Boise Cascade Co (BCC) 2017 Q3 法說會逐字稿

Good morning. My name is Kristi, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade's Third Quarter 2017 Conference Call.

(Operator Instructions)

Before we begin, I remind you that this call may contain forward-looking statements about the company's future business prospects and anticipated financial performance. These statements are not guarantees of future performance, and the company undertakes no duty to update them.

Although these statements reflect management's expectations today, they are subject to a number of business risks and uncertainties. Actual results may differ materially from those expressed or implied in this call. For a discussion of the factors that may cause actual results to differ from the results anticipated, please refer to Boise Cascade's recent filings with the SEC.

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

Thank you, Kristi. Good morning, everyone. I'd like to welcome you to Boise Cascade's Third Quarter 2017 Earnings Call and Business Update. Joining me today on the call are Tom Corrick, who's remote and dialing in; in the room with me here I have 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 of the presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA.

Now I will turn the call over to Tom Corrick.

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

I'm on Slide 3. Our third quarter sales of $1.23 billion were up 15% from third quarter 2016. Our net income was $31.7 million, or $0.81 per share, up substantially from the year-ago quarter and driven by stronger performances in both businesses.

Our Wood Products manufacturing business reported segment income of $24 million in the third quarter, more than double its segment income in the year-ago quarter. Wood Products saw pricing improvement on plywood, EWP and lumber in the third quarter. Our Building Materials Distribution Business posted another excellent quarter, with segment income of $39.4 million on quarterly sales of more than $1 billion. BMD executed very well in the quarter, taking full advantage of product price inflation to generate stronger-than-expected gross margins, particularly in commodity wood products.

Wayne will 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 $367 million, up 8% from third quarter 2016.

As Tom mentioned, Wood Products reported segment income of $24 million in the third quarter.

Reported EBITDA for the business was $39.4 million, up 45% from the $27.2 million of EBITDA reported in the year-ago quarter. The increase in EBITDA was due primarily to higher sales prices of plywood, EWP and lumber, offset partially by higher OSB costs used in the manufacture of our I-joist.

As mentioned in our earnings release this morning, we expect to commence depreciation on $45 million of additional assets at our Roxboro, North Carolina, location in the fourth quarter. Our book depreciation in the Wood Products segment will increase by approximately $2 million per quarter as a result of starting the depreciation.

BMD sales in the quarter were $1.046 billion, up 18% from third quarter 2106. Sales prices and sales volumes increased 10% and 8%, respectively.

BMD reported segment income of $39.4 million, or EBITDA of $43.3 million. This compares to segment income of $26.4 million and EBITDA of $29.9 million in the prior-year quarter. The improvement in income was driven by higher gross profit dollars resulting from higher sales and a higher gross margin percentage, as well as positive operating expense leverage.

The amounts for unallocated corporate costs 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 $6.9 million in third quarter 2017, compared with negative $6.4 million in third quarter 2016.

Turning to Slide 5, our third quarter sales volumes for LVL and I-joists were weaker than we expected going into the quarter, down 7% and 8%, respectively, compared with third quarter 2016. As a reminder, our third quarter 2016 EWP sales volumes included liquidation of Georgia-Pacific-branded engineered wood products from the acquisition of the two EWP facilities, located in Thorsby, Alabama, and Roxboro, North Carolina, in the spring of 2016. As expected, we converted a minority of the legacy GP engineered wood products customers to Boise Cascade-branded EWP, as wholesale distribution channel partnerships shifted following our acquisition.

Our Boise Cascade-branded EWP LVL sales volumes were up 7% compared with the year-ago quarter, and I-joist sales volumes declined 1%. I would note that our Distribution operations had EWP sales volume increases generally consistent with the increase in single-family housing starts for the three-month comparative periods. However, BMD reduced their EWP inventories in third quarter 2017 from the levels they held at June 30, which impacted their purchases from Wood Products.

Wood Products did see improvement in both LVL and I-joist net sales realizations in the quarter, with pricing up sequentially 3% on LVL and 6% on I-joists. We expect continued modest sequential improvement in EWP pricing in the fourth quarter.

Turning to Slide 6, our third quarter plywood sales volume in Wood Products was 405 million feet, up 5% from third quarter 2016. Following the hurricanes in Texas and Florida, we responded to customer demands for additional plywood production in September and again this month. We have been able to shift a portion of our internal veneer temporarily away from EWP production and toward incremental plywood production. Our Wood Products group has more flexibility with regard to optimizing production schedules quickly in response to changing EWP and plywood market conditions than many of our competitors.

