Boise Cascade Co (BCC) 2016 Q3 法說會逐字稿

Good morning. My name is Nova and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Boise Cascade third-quarter 2016 conference call. All lines have been placed on mute to prevent any background noise.

(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 matter of business risk 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 to you Wayne Rancourt, Executive Vice President, CFO and Treasurer of Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Nova. Good morning everyone. I'd like to welcome you to Boise Cascade's third-quarter 2016 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 Rich Viola, Senior Vice President of Sales & Marketing for our Building Materials Distribution operations.

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

With that I will turn the call over to Tom Corrick.

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

I am on slide 3. Our third-quarter sales of $1.07 billion were up 8% from third-quarter 2015 as a result of growth in engineered wood products and our distribution business. Our net income of $10 million was down 55% from the third-quarter 2015 due to a $10.3 million decline in Wood Products operating income and a $9.5 million pre-tax loss on the extinguishment of debt.

Wood Products reported segment income of $11.6 million in the quarter or EBITDA of $27.2 million. Although the team in Wood Products executed well in the quarter, operating income declined $10.3 million with reduced plywood sales volumes, sharply higher OSB pricing impacting our I-joist input costs as well as higher depreciation associated with the recently acquired engineered wood products facilities.

Wood Products made good progress on integrating the acquired Thorsby operation and recommissioning the Roxboro, North Carolina EWP facility.

Building Materials Distribution reported segment income of $26.4 million or EBITDA of $29.9 million. BMD continues to capitalize on favorable demand trends to grow their revenue and earnings with operating income up 16% from the year-ago quarter.

Wayne will now walk through the financial results in more detail. And then I will come back with a few more comments on the outlook before we take your questions.

Thank you, Tom. I'm on slide 4. Wood Products sales in the third quarter, including sales to our distribution segment, were $341 million, essentially flat with third-quarter 2015.

Increases in EWP sales volume were offset by declines in plywood and lumber sales volumes. Product pricing was relatively flat across EWP, plywood and lumber. Wood Products reported EBITDA of $27.2 million, down from the $32.9 million reported in the year-ago quarter, principally because of higher OSB costs used in the manufacture of I-joists as well as higher per unit conversion costs for plywood and lumber attributable to lower production volume.

As a reminder, we use about one square foot of oriented strand board for each linear foot of I-joist we produce. Our OSB input costs increased 35% from third-quarter 2015 or approximately $5 million in the quarter.

BMD sales in the quarter were $889 million, up 11% from third-quarter 2015. Sales volumes were up 8% and pricing was up 3%.

BMD's EBITDA increased $4.1 million from the comparative prior-year quarter, driven primarily by revenue growth and operating expense leverage. The corporate segment reported negative EBITDA of $6.4 million in the quarter which was higher by $2.2 billion than the $4.2 million reported in the third quarter of 2015, primarily due to higher incentive compensation cost, professional fees and pension expense.

Turning to slide 5, our third-quarter plywood sales volume in Wood Products was 385 million feet, down 27 million feet or 7% from third-quarter 2015. The $288 average net sales price for the quarter was up $6 from 2015's third quarter. Of note, the $288 average was a $17 or 6% sequential improvement from the second quarter of this year.

We are modestly encouraged by a reduced pace of Brazilian exports to the US since May of this year. However, the private equity backed plywood plant in Louisville, Mississippi has commenced operations. So we are cautious on our view of the plywood supply/demand balance for the remainder of the year and into the first quarter of 2017.

We plan to take our Chester, South Carolina plywood operation down for approximately one month beginning in late November to complete a rebuild of its boiler which will be helpful in managing our plywood production to demand again in the fourth quarter. However, the downtime is expected to adversely impact our per unit plywood manufacturing costs in the fourth quarter.

Turning to slide 6, our third-quarter sales volumes for LVL and I-joist were up 17% and 8% respectively compared with third-quarter 2015. We were able to produce and sell Boise Cascade branded LVL from the acquired Thorsby, Alabama location in the third quarter.

The Wood Products team also made significant progress in the quarter on recommissioning the first of the two LVL presses we expect to operate at the recently acquired Roxboro, North Carolina EWP facility. The Roxboro mill is expected to be producing on-quality LVL within the next week.

We plan to discontinue the manufacturing and sales of Georgia-Pacific branded EWP by the end of this year. As expected, we have retained a minority of the legacy GP engineered Wood Products customers as we rebrand the production to Boise Cascade. However, we believe we will more than offset these customer losses as we ramp up sales through our existing EWP customer base and newly targeted relationships in the eastern two-thirds of the country.

