Boise Cascade Company (BCC) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade's Third Quarter 2017 Conference Call. At this time all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session 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, Christie. Good morning, everyone. I'd like to welcome you to Boise Cascade's Third Quarter 2017 Earnings Call and Business Update. Joining me today on the call are Tom Corrick, who is remote and dialing-in, in the room with me here I have 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 of the presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. 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. I am on Slide 3. Our third quarter sales of $1.23 billion were up 15% from third quarter 2016. Our net income was $31.7 million or $0.81 per share, up substantially from the year ago quarter and driven by stronger performances in both businesses. Our Wood Products Manufacturing business reported segment income of $24 million in the third quarter, more than double its segment income in the year ago quarter. Wood Products saw pricing improvement on plywood, EWP, and lumber in the third quarter. Our Building Materials Distribution business posted another excellent quarter with segment income of $39.4 million and quarterly sales of more than $1 billion. BMD executed very well in the quarter taking full advantage of product price inflation to generate stronger than expected gross margins, particularly in commodity Wood Products. 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. I'm on Slide 4. Wood Products sales in the third quarter including sales for our distribution segment were $367 million up 8% from third quarter 2016. As Tom mentioned, Wood Products reported segment income of $24 million in the third quarter, reported EBITDA for the business was $39.4 million up 45% from the $27.2 million of EBITDA reported in the year ago quarter. The increase in EBITDA was due primarily to higher sales prices of plywood, EWP and lumber, offset partially by higher OSB costs used in the manufacture of our I-joists. As mentioned in our earnings release this morning, we expect to commence depreciation on $45 million of additional assets at our Roxboro, North Carolina location in the fourth quarter. Our booked depreciation in the Wood Products segment will increase by approximately $2 million per quarter as a result of starting the depreciation. BMD sales in the quarter were $1.046 billion up 18% from third quarter 2016. Sales prices and sales volumes increased 10% and 8%, respectively. BMD reported segment income of $39.4 million or EBITDA of $43.3 million. This compares to segment income of $26.4 million and EBITDA of $29.9 million in the prior year quarter. The improvement in income was driven by higher gross profit dollars resulting from higher sales and the higher gross margin percentage, as well as 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 $6.9 million in third quarter of 2017 compared with negative $6.4 million in third quarter of 2016. Turning to Slide 5, our third quarter sales volumes for LVL and I-joists were weaker than we expected going into the quarter, down 7% and 8%, respectively compared with third quarter of 2016. As a reminder, our third quarter 2016 EWP sales volumes included liquidation of Georgia-Pacific branded Engineered Wood Products from the acquisition of the two EWP facilities located in Thorsby, Alabama and Roxboro, North Carolina in the spring of 2016. As expected we converted a minority of the legacy GP Engineered Wood Products customers to Boise Cascade branded EWP as wholesale distribution channel partnerships shifted following our acquisition. Our Boise Cascade branded EWP LVL sales volumes were up 7% compared with the year-ago quarter and I-joist sales volumes decline 1%. I would note that our distribution operations had EWP sales volume increases generally consistent with the increase in single-family housing starts for the three-month comparative periods. However BMD reduced their EWP inventories in the third quarter of 2017 from the levels they held at June 30th, which impacted their purchases from Wood Products. Wood Products did see improvement in both LVL and I-joists net sales realizations in the quarter with pricing up sequentially 3% on LVL and 6% I-joists. We expect continue modest sequential improvement in EWP pricing in the fourth quarter. Turning to Slide 6; our third quarter plywood sales volume in Wood Products was 405 million feet, up 5% from third quarter 2016. Following the hurricanes in Texas and Florida, we responded to customer demands for additional plywood production in September and again this month. We have been able to ship a portion of our internal veneer temporarily away from EWP production and towards incremental plywood production. Our Wood Products group has more flexibility with regard to optimizing production schedules quickly in response to changing EWP and plywood marketing conditions than many of our competitors. The $324 average net sales price in third quarter for plywood was up 13% from the third quarter of 2016. Plywood demand and pricing remained favorable entering October with oriented strand board also in tight supply. Pricing for panels has weakened in the last 10 days. We normally experience seasonally weaker demand for plywood as we get into the second half of the fourth quarter and move into first quarter. In addition of the normal winter weather conditions late this year and early in 2018, there was additional OSB capacity scheduled to start out. We will continue to watch operating rates and mill lead times for plywood and OSB as we plan our production later this quarter and into the early part of next year. As we noted in our earnings release, we are planning to take maintenance and capital spending related downtime in several of our plywood facilities in the fourth quarter. Moving to Slide 7, BMD's third quarter sales as I said were $1.046 billion, up 18% from third quarter 2016. By product area, BMD sales of commodity products increased 21%; general line products sales increased 14%; and EWP sales increased 16%. The gross margin percentage for BMD in third quarter was 12.4%, up more than 30 basis points from the 12% reported in the third quarter of 2016. BMD's EBITDA margin of 4.1% in the quarter was ahead of what we normally expect in a steady product pricing environment and much better than last year's third quarter EBITDA margin of 3.4%. Sales volume 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 $28.6 million during the third quarter. BMD [proved] down its inventories by $37 million in the third quarter which was the principal driver behind the decline in our working capital. As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory and accounts payable detail broken down by segment for those that are interested. I'm now on Slide 9. We generated an additional $67 million of cash in the third quarter finishing the quarter with a $172 million of cash on our balance sheet. Our total available liquidity at September 30th was approximately $566 million, which reflects our cash balance and the availability under our committed bank lines. With our improved operating results, we're now slightly below our stated leverage target of 2.5 times gross debt to EBITDA. We've also focused on generating free cash flow this year by managing our capital spending and our working capital usage and we believe a positive result on both of these fronts give us and our Board of Directors additional flexibility on future capital allocation decisions. We did not repurchase any of our shares in the third quarter and we've approximately 697,000 shares left on our original 2 million share repurchase authorization. As you know we vary the pace of our share repurchase program based on 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. While we're still in the preliminary planning stages, for next year we anticipate similar levels of capital spending. Tom, I will turn the call over to you to wrap up.

