Boise Cascade Co (BCC) 2015 Q4 法說會逐字稿

Good morning, my name is Chennell, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Boise Cascade fourth-quarter 2015 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 on 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 to you Wayne Rancourt, Executive Vice President, CFO and Treasurer with Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Chennell.

Good morning, everyone. I'd like to welcome you to Boise Cascade's fourth-quarter 2015 earnings call and business update. Joining me on today's call are Tom Corrick, our CEO; Dan Hutchinson, head of our Wood Products Operations; and Nick Stokes, head of our Building Materials Distribution Operations.

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 for those that are interested.

And now, I will turn the call over to Tom Corrick.

Thanks, Wayne. Good morning, everyone. Thank you for joining us for our earnings call, today.

I'm on slide 3. Our fourth-quarter sales of $877 million were up 2% from fourth quarter 2014 as a result of higher sales volumes. Most of the sales improvement from better volumes was offset by the impact of lower prices for many of the commodity wood products we manufacture and distribute.

Our net income was down 85% from the fourth quarter of 2014, primarily due to lower plywood and lumber prices in our wood products manufacturing business. Our building materials distribution business reported a strong quarter despite revenue headwinds for product price deflation.

We were very pleased to negotiate the purchase of Georgia-Pacific's engineered lumber mills in Thorsby, Alabama, and Roxboro, North Carolina, in the fourth quarter for $215 million. The antitrust regulatory review remains in progress. We anticipate closing the transaction in the first half of the year.

The Alabama facility is currently producing LVL and the North Carolina facility is focused on I-joist production. We expect to gain incremental sales, as well as freight and operating savings, across our system once we acquire these assets. Until the transaction receives antitrust approval, we will be restricted in our comments regarding future operating plans.

In modeling the future operating configuration and product demand at 1.5 million housing starts, we anticipate incremental mid-cycle EBITDA earnings of $40 million. Logistic synergies and incremental organic growth in our distribution business are important components of the mid-cycle EBITDA guidance.

Turning to our accelerated strategic capital program, we expect to complete the installation of the new dryer at our Florien, Louisiana, plywood mill in the second quarter of this year. The acquisition of the EWP mills will impact our capital plans this year and in 2017, as we will have additional veneer and EWP capacity to efficiently serve customers along the East Coast.

We did not have an open window for repurchasing shares between our last earnings release and today because of the ongoing negotiations surrounding the EWP acquisition, which was announced December 21. We remain committed to using opportunistic share repurchases as a way to create long-term value for shareholders.

The pace of execution will be a function of our free cash flow, share price, other capital allocation opportunities and open trading windows. We have approximately 1.3 million shares remaining on our current authorization.

I will have Wayne cover the financial results in more detail, and then I will come back with a few more comments on the outlook before we take your questions.

Thank you, Tom.

I'm on slide 4. Wood Product's sales, including sales to our Building Materials Distribution segment, decreased $24.7 million, or 8%, to $292.3 million for the three months ended December 31, 2015, from the $317 million for the three months ended December 31, 2014.

Wood Products EBITDA decreased $25.4 million to $8.8 million for the three months ended December 31, 2015, down from the $34.2 million for the three months ended December 31, 2014. The decrease in EBITDA was due primarily to lower plywood and lumber sales prices, offset partially by higher EWP sales volumes.

BMD's sales in the quarter were $707 million, up 6% from fourth quarter 2014. Sales volumes were up 11% in BMD and pricing deflation was down 5%. BMD's EBITDA increased $5.3 million from the comparative prior quarter, driven primarily by higher gross margins of $11.4 million, including an improvement in gross margin percentage of 100 basis points. This increase was offset partially by higher selling and distribution expenses of $5.5 million.

The Corporate segment reported negative EBITDA of $5.1 million in the quarter, essentially flat with a $5.2 million reported in fourth quarter 2014.

Turning to slide 5, our fourth-quarter plywood sales volumes in Wood Products were down 10 million feet, or 3% from fourth quarter 2014, as we chose to reduce production given market conditions in late 2015. The $268 average net sales price for plywood was down $62 from 2014's fourth quarter and $14 lower than third quarter 2015.

The North American industry operating rate for plywood was negatively impacted in 2015 by increased imports of plywood from South America and decreased exports from the United States, driven by the relative strength of the US dollar.

Operationally, we may choose to take additional downtime as we move through the balance of the first quarter to adjust production to demand, which could impact profitability. Plywood pricing in the first six weeks of the current quarter is about 4% below the fourth-quarter averages reported by Random Lengths. The upcoming comparison to first quarter 2015 on plywood pricing will be very challenging.

Turning to slide 6, our fourth-quarter sales volume for LVL and I-joists were up 10% and 17%, respectively, compared with fourth quarter 2014. LVL pricing was essentially flat, while I-joists sales price realizations improved 2% from fourth quarter 2014.

As a reminder, 2014's fourth quarter saw relatively weak EWP sales volume activity, as purchasers had accelerated purchases in second and third quarters of 2014 in a response to an announced price increase.

For full year 2015, LVL volumes increased 6% over 2014, and I-joist volumes for the full year were up 4%. With the strong US dollar, we reduced sales of EWP into Canada and Europe during 2015 which held back our overall volume growth. Our domestic EWP sales activity was in line with the change in US housing starts.

