Boise Cascade Company (BCC) Q2 2017 Earnings Report, Transcript and Summary

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

Thank you, Glenda. Good morning, everyone. I’d like to welcome you to Boise Cascade’s Second Quarter 2017 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. I do understand that we have a broken web link on our website to the slides. I’ve got someone working with NASDAQ at the moment to try to get it back up. We will get the slides posted as soon as possible, but we will go ahead with the call and be happy to take questions or comments off line after the webcast if there are questions regarding the slides. Turning to Slide 2, I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. And now I will turn the call over to Tom Corrick.

Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. Our second quarter sales of $1.14 billion were up 9% from second quarter 2016. Our net income was $22.2 million, up 15% from the year-ago quarter. Our Wood Products manufacturing business reported segment income of $15.4 million in the second quarter. The business continued to face headwinds from higher OSB input cost used in the manufacturing of I-joists. In addition to higher raw material cost, our per unit manufacturing cost increased relative to last year’s second quarter. Improved plywood and lumber pricing offset the negative earnings impact of the cost pressures. Our Building Materials Distribution business had another outstanding quarter reporting segment income of $34.5 million. BMD executed very well in the quarter taking full advantage of structural panel and lumber price volatility to grow sales and earnings. Strong EWP sales also helped BMD’s earnings. Wayne will walk 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. Wood Product sales in the second quarter, including sales to our distribution segment, were $350 million, up 1% from second quarter 2016. As Tom mentioned, Wood Products reported segment income of $15.4 million in the second quarter. Reported EBITDA for the business was $30.7 million, down slightly from the $31.1 million of EBITDA reported in the year-ago quarter. The decrease in EBITDA was due primarily to higher OSB input cost, higher per unit manufacturing cost as a result of lower plywood and lumber volumes as well as 4% lower net sales realizations for I-joists due to higher sales allowances. The negative earnings drivers for Wood Products in the quarter were almost entirely offset by the positive impact of higher plywood and lumber sales prices, which were up 11% and 18%, respectively. BMD sales in the quarter were $981 million, up 15% from second quarter 2016. Sales volumes and sales prices increased 8% and 7%, respectively. BMD reported segment income of $34.5 million or EBITDA of $38.4 million. This compares to segment income of $29.1 million and EBITDA of $32.5 million in the prior year quarter. The improvement in income was driven by higher gross profit dollars resulting from higher sales and positive operating expense leverage. 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 million in second quarter 2017 compared with negative $7.1 million in second quarter 2016. When you have them, turning to Slide 5. Our second quarter sales volumes for LVLs and I-joists were essentially flat compared with second quarter 2016. As a reminder, second quarter 2016 volumes benefited from continued sales of Georgia-Pacific branded engineered wood products following the acquisition of the Thorsby, Alabama and Roxboro, North Carolina engineered wood facilities at the end of first quarter 2016. While our overall sales volumes of EWP in the second quarter were flat compared to the year-ago quarter, sales of Boise Cascade branded LVL and I-joists increased 20% and 10%, respectively compared to the prior year quarter. This strong growth was driven by Wood Products gaining several key channel partner conversions in the second half of 2016. Wood Products successfully implemented list price increases in the majority of the U.S. markets late in first quarter. However, the increases did not flow through to our EWP net realizations to the extent we expected in the second quarter. We have contractual commitments to provide price increase protection to certain downstream purchases of our EWP for different periods of time which delays the effective date of any announced price increase. In the second quarter, we also recorded a negative adjustment of about $2 million as we received additional purchase information and closed out 2016 EWP sales allowance accruals. In addition, Wood Products increased the anticipated level of its EWP volume rebate accruals for 2017 during the quarter based on higher estimates of purchases by key channel partners in the first half of 2017. Those adjustments negatively impacted our reported net pricing for LVL and I-joists in the quarter. During our previous earnings call, we had anticipated modest sequential EWP net sales price improvement in the second quarter and further improvement as we moved into third quarter. We remain optimistic that we will see stronger net pricing for engineered wood products in the current quarter. Turning to Slide 6. Our second quarter plywood sales volume in Wood Products was 369 million feet, down 9 million feet or 2% from second quarter 2016. We are minimizing our third party veneer purchases, which allows us to shift more of our internal veneer production into EWP products and more tightly manage 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. Side note, I understand the link on our website has been fixed for those that are interested in bringing the slides up. Returning to comments. The $301 average net sales price in second quarter was up 11% from second quarter 2016. The tone of the plywood market feels good currently, particularly for our production in the west. Stronger OSB pricing and concerns over production disruptions in Canada because of forest fire activity is providing a measure of support for plywood sheathing products. However, Brazilian plywood imports and the ramp up of the private equity-backed plywood facility in Mississippi are continuing to put supply side pressure on Southern plywood pricing. We will continue to watch imports, domestic operating rates and mill lead times for plywood as we plan our production. Moving to Slide 7, BMD second quarter sales were $981 million, up 15% from second quarter 2016. By product area, BMD sales of commodity products increased 17%; general line products increased 10%; and in EWP increased 21%. The gross margin percentage for BMD in second quarter was 12.1%, down 40 basis points from the 12.5% reported in the second quarter 2016. BMD’s EBITDA margin of 3.9% in the quarter was slightly better than last year’s second quarter EBITDA margin of 3.8%. Sales growth and expense leverage was 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, decreased $16.8 million during the second quarter. BMD’s receivables and inventories grew in the second quarter, but those increases were more than offset by growth in the company’s accrued liabilities and accounts payable. As a reminder, 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’m now on Slide 9. We generated $61 million of cash in the second quarter. We ended the quarter with total available liquidity of approximately $498 million, which reflects our cash and availability under our committed bank lines. With our trailing adjusted EBITDA at $170 million, we are approaching our leverage target of 2.5x gross debt-to-EBITDA. As we move below our leverage target, it will give us additional flexibility on future capital allocation decisions. We did not repurchase any of our shares in second quarter. We have approximately 697,000 shares left on our original $2 million share repurchase authorization. We vary the pace of our share repurchases based upon our assessment of acquisition opportunities, our leverage and our free cash flow generation. Our capital spending for the year is expected to be between $75 million and $85 million. And with that, I will turn it back over to Tom for concluding comments.

