Boise Cascade Co (BCC) 2017 Q1 法說會逐字稿

Good morning. My name is Chanel, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Cascade's First Quarter 2017 Conference Call. (Operator Instructions)

Before we begin, I'll 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 -- in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC.

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

Thank you, Chanel. Good morning, everyone. I'd like to welcome you to our 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 to this webcast presentation includes reconciliations from our GAAP net income to EBITDA and to adjusted EBITDA.

Now I will turn the call over to Tom Corrick.

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

I'm on Slide 3 right now. Our first quarter sales of $974 million were up 11% from first quarter 2016 as a result of growth in engineered wood products in our distribution business. Our net income was $10 million, double the amount reported in the year- ago quarter. Net income in the first quarter 2016 included $3.5 million of acquisition-related expenses on a pretax basis.

Our Wood Products manufacturing business reported segment income of $7.4 million in the first quarter. The business experienced strong growth in EWP sales volume as well as improved sales realizations for plywood and lumber. For the first time, over 50% of Wood Products quarterly sales -- sorry about that, page problem -- were to our distribution business.

I want to thank both businesses for continuing to work together closely and drive value for our customers. Our Building Materials Distribution business reported segment income of $20 million. BMD posted strong financial performance executing very well with solid demand and favorable commodity pricing trends in the quarter.

Wayne will walk you 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 first quarter, including sales to our distribution segment, were $326 million, up 7% from first quarter 2016. The increase in sales was driven primarily by engineered wood products with LVL and I-joist sales volumes up 27% and 22%, respectively.

Pricing improved 8% for plywood and 12% for lumber compared to the year ago quarter, but our sales volume in those 2 product categories declined falling 11% and 12%, respectively.

As Tom mentioned, Wood Products reported segment income of $7.4 million the first quarter. Reported EBITDA for the business was $22.5 million, up from the $17.5 million of EBITDA reported in the year ago quarter. The increase in EBITDA was due primarily to a higher plywood and lumber sales prices as well as improved sales volumes of EWP. Also, first quarter 2016 results included the $3.5 million of acquisition-related costs that Tom mentioned earlier.

BMD sales in the quarter were $816 million, up 14% from first quarter 2016. Sales volumes and sales prices increased 9% and 5%, respectively. BMD reported segment income of $20 million or EBITDA of $23.7 million. This compares to segment income of $13.4 million and EBITDA of $16.6 million in the prior year quarter. The improvement in income was driven by higher gross profit dollars resulting from both higher sales and a 20-basis point improvement in gross margin percentage.

Beginning in first quarter 2017, we are no longer reporting our unallocated corporate costs as a business segment. The amounts for unallocated corporate costs, the change in the fair value of our interest rate swaps and other items impacting our reported adjusted EBITDA can be found in the tables of our earnings release. The net of those items was negative $5.8 million in first quarter of 2017 compared with negative $5.3 million in the first quarter of 2016.

Turning to Slide 5. Our first quarter sales volumes for LVL and I-joist were up 27% and 22%, respectively, compared with first quarter 2016. Increased EWP volumes were due primarily to increased penetration with our existing customers as well as improved single-family housing starts.

Our EWP mills ran well during the first quarter in response to stronger-than-expected demand. We believe there was a modest amount of demand pulled forward into the first quarter as a result of our announced price increases. However, we are seeing continued good demand this quarter, and we don't believe there are significant excess inventories in the channel.

The team at our Roxboro, North Carolina EWP facility continued to make slow but steady progress recommissioning the first LVL press during the quarter. Roxboro has started making shipments of LVL to customers. Mill is also adding more LVL production shifts this quarter, and we currently expect limited I-joist production and shipments from Roxboro to begin in the third quarter.

LVL net sales realizations in the first quarter were down 1% from the same quarter last year. I-joist sales realizations were off 2% from the year ago quarter.

We did announce 7% to 10% EWP price increases in the first quarter, so we would expect our net sales realizations in the second quarter to improve sequentially. It typically takes several quarters for the full effect of our announced price increases to be reflected in our operating results, given our sales arrangements with our downstream channel partners.

Turning to Slide 6. Our first quarter plywood volumes in Wood Products was 336 million feet, which was down 43 million feet or 11% from the first quarter of 2016. We have largely eliminated our third-party veneer purchases, which has allowed us to shift more of our internal veneer production into our EWP products and reduce plywood production in response to market conditions. We will continue to adjust our plywood production levels based upon where we see demand levels and pricing for the product.