The $324 average net sales price in third quarter for plywood was up 13% from third quarter 2016. Plywood demand and pricing remain favorable entering October, with oriented strand board also in tight supply. Pricing for panels has weakened in the last 10 days. We normally experience seasonally weaker demand for plywood as we get into the second half of the fourth quarter and move into first quarter.

In addition to the normal winter weather conditions, late this year and early in 2018 there is additional OSB capacity scheduled to start up. We will continue to watch operating rates and mill lead times for plywood and OSB as we plan our production later this quarter and into the early part of next year. As we noted in our earnings release, we are planning to take maintenance- and capital spending-related downtime in several of our plywood facilities in the fourth quarter.

Moving to Slide 7, BMD's third quarter sales, as I said, were $1.046 billion, up 18% from third quarter '16. By product area, BMD's sales of commodity products increased 21%; the general line product sales increased 14%; and EWP sales increased 16%.

The gross margin percentage for BMD in third quarter was 12.4%, up more than 30 basis points from the 12% reported in the third quarter of 2016.

BMD's EBITDA margin of 4.1% in the quarter was ahead of what we normally expect in a steady product pricing environment and much better than last year's third quarter EBITDA margin of 3.4%. Sales volume growth and expense leverage was 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 decreased $28.6 million during the third quarter. BMD drew down its inventories by $37 million in the third quarter, which was the principal driver behind the decline in our working capital. As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K has the receivables inventory and accounts payable detail broken down by segment for those that are interested.

I'm now on Slide 9. We generated an additional $67 million of cash in the third quarter, finishing the quarter with $172 million of cash on our balance sheet. Our total available liquidity at September 30 was approximately $566 million, which reflects our cash balance and the availability under our committed bank lines.

With our improved operating results, we are now slightly below our stated leverage target of 2.5x gross debt to EBITDA. We have also focused on generating free cash flow this year by managing our capital spending and our working capital usage. And we believe a positive result on both of these fronts give us and our board of directors additional flexibility on future capital allocation decisions.

We did not repurchase any of our shares in the third quarter, and we have approximately 697,000 shares left on our original 2 million share repurchase authorization. As you know, we vary the pace of our share repurchase program based on our assessment of acquisition opportunities, our leverage and our free cash flow generation.

Our capital spending for the year is expected to be between $75 million and $85 million. While we're still in the preliminary planning stages for next year, we anticipate similar levels of capital spending.

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

Thanks, Wayne. The October consensus estimate for 2017 US housing starts is 1.21 million starts. While an improvement from the 1.17 million starts in 2016, the consensus outlook for housing start growth in 2017 has been declining for the last several months. This weakness has been concentrated in multifamily activity, while demand for single-family homes has continued to show good growth. Many builders are facing challenges on labor availability, building lot constraints and cost-driven margin pressures which have slowed construction activity in our opinion. However, we continue to believe that demographics in the US will support an eventual return to normalized housing starts of 1.4 million to 1.5 million starts.

I remain encouraged by the current market environment. Importantly, we have a number of areas within our control in Wood Products and BMD to continue to drive revenue and earnings growth. We are seeing traction on EWP pricing with stronger demand and believe the momentum is likely to continue in 2018.

Wood Products is getting a higher proportion of its internally produced veneer into engineered wood products as demand improves, which captures more system margin and takes some pressure off the plywood market. The team is continuing to make progress on driving utilization and productivity in our eastern region, which includes the 4 mills acquired since late 2013.

BMD has done a terrific job of executing and responding to market opportunities at both the local and national level during a volatile and uncertain pricing environment in 2017. They continue to look at infill markets, product line extensions and other avenues to push up sales and earnings.

Commodity wood products pricing at the beginning of the fourth quarter was at elevated levels. Prices for structural panels and lumber have weakened in the last few weeks. It is difficult at this point to predict where panel and lumber prices will head this winter, but clearly the direction and rate of change in pricing has a big impact on earnings in both of our businesses.

There is a lot of good work being accomplished by our employees to further strengthen our market position and drive cash flow. I remain optimistic as I look forward to 2018.