Thank you, Wayne. The July consensus estimate for 2017 U.S. housing starts is 1.23 million starts. While still an improvement from 1.17 million starts in 2016, the consensus outlook for housing start growth in 2017 has been declining for the last several months. The deceleration in the pace of housing starts doesn’t appear to be solely reflective of a change in demand for houses. Many builders are facing challenges on labor availability and cost-driven margin pressures, which have led in some cases to reduce construction activity. We continue to believe that demographics in the U.S. will support an eventual return to normalized housing starts of 1.4 million to 1.5 million starts. I remain encouraged by the current market environment. Importantly, we have a number of areas within our control in Wood Products and BMD to continue to drive revenue and earnings growth. We are seeing traction on EWP pricing with stronger demand and believe the better realizations will show up in our third quarter statistics. Wood Products is getting a higher proportion of its internally produced veneer into engineered wood products as demand improves, which captures more system margin and takes some pressure off the plywood market. The team is continuing to make progress on driving utilization in productivity in our Eastern region, which includes the 4 mills acquired since late 2013. BMD has done a terrific job of executing and responding to market opportunities at both the local and national level during a volatile and uncertain pricing environment in 2017. They continue to look at infill markets, product line extensions and other avenues to push up sales and earnings. There is a lot of good work being accomplished by our employees to further strengthen our market position and drive cash flow. And I want to thank them for their very good efforts. I am optimistic as we move into the second half of the year. 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?

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

I guess, my first question on EWP pricing is this: given that it sounds like you are now past that point where you had the effect of the rebates and price protection, should we see pricing move up at an accelerated pace? I.e. you catch up to what was the underlying price trend in the first quarter or – excuse me, the second quarter? Or was the activity in the second quarter in terms of rebates, price protection, et cetera, serving to basically push out when you get pricing? So it’s the same ramp in pricing but just a quarter later, if you will.

George, this is Wayne. Without getting too far over our skis again, I think you’ll see a lot of the pickup that we were expecting between first and third quarter still in place. So based on numbers I’ve run so far, I think we’re probably going to be up about 4%, sequentially. There’s a lot of moving parts in that in terms of the customer mix, whose volumes are increasing in what regions. But the $2 million adjustment we had related to 2016, if you look at that, that probably cost us somewhere around $0.20 to $0.25 on LVL and a similar percentage change maybe 1.5% on the I-joists. And obviously, we don’t expect that to repeat in third quarter. And if I look at where we are on invoice-to-list prices in June compared to where we were at first quarter average prices, the June invoice prices are up right around 5%. So I’m pretty confident unless we see big changes in the mix that we’ll see probably about a 4% increase sequentially from third – or from second to third quarter.

