Boise Cascade Company (BCC) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Shynal, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade’s First Quarter 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [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 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 of Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Shynal, good morning, everyone. I'd like to welcome you to our earnings call and business update. Joining me on today’s call are Tom Corrick, our CEO; Dan Hutchinson, 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 for this webcast presentation includes reconciliations from our GAAP net income to EBITDA and to adjusted EBITDA. Now, I will turn the call over to Tom Corrick.

Thanks, Wayne. Good morning everyone. Thank you for joining us on our earnings call today. I am no Slide 3 right now. Our first quarter sales of $974 million were up 11% from first quarter 2016 as a result of growth in engineered Wood Products and our Distribution business. Our net income was $10 million, double the amount reported in the year ago quarter. Net income in the first quarter 2016 included $3.5 million of acquisition related expenses on a pre-tax basis. Our Wood Products manufacturing business reported segment income of $7.4 million in the first quarter. The business experienced strong growth in EWP sales volumes as well as improved sales realizations for plywood and lumber. For the first time, over 50% of Wood Products quarterly sales – sorry about that, page problem. We’re into our distribution business. I want to thank both businesses for continuing to work together closely and drive value for our customers. Our building materials distribution business reported segment income of $20 million. BMD posted strong financial performance, executing very well with solid demand and favorable commodity pricing trends in the quarter. Wayne will walk you through the financial results in more detail and then I will come back with a few more comments on the outlook before we take your questions.

Thank you, Tom. I am on Slide 4. Wood Products sales in the first quarter including sales to our distribution segment were $326 million, up 7% from first quarter 2016. The increase in sales was driven primarily by engineered Wood Products with LVL and I-joist sales volumes up 27% and 22% respectively. Pricing improved 8% for plywood and 12% for lumber compared to the year ago quarter, but our sales volume in those two product categories declined falling 11% and 12% respectively. As Tom mentioned, Wood Products reported segment income of $7.4 million in the first quarter. Reported EBITDA for the business was $22.5 million, up from the $17.5 million of EBITDA reported in the year ago quarter. The increase in EBITDA was due primarily to higher plywood and lumber sales prices as well as improved sales volumes of EWP. Also first quarter 2016 results included the $3.5 million of acquisition-related costs that Tom mentioned earlier. BMD sales in the quarter were $816 million, up 14% from first quarter 2016. Sales volumes and sales prices increased 9% and 5% respectively. BMD reported segment income of $20 million or EBITDA of $23.7 million. This compares to segment income of $13.4 million and EBITDA of $16.6 million in the prior year quarter. The improvement in income was driven by higher gross profit dollars resulting from both higher sales and a 20 basis point improvement in gross margin percentage. Beginning in first quarter 2017, we are no longer reporting our unallocated corporate costs as a business segment. The amounts for unallocated corporate cost, the change in the fair value of our interest rate swaps 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 $5.8 million in first quarter 2017 compared with negative $5.3 million in first quarter of 2016. Turning to Slide 5, our first quarter sales volumes for LVL and I-joist were up 27% and 22% respectively compared with first quarter 2016. Increased EWP volumes were due primarily to increase penetration with our existing customers as well as improve single family housing starts. Our EWP mills ran well during the first quarter in response to stronger than expected demand. We believe there was a modest amount of demand pulled forward into the first quarter as a result of our announced price increases. However, we are seeing continued good demand this quarter and we don't believe there are significant excess inventories in the channel. The team at our Roxboro, North Carolina EWP facility continued to make slow, but steady progress recommissioning the first LVL press during the quarter. Roxboro has started making shipments of LVL to customers. Mill is also adding more LVL production shifts this quarter and we currently expect limited I-joists production and shipments from Roxboro to begin in the third quarter. LVL net sales realizations in the first quarter were down 1% from the same quarter last year. I-joists sales realizations were up 2% from the year ago quarter. We did announce 7% to 10% EWP price increases in the first quarter, so we would expect our net sales realizations in second quarter to improve sequentially. It typically takes several quarters for the full effect of our announced price increases to be reflected in our operating results given our sales arrangements with our downstream channel partners. Turning to Slide 6. Our first quarter plywood volume in Wood Products was 336 million feet, which was down 43 million feet or 11% from the first quarter of 2016. We have largely eliminated our third-party veneer purchases, which has allowed us to shift more of our internal veneer production into our EWP products and reduced plywood production in response to market conditions. We will continue to adjust our plywood production levels based upon where we see demand levels and pricing for the product. The $282 average net sales price for plywood in first quarter was up 8% from the first quarter of 2016. The tone of the plywood market feels good at the moment with stronger OSB pricing providing a measure of support for plywood sheathing products. We continue to watch imports, domestic operating rates for plywood mills and lead times as we plan our production. Moving to Slide 7. BMD’s first quarter sales were $816 million, up 14% from first quarter 2016. By product area BMD’s sales of commodity products increased 12%, general line products increased 12% as well and EWP sales increased 22%. The gross margin percentage for BMD in the first quarter was 11.6% up 20 basis points from the 11.4% reported in the first quarter of 2016. BMD’s EBITDA margin at 2.9% in the quarter compared favorably the first quarter 2016’s 2.3% EBITDA margin. Expense leverage was also a meaningful part of BMD's earnings improvement in the quarter. 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 increased $79.7 million during the first quarter. BMD’s receivables and inventories grew considerably in first quarter, which is typical as the business ramps up seasonally. The seasonal working capital build is usually behind us as we move into May of each year. As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K as receivables inventory and accounts payable data broken down by segment for those that are interested in more detail. I'm now on Slide 9. We used just over $16 million of the cash we had on hand at year-end to support the working capital built in the first quarter. We ended the quarter with total available liquidity of approximately $438 million, which reflects our cash and our availability under our committed bank lines. We expect to manage our balance sheet toward our gross debt-to-EBITDA target of 2.5 times as we move through the remainder of 2017. We did not repurchase any shares in the first quarter. We have approximately 697,000 shares left on our original 2 million share repurchase authorization. We will continue to vary the pace of our share repurchases based upon our assessment of acquisition opportunities, our current balance sheet leverage and our prospects for free cash flow generation. Our capital spending this year is expected to be between $75 million and $85 million. Tom, I will turn it back over to you for closing comments.

