Boise Cascade Co (BCC) 2014 Q2 法說會逐字稿

Good morning. My name is Kevin, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade second-quarter 2014 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 recent filings with the SEC.

It is now my pleasure to introduce Wayne Rancourt, Senior Vice President, CFO, and Treasurer, Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Kevin. Good morning, everyone. I'd like to welcome you to Boise Cascade's second-quarter 2014 earnings call and business update. Joining me on today's call are Tom Carlile, our CEO; Tom Corrick, head of our Wood Products operations; and Nick Stokes, head of our Building Materials Distribution operations.

Turning to slide 2, I'd point out the information regarding our forward-looking statements. The appendix of the presentation includes reconciliations from our GAAP net income to EBITDA.

And with that, I will turn the call over to Tom Carlile.

Thanks, Wayne.

Good morning. Thank you for joining us on our earnings call today.

Before I start, I would like to begin by acknowledging Tom Corrick as the leader of our Wood Products business. He has developed and led the EWP business for many years and he has played a key role in our recent successful IPO process. Most of you have had a chance to meet Tom. The Company and the Board are very pleased to have an internal leader with Tom's experience and knowledge take over leadership of Wood Products.

Moving to slide 3, both of our businesses performed well in the second quarter, as demand picked up after a challenging start to the year. We reported $961 million of sales in the second quarter, up 13% compared to the second quarter of 2013. Our net income was $26.4 million, or $0.67 per share.

Wood Products and Building Materials Distribution both generated strong top-line growth, particularly on engineered wood products sales. Wood Products plywood sales and earnings benefited from our acquisition last September of the two plywood operations in the Carolinas. Wayne will provide more additional details in his comments.

The tone of the business is good as we start the third quarter. The pace of the recovery in housing is a little slower than many of us expected earlier in the year, but we believe the industry is still on track for over 1 million starts this year and the consensus estimate for 2015 shows further improvement to approximately 1.2 million starts. Over the next few years our expectation is for a return to long-term trend levels of 1.4 million and 1.5 million US housing starts.

With that overview I'll ask Wayne to cover the detailed financial results.

Thank you, Tom.

Turning to slide 4, Wood Products second-quarter sales, including sales to our Building Materials Distribution segment, were $351 million, up 25% compared to last year's second quarter.

The sales growth was driven primarily by plywood and EWP volume increases, as well as higher EWP prices. The decline in plywood prices was largely offset by improved lumber, particleboard and byproduct sales. I would note that our intercompany sales from Wood Products to our distribution business grew by almost $39 million in the quarter.

Wood Products second-quarter EBITDA was $41.3 million, up 40% from the year-ago quarter. Overall, the increase in EBITDA was due primarily to higher plywood sales volumes and higher EWP and lumber sales prices, as well as lower costs for purchased OSB we use in the manufacture of I-joists. The improvement in EBITDA included $4.8 million related to the acquired plywood operations.

The positive factors contributing to EBITDA growth for the quarter were offset partially by lower plywood sales prices and higher log costs.

Building Materials Distribution sales increased 11% to $758.4 million for the second quarter. Compared with the same quarter in the prior year the overall increase in sales was driven primarily by improvements in sales volumes of 15%, offset partially by a decrease in sales prices of 3%.

BMD reported EBITDA of $21.8 million. The earnings result was significantly better than last year's second quarter when BMD's EBITDA was $5.5 million.

A year ago the second quarter's gross margin bore the brunt of sharply declining commodity prices. Gross margins in this year's second quarter were 220 basis points better on a comparative basis, the bulk of which is attributable to the stable price environment for commodities.

As Tom mentioned, total Company net income was $26.4 million for the quarter, or $0.67 per share. Our effective tax rate for the quarter was about 35%, which included the favorable impact of tax credits recorded in second quarter 2014 related to 2013 research and development costs. We expect our normalized tax rate going forward to still be around 38%.

Turning to slide 5, our second-quarter plywood sales volumes in Wood Products were up 21% with the impact of the recent acquisition. We are continuing to sell a portion of the production from the new facilities as high-strength veneer, which doesn't show up in the plywood sales data. We will share EBITDA for the acquired facilities again next quarter, but for competitive reasons we do not intend to break out product level sales data for the individual mills.