Moving to slide 7, BMD's fourth-quarter sales were $707 million, up 6% from fourth quarter 2014. By product area, BMD's sales of commodity products increased 1%, general line product sales increased 10% and EWP sales increased 12%. The gross margin percentage for BMD in fourth quarter 2015 was up 100 basis points compared to fourth quarter 2014, driven primarily by the higher mix of general line and EWP sales.

As we have communicated in past conversations, sales of general line products typically carry higher gross margins, receive higher levels of supplier rebate support and incur more selling and distribution costs, and all of those factors happened in the fourth quarter of 2015.

Moving to slide 8, we have set out the key elements of our working capital. The Company's net working capital, excluding tax items and accrued interest, increased $1.7 million during the fourth quarter as payments of longer dated accounts payable were offset by the typical seasonal declines in accounts receivable and inventory.

As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K has receivables inventory and accounts payable data broken down by each segment for those that are interested in more detail.

I'm now on slide 9. Our cash balance decreased by $28.3 million in fourth quarter, and we ended the quarter with total available liquidity of $443.1 million. We currently plan to use $90 million of the balance sheet cash and $130 million of incremental bank debt to finance the purchase of the EWP assets and the associated transaction costs.

As Tom Corrick mentioned, we did not repurchase any stock in fourth quarter because we were in possession of material non-public information. Our effective tax rate in the fourth quarter was impacted by the late passage of tax extenders by Congress, including bonus depreciation and the R&D tax credit. At this point, we expect our book tax rate for 2016 to be between a 35% and 37%.

With that, Tom, I will turn the call back over to you to wrap up.

Thank you, Wayne.

The current consensus estimate of 1.25 million housing starts in the US for 2016 is at the upper end of the range we are using in our current planning. Housing demand improved in the second half of 2015, and we expect momentum to carry over to the first half of 2016. We believe 2016 will show improvement in housing starts with job and household formations progressing as the US economy continues to grow.

There is risk to the housing starts forecast presented by the strong US dollar and capital market volatility, both of which could hurt domestic economic growth. We continue to believe the demographics in the US will support a return to a normalized housing starts level of 1.4 million to 1.5 million starts.

Two of the bigger challenges we face in the near-term are the imbalance in plywood markets and successfully integrating the acquisition of the engineered lumber mills being acquired from Georgia-Pacific. We expect the plywood situation to improve with demand picking up seasonally in the second quarter, but the supply side remains concerning.

As some of you may know, a private equity firm has been working in Mississippi to construct new plywood capacity at the site of a previously closed plywood plant. They have described eventual capacity in the range of 360 million square feet with plans to start shipping product this spring. Together with the South American imports, we expect plywood price pressures early this year to be driven by exchange rates and oversupply more so than weakness in North American demand for plywood and veneer. We may need to adjust our production depending upon how market conditions develop.

As I said at the beginning of the call, I'm very pleased with the EWP acquisition. It provides us with a stronger operating footprint in close proximity to housing markets that continue to show very solid growth.

The purchase also increases our supply of low-cost, internally-produced veneer, provide substantial logistics savings, and assures that we will have adequate EWP capacity to meet our customer's needs as the housing recovery continues. Our entire company is very focused on making this an effective transition and capturing the available operating synergies.

We face a more difficult plywood and lumber product pricing environment than we would have expected at this point in the housing recovery; however, we continue to make measurable progress on the key elements of our strategy, and we are seeing solid revenue and earnings growth for both engineered wood products and distribution.

With the pending acquisition, we are further strengthening our favorable market positions in engineered wood products and building materials distribution. We also remain focused on productivity improvements in plywood and veneer. Over time, we believe those factors provide the foundation for creating shareholder value.

Thank you, again, for joining us on our call this morning. We would welcome any questions at this time.

Operator, would you please open the phone lines.

(Operator instructions)

George Staphos, Bank of America.

Good morning. I appreciate all of the detail. I guess one question, to start, a little bit bigger picture, Tom, you talk about doing the right things from a capital allocation standpoint to ultimately improve shareholder returns, and I'm paraphrasing here, relative to what you put in the press release and said on the call just now.

As we look back over the last several years, free cash flow has been generally negative, if for one year in 2014. Return on capital has been generally trending lower. Obviously, you didn't plan it this way, it has been more of a function of the market. What can you do from here that would turn the curve on both of those fundamental trends, whether it's free cash flow, return on capital, or ultimately, given that you are ultimately tethered to what is going on in the plywood markets and things that are ultimately out of your control.

George, I think that there are three aspects to that question. The first thing I would say, and I think the acquisition is a critical part of that, is that our EWP regions that have plywood production are doing fine. And the acquisition will integrate the Carolina plywood operations into an EWP region, and long-term reduce our plywood exposure there and increase our EWP, the benefits of EWP. And so I think that is a significant component of it.

The second thing I would say is the plywood business is a margin business. We continuously are buying, you know the major cost in that business is log costs. We continue to focus on paying the right price for logs. It takes a while for that to show up, because we have log purchase commitments from prior years that come in this year. But over time, we will be able to balance our log costs with our product pricing situation which will get us back into a margin situation.

The third component, that we don't talk about much, is we are having real success with our process improvement activities, the BIC process, and continue to see some pretty significant year-over-year improvements in the manufacturing cost side and recovery side on wood. And I think those trends will continue as well.