Thank you, Wayne. The April consensus estimate for 2017 U.S. housing starts is 1.28 million up from 1.17 million in 2016. Much of the growth is expected to come in single family construction, which is more favorable for the demand for our products. We continue to believe the demographics in the U.S. will support a return to normalized housing starts of 1.4 million to 1.5 million. We have a number of areas within our control in Wood Products to continue to drive better earnings as we move through the year. We have continued to grow our market position in EWP following our acquisition last year and we are seeing traction on pricing. We have increased our high strength veneer self-sufficiency with our completed capital projects and we are able to move a higher proportion of that veneer into engineered Wood Products as demand improves. We have additional recommissioning work to do at our Roxboro facility, volume encouraged by the progress that has occurred over the last few months. The BMD team has done a terrific job of executing and responding to market opportunities at both the local and national level. We continue to see considerable upside for the company in the distribution area. I would like to thank our employees’, customers and suppliers for a strong start to 2017. I appreciate each of you joining us on our call this morning. We would welcome any questions at this time. Operator, would you please open the phone lines?

Thank you. [Operator Instructions] And our first question comes from the line of George Staphos of Bank of America Merrill Lynch. Your line is now open.

Hey, good morning. This is actually John Babcock calling in for George. Just want to start out on the plywood front. I was wondering if you could talk about how imports trended during the quarter and ultimately what you expect going forward.

Hey, John. This is Wayne. The most recent data I have on exports from Brazil, so not necessarily arrivals into the U.S. yet. For January, it was 34.7 million cubic meters stepped up and – in February 47.6 and then in March it jump to 64.3, which is higher than what we saw in the highest month in 2016. So they're continuing to target. And if you look at where they are on total exports out of the country, it looks like it's up about 15% over what they did in 2016. So it looks like we're getting an increasing portion of an increasing pot.

Okay. And then if you could talk about – obviously, there was a recent announcement by the Department of Commerce that they're going to buy kind of availing duties on lumber imports from Canada. If you could talk about the impact of that on your business realizing it's obviously not as significant for U.S. as it is for others, but just generally how we should think about that?

John, good morning. This is Nick Stokes. On the distribution side is as everyone knows we are a buyer and a seller of both Canadian softwood and domestically produced softwood. We’ll leave it to others to figure out where that negotiation is going to go relative to another agreement or not. What we will continue to do is just run our business as you know the commodity Wood Products is a significant portion of our business and we’ll continue to run that business to react of the volatility with a commitment of making sure we have product for our customers to take.

Okay. And how should we think about that from a cost point of view on Boise Cascade and also as a bigger threat the availability or is it really the cost of lumber as you think about it?