Our $301 average net sales price for plywood was down 8% from the second quarter of 2013, but was up 2% sequentially from first-quarter 2014. With strengthening demand for plywood and more veneer flowing into engineered wood production, we are continuing to see strong operating rates in our veneer and plywood operations.

Turning to slide 6, our second-quarter sales volumes for LVL and I-joists were up 28% and 29%, respectively, compared with the year-ago quarter. Obviously, that was a much higher increase than what we saw in the housing start statistics. We believe there may have been some pent-up demand left over from first quarter when many customers in the supply chain had difficulty in positioning spring inventories or starting construction due to weather.

In addition, we announced a June 1 price increase on EWP, which may have spurred some additional activity in the second quarter. As others announce their results, we'll have a better idea of how much, if any, of the volume increases may be attributable to market share gains.

Our LVL and I-joists sales price realizations improved 4% and 8%, respectively, from the year-ago quarter and were up 2% and 5%, respectively, from first quarter 2014. We believe we will be able to further increase prices and operating margins on engineered wood products as our capacity utilization rates move higher with increased housing starts.

Moving to slide 7, BMD's second-quarter sales were $758 million, up 11% compared with the year-ago quarter. BMD sales of EWP increased 36%, general line product sales increased 9%, and commodity sales increased 6%. As I mentioned earlier, gross margins improved by 220 basis points compared with last year's second quarter and drove the strong EBITDA performance of $21.8 million.

On slide 8, we have set out the key elements of our working capital. Company net working capital decreased $12.7 million during the second quarter.

Accounts receivable grew with the higher sales activity, while inventory levels came down modestly in both businesses. As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K has the receivables, inventory, and accounts payable data broken down by segment for those that are interested in more detail.

I'm now on slide 9. We generated $43.9 million of cash in second quarter and ended the quarter with total available liquidity of $471.9 million. In July we contributed approximately $11 million to our pension plans, which funded the vast majority of our remaining obligations for 2014. Even with the pension contribution I would expect the Company to generate a meaningful amount of free cash flow from operations again in the third quarter.

Tom, I will pass back to you to wrap up.

Thanks.

As I mentioned earlier, the consensus estimate for 2014 total US housing starts now stands at 1,040,000, which would be up about 12% from the 925,000 start experienced in 2013. We believe the demographics in the US support a return to residential construction of 1.4 million to 1.5 million total starts per year in the years ahead. We will continue to manage our business to be supportive of our customers and capture the opportunities the market presents.

I'm optimistic about the outlook for the remainder of the year and 2015. We expect to see additional production and earnings from the acquired mills as we target maintenance and capital spending to bring the mills up to our standards and continue to implement the operations improvement process used in our other facilities. EWP sales volumes are on an upward trend as housing recovers and I expect further revenue and earnings growth in our distribution business.

In addition to the leverage we get from our existing businesses, we continue to seek out favorable opportunities to grow the Company and create additional shareholder value. We are returning to an earnings level that provides more flexibility in considering mechanisms for returning capital to shareholders if value-added acquisitions are not developing.

Thank you again for joining us on our call this morning and your support as investors.

We would welcome any questions at this time. Kevin, would you please open the phone lines?

Thank you. (Operator Instructions) Alex Ovshey; Goldman Sachs.

A couple of questions for you and I want to start on the capital allocation front. Can you talk about the appetite for buyback? I know Tom just sort of finished his prepared remarks with a comment there. But in terms of the timeframe, would it be reasonable to assume that we may see something on the buyback front in the back half of this year?

Alex, our focus first continues to be grow the Company and create value. We'll continue to talk with our board on the sequence of other things -- buybacks, dividends. We're not prepared to say anything more than that at this point in time, other than we continue to talk about it at every Board meeting.

Okay, that's fair. And then, on the plywood side, just looking at your realization, it seems like it lagged pretty materially with the implied number. -- should have been, based on just looking at the indices by Random Lengths in the West and the South. Can you talk to that, and is there just a lag and as we think about the third quarter we should see a pretty meaningful improvement in your plywood price realization, obviously holding things equal where we are today relative to what the average price reported for the second quarter was?