We expect to continue rebalancing EWP production between our Louisiana, Alabama and North Carolina EWP operations during the fourth quarter. Our primary focus is on restoring operations at the Roxboro, North Carolina facility ahead of the 2017 building season and capturing operating and freight synergies.

EWP net sales realizations in third quarter were essentially flat with the prior-year quarter but down slightly from second-quarter 2016. Other than a small price increase in the Western US earlier in 2016 we have seen no material price changes in EWP this year.

However, the realignment of EWP customers and shipping points will continue to impact reported net pricing over the next few quarters. Those changes may have positive or negative impacts on our reported net sales realizations for EWP given regional differences in pricing, freight cost and sales allowances.

Moving to slide 7, BMD's third-quarter sales were $889 million, up 11% from third-quarter 2015. By product area, BMD's sales of commodity products increased 15%, general line products increased 7% and EWP increased 11%. The gross margin percentage for BMD in third quarter was 12%, flat with third-quarter 2015. Commodity prices were relatively stable during third-quarter 2016.

On slide 8, we set out the key elements of our working capital. Company net working capital excluding tax items, current portion of debt, and accrued interest decreased $32.4 million during the third quarter. Receivables and inventories declined in both businesses during the third quarter and we reported an increase in accrued liabilities.

As a reminder, the statistical information filed as exhibit 99.2 to our 8-K has a receivables inventory and accounts payable detail broken down by segment for those interested.

I'm now on slide 9. We issued $350 million of eight-year notes with a 5.625% interest rate in August and tendered for the $300 million of 6.375% notes we had outstanding. $184.5 million of the old notes were tendered and retired in the third quarter. The remaining $115.5 million of principal of the old notes will be repaid on November 1 together with accrued interest and the early redemption premium.

We reported $122.9 million of restricted cash at quarter end related to the deposit with the trustee for the old notes. Excluding the restricted cash, our cash increased $35.1 million during the third quarter.

We ended the quarter with total available liquidity of $486 million, which reflects the increase in unrestricted cash and availability under our committed bank line. Our long-term debt was $467 million at September 30. We expect to manage our balance sheet toward a gross debt to EBITDA target of 2.5 times during the remainder of 2016 and in 2017.

I would note our effective tax rate in the third quarter was 35.6%. We would expect the full-year tax rate to fall between 35% and 37%.

And Tom, I will turn it back over to you for wrap-up comments.

Thanks, Wayne. The October consensus estimate for 2016 US housing starts has declined modestly to 1.18 million starts. We believe the housing recovery will continue in 2017 but the decline in pace of the recovery is something we are watching closely.

We continue to believe the demographics in the US will support a return to normalized housing starts of 1.4 million to 1.5 million starts. Our third-quarter results in Wood Products were disappointing. While many of the elements impacting profitability in the business were driven by commodity pricing for OSB volume, it was still a weaker result than we would expect to deliver at this point in the housing recovery.

I expect fourth-quarter OSB input costs to again pressure our reported earnings. We are moving into the seasonally weakest time of the year for end-product demand for EWP and plywood, which will make our sales mix for veneer and cost leverage difficult. Additionally, we have planned capital work at our plywood plant in South Carolina and recommissioning work at the Roxboro, North Carolina EWP facility.

BMD continues to execute very well against the pricing environment and the market opportunity. Business activity in October is typically good for distribution and then becomes much more weather-dependent as we get into November and December.

Last year we had favorable weather conditions deep into the fourth quarter and enjoyed an unusually robust year-end. We will see what the last 10 weeks bring this year.

I want to thank our employees for the efforts they have put forth this year. We have successfully worked through a number of key issues related to integrating the acquired EWP facilities and I remain confident that we are on course to realize the benefits we described when we purchased the GP assets.

We continue to grow our distribution business, as well. There is more work to do. However, I remain confident that the actions we are taking in Wood Products and BMD will leave us very well-positioned going into the 2017 building season.

Thank you again for joining us on the call this morning. We will welcome any questions at this time. Nova, would you please open the phone lines.

(Operator Instructions) Mark Wilde, BMO Capital Markets.

Good morning, Tom. Good morning, Wayne.

I wanted to just start out, you talked about mentioned the Chester outage in the fourth quarter. Is there any way to quantify that?

Hey, Mark, this is Wayne. I think on the cost side what we've seen in similar situations is it can cost us a couple million bucks in terms of the operating expense leverage. And then the other thing that typically happens when we go down for that period of time is the maintenance guys will catch up on any deferred maintenance.