Thanks, Wayne. The October consensus estimate for 2017 U.S. housing starts is 1.21 million starts. While an improvement from the 1.17 million starts in 2016, the consensus outlook for housing start growth in 2017 has been declining for the last several months. This weakness has been concentrated in multi-family activity, while demand for single family homes has continued to show good growth. Many builders are facing challenges on labor availability, building log constraints and cost driven margin pressures, which has slowed construction activity in our opinion. However we continue to believe the demographics in the U.S. will support an eventual return to normalize housing starts of 1.4 million to 1.5 million starts. I remain encouraged by the current market environment. Importantly, we've a number of areas within our control in Wood Products and BMD to continue to drive revenue and earnings growth. We're seeing traction on EWP pricing with stronger demand and believe the momentum is likely to continue in 2018. 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 of plywood market. The team is continuing to make progress on driving utilization and productivity in our Eastern region, which includes the four 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. We continue to look at infill markets, product line extensions, and other avenues to push up sales and earnings. Commodity Wood Products pricing at the beginning of the fourth quarter was at elevated levels. Prices for structural panels and lumber have weakened in the last few weeks. It is difficult at this point to predict where panel and lumber prices will head this winter, but clearly the direction and rate of change in pricing has a big impact on earnings in both of our businesses. There's a lot of good work being accomplished by our employees to further strengthen our market position and drive cash flow. I remain optimistic as I look forward to 2018. I appreciate each of you joining us on our call this morning. We would welcome any questions at this time. Christie, would you please open the phone lines?

Thank you. [Operator Instructions] Our first question is from James Armstrong of Armstrong Investment. Your line is open.

First question is, you obviously called out the risk of a weaker price environment. But could you talk about the lags in pricing that you are seeing and also what was the end of 3Q pricing for most of your products versus the 3Q average and shouldn't October see some cash up with [what was pertinent]?

Yes, as part of the pricing environment your arbitration is right, pricing accelerated through the third quarter and October prices were generally above the third quarter average. Prices have weakened the last week or so and north of knowing where in a limit December will come out, it will be interesting to see where the fourth quarter settles in total, but clearly October was above the third quarter average.