The $282 average net sales price for plywood in the first quarter was up 8% from first quarter 2016. And the tone of the plywood market feels good at the moment with stronger OSB pricing providing a measure of support for plywood sheathing products. We continue to watch imports, domestic operating rates for plywood mills and lead times as we plan our production.

Moving to Slide 7. BMD's first quarter sales were $816 million, up 14% from first quarter 2016. By product area, BMD's sales of commodity products increased 12%; general line products increased 12% as well; and EWP sales increased 22%. The gross margin percentage for BMD in the first quarter was 11.6%, up 20 basis points from the 11.4% reported in the first quarter of 2016. BMD's EBITDA margin at 2.9% in the quarter compared favorably to the first quarter of 2016's 2.3% EBITDA margin. Expense leverage was also a meaningful part of BMD's earnings improvement in the quarter.

On Slide 8, we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items and accrued interest, increased $79.7 million during the first quarter. BMD's receivables and inventories grew considerably in the first quarter, which is typical as the business ramps up seasonally. The seasonal working capital build is usually behind us, as we move into May of each year.

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

I'm now on Slide 9. We used just over $60 million of the cash we had on hand at year end to support the working capital build in the first quarter. We ended the quarter with total available liquidity of approximately $438 million, which reflects our cash and our availability under our committed bank lines. We expect to manage our balance sheet towards our gross debt-to-EBITDA target of 2.5x as we move through the remainder of 2017.

We did not repurchase any shares in the first quarter. We have approximately 697,000 shares left on our original 2 million share repurchase authorization. We will continue to vary the pace of our share repurchases based upon our assessment of acquisition opportunities, our current balance sheet leverage and our prospects for free cash flow generation.

Our capital spending this year is expected to be between $75 million and $85 million.

Tom, I will turn it back over to you for closing comments.

Thank you, Wayne. The April consensus estimate for 2017 U.S. housing starts is 1.28 million, up from 1.17 million in 2016. Much of the growth is expected to come in single-family construction, which is more favorable for the demand for our products. We continue to believe the demographics in the U.S. will support a return to normalized housing starts of 1.4 million to 1.5 million.

We have a number of areas within our control in Wood Products to continue to drive better earnings as we move through the year. We have continued to grow our market position in EWP, following our acquisition last year. And we are seeing traction on pricing. We have increased our high-strength veneer self-sufficiency with our completed capital projects, and we are able to move a higher proportion of that veneer into engineered wood products as demand improves.

We have additional recommissioning work to do at our Roxboro facility. I am encouraged by the progress that has occurred over the last few months. The BMD team has done a terrific job of executing and responding to market opportunities at both the local and national level. We continue to see considerable upside for the company in the distribution area.

I would like to thank our employees, customers and suppliers for a strong start to 2017. I appreciate each of you 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) And our first question comes from the line of George Staphos of Bank of America Merrill Lynch.

This is actually John Babcock, on the line for George. Just want to start out on the plywood front. I was wondering if you could talk about how imports trended during the quarter, and ultimately, what you expect going forward.

Hey, John, this is Wayne. The most recent data I have on exports from Brazil, so not necessarily arrivals into the U.S. yet, for January, it was 34.7 million cubic meters, stepped up and...

Cubic [meters not feet].

I'm sorry, cubic meters, yes. In February, 47.6. And then in March, it jumped to 64.3, which is higher than what we saw in the highest month in '16. So they're continuing to target. And if you look at where they are on total exports out of the country, it looks like it's up about 15% over what they did in '16. So it looks like we're getting an increasing portion of an increasing pot.

Okay. And then if you could talk about -- obviously, there was the recent announcement by the Department of Commerce that they're going to apply countervailing duties on lumber imports from Canada. If you could talk about the impact of that on your business, realizing it's obviously not as significant for you as it is for others. But just generally, how we should think about that?

John, this is Nick Stokes. On the distribution side, as everyone knows, we are a buyer and a seller of both Canadian softwood and domestically produced softwood. We'll leave it to others to figure out where that negotiation is going to go relative to another agreement or not. What we'll continue to do is just run our business. As you know, the commodity wood products is a significant portion of our business. And we'll continue to run that business, react to the volatility, with the commitment of making sure we have product for our customers to take.

Okay. And how should we think about that from a cost point of view on Boise Cascade? And also, is the bigger threat the availability or is it really the cost of lumber as you think about it?