Yeah, it's a very minor input cost for our Wood Products business on plants material for I-joist, so it really doesn't move our input cost. And to Nick’s point, this business is largely a trading phenomenon. So in the first quarter, for example, you saw running prices in February and into early March and in any time we have an upward price progression in commodities. About 50% of the sales in BMD, we tend to get a tailwind on gross margins. And the flip side is if we were to see a sell-off as a result of a new softwood lumber agreement going into place that had quotas versa tariffs, so that cause domestic lumber prices to fall. We would typically see gross margin compression if we had falling commodity markets and that would be true for the dimension lumber and OSB would be the two most meaningful for BMD. And that provided a tailwind in first quarter of this year, pretty strong tailwinds in second quarter of 2016. And as Nick said, we're really focused on being in stock and serving our customers and really we’ll be watching what the price direction is in second, third quarter, but I would tell you what random lengths, and if you get strong trends in either directions that's likely to be favorable or negative for our gross margins in BMD.

I think, there – it’s fair to say this, this is Tom Corrick, that there's more news to come both in terms of trade action by the U.S. government as well as potentially an agreement. From our perspective, I think we believe it's going to remain volatile, but exactly how that trend is going forward I think is to be seen.

Okay, I appreciate it. And then last question just on EWP. I was wondering if you could remind us on essentially like how much LVL and I-joist capacity you have with the Georgia-Pacific assets that you acquired and then also if you could talk about how the implementation is progressing relative to plan? And otherwise that’s pretty much all I have for you.

Okay, thanks, John. On the EWP capacity, the most significant capacity we have is the mill at Alexandria, Louisiana that produces the vast majority of LVL and I-joist that we sell east of the Mississippi. When we bought the Thorsby mill in Alabama, it was up in running at a 50% through put. We have since ramped up the production since its closer to the markets that we serve in the east like Atlanta. And that's running full today. The Roxboro mill that we acquired, we plan to restart two of the LVL processes as well as the I-joist capacity. The first LVL press is up in running around 75% of what we expect for the output, the qualities today around 80%. We do some resell, so obviously everything that’s going out the door is going out for its quality. But we’ve got continued work to do there on the first press. We will have I-joists early in third quarter and probably due limited shipments of I-joists and then in the second half of this year we will start ramping up the second LVL press with a view towards having it ready in 2018. And total capacity of Roxboro is likely to be around 4 million cubit feet of LVL and roughly a third of that will get used for Flange for I-joists.

I would note that on Wayne’s numbers, we’re also ramping up shares within operating two shifts and know we’re – the course of the second quarter we’re going to get up to four full shifts. So that’s on that first press.

So we’re probably on the EWP assets I would say through our system we’re probably today operating somewhere around 80% on an annualized basis and I would expect the additional volume that we’ll produce at Roxboro to deal with a housing start increase that we will see between 2017 and 2018.

Okay, thanks for the color.

Thank you. And our next question comes from the line of Brian Maguire of Goldman Sachs. Your line is now open.

Hi, good morning everyone.

Good morning, Brian.

Wayne, I was hoping you could help us may be quantify the benefit and the distribution business that you had from all the inflation in the quarter. I think you described a pretty high inflationary environment we had in pretty much all Wood Products. So give me a nice tailwind there. Just as we’re thinking about the right base to be using on a kind of a pricing neutral basis and what do you think the right – gross margin or you know EBITDA number would have been in the first quarter?

Yeah, probably the thing I would point to is if you look at our full year 2015 gross margin, it was 11.6. If you look at full year of 2016, it was 11.9. And I think we have noted a couple of times the exceptionally good gross margin we had in second quarter last year was 12.5. So I tend to think of our gross margin on an annualized basis somewhere in the 11.5 range. And first quarter and fourth quarter are typically weaker, second and third quarter are typically stronger because some of the seasonal products like composite decking. So if you ask me to put a number on it, I would say there’s – Nick and I may vary a little bit. I think there’s probably $3 million to $4 million of goodness in the first quarter because of the tailwinds on commodities and not just that wood based up, but we had some movements on steel on a couple other things. So compared to a year ago we’re up 20 basis points on gross margin and I think again there is some goodness in that. And I think we’re going to have a real challenge on the comp in second quarter against last year’s 12.5%.

Yes, understood. Thanks that helps. And just on the impact of OSB costs, I know you kind of have like a one quarter lag there and they were up 20% in the first quarter. So is it right to think about that as being a – a bit of a headwind of the second quarter Wood Products margins and EWP and anyway you kind of quantify that too.