Alex, I'll start and then ask Tom Corrick to add in. I can't speak to the lag to the indices. Mix does play a part into it. So it's not something that I have in front of me. We are -- as we ended the quarter and got into the third quarter, we saw some improvement in plywood prices. The demand/supply balance is quite good in plywood. And then, last week the unfortunate -- the damage of a fire at one of our West Coast competitors has put more pressure on pricing.

Tom Corrick, anything else you want to add?

Yes. This is a pretty broad generic statement, Alex, but I would just add that if you look at the mix of products we sell, we would tend to lag going up Random and we tend to lag Random going down as well.

That's helpful. I'll turn it over. Thank you.

George Staphos; Bank of America.

Thanks for all the details. Couple of questions. I know it might be difficult at this juncture, but do you have any initial estimate as to how much demand for EWP might have been pulled into 2Q from what otherwise might have been in the third quarter if not for the pricing action?

This is Tom Corrick. We're obviously still assessing that and I think partially we're going to have to wait to see what our competitors report when they report going forward. I can tell you that sales orders actually are down in the third quarter, but still above year-to-date levels. So we've certainly seen some slowdown in order volume, which would lead me to believe that some portion of it was related to buying in front of the price increase.

Okay. And, I'm sorry, you said -- go ahead, I'm sorry.

Yes, I was just going to add that our volumes were up quite a bit in second quarter. If you look at the APA data on production, I think the industry for I-joists and LVL was up 20% to 22% on production. So, as Tom said, when we see Weyerhaeuser out on the 1st and LP I think reports August 5th, we'll get a better sense on their sales numbers. But the production numbers for the industry in total were up well above what housing starts were.

Sure. Fair point. Tom, I'm sorry, I missed your comment there. You said your volumes early in the third quarter were up year on year or you're up to date over the first, whatever, seven months?

Yes, basically year to date.

Okay. Could you at least provide what you're running early in July, or in 3Q, in terms of bookings or billings or however you want to measure it?

No. George, I don't think we can provide you that specific a guidance. There has been some back-off, but it's not a material back-off, is the best way we can answer that.

Okay.

I think the way I'd describe it -- the July activity by itself does not explain what happened in the second quarter. There has not been enough of a fall-off in July that -- to indicate that there was a lot of pull forward.

All right. Thanks for that, Wayne. My last one and then I'll turn it over -- could you give us just a sense for year to date where operating rates are across your businesses, and in particular how you stand with veneer? Thank you.

Operating rates are probably in the mid- to high-60s right now on EWP. Our dryers are fundamentally running full at this point. In terms of veneer supply, we're not constrained by veneer supply right now.

Okay. Thank you.

Mark Wilde; Bank of Montreal.

Just come back to EWP for one more shot. You didn't do anything that would have increased your kind of geographic distribution range during the first half of the year, did you?

Mark, we did not. We do think our integrated model through distribution did help us. And strong growth in distribution was fueled by EWP as well.

All right. And just to kind of follow up, couple questions on that. Now, it's interesting, Tom. You guys always talk about the importance of distribution in EWP. But you've got a big competitor that went from unaligned with any distributor to aligned and they seem to have lost share. Any thoughts on that?

No. I can focus on what we do and we think there's value to that. And maybe we're seeing that in the current environment.

Yes, okay. The other question I had on EWP is just with the Carolina plywood and veneer operations, any thoughts on the potential over the next couple of years of integrating forward to EWP on the East Coast? You've talked about this in the past.

Mark, there's nothing to announce at this point in time. As we said when we bought those mills, we feel that's an opportunity down the road, if the demand's there, that it would be a great place to forward integrate into the EWP business.

But a fair amount of our investments over the next 12 to 18 months I would anticipate will be in that region. And it will be focused on similar work that we've done in Louisiana on upgrading dryers and veneer throughput. And you're right. It's really to increase veneer self-sufficiency that it can give us the flexibility over time to think about EWP in that region.

Okay. The last question I had is, can you just update us on log costs in the three different regions for you and where you see that going for the balance of the year?

Yes, but think about the change compared to a year ago. The South on a total wood cost basis hasn't moved much at all. It's low-single digits. And then the West, after an elevated start in first quarter, that has really backed off and on a year-to-date basis wood costs in the West are probably going to ramp about 3%.