Yes. It's a very minor input cost for our Wood Products business on flange material for I-joist. So it really doesn't move our input costs. And to Nick's point, this business is largely a trading phenomenon. So in the first quarter, for example, you saw a run in prices in February and into early March. And anytime we have an upward price progression in commodities, that 50% of sales in BMD, we tend to get a tailwind on gross margins. And the flip side is, if we were to see a sell-off as a result of a new Softwood Lumber Agreement going into place that had quotas versus tariffs, if that caused domestic lumber prices to fall, we would typically see gross margin compression if we had falling commodity markets. And that would be true for dimension lumber and OSB would be the two most meaningful for BMD. And that provided a tailwind in first quarter this year, pretty strong tailwinds in second quarter of 2016. And as Nick said, we're really focused on being in-stock and serving our customers. And really, we'll be watching what the price direction is in the second and third quarter. But I would tell you, watch Random Lengths. And if you get strong trends in either direction, that's likely to be favorable or negative for our gross margins in BMD.

And I think there -- it's fair to say -- this is Tom Corrick, that there's more news to come both in terms of trade action by the U.S. government as well as potentially an agreement. From our perspective, I think we believe it's going to remain volatile but exactly how that trends going forward, I think is to be seen.

Okay. Appreciate it. And then last question, just on EWP. I was wondering if you could remind us on essentially like how much LVL and I-joist capacity you have with the Georgia-Pacific assets that you acquired. And then also, if you could talk about how the implementation is progressing relative to plan and -- otherwise, that's pretty much all I have for you.

Okay. Thanks, John. On EWP capacity, the most significant capacity we have is the mill at Alexandria, Louisiana that produces the vast majority of the LVL and I-joist that we sell East of the Mississippi. When we bought the Thorsby mill in Alabama, it was up and running at about a 50% throughput. We have since ramped up the production since it's closer to the markets that we serve in the East like Atlanta. And it's running full today. The Roxboro mill that we acquired, we are restarting -- we plan to restart 2 of the LVL presses as well as the I-joist capacity. The first LVL press is up and running around 75% of what we expect for the output. The quality is today around 80%. We do some resell, so obviously, everything that's going out the door is going out first quality. But we've got continued work to do there on the first press. We'll have I-joist early in third quarter and probably do limited shipments of I-joist. And then in the second half of this year, we'll start ramping up the second LVL press with the view towards having it ready in 2018. And total capacity at Roxboro is likely to be around 4 million cubic feet of LVL, and roughly 1/3 of that will get used for that flange for I-joist.

I would note that on Wayne's numbers, we're also ramping up shifts. We've been operating 2 shifts. And over the course of the second quarter, we're going to get up to 4 full shifts, so -- on that first press.

So we're probably -- on the EWP assets, I would say through our system, we're probably today operating somewhere around 80% and on an annualized basis. And I would expect the additional volume that we'll produce at Roxboro to deal with this housing start increase that we'll see between '17 and '18.

And our next question comes from the line of Brian Maguire of Goldman Sachs.

Wayne, I was hoping you could help us maybe quantify the benefit in the distribution business that you had from all the inflation in the quarter. I think you described a pretty high inflationary environment we had in pretty much all Wood Products that gave you a nice tailwind there. Just as you're thinking about the right base to be using on a kind of a price neutral basis, what do you think like the right kind of gross margin or EBITDA number would have been in the first quarter?

Yes. Probably, the thing I would point to is if you look at our full year '15 gross margin, it was 11.6%. If you look at full year '16, it was 11.9%. And I think we noted a couple of times that the exceptionally good gross margin we had in second quarter last year was 12.5%. So I tend to think of our gross margin on an annualized basis somewhere in the 11.5% range. And first quarter and fourth quarter are typically weaker. Second and third quarters are typically stronger because of some of the seasonal products, like composite decking. So if you asked me to put a number on it, I would say there's -- Nick and I -- maybe it's going to vary a little bit. I think there's probably 3 million to 4 million of goodness in the first quarter because of the tailwinds on commodities, and not just the wood based up, but we had some movements on steel and a couple of other things. So compared to a year ago, we're up 20 basis points on gross margins. And I think, again, there is some goodness in that. And I think we're going to have a real challenge on the comp in the second quarter against last year's 12.5%.

Yes. Understood. That helps. And just on the impact of OSB costs, I know you kind of have like 1 quarter lag there, and they were up 20% in the first quarter. So is it right to think about that as being a bit of a headwind to the second quarter Wood Products margins and EWP, and any way to kind of quantify that too?