And you'll see some of that flow through in pricing just due to the normal lags between what Random Lengths prints and what you are realizations are, is that correct?

It's fairly immediate but things generally priced when [title] transfers, so what's reflected in Random Lengths was a pretty good comparison for us. If you go back and look at our last investor decks, we have page in the appendix that compares our quarterly realizations particularly on plywood to what the Random Lengths composites are and you'll see a very high degree of correlation in terms of timing.

Switching gears, the Building Materials Distribution segment margins are improving very nicely, however they tend to do decline when Wood Products price -- due to lag. Should that trend continue or has something in the business changed?

I'll let Nick respond.

I think you will expect that trend to continue. Our margin is driven by variation and commodity prices in the mix of the general line and the EWP product lines which will carry more sustainable and more consistent margins and obviously there is some seasonal impact in terms of the demand for those products given the mix. But our margins in the third quarter were clearly reflective of the pricing environment that we had from commodity products.

Okay. And then lastly have you seen any changes in plywood imports from South America?

Not based on the data that I had for September, it's pretty much in line with what was happening in July and August. Now whether or not there will be a delayed response in terms of supply given the pricing that we saw in October remains to be seen. But certainly no shift in volumes based on the September data.

Thank you. Our next question is from Mark Wilde of Bank of Montreal. Your line is open.

I wondered, first of all, can you just talk with us a little bit about the new competitor that seems kind of poised to come into the East Coast EWP market and just what kind of time line you are assuming there and whether you are seeing any impact from them yet maybe seeding the market with some product from the West Coast?

Mark, this is, Dan Hutchinson. We have not seen anything yet, I think they have announced the opening of that plant a couple of years out. So I think it's really too early to see much of anything.

Yes, I think that capacity is schedule to come on in '19, so whether or not they make moves in the second half of '18 to try to get more product in the market. But they ship East today out of their facilities and so some of the markets that are served out of that Southeastern plant are already being served off the West Coast today.

And then, Wayne I wondered, if you or Tom, could talk a little bit about sort of priorities from an M&A standpoint? In the past you've talked about maybe trying to move some different products through the distribution pipeline, and I think you've also talked about maybe targeted investments in areas where you thought there was a lot of growth potential for new types of building materials.

Tom, do you want to fill that one or do you want me to go ahead and take it?

Start it Wayne and then I'll follow-up.

Mark I think our emphasis right now is predominantly on the distribution side, and trying to find product lines where we think there is an opportunity to -- primarily focus in the building materials arena but maybe in a different channel than we're currently in and that would further support the customer relationships we have. So there's some product lines that obviously, if you looked at like roofing and installation, wallboard we would find ourselves in competition with our current distribution partners. But there're other things like our door shop that we've done in Atlanta, where we've gotten great support from our customers and they see that as additive. So we're clearly looking at adjacencies to try to augment what Nick and his team were doing or enter other building material related distribution environments that may not go into single family residential construction. And that as I say continues to be a focus, but we're only going to do that if we think it's a [indiscernible] issue from a shareholder line. If we can't get good returns, because we find ourselves competing with private equity or others, we'll look at other ways to use that cash to benefit our shareholders.

And Mark I would add that we also continue to look pretty aggressively at [indiscernible] markets for our distribution business. And so there's a lot of activity internally focused on both of those opportunities.

Thank you. Our next question is from Brian Maguire of Goldman Sachs. Your line is open.

Just also to reiterate the great job in the distribution segment, particularly in the margins there, and I think on the last call Wayne you talked about maybe getting to 11.8% to 12% kind of gross margin, you came in about 50 basis points more than that. So I'm just thinking about trying to quantify the impact of the rising -- sharply rising Wood Products environment, would you say it added maybe the 50 basis points to gross margins that was the excess to what you thought you'd get a couple of months back?

I don't know that it was the full 50 basis points but clearly what particularly went on in the panel side of the world, that was a big lift, and I think in a steady state pricing environment, something in the high 11s certainly in first and fourth quarter and something approaching 12 in the second and third quarters. We have more seasonal demand for general line products and some of the EWP. But the 12.4 was well above normal and if you take 40 basis points on a 1 billion in sales you can kind of get pretty good sense of EBITDA impact of the commodity price lift.