I appreciate each of you joining us on our call this morning. We would welcome any questions at this time. Kristi, would you please open the phone lines?

(Operator Instructions) Our first question is from James Armstrong, of Armstrong Investment.

First question is you obviously called out the risk of a weaker price environment, but could you talk about the lags in pricing that you're seeing? And also, what was the end-of-3Q pricing for most of your products, versus the 3Q average? And shouldn't October see some catchup with what was printed?

As far as the pricing environment, your observation is right, James. Pricing accelerated through third quarter, and October prices were generally above the third quarter average. Prices have weakened the last week, or so, and without knowing where November and December will come out, it will be interesting to see where the fourth quarter settles, in total. But, clearly, October was above the third quarter average.

And you'll see some of that flow through in pricing just due to the normal lags between what Random Lengths prints and what your realizations are, is that correct?

It's fairly immediate, but things generally price when title transfers. So what's reflected in Random Lengths is a pretty good comparison for us. If you go back and look at our last investor decks, we have a page in the appendix that compares our quarterly realizations, particularly on plywood, to what the Random Lengths composites are, and you'll see a very high degree of correlation in terms of timing.

Okay. That helps. Switching gears, the Building Materials Distribution segment margins are improving very nicely. However, they tend to decline when wood products price, due to lags. Should that trend continue? Or has something in the business changed?

I'll let Nick respond.

I think you will expect that trend to continue. Our margin is driven by variation in commodity prices and the mix of the general line and the EWP product lines, which carry more sustainable, more consistent margins. And obviously, there's some seasonal impact in terms of the demand for those products, given the mix. But our margins in the third quarter were clearly reflective of the pricing environment that we had on commodity products.

Okay. And then, lastly, have you seen any changes in plywood imports from South America?

Not based on the data that I had for September. It's pretty much in line with what was happening in July and August. Now whether or not there will be a delayed response in terms of supply, given the pricing that we saw in October, remains to be seen. But certainly no shift in volumes based on the September data.

Our next question is from Mark Wilde, of Bank of Montreal.

I wondered, first of all, can you just talk with us a little bit about the new competitor that seems kind of poised to come into the east coast EWP market and just what kind of timeline you're assuming there and whether you're seeing any impact from them yet, maybe seeding the market with some product from the west coast?

Mark, this is Dan Hutchinson. We have not seen anything yet. I think they've announced the opening of that plant a couple of years out. So I think it's really too early to see much of anything.

Yes, I think that capacity is scheduled to come on in '19; so whether or not they make moves in the second half of '18 to try to get more product in the market. But they ship east today out of their facilities. And so some of the markets that they'll serve out of that southeastern plant are already being served off the west coast today.

Okay. That's helpful. And then, Wayne, I wondered if you or Tom could talk a little bit about sort of priorities from an M&A standpoint. In the past, you've talked about maybe trying to move some different products through the distribution pipeline, and I think you've also talked about maybe targeted investments in areas where you thought there was a lot of growth potential for new types of building materials.

Tom, you want to field that one, or you want me to go ahead and take it?

(inaudible) start, Wayne, and then I'll follow up.

Mark, I think our emphasis right now is predominantly on the distribution side and trying to find product lines where we think there is an opportunity to primarily focus in the building materials arena but maybe in a different channel than we're currently in and that would further support the customer relationships we have. So there's some product lines that, obviously, if you looked at like roofing and insulation and wallboard, we would find ourselves in competition with our current distribution partners.

But there are other things like our door shop that we've done in Atlanta where we've gotten great support from our customers and they see that as additive. So we are, clearly, looking at adjacencies to try to augment what Nick and his team are doing or enter other building material-related distribution environments that may not go into single-family residential construction.

And that, as I say, continues to be a focus, but we're only going to do that if we think it's a judicious use of shareholder money. If we can't get good returns because we find ourselves competing with private equity or others, we'll look at other ways to use that cash to benefit our shareholders.

And, Mark, I would add that we also continue to look pretty aggressively at infill markets for our Distribution business. And so there's a lot of activity internally focused on both those opportunities.

Our next question is from Brian Maguire, of Goldman Sachs.

Just also reiterate the great job in the Distribution segment, particularly on the margins there. I think on the last call, Wayne, you talked about maybe getting to 11.8% to 12% kind of gross margin. You came in about a 50 basis points more than that. So I'm just thinking about trying to quantify the impact of the sharply rising wood product environment. Would you say it added maybe the 50 basis points to gross margins that was the excess to what you thought you'd get a couple of months back?