Yes. What we've generally guided to is about 1 square foot of OSB for every lineal foot of I's. So we did roughly $61 million in Q1 of '17. And there was, on our input costs, about a $57 million spread (on costs per unit) between where we were Q1 of '16 to where we were Q1 of '17. So if you did the math on the I's we produced, it ended up being a drag on the first quarter earnings of about $3.2 million. And going into second quarter, I suspect we'll have a similar gap. And as we did in the third quarter of '17, we should start to lag some of the pricing because we have pretty good pricing from an OSB perspective in Q3 of '16. So we should start to see the drag on earnings subside as we get into the second half of the year, unless we get a sustained run in OSB this summer.

Okay. Just one last one for me. The working capital was a pretty big use of cash in the quarter. I'm sure all that inflation and product prices had something to do with that. But just thinking, what's your expectation for the full year on working capital?

Well, what we've guided to in Nick's business, which is the main place where we see increases in working capital is 10% of the sales growth. The last couple of years, Nick and his guys have done a really good job and had been below that. But if you were planning on a $300 million to $400 million ramp up in BMD sales, I'd tell you to plan on $30 million to $40 million increase in working capital over the course of the year. December is typically a low point on receivables and inventory. But as we ramp up in the spring, we go through a considerable build from late February, typically through the latter part of April. And then we're pretty flat on working capital usage in May, June, July, August. And we start to have a little bit of a giveback on working capital out of the distribution business as we get into the latter part of the third quarter and into fourth quarter, and we release considerable amounts of cash from the working capital side in the fourth quarter.

And our next question comes from the line of Chip Dillon of Vertical.

First question, just a housekeeping thing, did you mention, Wayne, that the second press is second quarter or a second half start-up at Roxboro for LVL?

It will be second half. And our real target is to have it available in the February-March time frame of the first part of '18. So we will do a lot of the recommissioning work at the tail end of this year. Our plan right now is to produce -- our press uses 6-foot veneer. We're going to plan to produce that 6 foot veneer beginning late third quarter at our neighboring Moncure Plywood operation. And we'll use that, in essence, in the recommissioning process in the fourth quarter of Roxboro's operations. And then the plan would be to have it available for this [year] and '18, qualified and grade-stamps, and all the other stuff.

In '18, got you. As we think about the -- one other, the I-joist production there. You mentioned 1 line starting up in the third quarter. That's only 1 line of I-joist at Roxboro, right, that you'll have, ultimately?

Correct. And when we look at the trade-off on Roxboro versus Alexandria, Alexandria, we think, is probably the most efficient I-joist production anywhere in the world. And the advantage to Roxboro is it's close to market. But today, looking at it, we don't think the operating costs will be as low as Alexandria's. So we will probably put a limited number of shifts on at Roxboro until we have sufficient market demand that causes us to add shifts and run it full. But we definitely wanted it as a second source of I-joist in the East. So we'll get at least a couple of shifts up. But the plan will be to continue to run I's as much as possible at Alexandria, just given the cost of production at that facility.

Yes. And I would add, Chip, this is Tom. I would add that Roxboro is limited on total volume, certainly compared to Alexandria to roughly 4 million cubes. So that simultaneously kind of determines how you're going to run the I-line, in terms of available raw material for it.

And let's say, you ultimately get to 4 million units of LVL, and I know 1/3 of those would go to support I-joist. How much would you -- as you measure the units in I-joist, how -- what sort of could the production get to there?

I think if we needed it, ultimately, it will have capacity of somewhere around 80 million lineal feet. But as I say, I would think that we will only hit that if we start running into production limitations in Alexandria or if we see demand growth in excess of what we're expecting for '17 and '18. Once we get back to the 1.4, 1.5 million housing starts, if we continue to see the market share gains, we will end up running Alexandria hard and we'll end up running Roxboro as full as we can. As Tom Corrick mentioned, it's a little bit of where do you want the product? Because to the extent, we want LVL out of Roxboro, we would have to cut back on LVL sales to support the I-joist production. So at this point, having 4 million cubes of LVL in the East is more advantageous than taking 1/3 of that LVL volume and using it for I's, given the production cost at Alexandria. But if the mix changes, we can always make that shift as appropriate.

Got you. And it looks like, at least versus our model, your interest expense is probably trending a little lower than what we have. We have like $31 million. It's not -- it looks like you might be able to come in between, what, $26 million, $27 million for the year. And maybe we're right because, obviously, the working capital needs will be higher. But what are you -- what should we use for interest expense?