Tom, thanks for that. If I can piggyback one more time on your response. To the extent that you can comment, what should we see or what benefit would you call out from the latter two points, either improved procurement or the benefits being more visible on logs and then on the process improvement side of the ledger, what would you have us consider in our models for 2016 relative to 2015?

On the log cost side, George, I think our expectation is that log costs will be reasonably flat with 2015. I would note, also, on the cost improvement side, those are, I don't think we're willing to give any guidance on that, but I continue to see improvement in our numbers.

The other thing I'd note on the free cash flow is we have been investing heavily. We certainly have the strategic capital program last year which added $30 million of capital above our base costs and continue to repurchase shares as well, so there were some things that used cash last year. But I feel confident that we're going to be able to maintain a strong balance sheet and continue to pursue our capital program and frankly, continue to look at share repurchases inside our business.

Okay. My last one, and I will turn it over. Just back to log costs, I thought you inferred that, independent of the market, that because of your prior contractual commitments, there would be a benefit to log costs this year. Did I incorrectly hear that? If not, maybe what benefit might you see there, if you can share that. And then you mentioned that the projects will continue through 2017. I realize it is February of 2016, but do you have any early view on CapEx in 2017? Thank you, guys. I'll turn it over at that point.

On log cost, George, if I did not make that clear, the point I have is that we purchase logs in the product price environment that exists at the time. We purchased logs in 2014 and 2015 that we're bringing in this year, and so that tends to average our cost up. But the logs we're purchasing now are much more better matched to the marketplace. In 2016, I think our costs for logs will be relatively similar to our costs in 2015.

A lot of the log cost dynamics are driven by what goes on in dimension lumber and with the dimension lumber price declines that occurred in the spring of 2015, we've seen log costs moderate. To Tom's point, I don't think we're viewing log costs as a big price pressure on inputs for 2016.

Can you repeat the second half of the question again George?

Sure. Recognizing it is really, really early, do you have any view on what CapEx will look like for 2017. I will turn it over at that point.

George, the strategic capital spending, obviously need to finish the work we started at Florien, but the strategic capital spending that we've done above base capital, we can proceed or not proceed, depending upon circumstances. Those projects remain good projects.

I would note that with the GP acquisition, there are some things that represent very good opportunities for us there. And so we're really going to have to sit down and rethink exactly how we deploy capital with these new assets in place, which increase our self-sufficiency of veneer, because those assets have lathes and dryers and how we'll manage all of that going forward to make sure that we get the optimal return on our capital program. But at this point, I think the 2017 program is very much under review, and we can proceed with that if we need to or not proceed with it if the circumstances dictate that.

We typically think about base capital in the $55 to $60 range, and it will be elevated again this year, probably in the $85 million to $95 million range, and we'll think about 2017 depending on what business conditions are and where demand sits.

Thanks, Wayne.

Steve Chercover, D.A. Davidson.

Thanks, not the greatest morning, but I hope you're well. Can you talk about how much the economic and maintenance downtime impacted the Wood Products in Q4? We know it was 10,000,000 square feet, but what do you reckon the financial impact was, and some of that, I presume, was also for dryer projects.

Steve, this is Wayne. If you look at the EBITDA for Wood Products in 4Q, I would tell you there's a couple of things in there. The downtime impact, I can tell you that on the manufacturing cost side, it probably raised our manufacturing costs, in terms of what flowed through cost of sales, $4 million to $5 million.

If you look at a lot of the fixed cost, because we took it on a rolling basis across several mills, you don't really get a lot of the fixed costs off, and again, we're trying to manage the impact on employees. At the same time, we're trying to, obviously, take supply out of the market and make sure we're being balanced on what we're seeing on demand.

So the cost portion is probably $4 million to $5 million. If you said, well, what impact or what benefit did we get in selling price, that's somewhat unknowable, so the $268 realization we had on plywood, if you said, well, if you hadn't taken that downtime, would that have been to $267, or $266 or $265? I can't tell you. I can say there were a fair number of imports still coming in in the fourth quarter from South America. And trying to measure the revenue side is tough.

So, to be quite honest, we probably had more detriment on the cost side than we got benefit on the price side.

The other component that is in there in the fourth quarter is we probably had about $1.6 million of costs related to the GP transaction on advisory and legal that flowed through the quarter. We'll have additional costs that will flow through between now and when we close that deal. We did not call it out, because, frankly, $1.5 million or $1.6 million, we don't view it as material in the overall affairs.

The other one that occurs, somewhat every year, is EWP volumes decline between Thanksgiving and the end of the year. That tends to be the most profitable manufactured product we've got. So, if you look at the sequential decline from third quarter to fourth quarter, in Wood Products manufacturing, seeing the fall-off in volume seasonally also sequentially hurts the EBITDA performance in Wood Products, and those are the three things I'd really kind of call out.

We indicated in the press release that we would expect sequentially Wood Products earnings to improve, certainly better than the $9 million we reported in fourth-quarter. But just looking at where we were on plywood price in first-quarter 2015 at $312, if we end up $40 or $50 below on plywood price on 400 plus million of volume in the first quarter of 2016, that will be tough to close the EBITDA gap with where we were in first-quarter 2015 at $32 million.