Okay. And then any view going forward through the balance of the year?

The wood costs are going to be higher in the West than they are in the South. We don't -- it's something that we watch very carefully, but we don't expect it to be something that we can't manage going forward, 2014 into 2015.

But when we look at stumpage and we look at growth, the drain in and around the Carolina mills and in Louisiana we feel very good about the availability of fiber. If there's constraints, and we haven't bumped into a lot of this yet, but it's probably on getting loggers and getting a cut-and-haul piece (multiple speakers) --

I guess that's similar to what we've got with the truckers going on right now.

Yes, absolutely.

Okay. Thanks. Good luck with the rest of the year.

Chip Dillon; Vertical Research.

Congratulations on a very strong quarter. And I apologize; I missed some of the beginning of the call. But certainly the margins in distribution were very stellar, I would say. And was some of that either inventory related or, differently, did you maybe discontinue some items that weren't as profitable in the past?

I'll start and have Nick fill in. One, we have not changed our business model. The one area where we had strong growth was, again, EWP, as I just spoke earlier. Nick, beyond that --

Yes, Tom. There's two things really, Chip, and the language talks about the primary driver. It was just the absence of the negative commodity environment that we had in the second quarter of 2013. And that was an aberration. What you see in the second quarter of 2014 is a more normalized margin environment, a healthy mix, to Tom's point, about EWP and some of the seasonal products that kicked in as winter finished.

That's very helpful. And then -- and, again, you might have addressed this. But in a very general sense I know in the past you have talked about the consolidation potential that your company has. In particular you do have a very strong record in distribution. And from what we can see in the public realm, that's unique. But would you comment also on also branching into potential opportunities, if they were to present themselves, in either OSB or engineered wood products?

Yes. We've been pretty consistent on our point of view on that. Our first focus is on veneer-based and structural panel businesses that support EWP. We have said on the OSB side that that is something -- we used to own a business in OSB, owned a mill, we built a mill. We don't have any today. It's integrated with -- I mean, there's value within our EWP business. So it's not something we take off the table, but we're focusing on other things first, veneer-based. And in distribution we continue to look for things that fill out geographies where we're underserved or in adjacent product lines that serve our customers.

Okay. Got you. Thank you very much.

Bill Hoffmann; RBC Capital.

Just a couple more questions on the plywood mills down South. Just want to get a sense, since you were generating some pretty strong free cash flow, any increase in capital spend down there to bring those up to the cost position where you're targeting?

Bill, yes, we are investing some capital down there. We will be putting a new dryer in Chester. It was something that was in our plans when we bought the mill. It's very consistent with what we've done in our other mills. And it's cost savings, but it also helps us generate additional veneer to help support both our plywood and our engineered wood business.

We're spending some extra money on maintenance for capital on fixing some things that's consistent with our mills, but nothing major has surfaced at this point in time.

Bill, this is Tom Corrick. I would add that on that dryer in the Carolinas, that's a replacement of an existing dryer, not an additional dryer.

Okay. And how would you say you're operating down there, just from either an operating rate standpoint or cost position, compared to the other -- the rest of the facilities?

What I would say is that it's meeting our expectations. But there's lots of opportunities for improvement, which I think we knew as we went in.

Okay.

I would describe -- the second quarter was a lot closer to where we think the trend line is. I mean, obviously at $4.8 million we had said that we thought trend line EBITDA kind of pre-capital and pre-upgrade was somewhere around 20. Obviously the $4.8 that we got in the second quarter was a lot closer to that run rate than what we saw in the first quarter. So we were a lot happier that their performance is coming in line.

And on the other dryer projects we've done, those have typically been 3, 3 1/2 year kind of payback. So we would think that the dryer project at Chester is probably in a similar realm.

Bill Hoffmann: Okay, thanks. And just a last question, just in the M&A scheme of things right now, what are you seeing opportunity-wise? And are you seeing valuations come down at all?

I'll speak to valuations. We view valuations still a challenge. And we're pretty disciplined and we're not going to buy something that we don't think provides shareholder value. And that's a challenge in the marketplace.

All right. Thank you.