Well, the main thing for us on interest expense is going to be the cash interest on the notes we issued in August. And it runs $10 million in March and $10 million in September. And then we've got the amortization of the deferred financing costs. And we've got the term loans we have out from the Farm Credit guys, which, at current point, is $95 million. So if you put 2.5% on $95 million and add that to the $20 million. And then, as I say, we've got the amortization of the deferred financing costs. But we should be somewhere around the reported interest expense, somewhere in the $25 million to $26 million range.

Got you. Okay. And then I know last year in the first quarter -- I'm sorry, second quarter, and this was the first quarter I think you had the 2 assets that weren't running for the most part, maybe Alexandria was, but the GP assets, that's -- you get about $31 million of EBITDA in Wood Products. Even with this drag in OSB, and I know you have some ramping activity going on in -- continuing in Roxboro, do you think you can, with the pricing we've seen, get to that level this year in the second quarter or possibly exceed it?

Well, without giving forward guidance, which we try very hard to do, I will list the pluses and minuses. And I think you hit on the big ones. I think we are going to see increased engineered wood volume. We feel very good about the customer wins we had last year and how those are ramping up in Q1. And we think there was a little bit of volume pull forward. But we think volumes should be strong again in 2Q, and we should see traction on the price increases that went into effect in late March. On the plywood side, anybody's guess on price, but it feels pretty good right now. And I would tell you that based on the way we're operating and with the weather improving, I would expect our plywood sales volumes to improve sequentially from first quarter to second quarter. And those will all be positives. On the negative side, as you pointed out, will be the drag from the OSB on a comparative basis. And we're seeing a little bit lower prices on residuals into the pulp and paper industry. And we're seeing slightly higher log costs in the Pacific Northwest. So far, the South has been pretty moderate. So in terms of range of expectations, I would phrase it as I think the things we can control and the things we're doing well will hopefully overcome the drag from the OSB price differential.

Got you. Okay. Okay, that's very helpful. And then just lastly, when you look at the -- I guess, next year, when you think about the production you could have next year -- I'm sorry, let me back up. I had 1 more last question, I'm sorry. On the building products distribution business, you mentioned, obviously, that you got some immediate benefit or close to immediate benefit from higher prices, obviously, some inventory gain. Would you say that was significant in the first quarter? Or said differently, if we froze prices now in early May because I know they were generally rising in April for most wood products, do you think that the inventory gains would be lower in the second quarter assuming prices held where they are now? Or would be -- or you think they'd be similar to what they were in the first?

I think the tailwinds we got in the first would be more pronounced than what we would see in the second if we stayed flat on pricing for here -- from here. On the lumber side, I think anything that brings clarity around the trade situation, personal opinion is likely to cause lumber prices to fall. On the OSB side, I think order files continue to be out several weeks. And so if housing continues to ramp up seasonally, OSB could get tight, and we could see a rally in OSB prices in the second quarter. But if we stayed flat with where we are today, the gross margin tailwind in the second quarter would not be equal to what we saw in the first quarter this year.

Okay. And then lastly, on the plywood side, you were talking earlier, were those -- was the increase you said in March, was that the exports of plywood or imports? You mentioned a bigger piece of a growing pie. I was just curious if you were really -- were you saying import situations getting tougher again? Or did you imply the opposite?

I was implying that it's getting tougher. And what I gave you earlier where the cubic meters on shipments leaving Brazil. If you flip that around and you look at what happened on imports, APA was showing the plywood imports were 271 million square feet in first quarter, just looking at the import side, and that was a 7% increase from fourth quarter of '16, and it was a 20.4% increase from first quarter of '16. If you think about an average plywood mill in the 300 to 350 foot range, pretty decent-sized mill, the amount of imports in the first quarter were not quite a full plywood mill but close.

And our next question comes from the line of Mark Wilde of Bank of Montreal.

I wondered if we could get Nick Stokes to just talk a little bit about how you kind of positioned around lumber right now because you've had such a big runup, and I think of there is a lot of concern that there's actually not a lot of volume moving up in the West on some of these Random Lengths prices we're seeing. And clearly, as you mentioned, Wayne, if we get any clarity on the trade situation, there's probably some downside risk on lumber. So I wondered if Nick could just talk about how you guys manage this.