Trying to gauge the earnings impact, the offset to that is any impact that has on the pricing environment because, obviously, if we are taking that much production out in the Southeast there will be some impact on pricing. And it may be, frankly, slow the declines that would otherwise occur. But if you look at the earnings impact, if I had to ballpark it right now I'm guessing that it's a couple million bucks.

All right, that's helpful. Then can you just give us some sense of where you are at in terms of the ramp-up from the GP two facilities, what type of accretion we might be looking at for this year and then as we move into next year?

I will start and then I will let Dan chime in. As we said after the second-quarter call it's tough to sort out the results on Thorsby and Roxboro. Roxboro is somewhat easier because it's an island at this point.

We've been hiring employees to restart the press and we've been shipping in veneer. But at this point we haven't had any good quality product come off the line. We've got the APA stamps and we are going to be wrapping and shipping good product hopefully within the next week or two.

So we will start to get some revenue. But Roxboro has basically been in a loss situation because we haven't had good product. And, obviously, we've had all the ramp-up expenses.

On Thorsby we've shifted quite a few customers over from our Alexandria, Louisiana operation into Thorsby to take advantage of the freight. So, for example, a couple of large customers in Atlanta were shipping LVL out of Thorsby as opposed to Alexandria. And I think we are saving about $1 a unit on freight going into Atlanta, for example.

So Thorsby is contributing very positively to the EBITDA at this point. And then the offset to that from an income standpoint in wood is the higher depreciation we picked up.

Okay. Then you mentioned that by the end of the year you won't be doing any more GP branded product. So I'm just curious about how that impacts results when you phase out the GP brand?

Probably the near-term impact, the biggest negative on the GP side is the customer loss because there's a number of customers that have anticipated the brand switch and have moved in a couple of cases to our competitors. So if you look at the volume changes from the second quarter to third quarter we did incrementally lose more customers in the third quarter than we did in the second quarter. Essentially all of the legacy GP customers hung in in the second quarter and the majority of them through the third quarter.

As we go into fourth quarter we are ramping up some new business we won. So, frankly, it's a little tough to tell where the volumes come out right now. I think fourth-quarter volumes will be seasonally potentially a little bit better just because of the new business we are bringing on.

But we east of the Mississippi generally have a dual distribution strategy. And some of the independent wholesalers that we are dealing with GP, rightfully so, figured that going into the 2017 building season we would focus on internal Company distribution and our legacy independent wholesalers that we deal with.

And it's really that transition, Mark, in third quarter of losing some of the independent wholesalers that used to deal with GP and ramping up the business through our existing independents and our Company distribution and our downstream dealers. And I think we will see positive results from that in fourth quarter but more so as we get into the spring building season next year.

Okay. And then just a couple of other questions.

One is I notice that the I-joist pricing was down but I think you mentioned that some of that may be just marketing in the different regions and also incremental freight costs. I wondered if you could just help us with that. It was down about 3% quarter to quarter.

Yes, I would tell you if you are looking at quarterly prices on our EWP a lot of it is going to vary on what region of the country we are selling into and the customer mix. So I would tend to trend a couple of quarters as opposed to just looking at a single quarter.

And, again, if we are heavier to mix in a given quarter to the large dealers or large builders you will see the realizations come down. And then there are certain regional markets where pricing is higher.

You know, Mark, this is Tom. I would just add there that there's a lot of product mix issues that can roll into this customer mix issues, and I think the real key there is that we've seen no material changes in pricing in the marketplace, frankly, in either direction. So I don't see anything other than just typical mix issues going on.

Okay. The last question I had is just maybe if you could discuss current priorities for capital. It looks like CapEx is going to be coming down about $15 million next year, and I'm curious about incremental investment in distribution or manufacturing, either acquisitions or organic.

I would take acquisitions outside. Obviously, that tends to be more opportunistic, although the emphasis right now is probably looking for acquisitions on the distribution side because the wood side has got the transition issues with the GP facilities, etc,. that they are focused on.

In terms of the capital on the wood side the main thing that will keep it elevated in the first half of 2017 is completing a couple of projects at Roxboro as we recommission that mill. Then we've got a press project that we're doing to increase the veneer throughput out of the Florien, Louisiana where we just completed the dryer project.

Once we get through the first half of 2017 I expect that capital in Wood Products to drop back down to a more normalized $50 million to $55 million range per year. In distribution we're probably running at about $18 million a year unless we have something on the real estate side where there's an opportunity to acquire adjacent properties and build out our facilities. And then on corporate maybe one or two.

But the priorities right now are as I say finish up the Roxboro recommissioning, get the new press into Florien and then we will be through, particularly after this boiler project in Chester we'll be through most of the major projects in Wood Products. And it will be more maintenance capital going forward in the back half of 2017 and into 2018. And as I say, acquisitions trying to focus on distribution at the moment.