Yes. What we’ve generally guided to is about one square foot OSB for every lineal foot of Boise, so we did roughly $61 million in Q1 of 2017. And there was – on our input cost about $57 spread between where we were Q1 of 2016 to where we were Q1 of 2017. So if you do the math on the Is we produced, it ended up being a drag on first quarter earnings at about $3.2 million. And going into second quarter, I suspect we’ll have a similar gap as we did in the third quarter of 2017, we should start to lag some of the pricing because we have pretty good pricing from an OSB perspective in Q3 of 2016. So we should start to see the drag on earnings subside as we get into the second half of the year unless we get a sustained run in OSB this summer.

Okay. Just one last one for me, the working capital was a pretty big use of cash in the quarter. I’m sure of all that inflation and product prices had something to do with that. But just thinking, what’s your expectation for the full year on working capital?

What we’ve guided to in Nick’s business which is the main place where we see increases in working capital is 10% of the sales growth in the last couple years Nick and his guys have done a really good job and have been below that. But if you were planning on a $300 million to $400 million ramp in BMD sale, I’d tell you a plan on $30 million to $40 million increase in working capital over the course of the year. December is typically a low point on receivables and inventory. But as we ramp up in the spring we go through a considerable build from late February typically through the latter part of April. And then we’re pretty flat on working capital usage in May, June, July, August and we start to have a little bit of give back on working capital out of the distribution business as we get into the latter part of third quarter and into fourth quarter and we released considerable amount of cash from the working capital side in the fourth quarter.

Okay. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Chip Dillion of Vertical. Your line is now open.

Good morning, Chip.

Yes, good morning, Tom, Wayne and Nick. First question just a housekeeping thing. Did you mentioned Wayne at the second press – second quarter or second half start up at Roxboro for LVL?

It will be second half and our real target is to have it available in the February-March timeframe, the first part of 2018. So we will do a lot of the recommissioning work at the tail end of this year. And our plan right now is to produce a press uses 6 foot veneer. We’re going to plan to produce that 6 foot veneer beginning late third quarter at our neighboring Moncure Plywood operation. And we’ll use that announcements in the recommissioning process in fourth quarter of Roxboro’s operation and then the plan would be to have it available for this time and 2018.

Okay.

Qualified and [indiscernible] and all the other stuffs.

In 2018, got you. As we think about the – one other the I-joist production there. You mention one line is starting up in the third quarter that’s only one line of I-joist at Roxboro right that you have ultimately?

Correct. And when we look at the – the trade-off on Roxboro versus Alexandria, Alexandria we think is probably the most efficient I-joist production anywhere in the world. And the advantage to Roxboro is it’s close to market, but today looking out it, we don’t think the operating cost will be as low as Alexandria’s. So we will probably put a limited number of shifts on Roxboro until we have sufficient market demand that causes us to add shifts and run it full. So we definitely wanted to do the second force of I-joist in the east. So we’ll get at least a couple shifts up, but the plan will be to continue to run Is as much as possible at Alexandria just given the cost of production at that facility.

Yes. And I would add, Chip. This is Tom. I would add that Roxboro is limited on total volume certainly compared to Alexandria to roughly 4 million cubes. So that simultaneously kind of determines how you’re going to run the I line in terms of available raw material for it.

Let’s say you automatically get to 4 million units of LVL and I know a third of those would go to support I-joist. How much would you as you measure the units in I-joist and what sort of – could the production get you there?

I think if we needed it ultimately it will have capacity of somewhere around 80 million lineal feet. But as I say I would think that we will only hit that if we start running into production limitations in Alexandria or if we see demand growth in excess of what we’re expecting for 2017 and 2018. Once we get back to 1.4 million and 1.5 million housing starts if we continue to see the market share gains, we will end up running Alexandria hard and we’ll end up running Roxboro as full as we can. As Tom Corrick mentioned it’s a little bit of where do you want the product because to the extend we want LVL out of Roxboro, we would have to cutback on LVL’s sales to support the I-joist production. So at this point having 4 million cubes of LVL in the East is more advantageous than taking a third of that LVL volume and using it for Is given the production cost of Alexandria. But if the mix changes, we can always make that shift as appropriate.

Got you. And it looks like at least versus our model that your interest expense is probably trending a little lower than what we have. We have like $31 million. It looks like you might be able to come in between what $26 million, $27 million for the year. And maybe we’re right because obviously the working capital needs to be higher. But what should we use for interest expense?

