Boise Cascade Company (BCC) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Vincent, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to Boise Cascade's Second Quarter 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions] Before we begin, I remind you that this call may contain forward-looking statements about the Company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance, and the company undertakes no duty to update them. Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC. It is now my pleasure to introduce you to Wayne Rancourt, Executive Vice President, CFO and Treasurer of Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Vincent. Good morning, everyone. I'd like to welcome you to Boise Cascade's Second Quarter 2019 Earnings Call Business Update. Joining me on today's call are Tom Corrick our CEO, Nate Jorgensen our Chief Operating Officer, Mike Brown, Head of our Wood Products Operations and Nick Stokes, Head of Building Materials Distribution Operation. Tom is participating on the call remotely today, so Nate will step in and provide the executive summary comment and wrap with our outlook. Tom will be available for the Q&A session. Turning to Slide 2. I would point out the information regarding our forward-looking statements. The appendix includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA. I will now turn the call over to Nick?

Thanks Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I am on slide 3. Our second quarter sales of $1.2 billion were down 13% from second quarter 2018. Our net income was $27.7 million, or $0.71 per share down from a $1.06 per share at year ago quarter. Second quarter 2018 results included $9 million of net after tax losses were $0.23 a share from non cash pension settlement charges. Overall, the second quarter 2019 results reflected weaker financial performances in both businesses principally as a result of lower commodity wood product's pricing. Total housing starts were flat compared to the same period last year. Single-family starts, the primary driver of our sales, decreased 6%, while multi-family starts increased 16%. Our operating performance in both businesses was quite good considering the environment, consistent with our strategy the volatility of our earnings has continued decline as we emphasize growth and distribution in engineered wood products. Our wood products manufacturing business reported segment income of $18.9 million in the second quarter compared to $36.5 million in the year ago quarter. Our Building Materials Distribution business reported segment income of $33.8 million on quarterly sales of $1.1 billion for the second quarter compared to $47.7 million a segment income on quarterly sales of $1.2 billion at the comparative prior year quarter. Wayne will walk through the financial results in more detail and then I will come back to provide our outlook for-- before we take your questions.