And then within Wood Products, it seemed like the EWP volume was a little bit light, I think you talked about just the year-over-year comp that was tough but plywood was also a little bit better and I guess that had to do with taking advantage of the higher prices there and shifting some veneer. Any ability to kind of quantify what kind of an impact on volumes, earnings that shift had and as you look at the 4Q prices are still high would you expect to continue to have that kind of a shift going on?

I think when you look at the volumes in the third quarter there is a couple of things playing into it. First, we had the price increase that got announced earlier in the year so if you look at the volumes in the first quarter they were particularly strong in EWP. So there was probably some pull forward as we got into third quarter and strictly given the hurricane in Texas and in Florida, we and others I think anticipated the slowdown in housing starts in those markets which did occur. And so particularly in BMD I think they dropped their inventory to EWP by a little over $5 million in the third quarter which has a direct impact on how much they buy from Wood Products. And then in September we had sufficient EWP volumes at the mills that we were able to respond to customer request to get more plywood and quick deliveries. So particularly in the month of September we shifted a lot of production in the South towards plywood and away from EWP. But we didn't give up any EWP sales, essentially we funded those EWP sales out of BMD inventories and out of in hand and on hand inventories in the Wood Products business. So the production, I would anticipate will go into a more normal schedule as we get into fourth quarter, but certainly in October we were doing a similar shift and trying to get as much plywood availability as we could in the South.

Then I would, the numbers on volume are driven by sales and so we obviously on the production side we will manage to order flow but clearly the takeaway is what is going to determine the numbers we report.

Thanks that helps. Any delay to defer some of the planned plywood maintenance given the really strong pricing environment we are in still?

No, I think we are going to -- this is Dan. We are going to ahead and take it this as -- I think if you start deferring things you just get yourself into trouble and so we will take it later in the quarter when we are likely as Wayne has noted to see a reduction feed mill demand anyway.

Okay. And just one last one from me, you noted that the growth leverage is below the target that you said at 2.5 times. Any conversations at the Board level around implementing a dividend, whether it would be variable or fixed or maybe even a special dividend as a way to sort of return cash to shareholders given the stock liquidity?

Yes, I would say that's been on top of our conversation in the last several Board meetings, particularly as the balance sheet has continued to improve. It really -- I would describe it as the relevance has become more timely as -- certainly as we reported September and if you look at the trailing EBITDA. So I suspect on Thursday when we are together with our Board in Dallas, it will be yet again on top of our conversation. I don't think there is any immediate rush given the things we are pursuing on the acquisition side, but certainly barring the acquisitions, at least in the view of the management team and I believe our Board we will need to find a constructive way to return cash to shareholders given our leverage position.

Thank you. Our next question is from George Staphos of Bank of America. Your line is open.

I just want to come back to a point you were making. So the -- I might have missed it, and if I did it I apologize, was the inventory build in EWP in the quarter by design and was it for 4Q, it is because you were then able to hit the plywood market with available veneer capacity or did inventories build more than you had anticipated in EWP during the quarter?

George this is Dan Hutchinson again. Our business model is to sell our EWP out of inventory. It allows us to service the customers better and quite frankly allows us to have less changeovers [indiscernible].

But it was not above normal inventories is what you're saying?

Correct. No, I think it was above or should have been, but what we saw in the quarter was a pickup or a drop in EWP demand, a little bit from the manufacturing side. And then obviously a significant pick up in the plywood side. So I don't think we were oversupplied, I think we're in good shape. As Wayne pointed we were able to make a reduction in EWP inventory and still satisfy all the customer demands as well as do a better job on the plywood side.

This is Tom. On the manufacturing side I will let Nick comment, but I think just in general the pace of housing starts, particularly when you include manufacturing, has not been as robust as we would have guessed back in April, May, June. So, while inventories were probably in line and would relative to the market demand we were probably a little bit over in BMD, just anticipating a stronger building season and more activity on the multi-family side that didn't come to fruition as we moved through the second quarter and then into third quarter.