All right. That's helpful.

I will turn it over, Wayne. Thank you.

Brian Maguire, Goldman Sachs.

Good morning, everyone. I just had a question on the volume.

You pointed out that single-family starts are up pretty nicely this year. I know your own volumes have in Wood Products at least have lagged, particularly plywood and lumber. Just wondering if you could comment on what you are seeing out there?

Is it really all an impact from imports taking market share from you guys? Or is there more to it than that? Thanks.

Well, let's start on the plywood side. There's probably about 20%, maybe 25% of plywood that ends up in new residential construction at this point. And the volumes, if you look at the total consumption data for Wood Products across the industry, plywood demand is actually okay.

But we have been trying to reduce volumes, particularly in light of the imports and where pricing was certainly through the beginning of the third quarter and trying to make sure that we focus our veneer where we've got positive contribution and redirect more of that internally towards EWP production. On the lumber sales volume, the lumber we produce is really used either by the guys that are making wood windows or doors or going into home center board programs. We don't do very much on the dimensional lumber side at all.

We've got a little bit of studs that we produce. But it's mostly focused on downstream remanufacturing and, again, where pricing has been weak we have been taking capacity out to try to balance the market and make sure that we are focusing on only running those assets that are generating positive cash flow.

All right great. Maybe a follow-on to that, can you talk about where the operating rates are on plywood capacity right now?

And you mentioned maybe some downtime in the fourth quarter. Are you guys at the point where you are thinking about mothballing or taking a more serious look at how much capacity you need at this point?

We have been running, I would tell you the industry I think is probably running at about mid-80s in North America, down from the low 90s principally because of imports out of South America. In terms of our capacity utilization we have taken a modest amount of downtime through the system but most of it has been redirecting traffic of the veneer into our engineered wood. So we're still running our facilities fairly full at this point and the Chester outage is really related to maintenance capital more so than market-related downtime, and at this point we don't have any plan to permanently curtail any facilities.

If you think about our assets as opposed to some others in the plywood sector, almost all of them are linked to engineered wood products and so as Wayne says we see that market opportunity to continue to grow and our percentage of it continuing to grow. So we are using those assets and much of the veneer they generate to support our engineered wood products facility. (multiple speakers)

Go ahead, Brian.

Sorry, I was just going to ask one more on the impact of Roxboro in the quarter. I think you mentioned maybe for 4Q that Chester would be a couple million dollar hit for a month outage. Is that about the size of the losses that you are incurring on Roxboro now as you get that plant to the state where it can start generating some revenue?

Roxboro I probably wouldn't quantify the losses because I think a lot of it is going to depend on what we see for volumes in November, December as we get through this start-up. And there's two components. We're going to be moving closer, I think, in the next several months to an EBITDA breakeven at Roxboro.

Obviously, we've got certainly the last couple of months reasonably significant EBITDA losses at Roxboro, less than $1 million a month, but losses as we've hired people and then churning through veneer qualifying production on the LVL. The other thing is we've restarted depreciation on the LVL press assets as we've recommissioned. So Roxboro and Thorsby both carry fairly heavy depreciation following the acquisition.

So a lot of the elevated depreciation just Wood Products business is a result of that acquisition and spending. So if you look at it on an earnings before tax basis in Wood Products, Roxboro will be negative even once we go EBITDA positive.

Yes, this is Dan. We are going to start selling LVL in the fourth quarter out of there and using that LVL also that we are manufacturing on the press we have rebuilt to make I-joist, Boise I-joist. But we will really probably will not start selling the Boise I-joist until the first quarter, and so the combination of those two things will get us to a profitable position.

Okay, thanks very much.

Steve Chercover, D.A. Davidson.

Yes, good morning. How are you guys?

So we've already talked a little bit about the impact of both Thorsby and Roxboro, so I guess I will keep moving along. How do you expect your inventories will be given the downtime at the end of year? Should you be exiting 2016 pretty tight?

Our inventories of engineered wood products we always have a tendency to work those down in the fourth quarter, but making sure we have enough to take care of the first and second quarter of the new year, which always starts off fairly strong. We will take some volume out of inventories.

Good, thanks. And then (multiple speakers) sorry, go ahead.

I would just say on plywood we tend not to run from an inventory position.

Okay. Then I wanted to get a sense of a proper run rate for depreciation once everything's up and running. So would $16 million per quarter be about right?

I think they're going to be above that. Are you talking total Company or just wood?

Just wood.

Yes, $16 million is probably good for wood and then I'd say on a quarterly basis we are about $3.5 million on BMD.