Thank you, Nate. I'm on Slide 4, wood product sales in the second quarter including sales to our distribution segment were $334 million, down 21% from second quarter 2018. Approximately one-third of the decline in sales is due to the asset sales or closures in the last 12-months. As Nate mentioned, wood products reported segment income of $18.9 million in the second quarter, compared to $36.5 million in the prior year quarter. Reported EBITDA for the business was $33 million, down from the $55.9 million of EBITDA reported in the year ago quarter. The decrease in EBITDA was due primarily to lower sales prices of plywood and lower sales volumes of EWP in plywood, as well as higher per unit conversion costs. The per unit production costs were impacted by capital project related outages at our Chester, South Carolina mill and market related downtime due to weaker market conditions. The commissioning is currently underway on the recently installed assets at our Chester facility. The negative earnings impacts were offset partially by higher net engineered wood products sales prices, lower Orion frame board cost used in the manufacture of I-joists and decrease log cost, as well as lower employee related expenses, BMD sales in the quarter were $1.1 billion, down 10% from second quarter 2018. Sales prices declined 12%, but sales volumes were up 2%. Excluding the impact of the acquisitions made in the last 12-months, the sales decline in BMD would have been approximately 12%. BMD reported segment income of $33.8 million, or EBITDA of $38.8 million. This compares the segment income of $47.7 million and EBITDA of $52.2 million in the prior year quarter. The decline in income was driven primarily by a gross margin decrease of $10.6 million, resulting from lower average commodity prices compared with second quarter of 2018 and $3.6 million increase in selling and distribution expenses. The amounts for unallocated corporate cost and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $7.3 million in second quarter 2019, compared with negative $22.3 million in second quarter 2018. As a reminder, second quarter 2018 results included $12 million of non-cash pension settlement charges. As we move through the balance of this year, our earnings comparisons to 2018 should be taken with due consideration of the restructuring activities we undertook last year. We have included a summary of last year's items and the earnings impact in the appendix to our slides. Excluding restructuring related items, wood products third quarter 2018 EBITDA would have been $43.7 million and fourth quarter wood products' EBITDA would have been a positive $11.5 million. Turning to Slide 5. Our second quarter sales volumes for LVL and I-joists were down 5% and 11% respectively, compared with second quarter 2018. Our volume declines for EWP were roughly in line with industry production figures for second quarter, so we believe the weaker volumes are reflective of this lower building season this year. EWP consumption is also influenced by the mix of single-family and multi-family starts, median single-family home size, as well as the home foundation type. A starter home in the Southern US using concrete slab on grade construction uses far less I-joists for example than a two-story home in Denver with either a crawl space or a basement. Pricing in second quarter for LVL and I-joists was up 2% and 5% from the year-ago quarter, reflecting pricing actions taken in early 2018 and ongoing management of our customer programs. Turning to Slide 6. Our second quarter plywood sales volume of wood products was 343 million feet compared to 369 million feet in second quarter of 2018. The lower volume for plywood sales reflects downtime for facility capital improvements and in response to weaker market conditions, as well as the sale of our Moncure plywood facility during the first quarter of this year. The $272 average plywood net sales price in second quarter was down 28% from second quarter 2018. July's plywood pricing this year was more than 25% below levels experienced in third quarter 2018. Moving to Slide 7. BMD second quarter sales were $1.1 billion, down 10% from second quarter 2018. By-product area BMD sales of commodity products decreased 25%; General Line product sales increased 9% and EWP sales decreased less than 1%. The gross margin percentage for BMD in second quarter was 12.4%, 40 basis points higher than second quarter 2018, however, the gross margin dollars generated in second quarter 2019 were $10.6 million below the prior year quarter because of price deflation. BMD's EBITDA margin was 3.5% for the quarter, down from the 4.3% reported in the year ago quarter. Looking forward, we anticipate that commodity products pricing in the third quarter of 2019 will remain low compared to historical levels, however, we do not expect a substantial downward price volatility and gross margin erosion likely experienced in the third quarter of 2018. 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 $33.2 million during the second quarter, both businesses reduced inventories during the quarter in response to the lower than expected demand environment. Accounts payable decrease from first quarter due to payments made on extended term payables and lower inventories. Accounts receivable increased with the seasonal increase in sales and accrued liabilities grew due to the employee related compensation and customer rebates. The statistical information file does exhibit 99.2 to our 8-K as the receivables inventory and accounts payable data broken down by segments for those that are interested in the detail. I'm now on Slide 9. We finished second quarter with $202 million of cash. Our total available liquidity at June 30th was approximately $568 million which reflects our cash, as well as the availability under our committed bank line. Our capital spending excluding acquisitions is expected to be between and $85 million and $95 million this year, as we execute strategic projects that our manufacturing operations in Chester, South Carolina in Florine, Louisiana. We continue to expect our effective book tax rates to be approximately 26% going forward. I will now turn it back over to Nate to discuss our outlook.

Thanks Wayne. I'm on Slide 10. The July consensus for 2018 US housing starts is $1.24 million which is slightly lower than 2018. We believe in foreign economic drivers behind the demand for new construction like job formation remain in place, however, affordability issues in many metropolitan areas and the availability of construction labor continue to influence the pace of activity. With housing starts expected to remain relatively flat in the second half of the year, we continue to focus in other areas where we control to drive both revenue and earnings improvement. In Wood products we are focused on successfully completing our strategic capital projects and reducing controllable costs through our operational excellence initiatives. By considering the lower plywood pricing environment and also adjusting third quarter 2018 to exclude an $11 million impairment charge related to asset sales, we expect wood products year-over-year financial comparisons to be negative in the third quarter of 2019. For BMD, the team continues to make good progress and seeking acquisitions in targeted geographic markets; looking at product line extensions and pursuing other avenues to drives sales and earnings. With a more stable price environment, we expect the BMD to report improved year-over-year financial results in the third quarter of 2019. We welcome any questions at this time. Vincent, would you please open the phone lines.

[Operator Instructions] Your first question comes from the line of Brian Maguire. Your line is now open.

Hi, good morning, guys. Wayne just a question on the plywood operating rates in 2Q and just in general how much volume you might have forsaken given the pricing environment? And any kind of color or outlook for 3Q on any sort of economic downtime plans you to have in wood products?

Yes, Brian, this is a Mike Brown. I might address that, yes, in the product wood we've certainly took outages as Wayne indicated for both capital and market related issues. Year-over-year I think that was approximately 50 odd million feet of volume that we lost. Going forward in this quarter, we have a small amount of capital activity that we're going to implement. And of course the amount of outage that we will take related to market really depends on what happens with pricing. So we don't have specific plans that I could speak to for the next couple of months.