The other thing I'd add George and this is Nick, so you'll see moderate variation within a quarter on our EWP inventories. And I think what you saw in the second quarter was a little bit higher level of inventory given the severe logistics and transportation issues that we were having, we needed to make sure we had Wood Products customers in the third quarter probably [requesting] a more normalized inventory and certainly demand remains solid. And I would expect that our inventories are going to stay pretty constant, I wouldn't anticipate on the EWP inventories any prudent reduction in the fourth quarter unless we get to some seasonal downturn.

And I understand the answer is yes but I'll just for the record that was -- that aggregation is why your Boise branded I-joist line was down 1% on comparative basis, right? And there's nothing else beyond that, in your volume for the quarter if I heard that correctly?

I think the down 1% on I-joists volumes, there's a lot of moving things quarter-on-quarter basis, I would say given that a lot of the housing starts have been in the South and you get more slab on grade construction, and can't get more single story the demand for I's relative to start has not been as strong as say the demand for LVL. So, I-joists relative to dimension lumber I don't think you've got the same penetration rate we had a couple of years ago, I think it's more static.

On BMD just a couple of others and I'll turn it over. To be fair, so if I go back to your comments Nick are you suggesting that incremental margins which we've always assumed were I don't know 4% on an EBITDA basis have moved higher. And then from kind of the theoretical outlook just back to this past quarter I think the number I came up with unless I miscalculated was something north of 8%. You mentioned sales volume and leverage but that would be incorporated in a normal incremental margin. So I was wondering, if there's anything else in the BMD margin that we should at least at some degree try to isolate as we project forward, was there an amount of inventory profit that we should be managing for in our models as well?

Nick.

I think the best way I would describe it is in the previous calls and the conversations over the last few quarters, Wayne's guidance on our normalized margin is what you should expect going forward, given the seasonal patterns of the general line and EWP as it relates to the mix. And certainly in an environment that we had in the third quarter, the inventory that we have becomes more valuable and creates more margin opportunities and additional sales volume opportunities on the commodity side. When you get into an environment in declining prices, the opposite happens.

I would not read anything into the leverage that we had in the third quarter, as there has been a meaningful shift in the 4% to 4.5% normal drop through that we would expect on sales growth and in a normalized pricing environment where we will have reasonable price stability. I think the 10% product inflation has a lot to do with what you are seeing on the leverage this quarter.

So Wayne if we use 4% to 4.5% as kind of a bogey then and looked at the delta between that and what you saw should we assume that most of that's inventory profit?

Not just inventory but the [sales there is], so to the extent our cost of goods sold that we are buying something at a 100 for example and it goes to 110 we are going to try to price our margin off the 110 replacement cost. So it's not just the ending inventory, it's just the stuff we are buying and reselling through cost of goods sold. And that 40 basis points that I have referred to earlier as kind of excess gross margin in the quarter related to the commodity side, I would -- I mean you guys [shuffle] how you want to model but I would probably drop 4 million or something out of the EBITDA number and attribute that to commodity tail wind and that frankly could have even been more than that.

Thank you. Our next question is from Steve Chercover of D.A. Davidson. Your line is open.

Some of my questions have been answered. But I first of all want to ask whether you are having any difficultly with freight in your markets?

Steve, this is, Nick Stokes. The answer is yes. Certainly the transportation environment that we have through the third quarter was problematic for a number of reasons. Storm disruptions and some of the utilization of flatbed trucks in the South and the Southeast were diverted to different kinds of things. There were some spot rail issues from here or from many origins to some of our destinations. Generally speaking trucking is relatively scarce and relatively expensive and it's better today than it was 30 days ago or 45 days ago, but it's still very difficult.

Well, that's actually the response that I expected and so by extension I'm wondering, did you think that this freight kind of impasse is making lumber and panel prices a bit stickier than they would otherwise be, because I'm sure that these margins in other regions are sufficiently high that people would love to move their product into areas that are short, if they could get the freight. Does that seem reasonable?

I'll leave it to others to speculate on the impact that freight's having on commodity prices, I'm not smart enough to figure that one out. What I will tell you is that to the extent that BMD or other people in the channel have the capacity and capability to [manage grade] and deliver product when the customer wants it, it creates an opportunity for value.