Got it. And then, finally, can you remind us where the repo authorization is? As I recall, I think the last report said you had about $1.1 million left on the repo?

Yes, we've got $1.1 million remaining on the authorization at this point.

And do you think between the projects that you are undertaking and the recent refi you've got plenty of dry powder?

Yes, I think we are going to have a Board meeting in the next couple of days. I think if you were looking at capital allocation priorities, obviously getting through the spending on Roxboro and Florien is high on the list.

Looking at opportunities in distribution is part of the reason we extended the maturity on the notes is to give us the flexibility in terms of the maturity schedule. We do want to work the debt level down towards 2.5 on a ratio to EBITDA.

We'd much rather do that by growing the EBITDA than bringing the debt out. But, again, we have flexibility given our cash position and liquidity position to bring the debt down. But we will no doubt have a conversation with the Board again about remaining open on opportunistically repurchasing shares and working down the 1.1 million, because I think we've got the flexibility on the balance sheet and certainly on the maturity schedule to do that profitably if the opportunities are there.

Yes, I don't want to put words in your mouth but I believe the repo thus far is at around $29 million. And with that flexibility in your statement that you are feeling cautiously optimistic about 2017 I'm sure it will be nice to see a statement on that front.

Okay. Thank you both.

Chip Dillon, Vertical Research Partners.

Yes, Tom and Wayne, how are you guys doing? First question is, and I probably just missed this, on the Thorsby plant you mentioned that Roxboro you'd start I think you said selling LVL out of there and under the Boise brand next year.

What is the similar situation or status of Thorsby? Are you actually selling out of there now or when will you?

Chip, this is Dan. We have been selling LVL out of Thorsby for some time now. At first, obviously, it was a mix of the GP legacy with customers with that brand and the Boise brand, but today it's almost exclusively Boise brand as we continue to phase out that legacy brand.

From Roxboro we will start to sell a small amount of LVL in the fourth quarter of this year from that facility as we've been, as Wayne said, we have been manufacturing the product for a month or so. We just haven't got it up to the quality specs yet.

Got you. And I noticed in the statement you all, it seems to imply that as we get into the second and certainly third quarter next year, that you expect to have if not running on all cylinders, all of the whether it's the new dryers at the existing plants or these two you acquired, you should be running fully or mostly fully and these things should be contributing by certainly the third quarter if not the second. Is that fair?

Our current plan is to have, obviously, the new dryer at Florien up and running well before then, to have Thorsby running, obviously, depending on market conditions full, and to have the assets at Roxboro capable of running, and again it depends on market conditions.

The only asset at Roxboro that we do not have plans to run right now is the green end. We will ship veneer into Roxboro from our other facilities.

Chip, one of the issues and one of the reasons we ended up buying the GP facilities is we wanted to have excess capacity in the Eastern two-thirds of the country. So if you looked at our operating rates across our Alexandria, Louisiana, Thorsby, and Roxboro facilities we will not be running them full by any means in 2017.

What we're trying to do is make sure that we can support our customers as we get back to 1.5 million housing starts. So we are rebalancing really between Alabama, North Carolina and Louisiana based on customer location and freight and operating efficiency.

So we will take the operating rate up in Alabama. And certainly the first press will run full at Roxboro, we will have the second press that we will recommission at Roxboro. but I wouldn't expect Roxboro to run full until we get into 2018.

Of course, and, of course, a lot of that will depend on the housings level, I understand that.

Chip at the highest level, though, I would say your core statement is correct which is that we expect that come the building season next year that these assets will be contributing significantly and positively to our performance.

Okay, that's just good to know. And then if you could talk a little bit about the building products distribution business.

You know, your sales are growing nicely and I guess if you could just differentiate between mix in price and volumes and do you think you are taking share because of your balance sheet and maybe some struggles some others are having? And then as you talk about it, the margins are up nicely, although the third-quarter improvement was less than what we saw in the first part of the year and I didn't know if we had -- I mean, you certainly deserve kudos for how you brought those up but is there more to come?

I would tell you on the distribution business we do think we are gaining ground from a marketshare standpoint. That business is probably today 70% driven by new construction and 30% driven by what goes on in repair and remodel and a piece of that comes through the home center channel.

And feel very good about the trajectory going into next year. We've got one of our southeastern locations, for example the EWP volume compared to a year ago has doubled, and principally because of some customer shifts that occurred after we purchased the two EWP mills from GP.

So if you think about the downstream impact for distribution and its ability to grow in the Midwest and in the Northeast and, frankly, in the South and Southeast, we've got a lot more latitude in growing distribution now that we've got the GP EWP assets. And we are seeing pretty good customer receptivity which is having a positive impact on distribution.