Okay and then just bigger picture is sort of wondering as others are taking some downtime some permanent closures, some of those may be not starting until later in the quarter. You guys have a sense on how impactful that will be to the market supply and demand? And as you think we're getting enough announcements that we might start to see wood products prices lift a little bit later in the quarter, as some of that capacity does come off line.

Brian, this Wayne. I think the capacity withdrawals particularly the two large OSB plants in Western Canada that are slated to come out this quarter will be helpful, but kind of offsetting that I would say is the demand environment continues to be flat at best in most of the country. And the other thing is with the relative currency exchange rates and with the economic weakness in Europe, we are seeing increasing import activities on a number of products into the US. So we really don't see a lot of relief from the capacity utilization rates later this quarter and in the fourth quarter.

Okay, thanks. And just last one from me, obviously, really good gross margins in distribution given the volatility and prices. I was wondering if there's anything one-time or unusual in there. Obviously, the volatility was a little unusual, but thinking about that [12.4] margin going forward is that something that you think it could be able to repeat or we might expect it'll be a little bit lower going forward?

Brian, again this Wayne and I'll let Nick chime in if wants. A lot of it frankly is math. So if you look at our second quarter 2019 sales mix 41% was commodities, which is reflective of a huge deflation we've seen on lumber, I-joists and plywood. If you go back a year ago second quarter it was almost 50% of our sales and as a general rule commodities carry a lower gross margin percentage than the general line category and EWP. So with commodities again dropping about 8 percentage, 9 percentage points of the sales mix, that's part of the reason we're as strong as we are at the [12.4] and likewise that's why the operating costs are a little bit higher as a percent of sales is generally more handling activity associated with the general line and with EWP category than there would be on the commodities.

Next question comes from the line of George Staphos. Your line is now open.

Hi, thanks very much. How are you guys? Congratulations on the quarter, certainly better than what we were looking for. A couple of things; number one maybe piggybacking off of Brian's question. So can you come in a bit further in terms of what you're seeing over the last two- three months from an import standpoint on plywood? And if there's a way to size it versus where you're seeing earlier in the year or on a year ago basis? That'd be helpful to start.

So if I just look at Brazil, this is in thousands of cubic meters just to give you a sense. We were at --in April 81,000; in May 92.4 and in June 78.8. But importantly if you look at what was exported out of Brazil through the first six months, the US got 38.6% of Brazil's exports. If I look at the number for full year 2018, the US got 32.8% of Brazil's exports. So again the relative economic activity and currency exchange rates and by the way this is true on lumber as well and increasingly on engineered wood. So I think to the extent we end up with a strong US dollar and better economic activity here than what people is seeing in Europe or South America. We're likely to see inbound imports increase in a lot of our product lines.

Is the EWP level of importation sizable now, sufficiently sizable to actually impact your commercial strategies and your go-to-market -- in the past I wouldn't have thought that EWP would be that's susceptible to imports, but if there has been any change I'd be curious.

Georgia, it's Nate Jorgensen. I think what we see from Europe is generally tied to a kind of a specific geographic part of the US essentially the East Coast and more than the Northeast. And relative to the demand it has at the margin we certainly see influence relative to volumes and pricing when material shows up at the port. So it's something I would say it's not material, but nonetheless it does have an impact in select markets. And as Wayne described as given the currency and the opportunity that resides here relative to Europe, we begin -- we continue to become an important part of that product mix.

Understood. Two last ones and I'll turn it over. One, and would you perform better than I was looking for from an operating standpoint? I mean that's neither here nor there necessarily, but was your operations as you would have expected was performance a bit better than expected? If you can talk about what the puts and takes in terms of manufacturing were for you in the quarter beyond the obvious downtime. And then one thing that we've been tracking in your commentary on veneer and obviously you've got Florine. You've got Chester. Is there a way that you could size for us how much veneer you'll have available when you're done with the projects in a middle of next year? Available for the market relative to what would have been the case a year ago and five years ago? In other words how much external availability or supply do you have now of veneer? I remember once a strategic; I think remember being a strategic imperative for you guys. Thank you.