And then secondly, I have the sense just from Wayne's comments that you're looking for acquisitions, because otherwise I think dividend would be an easier decision and I'm just wondering, is distribution still the priority and are [seller] expectations reasonable at this point?

Yes, distribution is still the priority at the moment. And I would tell you that sellers that we've ongoing conversations will be the ones where we feel like they have reasonable expectations relative to our return requirements, and our ability to fold it in with our business. But there's clearly then some things transacted that have moved to private equity at price levels that we don't think makes sense for our shareholders and/or where -- when we fit it into our network, on a combined basis it doesn't add value for us.

And then if we think of the GP acquisitions, maybe as a proxy, is it fair to say that your criteria is near term accretion but it doesn't have to be instant?

Yes, it clearly doesn't have to be instantaneous, I mean what we're trying to do is create a defensible franchise over time and if we find an acquisition where we think we can bring value to it over time, we'll try to obviously keep as many of those economics on our side of the table as we can. But if you think about Corrick's earlier comment about infill markets and distribution, if you pull out the U.S. map we tend to get to all of the major MSAs but some of them we're doing with long freight hauls today and as housing has recovered and there's more business volumes in some of those MSAs, it makes sense to look at doing infill acquisitions. And clearly where we can bring a strong balance sheet and product line expansions we may be able to add value to a relatively small independent distributor that has a foothold and has business relationships in the marketplace. And as I say, if we can acquire those at a value that makes sense for us, we'd like to do that, but something that's got 15 or 20 locations and there's a lot of overlap with next existing location it's harder to make the economics work on those.

Got it.

So I think the [rightful] jobs are more likely to be the case, and this is probably going to be where there's a business team aligned with the way we do business culturally and where we see the opportunity to significantly ramp up revenues.

Thank you. Our next question is from Chip Dillon of Vertical Research. Your line is open.

First question is on the -- just a quick one on the CapEx, you mentioned that it would be roughly flat next year and another -- I'm just wondering, if there's anything you want to call out about beyond the normal maintenance that would be involved in that number that you're looking at?

The majority of the 55 or so that we would plan on spending in Wood would be maintenance capital. There's a little bit of additional capital still going into our Eastern region as we bring back the Engineered Wood capacity and there's a couple of high return projects that are smaller that we're looking at. In Nick's business we've got a project that we're working on in the Northeast acquiring some land that -- for Nick's business right now we kind of penciled in a number in the low 20s for next year, and some of that includes some incremental capital for real estate, probably about $5 million in there for real estate related stuff. And the rest of it in Nick's business is typically paving, roofs, and rolling stock, supporting the business.

When you say real estate, maybe taking an existing distribution location and just making it bigger or adding a location?

Making a location bigger and the one in particular I am thinking that we've been operating on our two locations and we in essence put the adjacent property under lease and assuming we can work through some mechanics we will end up buying it and then bring some improvements on it in terms of warehouse and office. But it is responding to sales growth we've had in that market and we've been storing it out of two locations about a mile apart and that's not the most efficient long-term solutions. So when we got a chance to buy the adjacent property we were in the process of doing that.

And then you mentioned that depreciation would be up about $8 million if I heard you right annualized when you turn on Roxboro and it's a $45 million investment. Is there a reason the depreciation like schedules only the implied six years or less?

Yes, the assets at Roxboro were idled in 2010 and as we bring them back and we look at what we expect for a useful life, we were trying to take into account that the assets are used in the age and what we think the capital replacement cycle will be over the forward years. And so that's why we went ahead and put a shorter book life on it. So basically if you take 45, divide by 5, you get 9 on an annual basis and that's not a perfect number, but it's pretty close to where we will likely end up.

Okay. And I should take that as being fairly conservative. And then the last question has to do with the comments you made to your earlier question about distribution and I might have just missed it. But you mentioned obliviously that is the focus for M&A and getting into areas that diversify out of single-family. I guess my question is -- and I've just might have missed this, but are you talking about opening new locations that would sell to building products that deal with different types of construction, commercial or are you saying within your locations you would acquire products to distribute that are aimed at different customer bases?

