Boise Cascade Company (BCC) Q3 2018 Earnings Report, Transcript and Summary

Good morning. My name is Lauren, and I will be your conference facilitator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Boise Cascade's Third Quarter 2018 Conference Call. [Operator Instructions]. Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of 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 filings with the SEC. It is now my pleasure to introduce you to Wayne Rancourt, Executive Vice President, CFO, and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Lauren. Good morning, everyone. I would like to welcome you to Boise Cascade's Third Quarter 2018 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 operation. 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 would like to turn the call over to Tom Corrick.

Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on Slide 3. Our third quarter sales of $1.3 billion were up 9% from third quarter 2017. Our net income was $13.8 million, or $0.35 per share, down from $0.81 per share in the year ago quarter. Reported net income for third quarter 2018 includes $16.3 million, or $0.41 per share, of after-tax losses from a noncash pension settlement charge and a noncash impairment loss on assets held for sale in northeast Oregon. Our Wood Products manufacturing business reported segment income of $13.9 in the third quarter, compared to $24 million of segment income into the year ago quarter. These results reflect stronger product pricing. However, better pricing was more than offset by higher log costs in the Pacific Northwest, and the impairment loss in northeast Oregon. Our Building Materials Distribution business reported segment income of $23.5 million on quarterly sales of $1.2 billion for the third quarter, compared to the $39.4 million segment income on quarterly sales of $1 billion in the comparative prior year quarter. Rapidly falling commodity Wood Products pricing caused significant gross margin pressures for our distribution business in the quarter. Wayne will walk you through the financial results in more detail, and then I'll come back to talk -- to describe actions we are taking on capital allocation and provide our outlook before we take your questions.

Thank you, Tom. I'm on Slide 4. Wood Products' sales in the third quarter, including sales to our distribution segment, were $402.7 million, up 10% from third quarter 2017. As Tom mentioned, Wood Products reported segment income of $13.9 million in the third quarter. Reported EBITDA for the business was $32.7 million, down from the $39.4 million of EBITDA in the year ago quarter. The decrease in EBITDA was due primarily to a $10.4 million noncash impairment loss and higher log costs in the Pacific Northwest offset in part by higher plywood and engineered wood products pricing. BMD sales in the quarter were $1.2 billion, up 11% from third quarter 2017. Sales prices and sales volumes increased 7% and 4% respectively. BMD reported segment income of $23.5 million, or EBITDA of $28.3 million. This compares to segment income of $39.4 million and EBITDA of $43.3 million in the prior year quarter. A decline in income was driven primarily by a gross margin decrease of $10.3 million, resulting from a steady decline in commodity prices throughout third quarter. 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 $18.2 million in the third quarter 2018 compared with negative $6.9 million in third quarter 2017. Noncash pension settlement charges negatively impacted third quarter 2018 EBITDA by $11.3 million. Turning to Slide 5. Our third quarter sales volumes for laminated veneer lumber and I-joists were up 9% and 8% respectively compared with third quarter 2017. Pricing in third quarter for LVL and I-joists was up 6% and 9% from the year ago quarter, reflecting price increase actions taken in 2017 and earlier this year. Turning to Slide 6. Our third quarter plywood sales volume in Wood Products was 368 million feet compared to 405 million feet in third quarter 2017. The $357 average plywood net sales price in the third quarter was up 10% from the third quarter 2017. While average plywood pricing in third quarter remained well above historic trends, prices were down about 10% from the start of the quarter to the end of September and have declined roughly another 15% during the month of October. Fourth quarter 2018 plywood pricing is likely to be well below our reported third quarter average. On Slide 7, I will transition to discussing the results for our distribution business. The key factor in the quarter impacting BMD's earnings was a sharp drop in lumber and structural panel pricing. On Slide 7, we have a chart showing the Random Lengths lumber composite for 2016, 2017 and 2018. Lumber pricing began to weaken in June and continued to decline throughout the third quarter. Lumber pricing fell during October and has recently hit levels not seen since 2016. On Slide 8, you can see a chart showing the Random Lengths panel composite for 2016, '17 and '18, and the story is very similar to what has happened in lumber. Moving to Slide 9. BMD's third quarter sales were $1.2 billion, up 11% from third quarter 2017. By product area, BMD's sales of commodity products increased 10%, general line products increased 9% and EWP sales increased 18%. The gross margin percentage for BMD in third quarter was 10.3%, down 210 basis points from the 12.4% reported in third quarter 2017. The gross margin decline was a direct result of the commodity price decline shown on the previous slides. BMD's EBITDA margin was 2.4% for the quarter, down from the 4.1% reported in the year ago quarter. We are not anticipating a meaningful rebound in lumber and structural panel pricing before year-end, so BMD will be challenged with compressed gross margins again in the fourth quarter. With commodity pricing for lumber and structural panels currently well below fourth quarter 2017 levels, price deflation in distribution could also negatively impact operating expense leverage this quarter. On Slide 10, we have set out the key elements of our working capital. Company networking capital, excluding cash, income tax items, assets held for sale and accrued interest, decreased $16.5 million during the third quarter. Accounts receivable inventory and accounts payable all decreased with the deceleration of sales in the quarter as pricing fell. The statistical information filed as Exhibit 99.2 to our 8-K has receivables inventory and accounts payable data broken down by segment for those that are interested in more detail. I'm now on Slide 11. We finished third quarter with $181 million of cash. Our total available liquidity at September 30 was approximately $577 million, which reflects our cash and availability under our committed bank lines. Our capital spending, excluding acquisitions, is expected to be between $75 million and $85 million this year. Capital spending in 2019 will likely be between $85 million and $95 million as we execute on projects at our manufacturing operations in Chester, South Carolina and Florien, Louisiana. Despite the unusual book tax rate this quarter, we continue to expect our effective book tax rate to be about 25% going forward. I will now turn it back over to Tom to discuss our capital allocation priorities and the outlook.