Adam Rudiger; Wells Fargo Securities.

Seems like there's a lot of confusing signs right now, whether it be the census data on the starts in new home sales or company-specific data on repair and remodeling trends. I was wondering if you could -- if it's possible when you look at some of the sales you're seeing out of BMD, what -- that might explain what's going on in the marketplace, whether it be -- talk about specific products or are you seeing strength in R and R and new construction, things like that.

Adam, this is Nick. You've articulated the challenge. There's a lot of mixed signals in terms of housing by itself. That ranges from places like Phoenix where permits are actually down year over year and they're building fewer homes than they did prior year. I'm sure everybody saw the report last week or so about the constraint on lot availability across the South, reportedly due to too much rain. There's places in some of the bigger metro markets where the trades in terms of the framers and the HVAC and the plumbers are putting a constraint on the pace of new home development and build. There is just a lot of very regional difference in terms of new houses.

Certainly the repair and remodel across the country, as well as houses in the Northeast and the Midwest where, as you'll recall, we had such a severe winter, both in duration and magnitude, the spring kind of came to light.

That's about as much color as I can give you, none of which is science. It's more feel and conversations with customers.

Adam, this is Tom Corrick. I would also add that if you look at seasonally adjusted housing data, it masks what happens month to month. And if you look at the second quarter versus the first quarter, starts were up over 30% and still it just looks kind of like the same seasonal number. But that's -- from an operations perspective that's a true increase in demand.

Okay. Second question was, can you quantify the EWP price increase in June and what the success of that so far has been?

There's a lot of range to it, but in general I would say it's 5% plus. The acceptance has been very good. I think it's been well implemented across the marketplace. It really takes several months for that price increase to fully show up in the marketplace as a result.

Great. That's all I had. Thank you.

(Operator Instructions) Steve Chercover; D.A. Davidson.

Two quick questions. First of all, with respect to the unfortunate incident in Springfield, did you have any veneer trading relationship with Swanson? And I was also wondering if it might impact log costs a little bit.

We have a very small relationship with that mill. I don't think it's going to materially impact our veneer supply. I don't think we have any sense whatsoever what will happen on the log side.

Steve, the other thing, our distribution facility was a customer and they're experiencing the same pain as others in the marketplace of doing a little bit of scrambling to backfill for the product they had assumed coming from that mill.

Yes. No, it was a total loss. It's very unfortunate. Okay. And then I had one question on distribution. I think you recently bought a DC in Kansas City. And can you tell us what the opportunity there is? And then, I was looking at your map and I see that there's nothing in the Dakotas. I realize it would be a small base, but it's growing fast with the oil. Is there an opportunity there?

Yes, Steve. As it relates to Kansas City, at the tail end of June we announced that we had acquired a facility in the market. It's in Lee's Summit. That trade area and marketplace is currently being served by our other distribution centers, primarily Tulsa. We've been doing business in that trade area for at least a decade. The volumes have grown. We've got an existing customer base.

The volumes have grown where it makes sense to put inventory and logistics service on the ground in the market. I think that gives us some capacity for additional products, better services to the customers and just a broader, healthier mix. And we'll save on logistics costs trying to service it from away. So we're very excited about that opportunity.

As it relates to the Dakotas, the growth of that market, obviously driven by some of the oil stuff, has been sporadic, but generally strong. We service that market today from both our Minneapolis facility, as well as our Billings, Montana facility. We're doing reasonably significant volumes over there and feel like we're getting our share.

Very good.

George Staphos; Bank of America.

Just some follow-ups. So looking at last year's 2Q in BMD and recognizing that there's a fairly significant inventory charge based on the way the commodities were progressing at that point in time, if we take a rough swag and say, okay, you would have been more or less in line with the prior-year quarter, and take that as my starting point, then look at the EBIT that you generated this quarter. Your incremental margin would have been, I think, still over 10% for BMD. Should we still assume more like a 5% incremental margin in BMD on a going-forward basis, I guess is question one.

Secondly, you mentioned that you're out with mid-single-digit price increase on EWP. Are you in a position to comment whether others have also been implementing pricing increases in EWP? And I had one last follow-on. Thanks.