Yes. We will tell you branch managers out of our existing location, are constantly looking for product opportunities in their local market and particularly focused around their customers. We've got one locations for example that just recently started stocking copper pipe. But what we are looking on the acquisitions side, we've had quite a bit of success for example in our door shop and in a couple of locations those doors not only go into residential construction but some of them are going into the commercial area. So I think as we are considering adjacencies for the distribution business, we're taking a broader look than just wholesale building materials that would support new residential construction. If there is things where we can leverage our experience on the part of next business that touches industrial today, we will try to do that. And as I said we've had some success in some markets where we think if we can buy existing distribution capacity we may be able to create value but it's not necessarily taking more products from these existing locations, it may be buying a business that it's an adjacency where we would keep the existing management team and the existing locations and look for an opportunity to grow revenues in the distribution arena.

Understood. Thank you.

Thank you. Our next question is from Daniel Jacome of Sidoti & Company. Your line is open.

Just two quick questions, most of mine have been answered. Is there any update on the [florine] plywood project I think you are doing some modernizing there, is that done I can't remember? And then the second question was just on lumber duties, I mean I know you guys work and speak with everybody, is there anything interesting you may have heard kind of in your channel checks or is that still kind of wait and see? It looks like it's been pushed back which is probably not too surprising.

This is Dan. On the florine project the two most recent projects down there were to put in a new large plywood and then to put in a press and both of those capital projects are finished and are progressing along well in the startup curve.

As it relates to the lumber duties, this is Nick again, I think everyone was aware that the countervailing duty that was in place, came off in August. Currently the only duty today is the antidumping duty at about 7%. The Commerce Department as everybody knows is expected to announce their recommendation for 2018 in mid-November. Again I'll leave it to others to speculate on the outcome of that. But I think our game plan is to anticipate volatility going forward as a result of those negotiations.

And then maybe I'll just have a last one here, for the acquisitions the pipeline you're looking at, is there anything like maybe down the road you might be able to acquire or do something in your business model to maybe lessen the seasonality -- seasonal effect on your business side or is that kind of like an impossible thing to change right now, just thinking very high level?

I don't think it's impossible to change, but I do think if you look at the construction activity, certainly in the housing market, it's going to have seasonality to it as long as people build in the [northern] figure. And that's probably true in the construction even on the commercial side. So I don't think it's reasonable to think that we're going to eliminate seasonality anytime soon. And given the scale of Nick's business, as of us acquiring anything that approaches Nick's business and would offset the seasonality or offset the seasonality we've seen in Wood Products, I think is probably unrealistic. But clearly as we look at other distribution businesses having components that aren't as dependent on single family new res is one of the avenues we're approaching but not necessarily with a view to try to [indiscernible], it's more to create a more open ended market opportunity for us.

Thank you. Our next question is from Mark Wilde of Bank of Montreal. Your line is open.

I just got some cleanups here. First, Wayne can you help us think about the impact from the maintenance in Q4?

I guess for guidance I would give you is, every time people have tried to think about our fourth quarter activity in the past they've underestimated the negative leverage from taking out volume and pace declined. So, we had $39 million of EBITDA in the third quarter. I'm not going to give you the specific guidance but that's not 5% or 10% impact as we go into fourth quarter, it will be a more meaningful impact on EBITDA on Wood Products. But I would agree with them particularly after we get after Thanksgiving, it's a crapshoot on where weather is and we think this is the right time to take the downtime and position ourselves to be ready for spring. But I wouldn't underestimate the downside leverage in Wood as we get in the fourth quarter.

This is Tom Corrick. I would also note that December and November are both 18-day months and that just simply always has an impact even outside the seasonal impacts with all the holiday time up.

Is there -- also is there any way to get a sense of what you are expecting in terms of incremental price in EWP in the fourth quarter?

This is Wayne. I'd say surprise sequentially just more than a couple of percentage points, but a lot of it depends on mix and what markets we ship into. But maybe 2% or 3%, I don't think you are going to see 5% or 6%. I'll be pleasantly surprised if we do.

Okay. And then another one, I just have been looking at the [log] prices out on the West Coast which are up pretty sharply in August and September, we didn't talk about that having any third quarter impact, should we be thinking about sort of more impact in the fourth quarter?