Got it. I'm surprised that the GP transaction costs were attributed to Wood Products and maybe not corporate, but thank you.

I can assure you, Steve, Dan would've preferred I had them in corporate.

I'll bet he would. And the deal sounds like it will proceed by the end of June. Are you pretty confident that you can get the Roxboro LVL restarted, kind of, on the run?

Yes, to Tom Corrick's point, and we will spend some time looking at this once we know the closing date, but the initial plan on restarting Roxboro, obviously, we will need to hire people, but because we have the neighboring plywood plants in North Carolina and South Carolina, we will have an ability to take EWP grade veneer that we're producing at those mills, today and redirect it to Roxboro and start up the presses in the back end of the mill and get EWP product out without necessarily restarting the wood yard, the lathes, and the dryers initially. And then we'll backup through the process as warranted.

In some ways, having that flexibility on the veneer will allow us to not only get the EWP side up, but we can look at what the conditions are in the plywood market and make some call on that veneer and determine relative value between plywood contribution, EWP contribution and, frankly, how we balance supply to demand. It gives us more flexibility once we have the keys to Roxboro.

Given your statement on the wood yard dryers and lathes, GP has no intention of restarting LVL on its own?

What they might do if the transition were to be blocked, it would be totally up to GP. I can say with some confidence that if we are successful in completing the transaction the first half, our intent will be to produce LVL at Roxboro and ramp that up because the freight and logistics savings, the operational savings, as well as having it from a service element for our distribution business will be pretty important, and we think there's quite a bit of synergy value in getting Roxboro up.

Has the DOJ asked for any incremental documentation over and above what you submitted initially?

So far the process with DOJ has gone quite smoothly. We are still early in that, but we remain reasonably confident that we will get that completed in the first half.

Okay. My last question is since you're still in the midst of the DOJ process, does that mean that you are precluded from repurchasing stock?

Not in my mind. We will obviously review that with counsel. But unless there was something that happened on either customer retention or if we got word from DOJ that they were taking a position other than getting this thing cleared in the first half, I would view that within 48 hours we will be clear, and we have a board meeting next week, and we will, as we do every board meeting, review the repurchase activity with our board next week.

Okay, thanks for taking my questions.

Mark Wilde, Bank of America, Montreal.

Thanks. Just to start off on the plywood side. Are you aware, Wayne or Tom, of any other plywood curtailments that have taken place out in the business?

The one we know of is in Omak, Washington. There is a small mill that was being used somewhat as a veneer source for EWP, and we know that mill's gone down. We believe the Indian reservation principals are looking to try to see if they can find somebody to restart. So we know that one's out.

Swanson is rebuilding their mill in Springfield, Oregon. From what we understand, as soon as they have that rebuild in place, the capacity that is running that used to be Olympic panel product will be closed in Shelton, Washington, so we view that one as kind of a neutral.

And then again, this is anecdotal, but we're hearing that, particularly some of the private players in the west side of Oregon, are under stress from a cash standpoint, and we've seen some modest downtime maintenance related announcements from some of the private players in the south. But other than the Omak one, and the pending closure of Olympic panel in Shelton, I'm not aware of any permanent curtailments at this point.

Okay. And then, stepping over to distribution, Wayne, any impact for you guys likely from these recently announced warehouse or rationalization moves?

This is Nick Stokes. Yes, we do see opportunity in those markets. Customers -- we've had conversations with customers now about those opportunities, and we do see it as incremental, yes.

That's helpful. I guess, Nick, one other question I have in distribution. The sales and distribution expense went up quite a bit in the fourth quarter, even on just a percent of sales basis, can you help us understand that?

Sure. As Wayne alluded to earlier in his comments, as well as the written stuff, certainly products like engineered wood, and general line, and some of those items that require higher sales and logistic expenses had a bigger share of our mix in the fourth quarter, and I think that's what you're seeing reflected.

Okay, all right. I think that's it for me, right now. Thank you.

Thanks, Mark.

Chip Dillon, Vertical Research Partners.

Yes, good morning, Tom. Good morning, Wayne.

Good morning, Chip.

First question is on the capital program. You mentioned again it's a bit elevated this year as you acquire the GP assets. What is the range we can think about next year, maybe if you do everything that you plan to do, or if you cut back from there, should we still see the same $85 to $95 kind of million dollar level that you're looking at this year?

As we look at 2017, I would tell you that the thing that is going to drive it is really what's the appropriate pace on the restart of the GP assets. The opportunities above the $55 million to $60 million in 2017 are going to be dependent on what the need is on EWP volume in the system.

So we've got the dryer project that is going on in Florien, Louisiana at the moment that was intended to provide more internal veneer for the Louisiana EWP operation. Some of that project we will probably hold off on. We will get the dryer in place, but some of the other improvements that we're going to make at Florien, we may hold off on, because we will have that Thorsby production, the Thorsby, Alabama production that is LVL today, and we will have the ability to bring up Roxboro. Part of the motivation in buying those assets from GP is obviously we can restart Roxboro, and it has lathe capacity and dryer capacity.

And I would guess out of the, call it $90 million this year, there may be $10 that would go into Roxboro this year. And then it will depend on what else is appropriate in 2017 depending on where EWP demand is. If we're able to meet EWP markets and depending on where plywood markets are, if we don't see a need to ramp up the lathes and the dryers, then we can be more towards that $55 to $60 number in 2017.