Yes. I think on distribution I would continue to guide people that probably 4% to 4.5% EBITDA margins on incremental sales as we get leverage on occupancy and on payroll.

And on the EWP price increase, there were a number of others in the industry that had similar price increase announcements. And to Tom Corrick's point -- and it depends on the builder and it depends on the distributor, but there are some organizations that have price protections for certain periods of time. So we would expect those price increases to show up in third and fourth quarter as that rolls in.

And that gets to this pull-forward nature. We do generally put volume constraints, so that we try to limit -- as price increases are done, we try to limit the amount of volume that people can pull forward to a reasonable number. And we'll see how that plays out in July and August. But as we mentioned earlier, we haven't seen a big impact yet on the volumes in July, but we'll see how that plays out in the balance of the third quarter.

But others did have price increases that were similar.

Okay. Thanks for that, Wayne. And two others and I'll wrap it up from my side. Number one, realizing that you still want to grow the Company, you were specific in terms of the areas that you're most focused on, veneer-based acquisitions that could grow your business overall. Within capital return, would you tend to put dividends above share buyback at this juncture? I mean, that's always been our take on your commentary. So that's question number one.

Question number two, given the spread that you're beginning to see between plywood and OSB, which is at a relatively high level, do you begin to worry are we at a level where we need to start considering whether there's some substation by OSB into some traditional plywood markets, recognizing obviously the trend for years has been OSB's been taking share from plywood? Thanks, guys. Good luck in the quarter.

As far as prioritizing dividends versus share buyback, I think it depends on our view. We will not implement a dividend until we're sure that it's a sustainable dividend over the long term. And we'll continue to maintain flexibility and it's a discussion that we have with our board every Board meeting.

As far as substitutions, Tom Corrick, do you want to speak to that?

Yes. I think that as we look at the substitution issue relative to residential construction I think that substitution's going to continue. I think that at least partially the price increases reflect the tightness in the supply. And that will probably drive some substitution as well simply due to availability issues.

But the bulk of what we sell in plywood really doesn't go into residential construction anymore. And there are features and benefits to the plywood panel relative to OSBs that I think makes us feel pretty comfortable about the relative relationship between the two structural panel businesses.

Tom, what do you think the remaining amount that plywood and OSB compete against each other in residential is, if you had to put it in a BSF metric?

Yes. I mean, numbers we see from industry sources would say that somewhere between 20% to 25% of plywood ends up in new residential construction. And a lot of that is in places where there's strong regional preferences, like the Northeast or where you have code issues, like Florida.

But in some ways the price separation you're seeing I think is reflective of the supply/demand balance in plywood being probably in the mid- to high-90s at the moment, and particularly with the Swanson fire. And with OSB I think you just have a case where more supply came on in response to what people anticipated for housing starts and the housing starts didn't show up. So I think you've got a more difficult supply/demand balance in OSB.

But the two are trading independently because largely OSB won the war on new residential construction and most of the substitution has taken place. And I think the pricing dynamics you're seeing confirm that those have really become more independent markets as time has gone on.

Thanks very much. Very helpful. Have a good quarter.

Mark Wilde; Bank of Montreal.

Couple of questions on distribution and then one on transportation. In the distribution business, the margins that you put up this quarter were margins that we didn't think you would see until we had much higher housing start numbers. Is there anything else that kind of helped that margin this quarter?

Yes. I think you've got a couple of things going on. As Nick said, we did get a nice rebound on commodity margins. Now, this math is not perfect, but if you took OSB at 225, the margin percentage is going to generally be higher than if OSB was selling at 300 or 350. Because the amount of dollars we can generate on a gross margin basis is going to be tied to the value of the service we provide. So, on a percentage basis I would expect if you have a low commodity price environment our gross margins are going to be a little higher.

And this, as Nick mentioned, in second and third quarter you're going to see a seasonal pickup in demand in engineered wood. You're going to see products like composite decking are going to have higher demand. And that's a product line that typically carries a higher gross margin than what you see on core commodities and some of the general line items.

So if you look at the 11.3% that we posted on gross margins, as we've been having conversations with people and if you go back and look at our numbers over the last five years, we've kind of said if we get to a normalized housing environment we think that gross margin number is probably 10.5% to 11%.