Thanks, Wayne. I'm on Slide 12. As we've discussed on past calls, we are working diligently to grow Boise Cascade and deploy capital in a manner that creates value for our shareholders and other key stakeholders. Last quarter, we discussed our upcoming capital plans for Chester, South Carolina. I am pleased that our board has also authorized proceeding on additional strategic spending at our Florien, Louisiana plywood plant to modernize the log utilization center over the next 18 months. The planned project will put the mill in a very strong competitive position and improve our veneer self-sufficiency. The board also approved an increase in our quarterly dividend from $0.07 to $0.09 per share. Fill in acquisitions in our distribution business remain a key priority. We are very pleased to have reached an agreement to acquire Arling Lumber in Cincinnati, which is expected to close before year-end. Moving to the outlook on Slide 13. The October consensus estimate for 2018 U.S. housing starts is 1.28 million, up from 1.2 million in 2017. The consensus estimate for 2019 implies only modest growth to 1.32 million starts as the affordability issues and constraints on construction labor are acting as headwinds to underlying demographic-driven demand. While we believe housing starts could reaccelerate next year, we are focusing on the areas we can control to drive both revenue and earnings improvement. In Wood Products, we are focused on achieving operational excellence and driving improved returns. We completed the sale of 2 saw mills and our particleboard operation in Northeast Oregon to Woodgrain Millwork last week, generating cash proceeds of $15 million. Those facilities fit better with Woodgrain than with our veneer-based manufacturing focus. We also announced this morning our plan to permanently cease production of laminated veneer lumber at Roxboro, North Carolina by year-end. Unfortunately, after a great effort by the team at Roxboro, we have been unable to reduce manufacturing costs to an acceptable level. The curtailment is obviously not the outcome we expected when we acquired the Roxboro facility in early 2016, but given where we stand in operating performance, it is the action we need to take. Wood Products will report a writeoff of approximately $60 million in the fourth quarter related to the Roxboro LVL curtailment, essentially all of which will show up as additional depreciation. Roxboro will continue to produce I-joists, and we anticipate no impact on our customers from the laminated veneer lumber curtailment as we have additional capacity and expansion opportunities at our Alexandria, Louisiana and Thorsby, Alabama EWP facilities that allow us to maintain our current service profile and also support future growth. Effectively managing the impacts of commodity price declines remains at the forefront for both our Wood Products and distribution group in the quarter. For BMD, the impact of the commodity price declines is likely to play out this quarter and make for difficult revenue and earning comparisons in the first half of 2019. However, Nick and his team continue to make good progress on their strategy of seeking acquisitions in specific geographic markets, looking at product line extensions, and pursuing other avenues to push up sales and earnings. To close, I want to thank our employees for executing well in a falling commodity pricing environment and working safely. I appreciate each of you joining us on our call this morning. We would welcome any questions at this time.