Yes, sure, Georgia. I'll have a stab at this and then I'm sure Wayne will chime in as well. On the manufacturing side, we've been concentrating now for quite a long time on our process improvement and reliability efforts. And they're starting to pay dividends. So while we were down in terms of volume which obviously doesn't help, the fact that we're starting you bear some fruit from our concentrated efforts around process improvement. They're starting to bear out in our cost structure. Now, we've got a long way to go when we're going to continue to focus our efforts on those particular locations that have the largest absolute opportunities. So more news there as we know we move through the next year or two. The veneer availability, yes, so I guess I'd summarize it like this. If you go back a number of years we were probably all thinking that we would have housing starts in the vicinity of 1.5 million, right, we were gearing up with such a life. And so if it turns out not to be the case which is the way it's looking at the moment, we should have veneer available for sale, if all things turned out to be proportional. Now I don't have the numbers right in front of me that could tell you exactly how much more veneer we would have available for sale because that depends largely on what happens to our own internal demand for EWP. I think you're aware of the way we run our operations. And we try and put as much veneer as possible into our EWP as opposed to plywood. There is balance there. So if Wayne has some additional comments maybe I could do deciphering while he's adding any color he'd like to add.

Yes. So on the manufacturing cost, that's --probably the biggest things that are favorable this year relative to a year ago as we've seen obviously a big drop in OSB which is the input cost for I-joists. And we used roughly one square foot of OSB for every veneer foot of I-joists. And if you do the math, certainly the first and second quarter relative to the year ago quarters that was a big positive. And we've seen log cost fall in the Pacific Northwest which we are getting some benefit from. We still have timber under contract that we're working through. But those are a couple of the big positives on a manufacturing side, as well as not dragging around some of the locations we closed and sold that really weren't adding positively to our EBITDA. On the veneer situation, a couple of years ago when we were tighter on veneer we were buying about a 100 million feet of veneer. And that has largely gone away and to Mike's point with the improvements we just completed at Chester and with a plan log yard improvements in Florien and the flow through in today, the lays and downstream through the dryers, we will have additional veneer and to Mike's point if the housing starts stay flat as 1.3 million it's unlikely that we will need all of the internally generated veneer. And the thing we're working on pretty strongly is to try to get more of our engineered wood products instead of the multifamily channel into like commercial construction. And with the changes in the building code where people will be able to do eventually 18 storey wood structures, we're going to try to get more EWP type products into markets other than single-family new resident and we're hopeful that over time and it won't be immediate. I don't think it's second half of 2019 or early 2020 adventure. But if we can -- we can do that over time then we should get revenue and earnings growth by taking more of the veneer into engineered wood and not be slowly beholding to what's going on in single-family.

Next question comes from the line of Mark Wilde. Your line is now open.

Good morning. I wonder if we could start out just by getting some sense of how you guys see inventory in the Channel right now kind of across particularly the commodities?

Mark. Good morning. This is Nick Stokes. I think if you think about the general line business, inventories in those products as you well know tend to not be volatile in terms of pricing. So generally dealers have invested in enough to keep them busy now that things are busier relative to the seasonal cycle. I think in terms of engineered wood, it's much the same thing, stability and pricing, confidence in those price levels and so guys are pretty good in terms of those inventories. I think on the commodity side given the lack of confidence in price appreciation and the relative ease at which people can get those products. I don't think there's an abundance of those products in the market. But I don't think there are any shortages either. So I think they're kind of matching the demand against the supply side in terms of timing, price and risk.

Okay. All right, I wondered, Nick, if we could also just talk about the new entrant that will be coming into the southern market for EWP next year. Whether you've seen any impact from that yet? I don't know whether they're seeding the market but just how you think that may play?

Mark, this is Wayne. I think the latest timing we've seen on the Roseburg LVL facility in South Carolina is that it's a fourth quarter start, and now need to go through the APA certification process. So we don't think we're likely to see big price impact this year as a result of that facility. And again depending on what regional demand is we would expect that supply to meaningfully come online in early 2020 for the building season. And really be the pace at which Roseburg brings that facility up and where the regional demand is will determine how much pricing impact, but clearly if you're thinking about potential headwinds in 2020 unless we get a reinvigoration at housing starts that's capacity that the market essentially doesn't need. The good news is it's a non -integrated facility. So they don't have a veneer production facility that they're going to feel obligated to run. They can buy veneer in the open market and paste the production through that facility based on market conditions.

Okay, all right, that's helpful. And then just EWP pricing has been doing very well. I think you were kind of your up on a year-over-year basis pretty nicely. I just wondered between kind of demands being a little softer than any of us expected and costs for things like OSB having gone down. How you think about sort of maintaining price?