This is Dan, they definitely have been up this year and I do not anticipate them coming off in the fourth quarter. I quite frankly don't have the calculations to what the impact is going to be in Q4 versus Q3, but they have been problematic this year.

Yes. Besides log [this] market is on because you are bringing up input costs, I would remind everyone that our mechanism for pricing OSB for web stock is a trailing average. So given what happened in August and September and October it's a fair bet that our OSB costs will continue to accelerate in the fourth quarter. So it's another thing that will put some pressure on Wood Products earnings in the fourth quarter.

Okay. And then the last thing I wanted to talk about…

Mark, before I close this thing, I would add in on log costs is, we have a significant portion in our regions that is purchased previously in prior years or prior periods and not all of our wood is purchased at the gate by any means. So as you see price increases in the market, up or down frankly, we have kind of a smoothing effect given how we purchase logs.

Got it really helpful.

It's in the west.

Last thing I wondered about is, and maybe it's a question for Nick Stokes, but we are both going to have some kind of a countervailing duty going back on. It sounds like kind of early first quarter and now we've got this surge in OSB capacity over the next couple of quarters. So I wondered, given kind of potential big movements from both of those, how do you play that or kind of manage that for your business?

That's a great question. And I would tell you that typically we don't try to position our inventory and our purchasing based primarily on expectation or price increase or decrease in the long sense. We try to buy everyday and sell everyday and take advantage or suffer the disadvantage of fluctuating pricing. Clearly if you look at commodity prices they are historically high through the third quarter. To Wayne's comments earlier they moderated over the last few weeks. I think if you look at BMD's inventory reduction, second quarter to third quarter by the time we finished, you obviously can interpret to some degree our expectation to what those commodity prices will be through the fourth quarter, the degree to which they decline and the magnitude of that decline is very difficult for us to assess at the moment. But we are primarily focused on having product everyday for our customers and buying from our manufacturer partners on a regular and consistent basis.

And Nick, were you at all surprised just coming back to the CVD for a minute. I think a lot of us had assumed, gee, we hit the end of August here, as 20% CVD rolls off and lumber prices are going to go down. Did you get thoughts like the rest of us did, when lumber prices actually didn't go down when the CVD rolled off?

No, I don't think so. Again we talk to our producers on both domestic and North of the border on an everyday basis and if you see some of their public disclosures, the insight that they have relative to their expectations in terms of what they're accruing and what they are expecting, probably gives you better sense of their thinking than I'm capable of at this point.

Thank you. Our next question is from George Staphos of Bank of America. Your line is open.

Just a couple of quick ones from me to finish off. First of all the OSB impact in Wood in the quarter, I was just trying to pencil it out, I mean the $4 million or $5 million would that be fair in 3Q?

Yes that's probably in the right range.

I think that -- I think we said some of like 12 year-to-date year-over-year.

Yes, so if you look at our I-joists volumes, we're at about 57 million feet in the third quarter and we generally use about 1 square foot of OSB for every veneer foot of I's.

Yes.

So, you can…

We can do the math from there.

Yes you can do the math from there.

And then the other question I had and you would begin to answer it and coming on Mark's question before, but would it be fair to say given the trajectory so on inventory in BMD, 2Q to 3Q and then the fact that prices are still relatively high and as you put it, subject to maybe more than normal volatility looking at the next couple of quarters that your inventories in BMD are maybe a touch lower than they normally be this time of the year or are they normal for fourth quarter or just entering the fourth quarter?

They are probably a touch lower than they might otherwise be, particularly given the volume of sales that we had. The relationship of inventory to sales in the third quarter was a little bit different than it was in the second quarter. I would tell you that our inventories on the non-commodity [piles] are very much in line with what we expected on the commodity side. We're probably down a little bit relative to what we might otherwise be, given the expectations that we have.

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Tom Corrick for any further remarks.

Thanks, Christie. Great. Thanks everyone for calling. We as ever appreciate the opportunity to update you on our progress. We're obviously very pleased with our third quarter results. While we're starting -- while we're now starting to see the typical seasonal slowdown in terms of demand and pricing, we remain very optimistic as we look forward to 2018. And with that, I'll say good morning and let everyone get on with their day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.