Okay. And I’m probably missing something. So apologies in advance. But one of the factors that you mentioned were volume rebates driving the, if you will, slower ramp in pricing or decline. When I look at 2Q volumes for LVL and I-joists, there really isn’t much of a change. It was all in the first quarter. So did we see an effect from the first quarter buying patterns? And I guess, putting a bow on it, does that suggest there was a fair amount of prebuying in the first quarter, looking back in hind sight given the oncoming pricing?

Well, a couple of things. I think we had some pull forward clearly, because if you take our first half numbers compared to first half last year, I think were up about 10% overall. So there’s some of the volume that I think got pulled forward into March. And we had a little bit slower activity frankly, in May than we would normally see seasonally compared to first quarter.

Sorry, you saw a little more activity in May of what did you say?

We saw less activity in May on the EWP side than we would normally see seasonally. I think we warned about that when we had the first quarter call. The activity was very strong in March compared to what we see in a typical year. And frankly, I think the housing start activity slowed a little bit in second quarter. It looks like it’s starting to reaccelerate. But the normal seasonal pickup we would see second quarter compared to first didn’t occur this year to the same degree. And as you’d expect, we have a variety of builders and retail lumber yards that we deal with. And depending on the customer, the rebate volume activity is different, largely based on scope and scale. And what we try to do each quarter is sit down with our field sales people and with the customers and try to gauge what their activity levels are. And we have some of the larger guys that have, frankly, this year been growing at a faster rate than some of the smaller guys. So we went ahead and upped our rebate expectations in second quarter. As you can appreciate, a lot of the estimated data we try to get out of the field and try to get a pretty good handle on, but particularly, the publicly reporting builders and the publicly reporting retail distributors are reluctant to give us their sales data before they release earnings. So try to triangulate as best as we can and try to update every quarter. But at this point, as I say, we’ve had very good sales activity at a couple of the large guys, so we went ahead and upped our expectations for rebates in the second quarter.

Okay. Switching gears a little bit. Can you provide a bit more color on how the integration of the Georgia-Pacific assets is progressing and I’ll stop there.

This is Dan Hutchinson. I think it’s going really well. The Thorsby facility is up and running very well, and we’re transferring orders to that facility from our Alex facility on a regular basis, depending on the optimizing freight. The Roxboro facility, if you think about it, it’s got 2 presses and an I-line. And we are running one of the presses and repairing the other with the intention of running it next year. And the start-up on that press that we are running – we’re running, it continues to improve. We’re probably running it today at about 70% of where it should be, and the I-line will probably start running here in the third quarter.

The other thing I’d point out on the integration, not only does it impact manufacturing, but you’ll note in our earnings release this morning that our intercompany sales are up $40 million from where they were in second quarter of 2016. So it’s jumped to $192 million up from $152 million. So the ability to redirect traffic on the engineered wood we’re producing out of the GP mills and the customers we’ve added has really benefited the distribution business on the engineered wood side.

Makes sense. I have some other question, but I’ll turn it over for now. Thank you guys.

Thanks, George.

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

Hey, good morning guys.

Good morning, Brian.

Weyerhaeuser recently had to settle a lawsuit on some of their flame-retardant EWP products. Just wondered if you could comment on, I think they’re pulling some of those products out of the market, it sounds like. I was wondering if you could comment on what impact, if any, you think there might be to your business. And I know it’s not your product, but just wondering if you think it might have any potential negative impact on builder or customer perception of EWP? Or is there any technology that you guys are looking that’s maybe a little bit different there as to – sort of address those fire code concerns?

This is Dan Hutchinson again. We have a product that is used in the same application as the Weyerhaeuser product. Our product is essentially a solid-sawn I-joist – solid-sawn flange I-joist we make up in Canada. And rather than a proprietary coating, we just, essentially, glue Thermax to the side of it. Thermax is a product that’s been used in the building industry for quite some time. And so our – we have to fill that market niche, but our approach to it has been totally different as to how to do that. I can’t speculate as to how everyone is going to react to this product recall by Weyerhaeuser, but I suspect the reactions will be varied. One thing that I would point out, that for our sales of I-joists, this end use requirement or end-use need is a very, very small part, probably less than 1% of the I-joists we sell.

Okay. I just wondered if you could maybe quantify any kind of financial impact you’d expect from all the fires going on out West and in British Columbia. And particularly, I’m thinking about OSB prices as they’ve moved up here a little bit. I recognize you get some offsets with plywood moving up as well. But is there a way to sort of bucket or maybe give a range of what kind of financial impact you’d expect to have on the second half of the year from that?