Mark, it's Nate Jorgensen. I think in terms of the kind of the marketplace as it exists today, I think as Wayne kind of alluded to, a good supply demand balance. And so we're experiencing that today and are expecting that here for the balance of the quarter. I think if you look at pricing in general, the 2018 price increase that has been fully concluded, so that work is --and those gains have are in place and behind us. And as you described in terms of going forward, there has been limited issues in market in terms of competitive issues. But as we go through the course of the year, we would expect those likely to increase. So that in perhaps in combination with Roseburg capacity certainly has some potential headwinds on EWP pricing. But as we sit here today, things are in pretty good balance and we would expect that to continue for -- through the third quarter, as we get into fourth quarter we'll see how Roseburg comes up along with general market conditions at that point.

Okay, that seems reasonable. The last one I had is for Wayne and that's really around the balance sheet. The balance sheet is very strong. You're -- you have a couple hundred million bucks in cash. I just wondered how you guys are thinking about sort of potentially returning more cash to shareholders as you did through the additional dividend last year versus M&A. And I have to assume that this lower trajectory on the housing market might be starting to manifest itself in valuations on potential M&A candidates. So maybe you could also kind of confirm or deny on that one.

I guess the way I would describe it is we think seller expectations that come down. There are a few things that we have seen come across in terms of potential targets. We are still looking for acquisitions principally to fill in the network for distribution. And look at some adjacencies. There have been a couple of smaller things on the manufacturing side. So we are, particularly, as we go through the middle part of this year hanging onto some cash just given what could be potential transactions. But having said that as we get deeper into the year, if it doesn't look like there or any transact and out in front of us that are going to use that capital. As you noted, we've been pretty good stewards with shareholder money we think. And we will obviously engage our board on how best the returning capital to shareholders, if we don't have other places to put it. And we feel good about where we are from a leverage standpoint. But, again, I think the deal sizes were typically going to see, Mark, are going to be under $50 million. And we feel good that we can obviously fund one or more of those of our balance sheet if they come in, probably the only headwind on the acquisition front is the private equity guys are flush with money at the moment. And so we will be thoughtful in terms of what we're willing to pay on multiples. But, again, if we don't find good uses for the money to grow the business organically, and don't find acquisitions that we think are at appropriate evaluations, we will find a way to give the money back to shareholders.

Next question comes from the line of Chip Dillon. Your line is now open.

Good morning, everyone. Thanks for all the details. First question not to pin you down but just to make sure we're kind of thinking in the right zip code here. The second quarter you did very well. I'm looking for example at EBIT basis and BMD, you did $34 million and you're saying you feel you'll be up year-over-year in the third quarter. I notice most years so that sequentially the third quarter is a little bit tough to match, sorry the second quarter, it tends to be the best quarter often. And I didn't know if you had a shot at hitting or getting close to what you did in the second quarter of this year in the third quarter in BMD.

Yes. I think the guidance, the reason we split the guidance between the two businesses is we really see them in different directions at this point. If I look at the $28 million we did a year ago on BMD and the $38.8 million of EBITDA we did in this quarter. I think some that will depend on commodity pricing. But, again, we feel really pretty good about the activity rate we're seeing from builders. I think we will have a pretty decent September and October. So I wouldn't be too firm against the $39 million, but feel really good about the volumes. And I think the volumes will be probably more supportive in third quarter. And we saw in second quarter just as the weather continues to improve.

In BMD

Yes.

Got you, okay, that's very helpful. And then just a kind of update us on the moving parts of the plywood market, you mentioned, and thanks for the details about the activity. I think you just mentioned Brazil, I kind of think in very round numbers that the plywood market in North America is somewhere around 10 billion square feet, give or take. And so I would guess that the number you're talking about represent about 4% of the market. Is that the right zip code that is when you convert the square meters into four feet, and you look at sort of an annual rate of -- looks like it's about -- looks like a million square meters coming in every year?

So the volume out of Brazil and Chile, if you add kind of all of the imports, it's still bouncing around. I'd have to pull up numbers, but it's been in the 15-ish percent range. I would tell you, Chip that is not the issue for plywood this year. The big issue for plywood is we've come from $400 OSB to something that a lot of cases just starting with one, I think last time I just looked at prices in the South OSB are trading at like $155. And so where we have in the first half of 2018 plywood being drug up by OSB, this year the price differentials are quite large. And so we're seeing a migration back to the normal end uses for OSB and particularly in new res. Plywood is not typically competitive other than areas whether there's a zoning issue. And as long as we see $150 price gaps between OSB and plywood, that's where you're going to see the biggest substitution the Brazil. To your point, the endpoints are noise relative to what the OSB overhang is doing. And if you look at the volumes from APA, I think OSB was up a couple percentage points versus a year ago and plywood was up. I think in the quarter about 5% on volume. And then -- and again I think it's reversed substitution back into OSB with the pricing off as hard as it is and that's probably the biggest thing pressuring plywood this year compared to a year ago.