I don't know that it was the full 50 basis points, but clearly what particularly went on in the panel side of the world, that was a big lift. And I think in a steady-state pricing environment, something in the high 11%s, certainly in first and fourth quarter, and something approaching 12% in the second and third quarter, as we have more seasonal demand for general line products and some of the EWP. But the 12.4% was well above normal. And if you take 40 basis points on $1 billion in sales, you can kind of get pretty good sense of the EBITDA impact of the commodity price lift.

That helps a lot. Thanks. And then, within Wood Products, it seemed like the EWP volume was a little bit light. I think you talked about just the year-over-year comp there was tough. But plywood was also a little bit better, and I guess that had to do with taking advantage of the higher prices there and shifting some veneer. Any ability to kind of quantify what kind of an impact on volumes or earnings that shift had? And as you look at 4Q, prices are still high. Would you expect to continue to have that kind of a shift going on?

I think if you look at the volumes in third quarter, there's a couple of things playing into it. First, we had the price increase that got announced earlier in the year. So if you look at the volumes in first quarter, they were particularly strong in EWP. So there was probably some pull-forward.

As we got into third quarter, and particularly given the hurricane in Texas and in Florida, we and others, I think, anticipated a slowdown in housing starts in those markets, which did occur. And so, particularly in BMD, I think they dropped their inventory of EWP by a little over $5 million in the third quarter, which has direct impact on how much they buy from Wood Products.

And then, in September we had sufficient EWP volumes at the mills that we were able to respond to customer requests to get more plywood and quick delivery. So, particularly in the month of September, we shifted a lot of production in the south towards plywood and away from EWP.

But we didn't give up any EWP sales. Essentially, we funded those EWP sales out of BMD inventories and out of in-hand and on-hand inventories in the Wood Products business. So the production I would anticipate going to a more normal schedule as we get into fourth quarter, but certainly in October we were doing a similar shift and trying to get as much plywood availability as we could in the south.

And I would note that the numbers on volume are driven by sales. And so we, obviously, on the production side will manage to order flow. But clearly, the take-away is what is going to determine the numbers we report.

Thanks. That helps. Any ability to defer some of the planned plywood maintenance, given the really strong pricing environment we're in still?

No, I think we're going to -- this is Dan. We're going to go ahead and take it. This is -- I think if you start deferring things, you just get yourself into trouble. And so we'll take it later in the quarter when we're likely, as Wayne has noted, to see reduction in seasonal demand anyway.

Okay. And just one last from me, you noted that the gross leverage is below the target that you set at 2.5 turns. Any conversations at the board level around implementing a dividend, whether it be variable or fixed or maybe even a special dividend, as a way to sort of return cash to shareholders, given the stock liquidity?

I would say that's been a topic of conversation the last several board meetings, particularly as the balance sheet has continued to improve. It really -- I would describe it as the relevance has become more timely, certainly as we reported September and if you look at the trailing EBITDA. So I suspect on Thursday, when we're together with our board in Dallas, it will be yet again a topic of conversation.

I don't think there's any immediate rush, given the things we're pursuing on the acquisition side. But certainly, barring the acquisitions, at least in the view of the management team and, I believe, our board, we will need to find a constructive way to return cash to shareholders, given our leverage position.

Our next question is from George Staphos, of Bank of America.

I just want to come back to a point you were making. So I might have missed it and, if I did, I apologize. Was the inventory build in EWP in the quarter by design and it was fortuitous because you were then able to hit the plywood market with available veneer capacity? Or did inventories build more than you had anticipated in EWP during the quarter?

George, this is Dan Hutchinson again. Our business model is to sell our EWP out of inventory. It allows us to service the customers better and, quite frankly, allows us to have less changeovers.

I understand that, but it was not above normal inventory is what you're saying.

Correct. I think it was about where it should have been, but what we saw in the quarter was a drop in EWP demand a little bit from the manufacturing side and then, obviously, significant pickup in the plywood side. So I don't think we were oversupplied. I think we're in good shape. As Wayne pointed out, we were able to make a reduction in EWP inventory and still satisfy all the customer demands as well as do a better job on the plywood side.