Well, the main thing for us on interest expense is going to be the cash interest on the notes we issued in August and it runs $10 million in March and $10 million in September. And then we’ve got the amortization as the deferred financing cost and we’ve got the term loans we have out from the Farm Credit guys, which at the current point is $95 million. So if you put 2.5% on $95 million and add that to the $20 million and then as I said we’ve got the amortization of the deferred financing cost. But, we should be somewhere the reported interest expense – somewhere in the $25 million to $25 million range.

Got you, okay. And then I know last year in the first quarter – I’m sorry second quarter and this was the first quarter I think you have that the two assets that weren’t running for the most part maybe Alexandria was for the GP assets. You did about $31 million of EBITDA in Wood Products. Even with this drag in OSB and I know you have some ramping activity going on and continuing in Roxboro. Do you think you can, with the pricing we’ve seen, get to that level this year in the second quarter or possibly exceed it?

Well, without giving forward guidance, which we tried very hard to do. I will list the pluses and minuses and I think you hit on the big ones. I think we are going to see increased engineered wood volume. We feel very good about the customer wins we had last year and how those are ramping up in Q1. And we think there was a little bit of volume pull forward, but we think volume should be strong again in 2Q. And we should see traction on the price increases that went into effect in late March. On the plywood side anybody’s guess on price, but it feels pretty good right now. And I would tell you that based on the way we’re operating and with the weather improving, I would expect our plywood sales volumes to improve sequentially from the first quarter to second quarter. And those will all be positives. On the negative side as you pointed out will be the drag from the OSB on a comparative basis and we’re seeing a little bit lower prices on residuals into the pulp and paper industry. And we’re seeing slightly higher log costs in the Pacific Northwest so far the South has been pretty moderate. So in terms of range of expectations, I would phrase it as I think the things we can control and the things we’re doing well will hopefully overcome the drag from the OSB price differential.

Got you. Okay, okay that’s very helpful. And then just lastly, when you look at the – I guess next year when you think about the production, you could have next year. I am sorry [indiscernible] one more last question, I’m sorry. On the building products distribution business, you mentioned obviously that you have some immediate benefit or close to immediate benefit from higher prices, obviously some inventory gain. Would you say that was significant in the first quarter or say differently, if we froze prices now in early May, because I know they were generally rising in April for most wood products. Do you think that the inventory gains should be lower in the second quarter assuming prices held where they are now or would be – or are you think they'd be similar what they were in the first?

I think the tailwinds we've got in our first would be more pronounced than what we would see in the second if we stayed flat on pricing on here. On the lumber side, I think anything that brings clarity around the trade situation; personal opinion is likely to cause lumber prices to fall. On the OSB side, I think order files continue to be out several weeks. And so if housing continues to ramp up seasonally, OSB could get tight and we could see a rally in OSB prices in second quarter. But if we stayed flat with where we are today, the gross margin tailwind in second quarter would not be equal to what we saw in first quarter this year.

Okay. And then lastly on the plywood side you were talking earlier, where those – the increase you said in March was that the exports of plywood or imports? You mentioned a bigger piece of a growing pie, I was just curious if you’re really [indiscernible] import situation is getting tougher again or did you imply the opposite?

I was implying that it's getting tougher. What I gave you earlier were the cubic meters on shipments leaving Brazil. If you flip that around and you look at what happened on imports, APA were showing the plywood imports were 271 million square feet in first quarter, just looking at the import side, and that was 7% increase from fourth quarter of 2016, and it was a 20.4% increase from first quarter of 2016.

I see.

So if you think about an average plywood mill, that 300 to 350 foot range, pretty decent sized mill. The amount of imports in the first quarter were not quite a full plywood mill, but close.

Very clear. Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Mark Wilde of Bank of Montreal. Your line is now open.

Good morning, Tom, good morning, Wayne.

Good morning, Mark.

I wondered if we could get Nick Stokes to just talk a little bit about how you kind of position around lumber right now, because we've had such a big run up and I think there is a lot of concern that that there's actually not a lot of volume moving up in the West and some of these Random Lengths prices we’re seeing. And clearly, as you mentioned Wayne, if we get any clarity on the trade situation there's probably some downside risk on lumber stock. I wondered if Nick could just talk about how you guys manage this.