Let me talk about what was going on in the second quarter and then, obviously, I think the trajectory on OSB has continued to be up. If you look at our input cost in second quarter, OSB was up about $70 per 1,000 square feet. And you can apply that against the roughly 60 million feet we use a quarter. So somewhere around $4 million negative drag. We have a rolling 13-week average that prices are input cost. So as OSB has continued to move up in third quarter, I’m not expecting that gap to narrow relative to prior year as we get into third quarter. And we’ll see where we go into fourth quarter. I think there’s some additional OSB capacity that’s expected to come on and typically, we see prices seasonally fall off as we get into the fourth quarter. But the year-over-year increase in OSB has continued to be a pretty sizable gap. As you pointed out, we’re up, I think, $30 on plywood, and we produce roughly 6x as much plywood as we purchase OSB. So that’s more than offsetting, at the moment, the OSB input cost, but it’s certainly constraining margins on our I-joist production at the moment.

Got it, okay. And then just one last one for me. Now that we’ve gotten the lumber duties in place, just wondering if the channel has sort of adjusted to them? And I know we were talking last quarter about the inventories getting kind of thin, as there was a bit of a staring contest going on. Is it your sense that the channel is kind of back to normal there? Or is there still some impact being felt from the duties as they’re being implemented?

This is Nick Stokes. Obviously, the actions of the U.S. government over the last 6 months is, as well as and maybe more importantly, the presumption and the assumptions the channel and the industry were going to take relative to their commodity inventory investment. I think it’s fair to say that the inventories of commodities have been a bit lower than usual given our seasonal experience, and that has led to the volatility as well as the speculation about the government’s action. As you know, the countervailing duty will come off on August 31, and I would presume there’s people sitting around tables today trying to think what the impact of that will be. And I’ll leave it to others to speculate there. But I think inventories in the field today are probably a bit lower than they might otherwise be just given people’s anxiety about commodity price risk and investments in big piles of working capital.

Okay, thanks very much.

Thanks, Brian.

Thank you. And our next question comes from the line of Ketan Mamtora from BMO Capital Markets. Your line is now open.

Thank you. Good morning, Tom, Wayne.

Good morning, Ketan.

Good morning, Ketan.

First question. One of your competitors is building a large EWP plant in the South. I realize it’s not coming for at least another 18 months. But can you talk about kind of the impact that will have on you guys and just the industry, in general, and how this changes competitive dynamics? Because we are only now kind of ramping up on the EWP operating rate. So any thoughts around that?

This is Wayne and I’ll invite my colleagues to comment. Obviously, based on where we think we are in operating rates and given that housing starts have been slower to recover this year than we had and many others had anticipated, we were somewhat surprised by the timing of the announcement. The thought that the industry will eventually need more capacity in the Southeast was, frankly, what drove our acquisition of the 2 GP facilities. So we would concur with their assessment that that’s a good region of country to be in where there’s likely to be continued housing start growth, et cetera. So the addition of more capacity in the Southeast over time doesn’t surprise us. The timing does, because at current operating rates we think are probably in the low 80s. So whether or not the industry needs that by mid-2019 remains to be seen. And we’ll, obviously, see how the rest of this year plays out in 2018. But if we get back to 1.4 million, 1.5 million housing starts, and assuming the start continue regionally where they have over the last couple of years, we think that capacity would be absorbed rather gracefully. But if it continues to be about a 60,000 to 70,000 increase in starts and that continues for the next several years, we think they’re probably early by a year or 2 and will likely have a detrimental impact on the supply balance.

I would note that they’re talking about a startup in mid-2019. And having been through many startups of LVL plants, that would really imply that the impact will show up in 2020. It takes quite a while to bring one of these things online. So it’s clearly out there. It’s clearly something we need to think about. I think the real determinant will be the trajectory of housing starts.

Got it. That’s helpful. And then, Wayne or Tom, can you talk about how plywood imports from Brazil has trended recently?

If you look at the data out of Brazil, for the first half of this year, they brought in 320,000 cubic meters – or I should say that’s what left Brazil. In the U.S. has represented roughly 34% of what’s been exported out of Brazil. And just as kind of a comparison, if you look at full year 2016, there was 490,000 that was exported from Brazil and the U.S. got 28%. So we’re up – in terms of what’s being directed towards the U.S, we’re up 6% compared to where it was in 2016. And as I say, they’re quickly approaching the total number for 2016 and we’ve still got 6 months left to go in the year.