I think that's (inaudible). So I'll let Nick comment. But I think, just in general, the pace of housing starts, particularly when you include manufacturing, has not been as robust as we would have guessed back in April, May, June. So while inventories were probably in line in Wood, relative to the market demand we were probably a little bit over in BMD, just anticipating a stronger building season and more activity on the multifamily side that didn't come to fruition as we moved through second quarter and into third quarter.

The other thing I'd add, George, and this is Nick Stokes, you'll see moderate variation within a quarter on our EWP inventories. And I think what you saw in the second quarter was a little bit higher level of inventory, given the severe logistics and transportation issues that we were having. We needed to make sure we had wood for our customers.

And the third quarter probably reflects a more normalized inventory. And certainly, if demand remains solid, I would expect that our inventories are going to stay pretty constant. I wouldn't anticipate on the EWP inventories any further reduction in the fourth quarter unless we get to some seasonal downturn.

Okay. And I'm assuming the answer is, yes, but just for the record, that aggregation was why your Boise-branded I-joist line was down 1% on a comparative basis, right? And there was nothing else beyond that in your volume in the quarter, if I heard that correctly?

I think the down 1% on I-joist volumes, there was a lot of moving things quarter to quarter, but I would say given that a lot of the housing starts have been in the south and you get more slab-on-grade construction and can get more single-story, the demand for Is relative to starts has not been as strong as, say, the demand for LVL. So I-joist relative to dimension lumber, I don't think you've got the same penetration rate you had a couple of years ago. I think it's more static.

Okay. Thanks for all the color on that. We appreciate it. On BMD, just a couple of others, and I'll turn it over, to be fair. So if I go back to your comments, Nick, are you suggesting that incremental margins, which we've always assumed were, I don't know, 4% on an EBITDA basis, have moved higher? And then, from kind of the theoretical outlook, just back to this past quarter, I think the incremental I came up with, unless I miscalculated, was something north of 8%. You mentioned sales volume and leverage, but that would be incorporated in a normal incremental margin. So I was wondering if there was anything else in the BMD margin that we should, at least at some degree, try to isolate as we project forward. Was there an amount of inventory profit that we should be managing for in our models, as well?

I think the best way I would describe it is, in the previous calls and the conversations over the last few quarters, Wayne's guidance on our normalized margin is what you should expect, going forward, given the seasonal patterns of the general line and EWP as it relates to the mix. And certainly in an environment that we had in the third quarter, the inventory that we have becomes more valuable and creates more margin opportunities and additional sales volume opportunities on the commodity side. When you get in an environment in declining prices, the opposite happens.

I would not read anything into the leverage that we had in third quarter that there's been a meaningful shift in the 4% to 4.5% normal drop-through that we would expect on sales growth in a normalized pricing environment where we have reasonable price stability. I think the 10% product inflation has a lot to do with what you're seeing on the leverage this quarter.

So, Wayne, if we used 4% to 4.5% as kind of a bogey and then looked at the delta between that and what you saw, should we assume that most of that is inventory profit?

Not just inventory, but the sell-through. So to the extent our cost of goods sold, if we're buying something at $100, for example, and it goes to $110, we're going to try to price our margin off the $110 replacement cost. So it's not just the ending inventory; it's the stuff we're buying and reselling through cost of goods sold. And that 40 basis points that I referred to earlier as kind of excess gross margin in the quarter related to the commodity side, I would let you guys model how you want to model, but I would probably drop $4 million, or something, out of the EBITDA number and attribute that to commodity tailwind, and it, frankly, could have even been more than that.

Our next question is from Steve Chercover, of D.A. Davidson.

Some of my questions have been answered, but I, first of all, wanted to ask whether you're having any difficulty with freight in your markets.

Steve, this is Nick Stokes. The answer is, yes. Certainly, the transportation environment that we had through the third quarter was problematic for a number of reasons: storm disruptions, and some of the utilization of flatbed trucks in the south and the southeast were diverted to different kinds of things, and there were some spot rail issues from many origins to some of our destinations.

Generally speaking, trucking is relatively scarce and relatively expensive. And it's better today than it was 30 days ago or 45 days ago, but it's still very difficult.

Well, that's actually the response that I expected. And so, by extension, I'm wondering do you think that this freight kind of impass is making lumber and panel prices a bit stickier than they would otherwise be? Because I'm sure that these margins in other regions are sufficiently high that people would love to move their product into areas that are short if they could get the freight. Does that seem reasonable?