But so far we haven't seen any huge shift in the overall business mix. So to the extent we are getting incremental EWP volumes, we are also pulling commodity business with that and other general line business, which was part of the synergies we thought we would get out of the GP transaction. There was about $6 million positive benefit to the distribution business.

As far as the gross margin, I think we flagged on the last call that the 12.5% we had in Q2 was the benefit of some commodity price tailwind. So we are 12% year to date. If you go back and look prior years we were in 2014 full-year gross margins in that business were 11.4%, 2015 we were at 11.6% and as you noted the 12% we had third quarter this year was dead on the 12% last year.

So I think if you are looking at the business we still think somewhere in the mid-11% range is the right way to think about gross margins in that business. And as we get revenue gains we think we are going to drop about 4% to 4.5% down to the EBITDA line on the incremental revenues.

Okay. And you mentioned 70% and 30% of the mix was repair and remodeling, 70%, 30% home center. Did I hear that right?

70% I would attribute to new construction --

New construction.

Whether that's single-family or multifamily. And we are pushing, obviously, to get a bigger presence in multifamily.

And I think about 30% of the business is repair and remodel and industrial and other things. So if you were trying to weight the sales growth, as I say I'd use 70%-ish against whatever your assumption is on housing starts and the 30% I'd probably weight based R&R and maybe look at same-store sales through the big box as a proxy.

Okay, and this may be obvious, but would you, you mentioned the $5 million impact of the higher OSB cost in your EWP business without essentially any pricing offset. I guess it's fair to say that a lot of your competition that makes their own OSB is, I guess, not choosing to pass on that in their transfer pricing. Or would you ascribe that to other issues?

Well, EWP as you know trades more like a lot of other building products where it's a list price and the pricing doesn't move very often. It is not traded historically like the commodity Wood Products where you see daily or weekly price fluctuations.

And if I think about 2016 our competitors had the benefit of lower veneer input cost to the extent they are not vertically integrated on veneer and as you said they manufacture OSB internally. In our case we manufacture of a lot of veneer internally and are basically vertically integrated on veneer and exposed to OSB and to a lesser extent strength-rated lumber for our New Brunswick operation and the legacy GP operation at Roxboro.

So, again, we are looking at pricing in EWP being driven by what we're seeing on supply and demand factors. And that will change independent of the input cost.

Got you. And last, quickly, I'm not asking you to predict earnings or anything, but would it surprise you if you did better than breakeven on an EPS basis from operations in the fourth quarter? Or is that something that you would think is not a given but something that you feel pretty comfortable with?

Well, if you listen to the tone of the script and if you read our earnings release I would describe it this way. BMD had a very good fourth quarter last year and this year I would say look at the weather in November and December, and I realize you are going to put estimates out in the next couple of days, put some Kentucky windage on the 18 million that we had a year ago and don't get too far ahead of yourself because last year we had the benefit of very good weather and that got us to some higher rebate tiers.

So I'm not necessarily looking to repeat the 12.2% that we had for gross margins last year. I'd be surprised if we had that this year.

In Wood Products if you look at the lower volumes in plywood, what we're expecting in LVL and the cost input pressures on OSB, I'm not looking for a fourth quarter that's going to be dramatically better than the fourth quarter reported a year ago. And, again, if we get good weather and the building season just holds in there and we get some higher volumes than we expect, that would be a positive.

But there's a lot of positives and negatives that could come through in the fourth quarter for wood. But I'm not expecting to be meaningfully better than we were in the fourth quarter a year ago just given the transition costs we've got going at Roxboro and what we've got with the Chester downtime and the OSB input cost.

I would note, as well, Chip, that if you, if you look at Random Lengths where pricing last week is basically about the same on plywood as it was in the fourth quarter of 2016.

Yes, yes. Very helpful. Thank you.

(Operator Instructions) George Staphos, BofA Merrill Lynch.

Thanks. Hi guys, good morning, thanks for all the details as always.

I want to come back first to Roxboro. So how important is getting the veneer end up and running in Roxboro to your overall profit projections, internally obviously, for 2017? And can you remind us as you add more production in Alexandria, you get the dryers up and running, you ultimately get green end up at Roxboro and in total the benefit, the EBITDA you targeted for the business that you acquired is something in the 40 range.

What kind of housing start environment do you need to get to that? Clearly, it's not, at least in your expectation it would not sound like, in 2017.

George, this is Wayne. Let me start with your last comment first.