Mark, great question. I'd start with the premise that says, in general, we are not speculators. So unlike some channel members and/or some of our competitors, we don't, by design, try to forecast quarterly prices and then make purchase decisions based on those forecasts. Our overriding principle is that we want to be in the market buying and selling every day. Having said that, to be sure the volume is driven, to some degree, by people's anticipation of how those product prices move. I would tell you that, on average, we try to keep -- there's a big difference in transit from if you think about the West Coast versus the East Coast. But on average, we try to have the about a month's worth of supply of commodity products available. And I would tell you, the last 10 days, your comment about not a lot of volume moving, getting bought and sold every day would be consistent with how we see it as well.

Okay. All right. And okay, well, I guess that's it on that front. And also, Nick, is it possible for you to talk a little bit about sort of how you're seeing your mix right now between sort of new construction and repair-and-remodeling and distribution? Do you have a read on that?

A read but no data. Certainly, if you think about the home centers which is primarily repair-and-remodel driven. That's been very strong the last 4, 5, 6 quarters and keeping pace with that. If we sell product into a traditional lumberyard, we assume that it's some combination of new construction, repair-and-remodel and/or DIY. And so the clarity associated with where that product absolutely ends up is a bit difficult. I would tell you that it's interesting by product. Certainly, our EWP volumes are driven by absolutely new construction, primarily. In the case of our composite decking business, a good chunk of that is big-time repair-and-remodel and/or DIY. So it varies a bit by product. If you think about BMD's mix in total and you look at kind of our run rate on EWP as a percentage of the total in BMD, we're getting up there close to 20% of the mix. And a few years ago, it was closer to 15% of the mix. And so I think that speaks to the work that we have tried to do across the company in terms of the EWP volumes. And I think it really speaks to the integration goodness of the 2 businesses that we have.

Okay. And then I want to just switch gears. Wayne, I think in to response John Babcock's question, you suggested that your engineered wood business would be running at about 80% of capacity this year. Is that right?

Yes, if you look at it through the year.

So I wondered if we can kind of toggle from there to sort of where you think you'll be at for the full year, in terms of realizing kind of the benefits or the -- just the EBITDA that you anticipate coming out of the GP acquisition.

Yes. So there was -- I'll break it down as there were 4 components that we were going after: so profits at Thorsby; profits at Roxboro; great benefits of having 3 mills in the East instead of 1; and then the margin benefit of having additional EWP volume and product volume through distribution. So if I tick through those, Thorsby is humming at the moment. We've moved customer orders to where their freight logical, and Thorsby is running basically flat out today, and I have no concerns at all about it hitting the EBITDA expectations we had for that mill. And we are seeing, in our selling prices, the freight benefits of having Thorsby shipping LVL in the East versus sending product out of Alexandria. And GP legacy would have been shipping from Alabama West towards Texas and some other places. So the freight piece we're getting on the Thorsby side, not so much at this point on Roxboro. And I would tell you, Roxboro today is not contributing anything on an EBITDA basis. In Nick's business, and Nick touched on this, if you look at the percentage of their sales that are now EWP, I think, one, that's a reflection of housing starts are continuing to be stronger than the growth in repair-and-remodel. So you're seeing, I think, an increasing portion of BMD sales are tied to residential construction compared to where they would have been during the housing downturn. But the pull-through, as a result of having made the GP acquisition, let's just say I'm highly confident that we probably already surpassed the $6 million or so that we have penciled in for the synergy benefit to BMD. We will be beyond that on an annualized basis in '17.

And then the freight benefits?

Freight benefits, this is a wild guess. I mean, we thought we would see $6 million to $7 million in freight benefit. I would tell you this year that we may see $2 million to $3 million of that through -- it will show up on the sales realization. So not only do we have the price increase going through this year, but as we rebalance where orders are shipped, we should see $2 million to $3 million. But that will show up in the sales realization line.

Mark, that freight savings are a function of getting the Roxboro mill up because that's where the real bang is for the freight side.

Okay. All right. So if I -- if we net-net, would you say probably 60%, 65% of the kind of anticipated contribution from GP is about where you'll expect to end the -- have for the full year?

Yes, Mark, this is Dan Hutchison. We're significantly above that. Again, the increase in -- and Nick or Nate -- Wayne touched on it, the increase in business and the contribution impact to Nick's business is dramatically above what we thought it would be. Our general increase in market share, in part attributable to having the capacity take on the market share, is well above what we thought it would be. The real downside of all of this is we simply have a slower start-up on Roxboro. And I think everybody's got to remember that we're not missing any orders. Orders that might have -- that we have might have planned to flow through Roxboro are being picked up by Thorsby and Alex. So we've just got a cost problem at Roxboro we're getting fixed.