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

Hi guys, this is actually Molly Baum sitting in for George. My first question, other than the additional depreciation, how should we think about the earnings impact from shutting the LVL production at Roxboro? And on top of that, what are Boise's plans for that line longer term? Are there perhaps opportunities to move into other wood product grades? Thank you.

Molly, this is Wayne Rancourt. On Roxboro, as many on the call know, we had losses in 2017 on an EBITDA basis that ranged between $800,000 and $1 million a month, and lost slightly over $10 million on an EBITDA basis in '17 in that facility. As Tom mentioned, we made very respectable progress this year, but unfortunately, year-to-date, the operating losses on an EBITDA basis are around $5 million, and we started running up against technical issues that we thought were basically insurmountable, and we weren't going to be able to get the laminated veneer lumber portion of Roxboro to a cost position that made sense to operate over time, so we're permanently curtailing. We will continue to make I-joists at Roxboro. They are an important part of our southeastern footprint. It backs up the I-joist capacity we have at Alexandria, Louisiana and the production we have in New Brunswick. And so we anticipate the I-joist production at Roxboro to continue for the foreseeable future.

Yes, this is Dan Hutchinson. Just on the I-joist production at Roxboro, it has the capability of producing a deeper I-joist than our Alexandria facility does. And so as we continue to get -- we continue to wrap that up, we'll be able to use that deeper I-joist to help us in multifamily and light commercial areas in the southeast.

Thank you for that. And then just two quick follow ons. How are inventories and supply chain for plywood and other product grades? And then the last one, just the latest you're hearing on imports from Brazil on plywood? Thank you, and I'll turn it over.

Yes, this is Dan Hutchinson again. I'll answer part of that. On the LVL side, our inventories at our mills are excellent. I'm going to let Nick talk about the supply chain. I haven't seen the latest monthly import data from Brazil, but it has been a very strong year coming in from Brazil. I have to assume that the recent dramatic decrease in plywood pricing is going to have some impact, and it should start to fall off, and then -- and I'll let Nick talk about what he thinks about plywood and LVL and inventories in the chain.

Good morning. As everyone on the call knows, there's no empirical data around how much inventory of any product is available, so you have to rely on sort of some anecdotal evidence from customers and conversations. From those conversations, I would tell you that I think most of our customers think they're adequately inventoried across the board, particularly on the commodity products, plywood dimension, commodity wood products. Certainly, they're expecting some seasonal adjustments as northern geographies slide into winter, and to some degree they reacted to the price reductions over the last few months in terms of trying to keep them lean. So I would tell you that based on that, I think they're adequate for the volumes that they expect over the next 30 to 60 to 90 days.

And our next question comes from Brian Maguire with Goldman Sachs. Your line is now open.

Wayne, appreciated the comment on the interquarter trends in plywood pricing in October. Just wondered if you could tell us roughly what your realization price is today versus the third quarter average, and if you could kind of remind us of the sensitivity you've got on that pricing in a seasonal quarter like 4Q.

Great question, Brian. For the third quarter average, we were 357 on a 3/8 basis. And as I said, over the quarter we fell about 10% from the beginning of the quarter to the end of September. And as of the end of October, it was down another 15%.

Down maybe 20% or so from that number?

Yes, so if we were at 357, we'll see how much lag we get in terms of our pricing versus what showing up spot on Random Lengths, but it's not hard to imagine that we're going to move closer to 300 by the end of the fourth quarter on an average.

Got you, all right. And then as far as sensitivity, as I think you probably -- seasonally, it's a little bit of a slower quarter, but something in the 350 area for volume, typically?

Yes, I would guess that we'll be somewhere, again, in the 370 range on plywood volume. We may, in reaction to what's going on in the pricing environment, have some downtime, particularly in the Pacific Northwest. So somewhere in the 350 to 370 area would be my guess on where we'll come out on fourth quarter volumes. And a little bit will depend on where we are on EWP production, because obviously we can produce EWP ahead of time and put it in inventory. That's a better deal than trying to stuff plywood into the market between Thanksgiving and New Year's. So again, I think the 350 to 370 range for volume that could run in the sensitivity, and then relative to third quarter is a guess at this point, but probably down $50 to $60.