The $40 million is assuming we are at 1.5 million housing starts and to break it down we assumed that we would get about $28 million inside the two facilities. We'd see about $6 million to $7 million in freight and logistics savings by being able to ship out of Alabama and North Carolina and redirect shipments in Louisiana and then there's about $6 million of benefit to distribution.

On the green end at Roxboro I would be surprised if we restart that in 2017 given the current conditions in the plywood market and given our approach to trying to start that mill back up machine center by machine center and being able to hire at a logical pace and, frankly, work through capital at a logical pace. We're not pushing hard to restart the green end.

And one of the reasons is we have the adjacent plywood mill in Moncure, North Carolina and Chester, South Carolina. So what we will be doing certainly through 2017 is internalizing more of the veneer out of Chester and Moncure into Roxboro.

So it allows us to hold off on the capital spending with recommissioning the green end. It allows us to be more thoughtful in terms of the pace of hiring people. And, frankly, given the contribution on veneer going into EWP versus plywood we think economically that's a better decision for 2017 and as we get into late 2017 into where we are on housing starts and demand and see where we are on plywood pricing we can revisit it.

Then in the near term we have ramped down LVL production modestly at Alexandria and and pushed more EWP into Thorsby. And the consequence of that is potentially more plywood production at the neighboring plywood plants at Florien, Louisiana and Oakdale. But, again, we are going to be looking at market conditions and making decisions around operating rights as we go through 2017.

You said Oakdale, and what was the other mill you were going to do potentially more plywood then?

Oakdale, Louisiana and Florien, Louisiana are the two that are adjacent to Alexandria and provide veneer into Alex. So to the extent Alexandria runs at a slower rate we would end up making more plywood at Florien and Oakdale.

That makes sense. On the green end, not to belabor it, I kind of remember that you at one point in time had expected to restart in 2017. Is that incorrect or is that dialing it back a little bit just based on what you are seeing on housing?

And, Tom, not that you changed much in terms of your script on housing but are you -- you said watch closely what you are seeing, what we are seeing in terms of single-family starts. Has anything gotten you a little bit more disconcerted in terms of the pace there?

I think, George, probably the biggest issue is if you just look at the rate of change in 2015 versus the rate of change in 2016, while we had single-family move reasonably well we certainly thought we'd have a stronger 2016 than we actually had. And the question is does it continue to next year be 60,000 starts versus 80,000.

And so I think that's still really what we need to watch is it plateauing. And it's still as we talk to people in the field it still feels very good. The conversation is very positive but, obviously, the growth has been a little bit slower than we had hoped and expected.

And on veneer in Roxboro is that dialed back because of that or it was always an 2018 phenomenon?

Well, I think partially as we looked at our alternatives as we bought the mills, certainly part of it was where would Moncure's be at making profitability be at making plywood. And given where hardwood and plywood prices have gone for us at that mill it makes a lot more sense to run that mill to EWP veneer which then in turn reduces the need for it out of Roxboro and I think allowed us pretty logically to delay that and, frankly, improve overall earnings as a result.

Okay, that makes perfect sense. I appreciate that.

Periodically the question comes up on the benefits of having an integrated model between Wood Products and distribution. And so I guess the flipside of the coin could be you know what would be the advantages if you see any over time from splitting those businesses?

The last time you looked at it and to the extent that you can comment how would you answer that question? Then I had a couple of follow-ons, as well.

I think our view right now on the integration is that's a pretty key element in terms of the earnings power of the Company. If you look at our growth rates on market share and wholesale distribution and on engineered wood having those two joined at the hip has really been driving the growth for both businesses and being able to present one face and do joint meetings on a customer level and feedback, if you looked at our EWP sales 65% to 70% of the domestic sales go through our internal distribution. And where we have independent wholesalers there are people that have been hanging around since, in most cases, 1999.

We really haven't added any new independent wholesalers. So we feel really good about our access to market. And if you look at what the two businesses have been able to accomplish this year on plywood and moving incremental plywood through the distribution business, having the two joined at the hip we think adds significant value.

I think part of your question is around separating the two businesses. I think the only thing that would, in our minds, drive a separation of the two businesses is if you had strategic acquirers for essentially both halves of the Company and there were significant synergies that would overcome the synergies we see between the two businesses composed as we are.

And, again, we continue to evaluate that. But splitting the Company in half purely from an operating standpoint we would lose significant operating synergies if they ran as two separate legal entities.

You know, George, to add to Wayne's answer, a couple of things. First off, if you look at Wood Products, two primary product lines there, EWP and plywood, both are products that need to go through distribution.