I would note, their currency moved favorably for the Brazilians during the middle of the quarter, which certainly added some momentum to this. As the currency has slipped back a little bit, it’ll be interesting to see what the impact of that is as well.

Got it. And then just final question, you talked about on a leverage basis getting to kind of your target level and talked about flexibility in capital allocation. Can you at a high level help us in terms of how you’re thinking about use of cash, whether there’s internal opportunities or whether there’s M&A or maybe dividends? Any thoughts around that, Tom?

Hang on just one sec. Yes. Obviously, and I think we’ve talked about this several times as we look at the continued recovery in housing, we really start to need to think through capital allocation decisions a little more carefully, because we believe we’ll be generating some pretty substantial free cash flow. I don’t think the basic theme has changed at all, which is we are going to – I think our base capital program is pretty set at this point, going forward. And we’re going to look at organic growth opportunities first, I think infill acquisition and distribution space. And then, really in concert with our board, we’re having some pretty detailed conversations around capital allocation as well as growth opportunities above and beyond what the housing recovery is going to provide. Wayne, anything you would add?

We’re obviously going to have a board meeting next week and the conversation will take place again. I think one of the challenges we have in using this on our share repurchases, we have, in our view, limited liquidity on the stock already. And to Tom’s point, as we generate significant free cash flow later this year and into 2018, share repurchase program may not be the only mechanism for returning capital to shareholders. And that’s one of the things we’ll be visiting with the board is are there other mechanisms we ought to look at to return capital that realize the cyclical nature of our business, but can allow us to deliver back additional free cash flow to shareholders. And we’ve got a number of thoughts we plan on discussing with the board next week.

That’s helpful. So just on that point, would you also consider a variable dividend considering your point on cyclicality of EBITDA?

That’s one of the concepts we’re looking at. But again, I don’t want to get ahead of our board. But if we – our first preference, as Tom said, was deploy the capital organically where we’ve got good returns. There’s a number of things we think could make sense from an acquisition standpoint. But barring those, we do not want to stack up cash on the balance sheet and find that our net leverage moves below 1.5x or some number that really doesn’t make sense. So how do we get cash deployed in an efficient manner that adds value for shareholders and, particularly, the ones that remain invested in the company. And that’s, as I say, topic for conversation next week with our board.

Got it. That’s very helpful. Appreciate your thoughts and good luck in the back half of the year and 2018.

Thanks, Ketan.

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

Yes, hi, gentlemen. Good morning.

Good morning, Chip.

Could you – Wayne, maybe just remind us what we should be using for a tax rate? I guess either for the third quarter and for the full year, I know it kind of moved around a little bit.

We’ve said for a while that the book rate should be between 36 and 38. So I think if you use 37, you’re probably not going to be far off in either direction.

Okay. That’s helpful. And then, if we look at – you mentioned in the discussion before about having to make the rebate expenses a little more, because more of your volume is moving through the larger distributors. And I was wondering why the big are getting bigger and the small aren’t? Is it a function of their ability to have working capital? Or is there some other reason why you think the share of the EWP is getting bigger with the larger distributors?

Well, I think frankly, it’s a function of the scope and scale of our network. And when we added the 2 GP mills, I think there was increased confidence in our ability to grow with the marketplace. And particularly, for some of the large dealers and large builders where they want national programs or programs that cover very large swathes of the country, our service model and the software support, the design support, the ability to deliver precut job packs. In cases – a number of the dealers, we put hardware into their facilities that allows them to precut job packs and do design work and deliver a more efficient answer to the builder. I think for some of those people, our service platform is more relevant. And if you look at, for example, when we purchased the GP mills, they probably actually had a slightly higher net price to the market, because they were selling to a lot of the smaller independent wholesaler dealers and a lot of case builders. So they had less rebate activity and frankly, less service involved. And I think our capabilities are somewhat unique in the market. I would say, Weyerhaeuser has similar capabilities through their system. But once you get below Weyerhaeuser and Boise Cascade, the people that can deliver on a national basis and deliver their support structure really drops off pretty dramatically.

Okay. I got you. And then, just shifting gears a little bit. I know earlier in the call, you talked about sort of the progress with the GP acquired facilities, and it seems like Thorsby is running pretty well. As I think about Roxboro and the start-up second press next year, when – and looking at, let’s say you do get sort of that 80,000, 90,000 or maybe 60,000 to 80,000 increase in housing every year. Do you think Roxboro would be running fully by say, 2019 or is that a little bit too optimistic?