Yes, Brian, this is Dan Hutchinson again. We have, as I stated earlier, a really good inventory position at the mills on LVL. So as Wayne's pointed out, we'll be looking really closely at plywood prices. And we have taken some modest market downtime based on pricing, quite frankly, and we'll continue to do so as we roll through the quarter.

Great, that's helpful. Switching over to input costs, I think we've probably seen some relief in western log prices, and I know there's a little bit of a lag in the OSB cost kind of flowing through. I was just wondering if you saw any benefit in 3Q there or you expect to get some starting in 4Q from those factors.

This is Dan again. We have seen some reduction in log costs in the Pacific Northwest. Unfortunately, you won't see as much of that show up on the income statement as you might think because we have relatively expensive logs in our log decks. We also have, of course, this timber under contract, or TUC, we historically do, which is relatively expensive. So I think the log costs will come up. You will not see that impact as greatly as you might think on our financial statements, and as Wayne pointed out to me the other day, it hasn't fallen -- the log costs haven't fallen nearly as fast as the plywood price. But we do think it's peaked out in the northwest, and we're starting to see it come off. And we're also starting to see some reductions in the OSB -- or our web -- our web price for OSB is coming off also.

And I would note that we're also seeing similar sorts of reductions for lumber both for our I-joist plant in Canada and our glulam plant in Idaho.

Okay, just last one for me. Just thinking about EWP prices. I know it's not a direct correlation to lumber price, but there are some applications where there are substitutes. Just wondering with the sharp fall in lumber prices, do you expect EWP prices to come under some pressure? And I think those are usually annually set, so wouldn't expect anything in '18, but as you're kind of looking ahead to '19, should we be worried EWP pricing?

Dan again. Certainly, there is a substitutional opportunity in some of those situations, but as you stated, that tends to be a -- doesn't fluctuate like these other commodity prices. If we continue to see downward pressure or lumber stays where it is, there will certainly make -- it'll make the conversations more challenging. But right now, we're not anticipating a significant change in EWP price.

Yes, and this is Tom Corrick. I would add that the I-joist product line has become pretty mature, and the users of I-joists tend to be users of I-joists, and the users of lumber tend to be users of lumber. And the other thing I would note is that the supply chain in the EWP side's different than probably what we've seen in the lumber side or the OSB side, where there have been some pretty significant capacity additions. And supply was quite tight last year, and if we continue to see even slight growth in housing, I think the supply-demand situation's going to remain quite tight, which will obviously have an impact on pricing.

And our next question comes from Chip Dillon with Vertical Research. Your line is now open.

You mentioned that you would be taking the charge, I guess, in the fourth quarter for the Roxboro shutdown. Could you talk a little bit about what kind of range that could be? And is it fair to say that's roughly half of the facility in terms of, maybe, the employment or the amount of wood you put through there? Or what proportion is that roughly?

Chip, this is Wayne. We are going to take a $60 million charge, approximately, in the fourth quarter, and the vast majority of that, all but a couple million bucks, will be depreciation. We do anticipate some severance. There's slightly over 50 employees that we anticipate being impacted, and there's probably more employees on the LVL side than on the I-joist side. But obviously, we have some salaried folks and some other people that we would like to retain and either keep at Roxboro or move to other facilities. So we're working through that announcement at the facility this morning. But in terms of the investment that we had on the books for Roxboro, the LVL and related assets represents about 3/4 of the investment at Roxboro.

Okay. And then in terms of the equipment, are you building in some kind of a, I guess, salvage value? Are you expecting to remove that equipment and either sell it to someone or move it to another place?

Yes, I think what we're going to do in '19 is we will look at, for the LVL assets and the veneer production assets, we'll look at whether or not we can remove those cost effectively. If we can scrap them out at a cost that's reasonable and free up the building footprint and the outdoor storage footprint, we'd move in that direction. If it's cost prohibitive or uneconomic to do that given demolition costs and scrap prices, then we'll essentially leave them in place. But the plan over time would be to remove those assets from the site and free up more space for the I-joist line and to use it for storage and potentially look at expanding production on the I-joists in the future.

This is Tom. I would just add that the bulk of the activity in the mill has been around the LVL press, and we'll be bringing billets from our Thorsby, Alabama mill to -- with the I line there.

Okay, that's helpful. And then the lumber mills you sold, which seemed pretty good timing there, were those mills assets you were planning to sell anyway at some point and you took advantage of the strong market of a few months ago? Or what was your thinking behind those divestitures?