And so we're not seeing quite as much on the freight synergies...

Yes (inaudible) . . .

I-- in Roxboro. But we threw out a $40 million number. And I haven't done the total math on it. But my guess is of the $40 million, we're going to be pushing towards $30 million this year (inaudible) second half of the year.

(Operator Instructions) Our next question comes from the line of Steve Chercover of Davidson.

So it's a bit late. So some of my questions are already answered. But I did want to ask, first of all, about lumber. Your volumes were down. But did Building Materials Distribution see incremental volume from others due to buyer's trying to get ahead of the duties?

Steve, this is Nick. From a distribution standpoint, we report our commodity volumes. They were up 12%. Depending on the product, some of that, in some cases, may be even 15% might be price. I don't get the sense that our supply partner on the customer side did that. I -- this is an opinion, not a fact. But my sense is that there was a lot of uncertainty around agreements. And people did not try to put stuff in ahead of an anticipation of duties and/or agreements. I think the inventories in the field are adequate. I think there was more apprehension about what was coming that caused people to just not make big commitments.

Steve, are you talking about our lumber production?

No, I wasn't referring to yours. I was just talking about lumber through the entire pipeline. I mean, you guys are a significant component of that distribution chain. So I'm assuming you're buying quite a bit from third parties, and it's going from Point A to Point B, but it doesn't sound like there was a big prebuy.

That's not my sense for sure, Steve.

Okay. And in adding to your other comment that inventories seem about right in the field, then people can't sit on their hands forever. Sooner or later, something's got to budge or constructions will come to a halt, right?

Yes.

Well, that's not what we want.

Yes. I was going to say that the hallway conversations have been exactly -- people are reluctant to buy because there's a fair amount of uncertainty on price. The flip side is Nick and his guys are saying if you can, in essence, do just in time fill-ins out of the warehouse and we're, in essence, taking the price risk, to make sure we're getting paid if we're selling commodity wood products out of a warehouse to a buyer who is otherwise skittish about going along, make sure we get paid appropriately. And so it's been pretty interesting, to Nick's point, as people have slowed down their purchases. It becomes the, I'm going to buy only what I need for the next couple of days. But if they haven't bought 2 or 3 weeks out and they don't have stuff rolling at them, it means you can have a little more swing on the price side.

Yes. Well, I guess besides the law of gravity, the only thing you know is the law of unintended consequences is going to raise its head. So one other question, which is unrelated. With respect to the acquisition pipeline, I think Wayne said that one of the considerations is -- or best part of how you allocate capital, so is the priority for the next potential deal still in veneer-based businesses? Or are there holes that you'd prefer to fill in distribution? So how should we think of that?

Yes. I would tell you that probably, the priority is on the distribution side. And things that we are focused on, or Nick and his team are spending time on, is really on geographic fill-ins at this point. If there's a larger opportunity that comes up, we'll obviously look at it. But I would tell you, given what we're doing from a management perspective in Wood Products, we're not spending a lot of time chasing deals in the manufacturing side at the moment. And I think Nick would tell you that what they've got going on in organic basis and us continuing to support working capital and increasing facility capacity in markets where that makes sense, that execution model is working very well, and there's not a lot of geographic holes to fill in. But there are a handful of markets where we'd like better coverage and a physical presence. And that's really where we're spending the effort today. But those would tend to be relatively low dollars in the grand scheme of things.

Understood. And the fact that you're not looking on manufacturing at present, is that primarily because you've got opportunities with Roxboro, et cetera, to improve with your existing asset base? Or because people have got inflated expectations due to the run-up in price?

Well, I would describe the Wood Products business as -- the 2 principal places where we operate are engineered wood and plywood. And I think given what we've done on the engineered wood side, we feel pretty good about the capacity we have to service 1.4 million housing starts, and there's a number of metro areas, that frankly, we would have a real challenge if we added engineered wood capacity getting to the marketplace through the downstream channels. Because we've got, in a number of MSAs, considerable shelf space, so to speak, already. So we really need to grow with the channel partners we have and make sure that we grow with the pace of housing starts and they're capturing market share in the local markets and supporting their growth. On the plywood side, if there was something opportunistic to buy, a mill that would provide veneer support to the EWP side, that might be interesting. But to grow plywood for the sake of growing plywood, in my opinion, it would need to be something that is servicing a more specialized market. I think our veneer expertise could transfer to some other lines in plywood. But to make commodity sheathing plywood is probably not on our list of strategic objectives. It would need to be something that serves a pretty isolated market because we continue to believe that OSB is going to capture an increasing share of that sheathing market over time.