So, again, we think we'll see leverage on operating costs. But when we think through our model we're thinking 10.5% to 11% gross margin line and somewhere in the 7.5% to 8% on operating expenses to get to that 3% bogey on the EBITDA margin. Now, hopefully we'll do better than that mid cycle and we're working every day to do that. But that's kind of what I would give you for guidance.

Okay. All right. Wayne, one other on distribution. Can you give us just some examples of sort of adjacent markets that you guys might be -- would consider in distribution?

Yes, I'll give you a couple examples and I'd ask Nick to chime in here, because he's probably closer to it. But if you looked at our 32 branches now with the addition of Kansas City, the customer set and product set varies by marketplace. And that's part of what's made us successful, is it's a pretty entrepreneurial culture and it's what works in the local market.

In a number of markets we've got a presence, for example, with the mobile home industry or with truss manufacturers and maybe some industrial customers. But that would not be true across the system. And we've got certain products that have been successful in certain markets that we haven't necessarily pushed into all markets. And we've got a number of branches, for example, where we run door shops.

And so I think we're continuing to be very thoughtful geographically about how we do that product line extension and the customer extension. But if you took the width of our product line across the system and if you took the width of our customer base across the system, there is a lot of headroom for organic growth, just by continuing to do what we do in servicing customers and just broadening the mix and broadening the customer set in each geography.

Mark, I would add just from a pure geographic standpoint, we are not ready to disclose the specific markets that we're looking at. I think from an instructive standpoint, you can look at the case study for Kansas City and kind of extrapolate where you think we might go and draw it up against our current footprint. I mean, we serve all parts of this country today. And there's some markets just geographically that we're a bit underserved. But we're working hard to look to see what kind of opportunities we have.

Okay. And one other question I had is, for guys that rely on truck transport quite a bit and from all that we've been hearing from other companies about sort of challenges in the trucking business right now, you haven't really mentioned that much this morning. I wonder if you could just touch on it briefly on both sides of your business.

Yes, Mark. This is Nick again. It is a very challenging problem from the distribution standpoint, both inbound and outbound. And you think about the inventory in the pipeline that doesn't flow as efficiently as we're used to, extends lead times, those kind of things.

If you think about distribution from an outbound standpoint, as you are well aware, BMD has their own fleet. And we haul about 60% of what we sell on our own equipment and hire the rest. And so, the hire-the-rest part is more challenging, but we believe that to the extent that we've got our own fleet it gives us a little bit of an advantage over some of our competitors who are purely at the mercy of the outside carriers.

But it's a problem. And there's all kinds of data on why it's a problem, but we certainly don't anticipate it getting easier.

I would say on our side that on the manufacturing side we're seeing exactly the same issues. There's a little bit of a characteristic of what I, for lack of a better term, would call moving pockets of destruction. So we'll end up with one mill that we end up with real challenges getting inventory out and over a two- to three-month period we'll adjust to that problem but have something else show up somewhere else.

We're also, frankly, having challenges with the railroads. So it's pretty broad-based. I guess from afar I don't think our challenges are different than our competitors, however. But certainly it causes inventory issues in our mills and for our customers that everybody's having to adjust to shipments taking longer than they took a year ago or three years ago.

Okay. So it sounds like the business may be very sensitive, if we were to see a little unexpected incremental pickup in demand that the system may be challenged to handle that. Or let's say we had a bad hurricane season, that that could create some real disruption as well. Is that fair to say?

Yes, absolutely. Yes, I would describe it as the rubber band is reasonably tight. And I think if you looked at what's happened to plywood pricing, for example, in the West in response to the Swanson fire, it gives you a good indication of how well balanced supply and demand were when things were running well and when transportation was working. And to your point, it doesn't take much of a hiccup to cause at least a two or three, four week shock in the system. Now, people will figure out how to add shifts and balance things back out, but you're absolutely right, Mark. Near-term events can cause more shock in the system than they used to.

Okay. All right. That's very helpful. Listen, good luck through the balance of the year.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our hosts for closing remarks.

Thank you. Thanks, everyone, for their interest in our company. We look forward to visiting with you again at the end of the third quarter. Thanks.

Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Have a wonderful day.