Chip, this is Wayne. We have been looking at our asset footprint, and things that align with where we're trying to head strategically we're clearly reinvesting in and setting up to be very low-cost facilities. In the case of the two lumber operations and the particleboard operation in northeast Oregon, those were not mills that were going to get strategic reinvestment for us. And if you looked at it year-to-date, it's about $66 million in revenue out of these three facilities and basically break even on an operating income basis. And Woodgrain is a vertically integrated millwork producer that's in the region, and we think they're a much more logical owner for those assets, and frankly, they've been a customer for a number of years. And so this trade, we think, is beneficial for those mills. And if they can be successful with them, it's to our advantage because we'll still have the plywood operation in Elgin, Oregon and we're going to cooperate on timberlands procurement and other factors. So it's really a question of where we want to allocate strategic capital going forward. And as I say, in our case, it's towards the veneer operations to support plywood and EWP and growing a distribution business.

And also in that region we'll -- Chip, sorry, this is Dan again. We'll continue -- that region also included our AllJoist -- our glulam facility at Homedale and we'll retain that also. So we retain the plywood facility and the glulam facility.

Okay, that makes sense. And then just as we think about the fourth quarter just for modeling. It seems like that like we saw, for example, in 2016 when we had a bit of a downdraft, that if I just look at your plywood guidance and what typically happens when you have to mark things in the distribution business, I'm pretty sure you're saying it can be to have to break even on the EBIT line in the quarter. Would you agree with that?

In Wood I would probably agree with that. I think in BMD, we'd put it up there as well, although it'll be a lot dependent on what happens as we go into December on price. I would tell you based on what we've seen in October, we're going to have significant margin pressure in the month of October, probably not generate a lot of EBITDA in distribution. And obviously we were buying inventory as prices were falling through October that we haven't turned yet that we'll end up selling in November, and unless prices move up, we'll have margin compression in November in distribution. So I think your caution is right. It could be tough to get to break even on an EBIT basis in each of the businesses in the fourth quarter.

And our next question comes from Reubin Garner with Seaport Global Securities. Your line is now open.

I want to try to make sure I understand the impact of deflation on you guys more so looking out to next year than Q4. Can you help us with -- how do you think a decremental margin on price in the -- I'm talking about BMD specifically. How do you think about a decremental on price declines, and then in that same line maybe what the impact of deflation will be on your working capital for next year?

Reuben, this is Wayne. Let me take the working capital one because that one's easier. What we have said on the way up is as our sales grow that we plan about 10% of the sales growth falling into working capital, and I would expect the inverse to be true. We will get some working capital benefit, although I expect most of that to show up by the end of this year as receivables and inventory values come down. And then the other thing that happens is commodities typically have much shorter payables terms. So when we get a ramp up in commodity prices the inventory, we only get about 10 or 11-day turns on commodities versus on a lot of the general line products it's 30 days. So I think if you look at our payables to inventory ratios, it'll go back to a more normal level as we get toward year-end. As far as the decrement from deflation, I mean, obviously we still have all of the same activity costs associated with shipping OSB or lumber if it sells at a lower price. And typically what happens is our gross margin percentage will creep up slightly as prices fall other than the decline in price. But if you got prices stabilized at, say, $250 versus $400 for OSB, we would typically get a higher percentage gross margin at $250 that would generate similar gross margin dollars to cover the operating costs. But in terms of deleveraging, I would expect that as we lose sales from deflation that you're probably looking at a drop through on EBITDA somewhere around 4%.

Okay, very helpful. And then a lot of moving parts with the investments you guys are making in the facilities, the sales and assets and the closure of part of Roxboro, at least. Can you talk about maybe all together what all this could mean from a whether just savings or just a profit improvement opportunity for 2019 relative to 2018? It's just putting all these different pieces together, what's the big picture opportunity for 2019?