Okay, that makes total sense, that's very helpful. And you said differently if we see a surge in OSB that could create a little more substitution back up into plywood if we -- if that happens.

Yes, you would have to see sustained OSB prices north of 300, I think before you saw any better plywood. And I'm not pretty much on that.

I understand. And can you just update us when all sort of said and done at Chester and Florien, maybe 2021-ish, let's say. I would assume your plywood capacity is somewhere around 2.5 will be and is around 2.5 billion square feet. And just remind us how much you think -- if the housing market is healthy, and so you keep growing EWP and let's say we get to 1.3 million, 1.4 million for starts. How much of that 2.5 billion or whatever that capacity is? Do you think would be sold on the open market versus what would be used in your --internally?

So I think for modeling purposes. I would model somewhere 1.4 billion to 1.5 billion feet on an annual basis is plywood. And I am hopeful that any incremental volume in veneer that we get out of either Chester or Florien, or some of the operational improvements that Mike described. That we can figure out how to get those into EWP and get them into an end market where we get paid better than plywood. I know this for us is really about trying to grow the engineered wood business including different end applications. We are not sitting around structurally and viewing plywood as a growth market or something that's going to compete effectively against OSB and traditional residential housing applications. So really it's about trying to get what used to be 25% or 30% of revenue in EWP, the more we can push that towards the 50% number and North of 50% that does really good things for our economics and really good things for our earnings stability.

Yes, I get that. And last question is there's been a lot of moving parts the last couple of years with a lumber and particleboard mill closure sale and buying more distribution locations. Your CapEx of $85 million to $95 million this year. Directionally, where do you think that goes in 2020 and 2021? And please be as specific as you feel comfortable, I know it's before budgeting season?

Well, I think for 2020, you can count on $85 million to $95 million. I don't see it going down given the project we've got in Florien, Louisiana. And then forward from that we'll evaluate obviously based on economic conditions and what we need to do in the business. Directionally, given the number of mills we have in wood, I would be surprised to see our base capital drop much below kind of $55 million- $60 million. And in distribution just given the size of the franchise that Nick and his team have managed to build. That's probably a 25-ish kind of number. And then we usually have a couple of million in quarters around IT. So I'd probably give you that for directional guidance. I think we saw continued pressure on pricing or if the economy were to go into recession, obviously, we can flex down from that as appropriate. But I think for the number of facilities we run in wood 55 to 60 is probably a good place, older number. Much of that focused on maintenance and upgrades that keep us in the cost position we're currently in.

Your next question comes from the line of Reuben Garner. Your line is now open.

Thanks. Good morning. So I know the past or recent months have been kind of --the stocks have been disproportionate in the south and southeast. And that's kind of impacted the demand in the I-joists -- for your I-joists business. What is your kind of --what are your conversations with your customers telling you about the outlook for that? Or I guess geographically where the construction is going to be over the next year, year and a half?

So, Rubin, I'll take the first part and I'll let Mike chime in. I mean part of the reason you're seeing such negative comps compared to 2018 is we had an unusually warm winter in the West in the first part of 2018. And so the I-joists demands in the Western U.S. places like Denver, Oregon, Washington, et cetera was exceptionally good in 2018. So that's part of the reason you're seeing the step change down in 2019 years as we have a more normal winter in the west than a year ago. But as a general rule to the extent you're seeing a lot of housing activity in the U.S. south, southeast, that's generally less favorable I-joists. And if you have very low lumber prices, you'll see some of the guys that are doing off site framing moved to lumber. But as a general rule, we feel very good about the efficiency of that product and what it does for builders in terms of quality and labor efficiency. And I think we feel okay about the I-joists volume holding in maybe a couple points below single family starts just given the geographic shifts in the country and where houses are being built. But we don't see a lot of reverse substitution once builders get used to using the product and get the labor savings and the quality advantages. We don't see a lot of reverse switching. And most of what we're seeing in the declines is geographic shifts and where housing is occurring.

Got it. Very helpful. And then secondly, I know recognizing this to build a longer term question, but you mentioned different end markets. Seeing the some legislation passed in the mass timber market. Can you -- any way you guys can talk about the potential for that market and your participation. How you go about doing it? Is it something where you leverage your existing assets or you have to make investments to do so?