Yes, Chip, this is Dan again. I have to – what we were going to do with Roxboro in 2018 and the next press is we’re going to do look at the change in demand and run the second press to meet that requirement. So we may run it a very short period of time in 2018. And as far as my forecast for the out years as to when we’re at full capacity using all of those assets, just depends on what housing start forecasts I get. So at the moment, it’s a couple of years out.

Yes, and this is not a level of detail you need, but we have built optimizers that take in all of the plywood plants we have in the South and in the Eastern part of the country as well as the 3 engineered wood facilities. And essentially, we look at where should we operate the capacity to get the lowest cash cost. So to Dan’s point, right now, Alexandria, Louisiana has the lowest-cost EWP facility we have to run. Part of that’s the integration it has with the 2 plywood plants in Louisiana, and it also draws veneer out of South Carolina. So we will essentially run Roxboro as swing capacity based on demand. But we want to have both presses up and available. We want to have crewing on it, be through the engineering issues. And we’ll do the same thing on the I-line. And part of that is an insurance policy in case we had a production disruption in Louisiana. And part of it is none of us have been very adept at forecasting single-family new residential construction and certainly not down to the regional level. So we want to make sure that we can respond pretty quickly. And frankly, we had some pretty good customer wins in 2016, and we’re getting pretty good traction with a couple of other people in 2017. So if we find that our market share increases, we also want to be able to have a capacity available to respond to any market share gains that we have continuing through this year and into 2018. But right now, the plan is to slowly ramp up Roxboro and take advantage of the cost structure at the Alexandria, Louisiana facility.

Okay. That’s very helpful and one last one. I guess, I lost track of this. But my understanding is that at least in terms of the whole duty situation, you mentioned the countervailing portion expires I guess, for now at the end of August. And I understand that, obviously, there are many stages to this whole process. So I guess, it’s fair to say the antidumping portion continues. But does the countervailing going away, is that something that means that, that element has been dealt with and it won’t last? Or is it just a temporary suspension of this with the potential for it to come back as they continue to work through the Commerce Department?

Chip, this is Nick Stokes. I have no idea what the answer to your question is. All we know, the facts are is that the countervailing duty will end on August 31. The antidumping duty continues beyond that. Actions between now and August 31, I am just not equipped to speculate.

This is Tom. I would note that if you think about how Nick runs his business, their purchases are very much driven off what they think they’re going to sell. And so we’re really not playing the pricing game there per se. We’re really trying to meet what we think our customers are going to need to buy next week. And so, we’re not in a speculative mode and I think manage that pretty well. And frankly, I think that showed up very much in the second quarter. We had a pretty significant drop for many weeks in commodity lumber prices, in particular. And I think you can really see it in BMD’s results, their ability to manage through that price volatility in a pretty effective way.

Thank you. And our next question comes from the line of Kurt Yinger from D.A. Davidson. Your line is now open.

Yes, good morning everyone.

Good morning, Kurt.

I apologize if I missed this, but could you talk a little bit about the volume declines in plywood and lumber? And then just looking at the EWP volume numbers, do I understand this right that basically the GP volumes dropped off and then your volumes made up for that this quarter?

This is Dan, Kurt. On the plywood, what we’ve said is that there’s a slight volume decline as we continue to shift our veneer from plywood into EWP. That makes sense? And we’ve said over the last few quarters that we will opportunistically, if you will, run incremental plywood depending on market conditions. And so, we do that. We look at that every week. But most of that change that you are seeing on the plywood side is really an effort to put our veneer into the highest valued product. On the lumber side, what we’re really doing is a little bit of making – the net sales prices, we deal with pine lumber on a very small business. A very small market. And we happen to be kind of a significant portion of that. And so we may take a little production out in hopes of having some impact on price, and we’ve changed a little bit of our marketing strategy there. So it’s a little bit less production and a higher price. So I think that’s working pretty well. On the EWP side, I think what we’ve said is that it looks like our sales Q2 to Q2 are relatively flat. But if you take – if you look at the Boise branded sales and take out of Q2 2016, the GP sales, our sales are actually up. And I think the number, the percentage increase is in the document.

Okay. And then, I guess, just thinking about the OSB squeeze on sort of EWP margins, would it still then makes sense going forward with a little pricing momentum at least in plywood in the West to, I guess, toggle that back going forward? Or I guess, is the thought process then the same going into the next quarter?