Okay, well let me start in wood. And again, I don't have a crystal ball. I think if you compare '19 to '18, the 2 major moving parts are going to be commodity pricing for plywood and ultimately what happens on our input cost. And the plywood is pretty easy to calculate. Just take the volume times whatever price variance, where you think prices are going to settle out. We've said over time we think plywood probably ends up at a trend price of somewhere around $295 on a 3/8 basis. And obviously we spent I lot of '18 well above that, so we'd expect a negative price variance next year barring a strong rebound in housing. As Dan said, we would expect log costs in the Pacific Northwest to moderate. We haven't seen price inflation on log costs in the south for a considerable period of time, and given the growth to drain ratios in inventories in the south, we're not expecting any log cost pressures in the south. Part of it is scale of operations in the northwest and just where log prices are. The majority of our log costs are in the northwest, even though the actual production is split pretty evenly between the south and the northwest. We pay more for logs in the northwest than we do on an aggregate basis in the south. We will get some relief on web stock cost for I-joists relative to where we are in '19, so I think that's a positive for wood. We'll avoid the EBITDA losses we've had at Roxboro, and then as we said, the 3 operations we had in northeast Oregon were essentially break even or slightly positive on an EBITDA basis. And really, the divestiture in northeast Oregon and the closure of Roxboro, they will obviously, particularly with the Roxboro writeoff, help our return on invested capital. And one of the things we're very focused on in both businesses is free cash flow return on investment. And in wood, I think that the steps we've taken and the actions we're doing on the reinvestment into Chester and Florien will clearly help our return on investment in the wood business over time.

Now, the projects at Florien and Chester, the real benefit of those projects is going to show up, just given the timeframe to get them completed, more in 2020 than 2019.

Then in distribution, I think in the first half of the year, I mean, barring some very unusual events, I'm expecting price deflation to make top line revenue comparisons and operating expense leverage challenging. Having said that, if we finish the year kind of where we are on pricing, I think the odds of BMD having some periods of tailwinds on escalating commodity prices in '19 are probably there, but I think you'll see challenging top line comparisons and expense leverage comparisons in the first half of the year. But I think BMD's got a legitimate shot to be flat to up for the full year just given the, in some ways, the beating we've taken on falling commodity prices since mid-June. I think it's going to be a difficult comparison for 6 months, and probably if housing continues to recover at a modest pace, we'll have pretty good comparisons in the back half of '19.

And our next question comes from Kurt Yinger with Davidson. Your line is now open.

My first question, Wayne, I don't know if I missed this but could you talk about how much the noncash impairment charge was? And did that flow into the roughly $14 million EBIT number for Wood Products?

Yes, in Wood Products there would have been $11 million that was included in their numbers, and of that $11 million, $10.4 million was not in cash, and the other $600,000 was related to severance and other transaction costs. And then in corporate, there would have been -- in unallocated corporate, there would have been $11.3 million related to the pension settlement on a pretax basis.

Okay. And so with the pension I assume being done in the third quarter, I mean, is that sort of an $8 million charge per quarter going forward, do you think?

No, what we did is we did two pension risk transfers with Prudential where we handed off retiree liabilities and assets to Prudential and under a group annuity contract. So we've gone from roughly $500 million in pension liabilities to about $170 million or $180 million. And obviously, we measure that at December 31, but what we have remaining in our pension plan is people that effectively haven't reached payout status yet, and we have now over 80% of the assets in duration match fixed income. So with the $20 million contribution we did to take advantage of 2017 tax rates, we're essentially fully funded and we've moved the portfolio very heavy to duration matched fixed income. So we've effectively neutralized the pension risk for the company going forward, and we should have minimal pension expense in 2019 and very, very little volatility in our funded status regardless of what happens in capital markets.

Okay, that makes sense, thanks Wayne. And then my last -- my last question was just higher level. Could you guys maybe talk about your views on the response from the industry, whether it be plywood or lumber, to the declines we've seen? Seen some curtailment announcements already. You've talked about a little bit of market-related downtime. Do you think those are more log cost, pricing or just better discipline running to orders?

Yes, I think what you're seeing a little bit is a short-term mismatch between supply and demand. And if you covered up the pricing chart for the first 5 months of the year, the pricing levels we have today are probably a little bit below where we would think things would normalize. But it's really returning to a cost curve where the marginal guys' cash break even. And so we think if we get just a demand response next year with improved housing, you'll probably get a good balance on supply and demand. But I think we would view -- a good portion of the price decline was returning to more normalized cash margins for OSB dimension lumber, and frankly for plywood.

