home relative to the new buyer so to speak, does that take away some of the growth that you would have otherwise thought -- we would have otherwise expected for engineered wood, say, a couple years ago? If we're building smaller homes, do we need as much EWP as would have otherwise expected?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [55]

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I think our view here is that if we get single-family growth of 3% to 5%, that will just slightly exceed the volume lost from smaller, medium and average home sizes. So it's probably maybe a 1 -- maybe 2% plus in terms of product consumption. But you're going to need something in the 4 % to 5% pickup rate in single family to offset the change in home size.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [56]

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Understood. Two last ones and I'll turn it over. It's been a while since we've asked on this. Any impact that you've seen in the market from the new supply in plywood that had come on a couple years ago? From what we recall, that had some operating issues. To the extent you feel comfortable, what effect have they had on the market?

And then, could you update us on your longer-term thesis in terms of what you think normalized EBITDA for this business should be mid-cycle? Whenever we have that next mid-cycle and the need to be long veneer, given what would ultimately be a shortage of veneer.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [57]

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Okay. So let me start with your first question, which is the plywood mill that the private equity guys restarted or rebuilt. I think, relative to the impacts from the OSB plant construction and what's coming in from Brazil, that P facility is a bit of a rounding error and not noticeable in the market. And I don't clearly have a detailed view of what their operating rate is, but it's -- in the grand scheme, it's a rounding error.

In terms of mid-cycle on Wood Products business, there are considerable puts and takes. I think the -- when we did our IPO, we thought we would have about $45 of EBITDA margin in the plywood portion of our business, and that we would be running somewhere around 1.5 billion on production. And we've obviously offloaded Moncure and made some other changes. So I think our steady-state production is probably closer to 1.3 billion, maybe 1.4 billion. And certainly with what's happened on the OSB side, I'm not sitting here today feeling like we're going to get $45 of EBITDA margin in our plywood business, short of some changes. And obviously, we're working on operational improvements to try to really expand EBITDA margins, but that's probably the piece of the earnings puzzle on Wood Products that's the most challenged relative to what we would have expected 5 or 6 years ago.

I think the engineered wood story, very much intact, short of the fact that we're 150,000 or 200,000 starts short of where we thought we might be at this on housing starts. But I think our penetration, our market share gains, et cetera, are good if I look at where our input costs are today relative to selling price. I think the margins are in line with what we expected. Again, the volumes aren't quite where we thought they'd be. But it's still a very good business for us, and it remains to be seen what impact the new Roseburg facility coming up in South Carolina late this year or early next year will have. But again fundamentally, feel very good about that business and then, obviously, closing a couple lumber mills, selling off our particleboard plant.

The wild card to me is the difference between being at $130 million in EBITDA and $170 million or $175 million in EBITDA is what do you think happens on structural panels. But I think, today, I would tell you that wood business is probably in the low to mid-$125 million, $150 million range. But we've got work to do on our cost side, and we'll see what impact the Roseburg facility has and, frankly, whether or not housing starts can continue to get towards 1.4 million or 1.5 million. The demographics are certainly there to support it, but if we stayed 1.3 million, it's going to be hard to be meaningfully north of, in my opinion, $125 million, $150 million in the wood business given what's going on with structural panels and OSB.

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Operator [58]

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Your next question comes from the line of Mark Wilde with BMO Capital Markets.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [59]

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I had just a couple of follow-ups as well. One of them is just the -- when we look at the APA data, the year-over-year declines in I-joists and LVL were both quite large. I think you've addressed a little bit of this already, but I'm just curious as to whether you think there is some substitution that kind of went on in the first quarter maybe because dimensional lumber was so low? Or whether this is just the sort of an aberrant quarter here in the first quarter that reflects weather and other things?

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Nathan Jorgensen, Boise Cascade Company - COO [60]

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So Mark, it's Nate Jorgensen. So let me -- I think Wayne spoke to a big piece of the dynamic, which was, again, the kind of the West census region. Given the penetration typically that we see, especially with I-joists in that part of the country, when starts were off on a quarter-over-quarter basis, I think it was 27%, that has real impact in terms of I-joist consumption. So I think that was a key part of it in terms of what took place in the West and really across the business.