Yes. Good morning, Mark, great question. I'd start with the premise that, it says in general we are not speculators. So unlike some channel members and/or someone of our competitors, we don't by design try to forecast quarterly prices and then make purchase decisions based on those forecasts. Our overwriting principle is that we want to be in the market, buying and selling every day. Having said that, to be sure, the volume is driven to some degree by people's anticipation of how those product prices move. I would tell you that on average, we try to keep – there's a big difference in transit from – you think about the West Coast versus the East Coast, but on average we try to have about a month's worth of supply of commodity products available. And I would tell you in the last 10 days, your comment about not a lot of volume moving getting bought and sold every day would be consistent with how we see it as well.

Okay, all right. Okay, well, I guess that’s it. And also Nick, is it appropriate to talk a little bit about sort of how you're seeing your mix right now between sort of new construction and repair-and-remodeling in distribution? Do you have a read on that?

A read, but no data. Certainly, if you think about the homes and the switch is primarily repair-and-remodel driven that's been very strong in the last four or five, six quarters and keep in pace with that. If we sell product into a traditional lumberyard, we assume that it’s some combination of new construction repair-and-remodel and/or DIY. And so the clarity associated with where that product absolutely ends up is it is a bit difficult. I would tell you that it's interesting by product, certainly our EWP volumes are driven by absolutely new construction, primarily. In the case of our composite decking business, a good chunk of that is big time repair-and-remodel and/or DIY. So it varies a bit by product. If you think about BMD’s mix in total and you look at kind of our run rate on EWP as a percentage of the total in BMD, we're getting up there close to 20% of the mix and few years ago, it was closer to 15% of the mix. And so I think that speaks to the work that we have tried to do across the company in terms of the EWP volumes and I think it really speaks to the integration goodness of the two businesses that we have.

Okay. And then, I wanted to just switch gears, Wayne. I think in response to John Babcock's question, you suggested that your engineered wood business would be running at about 80% of capacity this year, is that right?

Yes, if you look at it sort of the year.

So, I wonder if we can kind of toggle from there to sort of where you think you'll be at for the full year in terms of realizing kind of the benefits or just the EBITDA that you anticipate coming out of that GP acquisition.

Yes, so there was – I’ll break it down as there are four components that we’re going after; so profits at Thorsby, profits at Roxboro, freight benefits of having three mills in the East instead of one, and then the margin benefit of having additional EWP volume and product volume through distribution. So if I kick through those, Thorsby is humming at the moment. We've moved customer orders to where their freight logical and Thorsby is running basically flat out today and I have no concerns at all about it hitting the EBITDA expectations we had for that mill. And we are seeing in our selling prices in the freight benefits of having Throsby shipping LVL in the East versus sending product out of Alexandria and GP legacy would have been shipping from Alabama, West towards Texas and some other places. So the freight piece we're getting on the Thorsby side not so much at this point on Roxboro and I would tell you Roxboro today is not contributing anything on an EBITDA basis. In our Nick’s business and I’ve touched down on this, if you look at the percentage of their sales that are now EWP, I think one that's a reflection of how things are continuing to be stronger than the growth in repair-and-remodel, so you're seeing I think an increasing portion of BMD sales are tied to residential construction compared to where they would have been during the housing downturn. But the pull through is a result of having made the GP acquisition, let's just say, I'm highly confident that we have probably already surpassed the $6 million or so that we had penciled in for the synergy benefit of BMD. We will be beyond that on an annualized basis in 2017.

And then the freight benefits?

Fright benefits; this is a wild guess. I mean, we thought we would see $6 million to $7 million in fright benefits. I would tell you this year that we may see $2 million to $3 million of that through – it will show up on the sales realization. So not only do we have the price increase going through this year but as we rebalance where orders are shipped, we should see $2 million to $3 million, but that will show up on the sales realization line.

Mark, that freight savings is a function of getting the Roxboro well up because that's where the real thing is for the freight side.

Okay, all right. So if we net-net, would you say probably 60%, 65% of the kind of anticipated contribution from GP is about where you'll expect to end the year – have for the full year?

Yes, I have –

Yes, Mark, this is Dan Hutchinson. We’re significantly above that.

Okay.

Again, the increase – Nick or Wayne touched on it, the increase in business and the contribution impact in the Nick’s business is dramatically above of what we thought it would be. Our general increase in market share and part attributable of having the capacity to take on the market share is well above what we thought it would be. The real downside of all of this is we simply have a slower start up at Roxboro and I think everybody has got to remember that, we're not missing any orders. Orders that might have – that we have might have planned to flow through Roxboro are being picked up by Thorsby and Alex. So we've just got a cost problem at Roxboro, we’re getting it fixed.