If we're seeing continued growth in housing starts moving towards 1.3 million and change, or 1.4 million, then we will go ahead and take on additional capital projects at Roxboro, bring on the lathes and the dryers. And then we also think there's an ability to put incremental capacity at Thorsby, Alabama. And again, it's really going to be optimizing the capital program across the south and the southeast to take advantage of the integration between the plywood operations and what will be the 3 EWP mills.

Again, quite comfortable we can manage that number down as business conditions warrant, or if the economy goes into recession. But for this year we're starting out with a plan of $85 to $95 million, and we will have flexibility in the second half of the year if it turns out the plywood markets remain weak, or if we don't see demand follow through on housing, then we will bring that number down, as appropriate.

Okay, that's very helpful. And when you look at, I think you mentioned, I believe, that you could, in essence, forward integrate about 10 million square feet of plywood initially at Roxboro. If we shoot forward three or four years from now, let's say that you are up to what you would consider mid-cycle production of EWP. It looks like now you're selling around 1.6 billion square feet of plywood, what could that go down to if you were at a higher level, or once you get all of these facilities running, and let's say we are at a 1.4 million start environment.

I think the way I would describe it, is our original mid-cycle guidance was predicated on plywood margins of around $45. If that's the plywood environment, we will be running around 1.6 billion in volume and selling it as plywood.

If we woke up and found ourselves in a plywood environment that was $10 margins or $15 margins, we would spend less capital inside the EWP mills on veneer production, and we would redirect some of the plywood veneer into the EWP mills for layup and turning it into engineered wood.

Again, we're going to be very focused on appropriate returns on capital and what the market demand is. As Tom Corrick pointed out, given where the stock price is today, some of us feel very firmly that when we look at our free cash flow over the next three years, we think the stock presents good value and we will be advocating to the board that we take advantage of the share repurchase as a capital allocation mechanism.

Just on that, that's very helpful. If you kind of look at it, it looks about half of your current liquidity availability is going to be needed for the GP assets. You do have the elevated CapEx number for the year. Would you wait to see how the wood products markets act before you would get back into buying stock? And let me ask you this, can you buy it now? In other words, you mentioned you had non-public information, are you in a position today where you can, soon to buy the stock, or is there another reason you have to wait given the GP transaction?

I may have misspoke earlier, and if I did, let me clarify it. As of today, I have no material non-public information.

We've said we think the GP transaction will close in the first half, and we've now released earnings. So, I would be comfortable, based on counsel from John Sahlberg our general counsel, and otherwise I'm comfortable that we could execute. If for some reason we got a phone call Tuesday from the DOJ, and they said: hey, we're going to give you a second request and your deal is going to get hung up, and you're going to end up in an OfficeMax/Staples situation. We would review that as material non-public information that we would either need to release on an 8-K or make some disclosure before proceeding on share repurchases. But particularly given where the share price is, we will try to make sure that we have appropriate disclosures in place so that we are not precluded from repurchasing stock.

Very clear. Thank you, very much.

Bill Hoffman, RBC Capital Markets.

Thanks. A couple of questions. The first is in the Building Materials Distribution business. I just wondered if you could give us a little bit of an update on what you're seeing regionally as an early start to this year.

This is Nick Stokes. I think the best way to describe it is steady but not spectacular demand across the system. Certainly relative to the last couple of years. The winter impact has been less severe. And certainly there are some geographies and regions, you know, if you think about Texas and the oil impact, it's having an impact in terms of just the overall economic climate, but generally it's pretty good.

And what about things like inventory, the change, whether it be plywood, OSB, lumber, et cetera?

Well, as everybody knows, there's no empirical data on field inventories. I would tell you that the best indicators that we get is through the conversations that we have with our customers and our suppliers.

In all cases, people express opinions and share a perspective that says that the field inventories are generally sufficient for the steady but not spectacular demand, the seasonality effect, so I think it's in pretty good shape. Certainly I have not heard anybody express a desire to invest significantly in commodity products at this point in time.

Thank you. And then this last question, for either Wayne or Tom. With regards to the GP assets, can you talk a little bit about the Thorsby mill and what its operating rates have been?

This is Wayne. I'm a little reluctant to do that for two reasons. One, GP is private, and they have shared confidential information with us that we are not at liberty to disclose.

The second is I don't want to give you a number, even if I had it, because what we're really focused on is what is the business activity level that's there on the day we get the keys. Depending on what their customer losses are between date of announcement and when we close, what's going to be relevant to us is what book of business do we have when we get the keys, and how do we maintain that, and how do we grow that going forward.

And we will certainly provide more guidance on that when we have a specific closing date and when we have a chance to sit down with customers and have fully open conversations. But at this point, I would be reluctant to give you a sales run rate or an EBITDA run rate that may not be representative of what it is when we get the keys.

Okay, fair enough, thank you.

(Operator instructions)

George Staphos, Bank of America.

Hi, everyone. Guys, I was wondering if you would care to hazard to guess, and I recognize that it would be that at best. I don't think there would be anybody holding you to this, in terms of how much more supply you think we could see come from Brazil, and maybe to a lesser extent, Chile in the plywood market. And then said differently, and again, recognizing this is a little bit of educated finger in the air, what kind of housing start environment would you need to see to, in your view, sop up that supply that is hitting the market right now?