The other thing that we look at and we work at and pay close attention to it is working with a range of builders in terms of conversion to dimensional lumber. And we really just -- we don't see a lot of change typically. When builders get locked in on subdivisions and even product in a given marketplace, they tend to stay very kind of committed to that solution. So we're not seeing a lot of interchangeability from going from an I-joist solution to a dimensional lumber solution. And we didn't really see much or experience much of that in Q1 based upon the builder relationships that we had.

So again, from our vantage point, it's largely West-related, weather-related. And we haven't seen really any significant impact in terms of conversion back to dimensional lumber at this point.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [61]

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And it's not a huge driver for us today, Mark. But the other pieces we've got are pretty decent effort that's been underway now for 18-plus months to get more of our engineered into multifamily construction and light commercial construction. And I think, over time, that's another avenue that can give us some growth in the volumes outside of what's going on in single-family starts.

So as we think about the second half of '19 and into 2020, that's one of the initiatives that we'll put a fair amount of effort behind is trying to get volume growth on the engineered wood products that's beyond what's just going on with single-family starts.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [62]

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I was just going to ask, light commercials, is that like if I see these kind of 3- and 4-story kind of wood frame hotels going up in the suburbs, that kind of stuff?

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Nathan Jorgensen, Boise Cascade Company - COO [63]

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Yes. Mark, it's Nate. Yes, exactly. So that would be the various hotels, and that's an active marketplace and one that we do well in. And as Wayne described, it's an area of focus that we expect to further grow our penetration in those kind of opportunities.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [64]

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Lastly, I would say, Mark, when you look at first quarter last year or first quarter this year, last year, we had a price increase. Demand was very strong, very mild winter. And I think people were worried about where their next stick of LVL was going to come from, where their next I-joist was going to come from. And so there was aggressive buying ahead demand just to make sure you had inventory. This year, I don't -- so far, I don't think people have been overly worried about availability of product, and so they're carrying lower inventories. I think you saw us swing an increased inventory in the first quarter last year. You're just not seeing this year.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [65]

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Okay. All right. That's helpful. Finally, Wayne, possible to get a sense of sort of log cost benefit in the first quarter. And also whether there were any kind of inventory adjustments in the numbers?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [66]

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Go ahead, Mike.

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Dean Michael Brown, Boise Cascade Company - EVP of Wood Products Operations [67]

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Yes. I guess what I would say, Mark, is if you look across our entire system, year-over-year there wasn't that much of an impact really in our average log cost. Geographically, there was. So in the Pacific Northwest, particularly, on the coast, I mean, of course log costs have come down relatively significantly. But at the same time, I think it was Tom that mentioned because we have purchased logs that have -- we've been bought in the last 2 or 3 years that we have to consume, it was a fairly muted sort of decrease, all things considered.

In the South, our log costs were basically flat to up like less than 1%. So over the entire Boise Cascade system, there was almost no -- either positive or negative impacts from log price variance, which is probably not what you thought I was going to say. But when you roll it all up, that's what it looks like.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [68]

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Probably, where we got the most cost input relief was on OSB that we use for the web part of our I-joist, the vertical part of the I. We use about 1 square foot for every linear foot of I-joist. And that's where we probably seen the most cost relief is on the OSB input cost to make I-joist.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [69]

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Okay. That's helpful. And then the inventory issue, Wayne?

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [70]

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Really haven't seen any movements or adjustments on inventory.

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Operator [71]

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We have no further questions at this time.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [72]

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Okay. Thanks, Emily. You got any final comments for me.

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Thomas Kevin Corrick, Boise Cascade Company - CEO & Director [73]

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Yes, a quick wrap-up. Obviously, a challenging quarter for us, particularly compared to 2018. I'd say, given the ongoing challenges with pricing, our focus on growing our EWP and distribution businesses continues to help our performance, and particularly as demand recovers from this winter and the slowdown we saw then. So all in all, I feel good about the direction we're headed. I want to thank everybody for joining us today, and have a good day.

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Wayne M. Rancourt, Boise Cascade Company - Executive VP, CFO & Treasurer [74]

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Thanks, Emily.

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Operator [75]

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This concludes today's conference. You may now disconnect. Have a great day.