Yes. This is Dan again. We will continue to shift veneer into EWP because even with the Delta in the OSB pricing that’s still the best place to put the veneer. If the OSB price drags up plywood pricing, which we hope it does since we’re going to have to pay for the OSB anyway, then we will look opportunistically at making some more plywood. But we will not be shifting veneer from EWP into plywood to take advantage of a short-term blip in the market. We’ve been very consistent over the last umpteen years in being very consistent in supplying veneer to the EWP market when it’s needed.

I think it’s worth noting and I think it’s important to underpin why we did the GP acquisition. EWP, unlike the commodity products which are auction-driven, these customers are committed to a supplier. And part of that commitment is that you’ll have product available for them in a growing housing market, in a difficult cost environment because they really don’t have an alternative once they’ve made a choice. And I think one of the reasons we’ve had success with the growth in Boise branded product over the last 12 months is the acquisition of those mills showed a very clear commitment to the marketplace that we’re going to honor that commitment to be there in strong markets and difficult markets, and we’re investing in that business and growing in that business.

Okay. That’s very helpful. And then, final question just higher level as we look sequentially 2Q to 3Q, plywood pricing in the West’s a bit better; you expect to get some EWP pricing; and, at least, distribution looks, historically, to be pretty flat. I mean, are there any sort of negative offsets we should be thinking besides the continued inflation in OSB? I mean, is there any risk in BMD with, I guess, the continued volatility in lumber? Any sort of color around that would be great.

Yes. I would tell you in BMD, I feel very good about the ongoing sales rate. I think the real question is do we get volatility in lumber and OSB to the downside. But as long as the pricing continues to be stable at this rate, my guess is it will end up with gross margin somewhere in the 11.8% to 12% range. I think they did a remarkable job of managing in the second quarter. But that’s probably the risk with the duties coming off at the end of August. If you saw a sharp decline in lumber prices in the back half of August and through September, that would present a challenge for BMD. Or if you saw, for some reason, OSB prices revert hard, that always potentially sets up a margin squeeze. And depending on how inventories turn, you could get to September 30 and have a lower cost of market that’s been an issue only one time in the last 5 years. So hopefully, we won’t find that. I think on the wood side, as you noted the plywood side appears pretty decent at the moment. That can change, obviously, within a couple weeks. So from my internal, if we get second quarter pricing for an average for third quarter, I’d be quite happy. If that sustains through September. And I think on the input cost, we’ve seen some elevation on wood cost in the West. We’re seeing higher glue/resin cost this year than we’ve had in the past. And then, obviously, we’ve got to work on our unit manufacturing cost. But I do expect wood to be sequentially better than second quarter because we won’t have the rebate adjustment and a couple of other things. But I don’t think we’re off to the races. I think the housing environment has been good, but it has not been as robust as what people thought it would be back in February, March. So again, I think we’re managing the business well but I don’t think we’re off to the races in the second half. I think that will continue to be a good backdrop, but we need to execute.

And final question. In the South, with the incremental plywood volumes from Brazil and then the private equity mill, do you guys get the feeling that OSB sort of is already holding up plywood pricing down there? And that if OSB came off you could see maybe a similar action? Or I guess, is that just speculation?

Some of the markets that plywood has evolved into are not directly impacted by what’s going on with housing and directly impacted by OSB. But clearly, if the lead times get pushed out on OSB and if pricing goes up, people can substitute back into plywood. But that’s probably one of the bigger risks as we go through the back half of this year and into 2018 is, if you ended up for some reason with a major oversupply issue in OSB and it pushed OSB pricing back down to 240 or 250, I think it would have a detrimental impact on plywood for sure.

This is Tom. The other thing I would note is if you take where the Brazilian currency was last year, and where the Southern pine plywood pricing was last year and go through the math of that on realization back to the Brazilians and you take those same numbers this year, the number actually is pretty similar. So there may be some cost driven pact on pricing out of what the Brazilians are willing to do and not do.

Great, thank you guys.

Thank you. And our next question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is now open.

Hi, guys. Just a couple of follow-on questions. To the extent that you can comment, how much if we grow towards that 1.4 million to 1.5 million starts over the next several years let’s call it by 2019 or 2020, how much ability do you think you have to redirect veneer to EWP within plywood so as to take some of the supply pressure off from the previously mentioned sources?