And so we’re not seeing quite as much on freight synergies.

Yes. We might see the freight synergies switching…

[Indiscernible] at Roxboro, but we throughout 40 number. And I haven’t done the total math on it, but my guess is above 40 and we're going to be pushing towards 30 this year.

Yes. Okay, all right. That’s…

The time it gets by second half of the year.

Yes. That’s exactly what I was looking for. That's very helpful. Thanks Wayne and good luck in the second half of the year.

Thanks Mark.

Thanks Mark.

Thank you. [Operator Instructions] Our next question comes from the line of Steve Chercover of Davidson. Your line is now open.

Thanks and good morning, everyone.

Good morning, Steve.

So it's a bit late, so some of my questions are already answered. But I did want to ask first of all about lumber, your volumes were down but did Building Materials Distribution see incremental volume from others due to buyers trying to get ahead of the duties?

Steve, this is Nick. From a distribution standpoint, we report our commodity volumes, they were up 12%. Depending on the product some of that in some cases maybe even 15% might be price. I don't get the sense that our supply partner on the customer side did that. This is an opinion not a fact, but my sense is that there was a lot of uncertainty around agreements and people did not try to put stuff in ahead of an anticipation of duties and/or agreements. I think the inventories in the field are adequate, I think there was more apprehension about what was common that cause people to just not make big commitments.

Steve, are you talking about our lumber production?

No, I wasn’t referring to yours. I was just talking about lumber through the entire pipeline. I mean, you guys are significant component of that distribution chain. So I'm assuming you're buying quite a bit from third parties and it's going from point A to point B, but it doesn't sound like there was a big pre-buy.

That's not my sense for sure, Steve.

Okay. In adding to your other comment that inventories seem about right in the field and people can't sit on their hands forever, sooner or later something's got to budge or constructions will come to a halt, right?

Yes.

Well, that's not what we want.

Yes. I was going to say that the hallway conversations have been exactly – people are reluctant to buy because there's a fair amount of uncertainty on price, the flip side is Nick and his guys are saying that if you can – in essence do just in time fillings out of the warehouse and we're in essence taking the price risk, make sure we're getting paid if we're selling commodity Wood Products out of warehouse to a buyer who is otherwise skittish about going along, make sure we get paid appropriately. And so it's been pretty interesting. To Nick’s point, as people have slowed down their purchases, it becomes – I'm going to buy only what I need for the next couple days. But if they haven't bought two or three weeks down, they don't have stuff rolling at them, it means, you can have a little more swing on the price side.

Yes. Well, I guess besides the law of gravity, the only thing you know is law of unintended consequences; it’s going to raise its head. So one other question which is unrelated, with respect to the acquisition pipeline, I think Wayne said that one of the considerations is – or that's part of how you allocate capital. So is the priority for the next potential deal still in the near base businesses or are there holes you prefer to fill in distribution? So how should we think of that?

Yes, I would tell you that probably the priority is on the distribution side and things that we are focused on our Nick and his team are spending time on is really on geographic fill-ins at this point. There's a larger opportunity that comes up. We’ll obviously look at it, but I would tell you given what we're doing from a management perspective in Wood Products, we're not spending a lot of time chasing deals in the manufacturing side at the moment. And I think Nick would tell you that what they've got going on in organic basis and us continuing to support working capital in an increasing facility capacity in markets where that makes sense. That execution models working very well and there's not a lot of geographic holes to fill-in, but there are a handful of markets where we like better coverage in a physical presence. And that's really where we’re spending the effort today, but those would tend to be relatively low dollars in the grand Schema things.

Understood. And the fact that you're not looking on manufacturing at present is that primarily because you've got opportunities with Roxboro et cetera to improve with your existing asset base or because few have got inflated expectations due to the run up in price.

Well, that I would describe the Wood Products business, the two principal places where we operate are engineered wood and plywood. And I think given what we've done on the engineered wood side, we feel pretty good about the capacity we have is to service 1.4 million housing starts and there's a number of metro areas that frankly we would have a real challenge if we added engineered wood capacity, getting into the marketplace through the downstream channels because we've got in a number of MSAs, considerable shelf space so to speak already. So we really need to grow with the channel partners, we have and make sure that we grow with the pace of housing starts and they're capturing market share in the local markets and supporting their growth. On the plywood side, if there were something opportunistic to buy a mill that would provide veneer support to the EWP side, it might be interesting but to grow plywood for the sake of growing plywood, in my opinion it would need to be something that is servicing a more specialized market. I think our veneer expertise could transfer to some other lines in plywood, but to make commodity sheathing plywood is probably not on our list of strategic objectives. It would need to be something that serves a pretty isolated market because we continue to believe that that OSB is going to capture an increasing share of that sheathing market over time.