I'll leave it to others to speculate on the impact that freight is having on commodity prices. I'm not smart enough to figure that one out. What I will tell you is that to the extent that BMD or other people in the channel have capacity and capability to manage freight and deliver a product when the customer wants it, it creates an opportunity for value.

Great. Thanks. And then, secondly, I have the sense just from Wayne's comments that you're looking for acquisitions, because otherwise I think the dividend would be an easier decision. And I'm just wondering is Distribution still the priority? And are seller expectations reasonable at this point?

Distribution is still the priority at the moment, and I would tell you this: the sellers that we have ongoing conversations will be the ones where we feel like they have reasonable expectations relative to our return requirement and our ability to fold it in with our business. But there's clearly been some things transacted that have moved to private equity at price levels that we don't think make sense for our shareholders and/or where when we fit it into our network on a combined basis it doesn't add value for us.

And if we think of the GP acquisitions maybe as a proxy, is it fair to say that your criteria is near-term accretion, but it doesn't have to be instant?

It clearly doesn't have to be instantaneous. What we're trying to do is create a defensible franchise over time. And if we find an acquisition where we think we can bring value to it over time, we'll try to obviously keep as many of those economics on our side of the table as we can.

But if you think about Corrick's earlier comment about infill markets in Distribution, if you pull out the US map, we tend to get to all of the major MSAs, but some of them we're doing with long freight hauls today. And as housing has recovered and there's more business volume in some of those MSAs, it makes sense to look at doing infill acquisitions. And clearly, where we can bring a strong balance sheet and product line extensions, we may be able to add value to a relatively small independent distributor that has a foothold and has business relationships in the marketplace.

And as I say, if we can acquire those at a value that makes sense for us, we'd like to do that. But something that's got 15 or 20 locations and there's a lot of overlap with Nick's existing locations, it's harder to make the economics work on those. So I think rifle shots is more likely to be the case, and it's probably going to be where there's a business team aligned with the way we do business culturally and where we see the opportunity to significantly ramp up revenues.

Our next question is from Chip Dillon, of Vertical Research.

First question is on the cash flow -- just a quick one on the CapEx. You mentioned it would be roughly flat next year. And I know there are A-- I'm just wondering if there is anything you want to call out above and beyond the normal maintenance that would be involved in that number that you're looking at.

The majority of the $55 million, or so, that we would plan on spending in Wood would be maintenance capital. There's a little bit of additional capital still going into our eastern region as we bring back the engineered wood capacity and there's a couple of high-return projects that are smaller that we're looking at.

In Nick's business, we've got a project that we're working on in the northeast acquiring some land that for Nick's business right now we've kind of penciled in a number in the low $20s million for next year, and some of that includes some incremental capital for real estate, probably about $5 million in there for real estate-related stuff. And the rest of it in Nick's business is typically paving, roofs and rolling stock supporting the business growth.

And when you say real estate, maybe taking an existing distribution location and just making it bigger? Or adding a location?

Making a location bigger. And the one, in particular, I'm thinking of, we've been operating on that 2 locations, and we, in essence, put the adjacent property under lease. And assuming we can work through some mechanics, we'll end up buying it and then putting some improvements on it in terms of warehouse and office. But it's responding to sales growth we've had in that market and we've been serving it out of two locations about a mile apart, and that's not the most efficient long-term solution. So when we got a chance to buy the adjacent property, we were in the process of doing that.

Gotcha. And then you mentioned that depreciation would be up about $8 million, if I heard you right, annualized when you turn on Roxboro. And it's a $45 million investment. Is there a reason the depreciation schedule is only an implied 6 years, or less?

The assets at Roxboro were idled in 2010, and as we bring them back and we look at what we expect for a useful life, we're trying to take into account that the assets are used and the age and what we think the capital replacement cycle will be over the forward years. And so that's why we went ahead and put a shorter book life on it. So basically if you take $45 million divided by 5, you get $9 million on an annual basis. And that's not a perfect number, but it's pretty close to where we'll likely end up.

Okay. Okay. And I should take that as being fairly conservative. And then the last question has to do with the comments you made to earlier questions about Distribution. And I might have just missed it, but you mentioned, obviously, that is the focus for M&A and getting into areas that diversify out of single-family. I guess my question is, and I just might have missed this, but are you talking about opening new locations that would sell building products that deal with different types of construction, commercial? Or are you saying within your locations you would acquire products to distribute that are aimed at different customer bases?