Well, part of what we’ve been doing is trying to increase our internal veneered generating capacity with the projects we’ve done in Louisiana and the ones we’ve done in South Carolina. So our hope is to not be in a position where we have to cannibalize the plywood business to support EWP. I mean, right now, we’re doing that, or we’ve been doing that in the West because given where log costs to manufacturing have been relative to plywood prices say 9 months ago, we concluded on a cash basis, it was better to reduce plywood production, take supply out of the market. So we’ve been running right now at a quarterly rate or somewhere around 370 million feet. If you go back couple of years, we were running about 410 million feet. So we’ve shifted probably 100 million to 120 million feet into EWP. And we can obviously do that as we continue to grow the engineered wood volumes. But we have latent throughput in the plywood operations to support continued growth in EWP and to fill out Roxboro. So I’m hoping we can keep the plywood volumes – assuming the margins remain favorable, I’m hoping we can keep the plywood volume somewhere in that 360 million, 370 million range as we continue to ramp up EWP.

That’s helpful. Just a quick one, residuals, what was the impact positive or negative in the quarter? And what’s the outlook to the extent that you can comment?

I would tell you that the outlook for areas where it’s supporting container board production or tissue is reasonably favorable. If you happen to be in the trade area that’s heavily influenced by newsprint or uncoated free sheet the trends continue to be negative. And the latest volume stats on uncoated free sheet, I think, year-over-year were down about 4.5%. So it’s a challenge that we continue to face. I would tell you it’s probably, compared to 2016, this is off the top of the head, but my guess is it’s probably costing us at the moment $1 million, $1.5 million a quarter, somewhere in that range. So it’s $4 million to $5 million a year probably, and we’ll see if that accelerates. I would describe it as the wood industry continues to recover and as a dimension, lumber guys bring on more capacity, you got more residuals chasing a smaller demand. And some of the guys that were trying to do pellets and some of the power-driven stuff have backed off a little bit. So the overhang on residuals, I would tell you directionally is probably more challenging, nonetheless.

Okay. I appreciate the thoughts on that. And then lastly, recognizing that we’re not at full utilization and you’re still in the process of integrating GP and your next line of work is on Roxboro, are you getting the logistical synergies between Alex and Thorsby that you’d expected? And then broadly, with those 2 mills now and your position in the Southeast, can you remind us what that component of the overall synergy bucket was when you did the deal?

In total, we thought we’d get about $40 million of EBITDA benefit across the system, kind of 27-ish out of the Thorsby, Roxboro-based mills, about 6 or 7 on logistics and then 6 to 7 benefit to BMD. If I look at where we are today, I’m quite comfortable that we’re getting the half plus that we thought we would get out of Thorsby. We’re not anywhere close to there on Roxboro. We are getting freight advantage out of Thorsby. Frankly, most of the freight advantage was going to come out of running Roxboro full. So we’re a ways away from getting the 6 to 7 that we thought we would get on freight synergies because we’re not operating Roxboro full. And I would tell you the plus side to BMD, I’m very confident that we’re seeing the 6 to 7 on an annual basis in BMD if you look at what we got flowing on the incremental EWP. And then, I don’t think it’s a huge number yet, but there is some follow-through on other product sales that the customers have converted and are buying more EWP. And Nick would tell you that yes, maybe. But if I look at – just look at the $40 million of incremental sales on the intercompany and put an incremental margin on that, you can get a feel for what the benefit is to BMD.

George, I would add that we’re obviously tracking what we committed when we purchased it to how we’re doing. And the buckets are not exactly matching up with how we thought the buckets might fill up. But if you add all the buckets together, the numbers are actually pretty similar to the path we defined.

And I’m showing no further questions over the phone line. I would like to turn the call back over to Tom Corrick for closing remarks.

Thanks, everybody, for being on the call today. I guess I would just close up with a few comments. I think we do continue to do a good job of integrating our acquisitions in wood. I think we have continued opportunities to see improvement there. I’m very pleased with how BMD has managed in a very volatile environment to really drive some strong growth. And I think we’re very well positioned to continue to do great things in BMD. As we look forward, we talked about the fact as we recovery continues, we really need to start thinking about capital allocation. And we continue to have a pretty strong dialogue with the board around those capital allocation issues and growth opportunities. Clearly, focus right now is looking at infill opportunities and distribution space and we continue to work hard in that area. All in all, I feel pretty good about what our people are doing and how we’re doing it. And I think the environment going forward has a pretty good feel to it. We don’t see many negatives. So with that, I appreciate everybody being on the call today.

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