Great. Well, thank you all.

Thanks Steve.

Thank you. And our next question comes from the – follow-up from the line of Chip Dillion of Vertical. Your line is now open.

Yes. I appreciate the answer to Mark’s question about I think you said the acquisition benefits are contributions like $30 million, this year $40 million of EBITDA next year. What was EBITDA impact in 2016? I know there were some – I think some negatives in there, if you could just – should we have that to compare with as we go from 2016 to 2017?

And I'd tell you in 2Q of 2016, we would have had a modest benefit because Thorsby was making decent money, Roxboro was curtailed and we were a largely selling GP product that was an inventory in particularly the MI inventories. By third quarter, we had started to convert Thorsby production to Boise Cascade, but we were still supporting the legacy GP operations. So I would tell you quite candidly that we started to mess up the cost structure at Thorsby, but very purposely and we started to incur costs with restoring operations at Roxboro. So net, net not much of a contribution in third quarter. By fourth quarter, we had converted essentially production at Thorsby to Boise production. We had wound down the GP lines and Thorsby was contributing more EBITDA than we were losing in ramping up Roxboro, so net, net the two would have been a positive contribution in four. And as we move through this year, particularly as we reduce the drag at Roxboro getting Thorsby up to full capacity, getting the price increase through and getting the freight benefits. I would tell you they will – together they will be – a positive EBITDA column in the first half and more so in the second half of this year.

And again, sort of last year maybe something in the five-ish all-in maybe 5% and the 10% ranges. What the nine-month contribution was?

Yes. I mean I'm doing math off the top of my head, but my guess is that the net, net of two in 2016 it might had its $5 million but it wasn't a big number and just as remainder…

And then you mentioned the ramp would be increasing second half versus first half. But is it fair to say the second quarter should be better than the first or not necessarily because of just the timing of work being done there?

Yes, I think second quarter will be better than first because we'll have a couple of things, we'll have more volume. We’ll have – in my opinion the EWP move first in distribution of deferred, Nick. The EWP move first and for some of those dealers that converted to Boise Cascade EWP, I think Nick’s guys will start to get the benefit of that on sales as we move through this year, which will have some modest benefit, but I think that the main benefits will be Thorsby running full. So we’ll get the operating efficiencies from that and price increase we announced will start to gain traction in second and third quarter and I think that will give lift. And frankly, Roxboro the focus is on getting the volume and the throughput up and if we incur operating cost in the near-term as Tom Corrick alluded to we're adding shifts and training employees to get to four shifts on the first press. Once we get that more or less in hand, we'll be doing the same thing on I-joist line probably one or two shifts. And then as we get to late fourth quarter, we'll have expenses in ramping up the third press, but we really – even if that causes a temporary drag on earnings, we want to be ready for 2018 because what we've got on market share gains, the last thing we want to do is late 2017 or early 2018 be telling customers that we're not going to have product form in the spring of 2018, that would be a bad outcome.

Totally, understand. So again just my understanding, if I just think about a standalone $5 million roughly in 2016, $30 million this year and something in excess of $40 million next year, if all goes to plan.

Well, the $5 million that Wayne was mentioning, but I think was related directly to the plants. There's also the benefit of BMD and the incremental volume associated with all the things that happened last year, some of which were acquisition related.

In BMD, okay, all right. We will factor that in. Thank you.

Thank you and I'm showing no further questions at this time. I would now like to turn the call over to Mr. Tom Corrick for closing remarks.

Okay, great. Thanks for joining us today. I think just a quick wrap up here. Three things I would note. One, I think that we're feeling generically as good – at the market feels about as good as its felt in quite a long time and obviously that showing up and the continuing ramp up in housing starts. Above and beyond what's going on in the market, I think we have many things that are in our control particularly in the Wood Products side that I feel really good about how we're executing on and I think we're making very good progress. And I guess the last thing, I would say, as you know throughout the last 10 years, we're very significantly increased share and increased our capacity to take advantage of that share. And I think we continue to be very well positioned as housing returns to what we believe our trend levels of between 1.4 million and 1.5 million starts to have the capacity on both sides of the business to service that growth from this point forward. So feel pretty good about things right now and where we're positioned.

Thank you everyone.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.