I would tell you our branch managers out of our existing locations are constantly looking for product opportunities in their local market, particularly focused around their customers. We've got one location, for example, that just recently started stocking copper pipe.

But what we're looking at on the acquisition side, we've had quite a bit of success, for example, in our door shops, and in a couple of locations those doors not only go into residential construction, but some of them are going into the commercial area.

So I think as we are considering adjacencies for the Distribution business, we're taking a broader look than just wholesale building materials that would support new residential construction. If there's things where we can leverage our experience on the part of Nick's business that touches industrial today, we'll try to do that. And as I say, we've had some success in some markets where we think if we can buy existing distribution capacity we may be able to create value. But it's not necessarily taking more product through Nick's existing locations; it may be buying a business that's in an adjacency where we would keep the existing management team and the existing locations and look for an opportunity to grow revenues in the Distribution arena.

Our next question is from Dan Jacome, from Sidoti & Company.

Just two quick questions. Most of mine have been answered. Is there an update on the Florien plywood project that I think you were doing some modernizing there? Is that done? I can't remember.

And then the second question was, just on Nafta, the duties. I know you guys work and speak with everybody. Is there anything interesting you may have heard kind of in your channel checks? Or is that still kind of wait and see? It looks like it's being pushed back, which is probably not too surprising.

This is Dan. On the Florien project, the two most recent projects down there were to put in a new large drier and then to put in a press, and both of those capital projects are finished and they're progressing along well in the startup curve.

As it relates to the lumber duty, this is Nick again, I think everyone is aware that the countervailing duty that was in place came off in August. Currently, the only duty today is the anti-dumping duty, at about 7%. The Commerce Department, as everybody knows, is expected to announce their recommendation for 2018 in mid-November. Again, I'll leave it to others to speculate on the outcome of that, but I think our game plan is to anticipate volatility, going forward, as a result of those negotiations.

Okay. Great. And then, maybe I just have one last here. For the acquisitions, the pipeline you're looking at, is there anything that maybe down the road you might be able to acquire or do something in your business model to maybe lessen the seasonal effects on your business side? Or is that just kind of like an impossible thing to change right now? Just thinking very high level.

I don't think it's impossible to change, but I do think if you look at the construction activity, certainly in the housing market, it's going to have seasonality to it as long as people build in the northern tier. And that's probably true in the construction, even on the commercial side. So I don't think it's reasonable to think that we're going to eliminate seasonality any time soon.

And given the scale of Nick's business, the odds of us acquiring anything that approaches Nick's business and would offset the seasonality or offset the seasonality we see in Wood Products, I think is probably unrealistic. But clearly, as we look at other distribution businesses, having components that aren't as dependent on single-family new res is one of the avenues we're approaching, but not necessarily with a view to try to eliminate seasonality. It's more to create a more open-ended market opportunity for us.

Our next question is from Mark Wilde, of Bank of Montreal.

I've just got some cleanups here. First, Wayne, can you help us think about the impact from the maintenance in Q4?

I guess the guidance I would give you is every time people have tried to think about our fourth quarter activity in the past, they've underestimated the negative leverage from taking out volume and price decline. So we had $39 million of EBITDA in the third quarter. I'm not going to give you specific guidance, but that's not a 5% or 10% impact as we go into fourth quarter. It will be a more meaningful impact on EBITDA in Wood Products.

But I would agree with Dan, particularly after we get after Thanksgiving, it's a crap shoot on where weather is, and we think this is the right time to take the down time and position ourselves to be ready for spring. But I wouldn't underestimate the downside leverage in Wood as we get in the fourth quarter.

Mark, this is Tom Corrick. I would also note that December and November are both 18-day months, and that just simply always has an impact, even outside the seasonal impacts, with all the holiday time off.

Okay. All right. Is there also -- is there any way to get a sense of what you're expecting in terms of incremental price in EWP in the fourth quarter?

This is Wayne. I'd be surprised sequentially if it's more than a couple of percentage points, but a lot of it depends on mix and what markets we ship into. But maybe 2% or 3%. I don't think you're going to see 5% or 6%. I'll be pleasantly surprised if we do.