Yes. Reuben. So this is Mike. Yes, you're right. I mean it's, in theory, it's a huge market, equivalent sense of magnitude to the current markets that we play in, in terms of single family and multi family. So there's certainly a huge demand in the commercial area. Now the rate of adoption of mass timber into that area yet to be seen. But it certainly, it's got a lot of attention recently. And the approach that we've taken is that we've set up a group within the company that's focused on that. There are some products that we make today that I think that can be gained some share in what I call the commercial area, and that's what we focused on it. But there are some other aspects of mass timber that we don't play in today. Wayne amongst others, including Tom Corrick has spent some time in Europe looking at how that market works and what the go- to-market approaches. So over the next 12 to 24 months, we'll be looking very closely at the opportunities that exist for us to get in quickly or whether we should take a sort of a more organic approach. But it is our intention to spend time and effort looking at how we can move either some of our existing products or I'll call them the newer wood based product into that particular sector.

Next question comes from the line of Steven Chercover. Your line is now open.

Thanks. So it's kind of late in the Q&A so forgive me if some of these are follow-ons. But starting with the CapEx at Chester and Florien. Can you carve out of the 85 to 90, how much is specifically at improving those two assets, and what type of returns you're expecting when it's all said and done?

So those two projects on an annual basis probably elevated the capital spending by about $10 million bucks in Wood. So instead of 55 call it 65. And in Chester, we bought that mill in late 2013 and we've been in a protracted rehabilitation process to get it up to reliability in mechanical condition that we're comfortable with, having that mill in and putting it in a lower cost position. So I would tell you that replacement of the equipment in a log utilization center, the things we've done to improve the lays and the green end. And the new dryer are largely maintenance replacement of obsolete for machine centers. So we are expecting labor savings, some better product quality and modest incremental throughput. But that was replacing worn out tired parts of that mill. And again, we feel very good about the steps we've been taking over the last five years to recapitalize that mill. And in Florien, it's somewhat of a similar case, we put in a very large new dryer that's got high automation, better labor efficiency, and we've kind of put that overall mill rehabilitation on hold after we made the Georgia -Pacific acquisition, and we hadn't made the improvements in the log yard and in the lays to get the full amount of the veneer through to the dryer. Now we put in. So this project that we have underway that we’ll finish up mid year of 2020 is really to allow us to get more logs processed efficiently through the front end of the complex and to the lays. And with that we’ll be able to get the veneer off the lays and into the new large dryer. And again that will, if the market allows meaningfully increase our self sufficiency of the veneer going into Alexandria, should we find ourselves in a position where we're back towards the 1.4 million and 1.5 million housing starts. And the return on it's pretty favorable, but I would tell you that a lot of the return will be driven by getting more product out of the overall system, if we find ourselves at a 1.3 million housing starts and for some reason we aren't able to penetrate multifamily and some of the other areas of like commercial, we will have more capacity than we need based on current demand.

So it's not so much large incremental EBITDA that we should be adding to our target more like the ability to survive and/or participate?

Well, again, I think, as Mike mentioned, we may be able to sell to other engineered wood producers or plywood producers. But my hope is that we can find outlets in the non-single family arena that will allow us to suck up that veneer is incremental EWP production. And if we can do that the economics become pretty good. But as Mike said, that's still in the development phase yet to be proven that we can do that and a volume that is meaningful and obviously we're putting a lot of time and energy into it. Because we think it's pretty important and it's under our control. But I wouldn't model it into your 2020 numbers, for example.

Got it. And like many of us, I'm fascinated by this whole CLT explosion, and I see it going up around here in Oregon. But when you talk about the incremental veneer, it's something that you again could help provide new entrance, but it doesn't, despite what Tom is doing over in Europe, and doesn't sound like there's anything imminent, where you're going to be a CLT producer?

Well, and this will, -- I don't want to overstate this, but the US is late to the game. Europe, if you look at Austria and the number of other countries has been building larger wood structures with timber for a long time. So part of it is as the building code has changed here in the US. We were, -- I think, smart enough to say hey, there's a couple countries in Europe that have been doing this for decades. Australia has also made considerable progress. And so we said rather than reinvent, we all, let's go see how they've done, what engineering resources have they put to it. What channels did they go through and let's figure out how we can participate in the US in a way that makes sense for our shareholders. And if you look at a number of the large landlords, land lease for example there is a huge project that Google and others are trying to do up in Toronto and its called sidewalk labs. So it's really are the things coming out of Europe that we see getting adapted either through the landlord channel or people looking at what's been done in Europe and adapting at the North American given the changes in US building code. And we want to try to be part of that mix and both in manufacturing, distribution, we think there's a market opportunity there and we really want to figure out how we can play that make sense for our shareholders.