And I would note that a huge driver in that return was the fact that early in the year, for a multitude of reasons, some startup issues, freight issues, probably too-lean inventories going into the new year, really very -- a little bad weather impacting housing starts. There were a whole bunch of factors that really created kind of the reverse, where we had pretty good demand and some really serious supply constraints that I think drove a lot of that price increase. And as those things got fixed, we actually kind of overshot the mark in the other direction, and I think the pricing we've seen in the last 3, 4 months is a direct result of that.

Right. I guess my last question is we've heard some anecdotes that trucking's been a bit better. But I mean, if we get a seasonal rebound in demand in the first part of 2019, I mean, do you think the freight and logistics aspect is going to be much better next year than this year?

Well, I think the issue is right now, to Nick's point, if you look at the supply chain, the demand is okay but it's not particularly strong. And I think right now throughout the supply chain, people are pretty calloused in terms of, "Do I need inventory on ground," at risk of supply constraints. So I think you probably got maybe two weeks on order files, and people are pretty confident that if they call and they need product in 10 days, they can get it and the price is going to be what the price is going to be. I think if we had an unusually warm winter and building activity was more robust than expected in February and March, there's not really a lot of slack product sitting in the supply chain. And I think you could get a decent rally in the second half of first quarter if building activity is there because I just don't think there's enough shock absorber in the supply chain to cover it. But again, right now I think most of the people on the buy side are not feeling like they're at any risk of price escalation, and there's pretty good availability on products. So you have kind of normal replenishment. I don't see anybody trying to buy ahead and feeling like there's going to be supply constraints or that they're going to be short inventories. But that can change literally within a couple of weeks.

I would note that, and not to make any future predictions about the performance, but two of the large railroads had some really serious operational issues in the first 4 or 5 months last year. And obviously, if they can avoid repeating that, that'll have an impact as well.

Yes, this is Dan. When we think about trucking going into '19, I don't have any reason to believe, at least on the Wood Products side, that it's going to be improved. I think we're going to be challenged like we were this year. I would also note that I think that we handled it quite well and we were able to get our product from our mills to our customers. I think UP I believe's doing what the CSX did relative to realigning their operational strategy. I don't know how that's going to pan out, but I suspect it's going to cause some challenges in the system.

[Operator Instructions]. And our next question comes from Mark Wilde with Bank of Montreal. Your line is now open.

I wondered if we could just come back to kind of log cost for just a minute. It sounded like the commentary you had about Pacific Northwest logs suggested you were both carrying log inventories and you may have bought stumpage at higher prices so that there may be a real lag between when we see log prices fall and when your log costs actually fall. Am I reading that correctly?

Yes, Mark, this is Wayne. Typically what we do, if you look across the season, and this time of year we will build log decks in the Pacific Northwest because we have a lot of areas that can get snowed out, or in the spring we'll get breakup as the roads dry out or if we get rains. And so what we found over the years is if we put logs on the ground late in the year, we can be selective buyers in the first quarter and avoid in certain years sharp increases in spot market prices if availability gets tough. But one of the things we do as a background to all that is we typically keep timber under contract where we bid on state and federal sales that represent roughly 30% of our wood needs so that if we see spikes in the spot market we can periodically rely on our log decks and we can rely on the spot market to a lesser degree and try to opportunistically play in the spot market. And if you look at what happened in the first half of '18, a lot of the timber bids were at elevated prices, reflecting what was going on with dimension lumber and what was going on with exports. And it's not going to represent, obviously, 100% of our wood needs, but that timber under contract typically has to get cut out in 18 to 36 months, and we bleed it in along with spot market purchases. So I think if you said, "Well, spot's off 25% in '19. How come your log costs aren't down?" We will have logs that are in our log deck for '18, and we'll have part of this timber under contract that we'll harvest and bring in. And so you may see a 10% or 15% decline in log costs as opposed to 20% or 25% if dimension continued to stay soft and spot market prices came down.

Perfect, that's exactly what I was looking for there. And it sounded like you're pretty comfortable with your log cost outlook down in the south. I'm just curious, though. We always know that log markets are very localized, and there are some parts of the south where we're seeing a lot of increase in both sawmill capacity and even some engineered wood capacity addition. So could you just talk about your particular baskets and what you're seeing?

Yes, Mark, this is Dan. You're right that depending on what's happening, there are regional log baskets, and there are some situations in the south where large mills have been put in, have put a little pressure on it. But our facilities are located in really robust log markets, and I don't see anything that's going to impact us in '19 relative to log costs in a significant way in the south. That doesn't mean that something might not happen going forward that could have some impact on that.