Okay. And then, another one. I've just been looking at the log prices out on the west coast, which are up pretty sharply in August and September. We didn't talk about that having any third quarter impact. Should we be thinking about sort more impact in the fourth quarter?

This is Dan. They definitely have been up this year, and I do not anticipate them coming off in the fourth quarter. I, quite frankly, don't have a calculation as to what the impact is going to be in Q4 versus Q3, but they have been problematic this year.

Besides logs, Mark, as long as you're bringing up input costs, I would remind everyone that our mechanism for pricing OSB for web stock is a trailing average. So given what happened in August, September and October, it's a fair bet that our OSB cost will continue to accelerate in the fourth quarter. So it's another thing that will put some pressure on Wood Products earnings in the fourth quarter.

Okay. And then the last area I wanted to talk --.

Mark, Corrick. The other thing I'd add in on log costs is we have a significant portion in our regions that is purchased previously, in prior years or prior periods, and not all of our wood is purchased at the gate, by any means. So as you see price increases in the market, up or down, frankly, we have kind of a smoothing effect, given how we purchase logs.

In the west.

Okay. Last thing I wondered about is, and maybe it's a question for Nick Stokes, but we're both going to have some kind of a countervailing duty going back on, it sounds like, kind of early first quarter. And then we've got this surge in OSB capacity over the next couple of quarters. So I wondered, given kind of potential big movements from both of those factors, how do you play that or kind of manage that for your business?

That's a great question. I would tell you that typically we don't try to position our inventory and our purchasing based primarily on expectation of price increase or decrease in the long sense. We try to buy every day and sell every day and take advantage or suffer the disadvantage of fluctuating pricing.

Clearly, if you look at commodity prices, they're historically high through the third quarter. To Wayne's comments earlier, they moderated over the last few weeks. I think if you look at BMD's inventory reduction second quarter to third quarter, by the time we finished, you obviously can interpret to some degree our expectation of what those commodity prices will be through the fourth quarter. The degree at which they decline and the magnitude of that decline is very difficult for us to assess at the moment, but we're primarily focused on having product every day for our customers and buying from our manufacture partners on a regular and consistent basis.

Okay. And Nick, were you at all surprised, just coming back to this CVD for a minute? I think a lot of us had assumed, gee, we hit the end of August here, this 20% CVD rolls off and lumber prices are going to go down. Did you get caught like the rest of us did when lumber prices actually didn't go down when the CVD rolled off?

No, I don't think so. Again, we talk to our producers on both domestic and north of the border on an everyday basis, and if you see some of their public disclosures, the insight that they have relative to their expectations in terms of what they're accruing and what they're expecting probably gives you a better sense of their thinking than I'm capable of at this point.

Our next question is from George Staphos, of Bank of America.

Just a couple of quick ones from me to finish up. First of all, the OSB impact in Wood in the quarter, I was just trying to pencil it out. Maybe $4 million or $5 million, would that be fair in 3Q?

Yes, that's probably in the right range. I was just -- I think we said something like $12 million year-to-date, year over year. So if you look at our I-joist volumes, we were at about 57 million feet in third quarter, and we generally use about 1 square foot of OSB for every linear foot of I's. So you can --.

We can do the math from there.

Yes, you can do the math from there.

That was our method. And then the other question I had, and you began to answer it in commenting on Mark's question before, but would it be fair to say given the trajectory we saw in inventory in BMD 2Q to 3Q and then the fact that prices are still relatively high and, as you put it, subject to maybe more than normal volatility looking out the next couple of quarters, that your inventories in BMD are maybe a touch lower than they normally would be this time of year? Or are they normal for a fourth quarter, at least entering the fourth quarter?

They're probably a touch lower than they might otherwise be, particularly given the volume of sales that we had. The relationship of inventory to sales in the third quarter was a little bit different than it was in the second quarter.

I would tell you that our inventories on the non-commodity piles are very much in line with what we expect. On the commodity side, we're probably down a little bit relative to what we might otherwise be, given the expectations that we have.

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Tom Corrick for any further remarks.

Thanks, Kristi. Great. Thanks, everyone, for calling. We, as ever, appreciate the opportunity to update you on our progress. We're obviously very pleased with our third quarter results. And while we are now starting to see the typical seasonal slowdown in terms of demand and pricing, we remain very optimistic as we look forward to 2018.

And with that, I'll say good morning and let everyone get on with their day.

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