Got it, thanks, Wayne. Last one with respect to the bolt-on you've done in distribution. I don't think these have been particularly material in themselves. So is the real opportunity to expand your product lines through those facilities and maybe reduce freight? Because I don't I'm thinking about big or otherwise.

Yes. If you look at, I will take Nashville for example because that was one of the first one that we did. They had been selling Boise Cascade EWP for a long time, but relative to the national market and relative to the presence we see in our system like in Denver, Salt Lake, Houston, Dallas, they were under penetrated. So Nick and his guys have been spending a lot of time with the Nashville location alongside what we had historically Memphis and Atlanta targeting the right growth opportunities in national. And to your point with the right working capital investment and investment in property. We think we got an ability to dramatically ramp up the activity levels in the Nashville. And the same would be true in acquisition we made in Cincinnati and our intent would be to do that in Birmingham as well. I think Medford, Oregon, very small location, operates in some ways more as a satellite branch of our Vancouver, Washington, but clearly Cincinnati, Nashville and Birmingham, we went into those with a view that we could significantly expand their revenue footprint and frankly do more in traditional commodities than what any of those three were doing on their own. And get more big boxes in some of the national players into that customer mix.

Are there any other glaring holes that I’m looking at one of your presentations, since something where you want to be?

So the most glaring hole that I always talk to Nick about is I look at like Austin, San Antonio and again we service those markets today out of a combination of Houston, Dallas and occasionally Albuquerque, but if you look at West Texas and given the economic activity and there is an opportunity for us there, Gulf Coast region. There are a couple of spots and again we in our investor deck and we will put new one up here shortly. We actually have a map that shows housing start activity and proximity of our DMV branches and we made it fairly easy to go look at the color coding even figure out we’re under represented relative to housing starts, but it's really important for us when we go in particularly when we do it through acquisition, that we have really got alignment with the key vendors and that their management team and the culture fits. The last thing we are going to do is by somebody who has got in some ways the wrong set of vendors and we certainly are going to bring anybody on plain field that doesn't want to behave in a culture consistent with the way we behave.

Our next question comes from the line of George Staphos. Your line is now open.

Hi, guys. Just a quick one to finish up here for Wayne and Mike. If you look at the areas that the mills that you are targeting for the next level of investment and this piggybacks a little bit on the prior question. How much of the benefits of earnings you think is volume dependent and how much is actually would actually show up almost irrespective of the single family start environment? If you had a size in total what kind of pickup should we expect to see to normalized cash flow and results from those investments? Thanks guys and good luck in the quarter.

You may or may not appreciate this answer. I would say without volume, we would get if you were looking at --yes, it's maybe 25 bucks out of 100. There's way more leverage on the earnings if we get incremental volume, particularly we get it through EWP. But again, we think it's important that we do that for cost structure on those mills and market position. And one macro issue that we're paying a bit of attention to is obviously a lot of activity east of the Mississippi from a housing standpoint and general economic activity. And the one thing I would point out on lumber OSB and plywood is as the production capacity in North America migrates to the south that is largely a truck ship market. And if you think about Western Canada, and particularly Upper East, upper reaches far from the border, almost exclusively a rail market with a very long lead time. So we think for the distribution business and our manufacturing footprint. It is increasingly important that we pay attention to the manufacturing costs, and pay attention to the fact that down through the channel, this behavior of being just in time on inventories may become more prevalent as more of the industry becomes a truck market versus a rail market. And again, that's a long migration of capacity. But we think it's been underway for a number of years and it's likely to continue. So low cost capacity in the south is really important to our company. End of Q&A

There are no further questions, presenters. Please continue.

Tom, you want to do the post?

You bet. Happy to do it, Wayne. So I want to thank everyone for joining us today. As we discussed earlier, we're really pleased with our results in the second quarter as our efforts to reduce our exposure to commodity pricing by growing EWP and distribution are beginning to show a real impact. As we look forward, we see more the same flat housing and pricing compared to current levels, at least for the remainder of 2019. I want to close up by just saying thanks again for calling in. We really appreciate your interest in Boise Cascade. I hope you have a great day and goodbye.

This concludes today's conference call. You may now disconnect.