Couple things I would say, Mark. One is in our plywood operations, we tend to use a larger log that is not one the sawmill guys focus on. They have a hard time recognizing value out of it. And the other thing I'd say is even in log markets where there's a lot of incremental capacity going in, what you're really talking about is a freight play. I was looking at the forest inventory data for the Forest Service the other day, and at 2016, the growth in the southeast exceeded the harvest in the entire United States. So there's clearly a gap between supply and demand for logs in the south right now.

Yes, Mark, just to give you a little bit of data on the southern operations and the one that we consider in the east in the Carolinas. Those year-to-date '17 compared to year-to-date '18, 0 change in delivered logs, so at the gate. If you look at the Pacific Northwest, on a year-to-date basis, log costs were up 21%.

Okay, that's helpful. The last thing I wondered is just from a distribution standpoint, can you maybe provide even a little more color on how you guys read the housing market based on what's flowing through distribution? And also maybe address the issue of whether you think we've hit a bottom in the lumber market. There seems to be a lot of speculation over the last few days that maybe lumber has bottomed and is primed for a bounce here.

Mark, this is Nick. On the expectation of the pricing market, we have seen some commentary by some of the producers over the last week to 10 days that indicate that they don't expect prices to recover to the high levels of 2018 in the next 2 months. I think that's a -- I think that's a --

We won't name names of who said that on the earnings call.

I think that's a bit of an outlier, but I would tell you that -- I would tell you that to some degree, customers have been more willing to buy in the week to 10 days. And that doesn't mean we've hit a bottom, but there's some confidence out there that probably hasn't existed 3 weeks ago. I think the backdrop is these supply increases as they come on, and we're obviously staring down the throat of winter, and we'll just see how severe it is. Our expectation is that it's going to -- we're close to some settlement area, I won't say bottom, but settlement area, but we don't anticipate a lot of upside in the next 30 days. Having said that, I might have said the same thing a month ago. And if we experience the price erosion in November and December that we did in August, there's going to be a pretty dour Christmas Eve night when everybody gets coal in their stocking, so we'll see how it goes. As to the housing deal, we don't have a lot of visibility that anybody else does in terms of housing. I would tell you that what our retailers tell us is that it's pretty sporadic. In some places there's still a lot of activity and pent up orders that they're waiting to fill. In other cases, it's slowed down.

Mark, this is Tom. I reached out to our national accounts people on the manufacturing side. Basically, what we are in general hearing is that builders are talking about moderating their growth forecasts for next year, but we're not hearing anyone say that they think their starts will be flat or down.

Okay, that's helpful. The last question I had, Tom, I think there are some plywood assets for sale in the south. From everything you have said over time, it doesn't sound to me like you feel the need to buy more plywood or veneer. Am I correct about that?

I think, Mark, with the recent projects that we're looking at in Chester and Florien, we'll be in very good shape on self-sufficiency. And I don't see us making an investment to go into plywood for plywood's sake. It's always clearly going to be tied to our EWP strategy, so I think it's very unlikely we'd do an acquisition in that space.

And I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Tom Corrick for any closing remarks.

Thank you, Lauren. Obviously, we had a challenging third quarter. However, I am pleased with the progress we've made during the quarter and during 2018 on a number of fronts, and we continue to focus on strengthening on our strategic position. BMD has done quite a bit of geographic intel this year with acquisitions in Nashville and Medford, and the upcoming acquisition in Cincinnati. I'm really, really pleased that we're taking the final steps to complete the modernization of our plywood operations in the southeast with the work at Chester and Florien that we started in 2015. And we continue to rationalize operations to focus on our core businesses and assets with the sale of the northeast Oregon mills and the announced closure of the Roxboro LVL line. I think also, we've done all this in situation where we've really been able to strengthen our financial position to fund growth going forward. We're sitting on $577 million in liquidity. We have a very conservative debt position. We fundamentally have our pension fund funded, and we did all that -- even as we did all that, we were able to return cash to our shareholders. We're facing a challenging environment in this quarter, but I'm really confident about the future given our many recent actions to strengthen the company and to drive additional value for our investors. And with that, I'd like to thank everybody for calling in, and I hope everyone on the line enjoys a great holiday season.

Thank you, Lauren.

Thank you. 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 wonderful day.