They are in general not going to ship direct to dealers, the need for wholesale distribution support. And if you look at the companies that have over time deemphasized their internal wholesale distribution system you've seen some pretty dramatic declines in market share and EWP, simultaneously with that a reduction in focus and distribution. So we see some very substantial operating synergies for both our plywood business and our EWP business by having the two businesses connected.

No clearly, and if anything some of the peers that you mentioned seem to be going the other way. So that would support your point but periodically, again, the question comes up from the buy side. So I think it was good to talk about it here.

Two last questions that I've got and I will turn it over. Clearly the ramp in growth in the Brazilian imports has slowed, but I think there was a little bit of a tick up in August. Is that noise at this juncture?

It sounds like it based on your comments that you are a bit more worried about the domestic increase in capacity. And then back to cash flow, when we're in a ramp up period as we have been hopefully in terms of the housing complex, your business doesn't really generate a heck of a lot of cash flow because of the need to feed distribution. When do you see the business getting to a point where you will have excess cash flow beyond what you need to recapitalize facilities, take down debt, etc., to be able to buy back stock at a more aggressive pace assuming valuation was appropriate?

Is that a 2017 phenomenon? Or do you really have to get to 2018 and hopefully 1.4 million, 1.5 million starts versus see materially the free cash flow levels go up? Thank you, guys.

Yes George, let me take a shot at this. On the first one on Brazil, the data I have, and these are in million cubic meters, for May it was into the US or targeted out of exports out of Brazil towards the US it was 60 million cubic meters in May, 54 million in June, dropped to 51 million in July, dropped further to 47 million in August --

Okay, we will check our August numbers because we had a little bit of a tick-up after the peak in May.

And fell to 26 million in September. And this is measuring as exports out of Brazil targeted to the US.

Okay, thank you for that.

As far as free cash, as I said when we look forward at our EBITDA we are not that concerned about our debt levels but, again, we want to make sure we get back towards the 2.5 times. BMD is throwing off even today significant free cash flow given their EBITDA and given how well they have managed the working capital and where their capital is.

And, again, I think as we look at EBITDA for Wood Products next year if we continue to have high OSB and low plywood prices that's going to be a challenge where we will likely see benefits as higher EWP volumes and if market conditions remain as they are likely higher EWP prices. And to the extent we can reduce capital spending to more normalized levels in Wood Products we will start generating significant free cash flow out of that business, as well.

And as long as we get our debt levels down towards that 2.5 times I think you will see, absent acquisitions, the pace of the share repurchases pick up. But, again, it will be dependent on share price and what we see as opportunities in the acquisition arena.

But in terms of the free cash flow that we have available to deploy I would expect that to be meaningfully better in 2017 than it was this year.

That's great. Wayne, I appreciate it. Go ahead, Tom.

I would add there, George, that we are ramping back down to what I consider base capital spending. And until we see a really substantial increase in our free cash flow I see us being pretty disciplined about how we manage CapEx other than potential acquisitions. So we are focused on that issue pretty intensely.

Thank you very much.

Mark Wilde, BMO Capital Markets.

Thanks. Just one follow-on.

I noticed in the release that you had an increase that you called out in incentive comp and professional fees and I wondered if you could put a little color around that? I mean, earnings were down year over year, so I was a little surprised that incentive comp was up. And then maybe a little color on the professional fees, as well.

Yes, on incentive comp what we typically do, Mark, is set a target with the Board on return on capital and on EBITDA at the beginning of each year. And, obviously, 2015 was quite disappointing relative to expectations earlier in the year with plywood pricing continuing to decline. So we had very little incentive comp in Wood Products a year ago and lower compensation, frankly, for the corporate officers that straddled the two businesses.

We're closer to target this year on both businesses. And then the other thing is we put in on our long-term incentives we put in three-year cliff vesting on our LTI on the grants that were done this year and the Board put in LTI grants that vest in 2017 and 2018 in essence to fill part of that gap.

So if you look at the actual economics to the officer group, they remain the same in total. But the accounting treatment is take a third of the three-year vest, take half of the two-year vest and take the full shot on the one-year vest. So we've got it on a book basis higher reported incentive comp as we work through the transition to three-year cliff vesting on the LTI.

Okay. And then professional fees?

Mostly lawyers around acquisitions and due diligence.

Okay, very good. Good luck in the fourth quarter and into next year.

Okay, thanks Mark.

I am showing no further questions in the queue at this time. So I'd like to turn the call back to Mr. Rancourt for closing remarks.

Okay, thanks Nova for your help today. I appreciate everyone joining us on the call.

Email or phone if you have any follow-up questions and otherwise we look forward to talk to you after we release year-end earnings. Have a great week.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.

You may all disconnect. Everyone have a good day.