This is Wayne, let me give you some data on Brazil's exports. I will let you draw your own conclusions, but I will give you some data.

In the calendar year 2014, they shipped in 1.27 billion cubic meters, that's exported. Of that, 99 million cubic meters found its way to the US, and we were just below 8% of the exports. If you fast-forward to 2015, there was 247 million, almost 248 million cubic meters that showed up in the US, and we were 17.1% of Brazil's exports, and their overall volume had increased to 1.45 billion.

If I look at January, they sent in 28.6 million cubic meters, and the US was up to 25.7% of the exports. And the volumes in January relative to January of 2015 for their total exports, were up 21%.

And, again, if you look at the total volume compared to a large plywood plant in the US, it's not overwhelming. But when you have 7% or 8% of North American demand being satisfied by imports, if you do not have a supply response in North America that recognizes that, you end up in a significant oversupply situation.

And that's really what we're trying to work through, is trying to understand having gone from 8% to 26% on an exchange rate basis, taking into account ocean freight and pricing in Europe and the US, and we're, frankly, trying to get our arms around this, should we expect that number to go to 30 or 35, or where is that balancing point? And we've got several people internally that are working on that. We have bought a recent RISI study. We've got a couple of our senior executives that are going to be traveling to Brazil in the next couple of weeks to meet with producers and try to get a handle on what that expectation is.

I think, to your point, if we get to 1.2 million to 1.25 million on housing starts, depending on the behavior of the OSB guys, I expect some of this sheathing that's being imported to be absorbed by an increase in housing starts, and that will help balance the market. But we will need to be flexible and thoughtful on the supply side as we go through 2016, particularly if we continue to see an increase in the imports from South America.

As a major plywood producer we will have to think about what an appropriate response is. That may very well be waiting to see if high cost guys go out on a permanent basis, but that is something we're going to have to manage as we go through the first half of this year.

An additional thing, I would say -- Oh, go ahead, George.

I was also going to take it the other way. Last year, going into the year, I think the range on consensus was 1.1 million to 1.2 million starts. You obviously wound up at the lower end of that range. That decremental hundred thousand starts, can you remind us, recognizing this is now in square feet as opposed to cubic meters, but, what did that cost in total from your vantage point in terms of actual plywood demand and also, for that matter, veneer demand that did not run through in LVL or I-joists?

Based on current usage patterns, George, which I think you have to focus on the emphasis on current usage patterns, you'd have a couple hundred million feet of veneer going into EWP. If you had been up another 100,000 starts, a little bit over 200 million feet. And you'd have a couple hundred million feet going into new residential construction. Recognizing that's current usage patterns and given that the OSB guys have had significant excess production available at very good pricing, it's not clear to us that, that incremental component of new res is going plywood or is going OSB.

But clearly, and in economic growth, certainly accounts for some growth, but those are kind of the numbers based on current usage patterns.

The demand side on plywood last year was not the issue. It grew a little bit below GDP. It was around 2% in North America, which is kind of in line with our expectations, very slow growth in plywood demands, and of course driven by general economic conditions. And to Tom's point, we would expect some to go in the LVL and I-joists.

It was not really the demand side that caused the problem in 2015. It was clearly the supply side. And I think if we get an incremental 100,000 to 150,000 housing starts this year, that will naturally absorb some into EWP, assuming the OSB guys are able to balance supply to demand, I think we will see part of the oversupply situation fixed with the housing starts.

But clearly, the South American guys have more supply they can send this way if there's a strengthening in pricing relative to Europe, this will be a market that they will largely focus on, and then we've got the ramp up of the mill in Mississippi if that occurs. And so, again, we will be thoughtful in terms of our role on the supply side, and be thoughtful about how we balance veneer into EWP versus plywood and our thoughts on how much incremental veneer we choose to produce and purchase externally.

OK, thanks for that, Wayne. Two more for me, and I'll turn it over. Can you comment on what your operating rates were in the quarter and for the year as a whole? For your major businesses, obviously you can't talk to the potential GP assets.

And the pension funding I think was $55 million if I read the cash flow statement correctly. Do you have a view on that and any other larger cash flow items for 2016, again to the extent that you can project here? Thanks, guys.

Let me start with the pension one because that's the easiest. We did, for a number of reasons, on capital allocation, decide that funding the pension plan last year with long-dated, term debt that was cheap on a LIBOR basis, we just completed a swap on that $50 million. So we swapped the LIBOR component at 1%, 1.01% actually for the six years, so that's, in essence, fixed-rate, term debt at this point, and we feel pretty good about that.

The only thing we would anticipate going out on pensions through the cash flow this year is our non-qualified plan, and then we contributed company real estate to our pension plan, and we've got some payments on the sale lease back, so we'll probably have $4 million-ish that will run through the cash flow that will appear as pension contributions.

As far as operating rates on major products, on EWP we were probably operating last year at around 70% of capacity. On plywood, even with the down time, I would tell you that we were probably in that high 80s or low 90s on our veneer and plywood. On lumber, that has been weak in terms of the pricing, and we just recently took a curtailment in Eastern Oregon that will be more persistent in terms of the shifts coming off.