And our next question comes from a follow-up from the line of Chip Dillon of Vertical.

I appreciate the answer to Mark's question about -- I think you said that the acquisition benefits are -- or contribution is like $30 million this year, $40 million of EBITDA next year. What was the EBITDA impact in '16? I know there was some -- I think some negatives in there. If you could just -- should we have that to compare with, as we go from '16 to '17?

I would tell you, in 2Q of '16, we would have had a modest benefit because Thorsby was making decent money. Roxboro was curtailed. And we were largely selling GP product that was in inventory, and particularly, the VMI inventories. By third quarter, we had started to convert Thorsby production to Boise Cascade but we were still supporting the legacy GP operations. So I would tell you quite candidly that we started to mess up the cost structure at Thorsby but very purposefully. And we started to incur cost with restoring operations at Roxboro. So net-net, not much of a contribution in third quarter. By fourth quarter, we had converted, essentially, the production at Thorsby to Boise production. We had wound down the GP lines and Thorsby was contributing more EBITDA than we were losing in ramping up Roxboro. So net-net, the 2 would have been a positive contribution in 4. And as we move through this year, particularly as we reduce the drag at Roxboro, getting Thorsby up to full capacity, getting the price increase through and getting the freight benefits, I would tell you, they will -- together, they will be firmly a positive EBITDA contribution in the in the first half, and more so in the second half of this year.

And again, so last year, maybe something in the 5-ish all-in, maybe $5 million to $10 million range is what the 9-month contribution was?

Yes. I mean, I'm doing math off the top of my head. But my guess is the net-net of the 2 in '16, it might have added $5 million. But it wasn't a big number. And just to remind...

And then you mentioned the ramp would be increasing second half versus first half. But I -- is it fair to say that the second quarter should be better than the first or not necessarily because of just the timing of work being done there?

Yes. I think second quarter will be better than first because we'll have a couple of things. We'll have more volume. We'll have, in my opinion, the EWP move first then distribution, I'll defer to Nick. The EWP move first. And for some of those dealers that converted to Boise Cascade EWP, I think Nick's guys will start to get the benefit of that on sales as we move through this year, which will add some modest benefit. But I think that -- the main benefits will be Thorsby running full, so we'll get the operating efficiencies from that. And the price increase we announced will start to gain traction in the second and third quarter. And I think that will give lift. And frankly, Roxboro, their focus is on getting the volume and the throughput up. And if we incur operating costs in the near term, as Tom Corrick alluded to, we're adding shifts and training employees to get the 4 shifts on a first press. Once we get that more or less in hand, we'll be doing the same thing on the I-joist line, probably 1 or 2 shifts. And then as we get to late fourth quarter, we'll have expenses in ramping up the third press. But we'd really -- even if that causes a temporary drag on earnings, we want to be ready for '18 because what we've got on market share gains, the last thing we want to do is late '17 or 'early '18 is be telling customers that we're not going to have a product for them in the spring of '18. That would be a bad outcome.

I totally understand. So again, just my understanding, if I just think about it stand alone, $5 million roughly in '16, $30 million this year and something in excess of $40 million next year, if all goes to plan.

Well, the $5 million that Wayne was mentioning I think was related directly to the plants. There's also the benefit of BMD and the incremental volumes associated with all the things that happened last year, some of which were acquisition-related.

In BMD. Okay. All right. We'll factor that in.

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

Okay, great. Thanks for joining us today. I think, just a quick wrap-up here, 3 things I would note: one, I think that we're feeling generically as good -- the market feels about as good as its felt in quite a long time, and obviously, that's showing up in the continuing ramp-up in housing starts. Above and beyond, what's going on in the market, I think we have many things that are in our control, particularly in the Wood Products side, that I feel really good about how we're executing on. And I think we're making very good progress. And I guess the last I would say, as you know, throughout the last 10 years we have very significantly increased share and increased our capacity to take advantage of that share. And I think we continue to be very well positioned as housing returns to what we believe are trend levels of between 1.4 million and 1.5 million starts to have the capacity on both sides of the business to service that growth, from this point forward. So feel pretty good about things right now and where we're positioned.

Thank you, everyone.

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.