We had a negative EBITDA situation and concluded that we were not likely to see a better balance on supply and demand in the near-term in the pine lumber area, so we went ahead and did a, more or less, permanent reduction in Eastern Oregon. And again, I would expect that to be an EBITDA positive event where we have eliminated the EBITDA losses that were occurring in that facility.

And then particleboard, which is kind of a minor thing in our affairs, but it's probably operating at a 65% to 70% operating rate, so we've got some headroom there if the housing market and economy continues to improve, I would expect some incremental earnings out of the lumber side in the particleboard, but the big driver is going to be the plywood and EWP.

Mark Wilde, Bank of America, Montreal.

Thanks, I've got a few follow-ups. One, Wayne, is there any impact in the lumber business from currency right now, because I know that a lot of that pine lumber goes into things like molding and millwork, and we tend to bring that stuff in, also, from places like Chile and New Zealand, which have weaker currencies right now.

Yes, I would tell you there's a number of places, as you point, on the imports. The other thing is with the dimension guys having issues on pricing. There are some of the dimension guys that can swing and cut pine and cut some of the things that impact the markets that we're in.

The other piece is it was a pretty bad fire season in the Pacific Northwest last year, so there's a number of the people that have trees standing that have been burned that are trying to get that stuff harvested and through the market before it deteriorates. So our view, which was driving the curtailment in Oregon, our view is that the pine lumber market will be challenged, both for the reasons you cited around currency in South America, but importantly with the Canadian currency as weak as it is, with dimension lumber pricing where it is and with this available log supply issue, we think the pine lumber shop molding market is going to be challenging for the next several months.

All right, another question. We talked about the Brazilian imports of plywood. I noticed the Chilean imports are up as well, but I know the Chileans produce kind of a finished, sanded plywood, so are those imports less of an issue for you guys from a competitive standpoint?

In terms of the direct end-product competition, we don't compete head-to-head with Arauco, for example, on their board. A lot of their board will show up on the home center channel, and it's a very high-end product. It has a similar impact in terms of the balance, because what will happen is the domestic producers that stepped in behind Arauco when their mill burned several years ago, those guys will get displaced as Arauco comes back into the market. We viewed Arauco as a steady or longer-term player that has an ongoing presence in the market, and Nick can speak to this, but Arauco is a core supplier for our BMDs, and we have a good relationship with those guys, and again, they have tended to be a consistent player in the market.

Brazil was heavy in the market when the US went to 1.8 million housing starts or 2 million housing starts. Back in 2005, 2006, Brazil jumped in, and opportunistically filled part of that gap, and again, it was a period when their currencies were weak. So we view those guys as being more opportunistic and more swing players than we would the Chileans that are more focused on this market with high value product consistently.

I would say the Chileans are focused on coming into the market with the value proposition of quality, and the Brazilians are focused on coming into the market with value propositions focused on price.

Okay, that's good. Another question just around the plywood business. Do you have any sense of just over the last year or two whether plywood has been displaced by OSB in some of the niche uses just because the price spread between the two had gotten so wide? In other words, did it trigger some more substitution.

Yes, I think there are a couple of things. One is, and we tried to be clear on this at the end of 2014 and early 2015. The price gap to OSB was quite wide, and I think there was some marginal substitution into OSB.

And the other piece, and I will give a couple of the OSB guys kudos for this, there have been some products developed by Huber, and I know LP is working on a fire resistant board. They are clearly making inroads at the margin on a couple of places where plywood has, in essence, held them out for a long time. Again, we see modest erosion and substitution into OSB,. It's not alarming, and it's really on pace with what we would, more or less, expect, which is why we're not looking to create incremental plywood production, and why we were, in some ways, distressed to see the private equity guys building the mill in Mississippi.

I don't think we've seen anything on the substitution to OSB that's any different than what we would have expected over time, and again that's why we're viewing, even with the housing recovery, demand growth in plywood somewhere in the 2% to 3% range. We're not expecting 8% to 10%, because we do think there will be continued substitution by the OSB guys.

Okay, last two questions. One is, given what we see right now in the plywood market, is there any need, do you think, for you guys to rethink or recalibrate the mid-cycle EBITDA numbers that you've put out there?

Yes, I would describe it this way. When we put out our $270 number which included the $20 million that we thought we would have mid-cycle from the Carolina operations we acquired in late 2013, we were assuming that of the $170 to $180 that would be in Wood Products manufacturing that somewhere around $70 million or $80 million would come out of the plywood operations, assuming we were selling about 1.6 billion square feet.

If the supply fundamentals, and I view us as being part of this, if the supply fundamentals do not adjust to the reality of the demand situation, and we ended up with plywood margins on an EBITDA basis in the $20 range, than I would tell you that our mid-cycle number would need to come down by $40 million to $50 million.

Now, obviously we think there will be a lot of economic reasons why this will not persist, because we think those guys that are high cost that are probably running cash out-of-pocket today. But if you said, where is there risk in our mid-cycle guidance, I would say, given what we're seeing on South America and where their currencies are, that is a risk unless the domestic supply adjusts to the reality of the 7% to 8% percent of the market being imports, and again we will see if that number continues to escalate. But that is probably where we've got risk on our mid-cycle earnings is on the plywood side.

Mark, I would add that if you look at it, and I think Wayne has spoken really well to the plywood side, but I would note that we feel very good about where we are relative to our guidance on both EWP and on the distribution side, so the focus here is on the plywood piece.

Okay. Alright. The last question I had is, Tom, just thinking about your footprint in EWP, assuming the GP deal gets done. At that point, can you be, economically, a national player in EWP, or will there still be geographic holes that you might want to fill over time?

I think that the key there, I don't think there's going to be, we'll be operating in all of the key wood baskets, Mark. Our production east and west will be very balanced in terms of where demand is relative to where our production is.

Then I would note that EWP consumptions have almost virtually 100% into new residential construction, and so I think we will be right size for where we think household formation is going to be, long haul. So, not to say on the margin we wouldn't look at opportunities that made sense, but I think we will be very well-positioned in this business with these assets in our portfolio.

And the other piece we are going to be, and we are focused on today, but as people focus on green building, we're obviously trying to do more into multi-family and light commercial and other commercial applications.

So, where Tom said, two years ago, we would have been much more focused solely on single-family, and I think through Nick's group and the work of Dan's sales and marketing teams, we are trying to get a bigger presence into multi-family and some of the industrial categories in building. And so I view those as real opportunities over the next 36 months as well as the single-family new res.

Okay, that's helpful. Good luck in the coming year, guys.

Chip Dillon, Vertical Research Partners.

I know you're starting to explore a little bit more about what is going on with the South American imports, especially Brazil. What would be a reasonable guess in terms of the length of the supply chain, and the reason I ask is the currencies are moving around, certainly, and note for example, within the last three weeks or so, the euro has actually appreciated about 5%.

That may at least start to maybe tip some of the incentives, and maybe it won't. It's still pretty small, but let's say that you did get a movement that would tip the incentives, it still would take, I guess, a couple of months, right, before you would see the trade flows reflecting that, I would imagine, just because of the supply chains. Do you have a view on that?

I think based on our past experience out of Brazil, it's probably a 6 to 8 week kind of movement.

It's a 30 day boat trip. You've got to get it to the port.

It would take a little bit longer than that only because as the price adjusts, they still have to find an alternative market for the product, so I don't think it is an on/off switch by any stretch of the imagination.

I see. They would have to make sure it sticks or continues in that direction.

I think one of the things NIck had talked about there, Mark, is the Brazilian economy traditionally uses a lot of plywood, and right now the Brazilian economy is not exactly a heavy consumer of their production, and so that has certainly exacerbated the problem.

The other thing that makes it possible is there's a significant over-capacity on ocean container vessels, and how those guys adjust, having just read Maersk's earnings announcement, how those guys adjust their capacity to the realities may impact some of the cost dynamics on the flows, as well.

I see. And you've talked a lot about the imports. Obviously, we've had some lost exports, too, and what countries are particularly seeing an impact there? For us where we're exporting less?

Well, I can only speak to ours. As our international group sources product, for example, to Mexico, we are taking stuff from South America and shipping it to Mexico as opposed to taking domestic production and sending it to Mexico, as one example.

We're not a huge exporter of plywood though.

Okay, I see, that's helpful.

As we mentioned earlier, we have substantially reduced EWP sales in both Canada and Europe.

I see. Okay, thank you.

Steve Chercover, D.A. Davidson.

This is kind of a think out loud question, and obviously a real long shot. But if the Brazilian real is going to be cheap forever, would you ever consider perhaps buying one of the mills that is currently disrupting you?

I would not say never, but there is a reason we are putting two guys on a plane. And again, it would take a long conversation with the board, frankly, critical mass, and you'd have to have some view of the political and economic situation, because I think we've seen the Brazilian currency swing wildly over 10 or 15 year periods.

But in some ways, this is not dissimilar to the Europeans looking at their paper business and concluding that, gee it's a cheaper place to grow trees and produce pulp. We will need to reach some conclusion on whether this is a permanent situation or whether it is transitory, and I think it would take a lot for us to get convinced that it is permanent. And we would have to look at other capital allocation opportunities, including share repurchases and conclude that, that is an appropriate way to add value for shareholders. And I would say that there would be a fair amount of political risk and economic risk that we would attach to that kind of an investment decision.

Steve, we were in Brazil in the mid-2000s with the veneer operation, and, frankly, got caught on the other side of currency move and lack of containers. And I think one of the things you conclude is that if the volatility in the US is uncomfortable, the volatility there is even more uncomfortable. And the other thing I would say based on our experience is, that dabbling in a foreign country in production is not something that if you're going to go, you need to go, would be the way I would describe it.

And that's why I said it was a think out loud question. With respect to the industry structure there, I know it's like the last priority, right now. Are there kind of standalone mills like you have here in western Oregon?

There are a couple of major producers of plywood in Brazil, and then there are a number of very small family-owned facilities, so you've got, as I say, a couple of major players, and very fragmented below that.

Got you. Okay. Thanks again.

We probably have time for one or two more questions.

I'm showing no further questions at this time. I would now like to turn the call over to Tom Corrick for closing remarks.

Basically folks, we appreciate you being on the call, today. We remain very satisfied with how our EWP and distribution businesses are advancing their position in the marketplace and the profitability, and we're going to be really focused on challenges in plywood and integrating the EWP acquisition, which we're very excited about. And thanks for joining us, today.

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