Boise Cascade Co (BCC) 2017 Q4 法說會逐字稿

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

Before we begin, I will 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 the 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 to Wayne Rancourt, Executive Vice President, CFO and Treasurer of Boise Cascade. Mr. Rancourt, you may begin your conference.

Thank you, Bridget. Good morning, everyone. I'd like to welcome you to Boise Cascade's fourth quarter 2017 earnings call and business update. I'm dialing in from Florida this morning. I'm joined on the call with the rest of my colleagues that are in Boise: 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 of the presentation includes reconciliations from our GAAP net income to EBITDA and adjusted EBITDA.

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

Thank you, Wayne. Good morning, everyone. Thank you for joining us for our earnings call today. I'm on Slide 3. Our fourth quarter sales of $1.09 billion were up 19% from fourth quarter 2016. Our net income was $19.1 million or $0.49 per share, up substantially from the year-ago quarter and driven by stronger performances in both businesses. Our Wood Products manufacturing musiness reported segment income of $6.8 million in the fourth quarter compared to a segment loss of $7.8 million in the year-ago quarter. Wood Products saw pricing improvement on plywood, EWP and lumber from last year's fourth quarter. Our Building Materials Distribution business posted another very strong quarter, with segment income of $22.9 million on quarterly sales of $932�million. BMD executed well in the quarter, particularly in managing through the declines in market pricing for OSB and plywood.

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 fourth quarter, including sales to our distribution segment, were $331 million, up 14% from fourth quarter 2016. As Tom mentioned, Wood Products reported segment income of $6.8 million in the fourth quarter. Reported EBITDA for the business was $24.2 million, more than triple the $7.7 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 I-joist and higher per-unit conversion costs.

BMD sales in the quarter were $932 million, up 21% from fourth quarter 2016. Sales prices and sales volumes increased 14% and 7%, respectively. BMD reported segment income of $22.9 million or EBITDA of $26.9 million. This compares to segment income of $15.5 million and EBITDA of $19.1 million in the prior-year quarter. The improvement in income was driven by higher gross profit dollars, resulting from higher sales, 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 $7.2 million in fourth quarter 2017 compared with negative $10.2 million in fourth quarter 2016. As a reminder, fourth quarter 2016 included a $3.9 million charge related to our pension lump sum settlements.

Turning to Slide 5. Our fourth quarter sales volumes for LVL and I-joists were a bit better than we expected going into the quarter, up 8% and 6%, respectively, compared with fourth quarter 2016. For the full year, our LVL volumes were up 6% and our I-joist volumes were up 4% from 2016 levels.

Pricing in fourth quarter for LVL and I-joist was up 3% and 4% from the year-ago quarter. The business recorded additional EWP customer rebates in the fourth quarter, which resulted in a sequential decline from our third quarter sales realizations. For the full year, Wood Products reported 1% better pricing on EWP compared to 2016's net sales realizations.

While we raised list prices for EWP in early 2017, sales allowances related to new accounts, volume purchases and temporary price protection provided to customers, offset the majority of the benefit of the list price increase during the year. We expect additional flow-through from last year's price increase as we move through 2018, and the last of the price protection periods related to the 2017 list price increase expire.

Wood Products announced further list price increases for both LVL and I-joist in January that started taking effect this month. With the 2018 price increase, we should see modest improvement commencing in second quarter, however, we will not see the full bottom-line impact of this year's list price changes until early 2019.

Turning to Slide 6. Our fourth quarter plywood sales volume in Wood Products was 347 million feet, down 5% from fourth quarter 2016. We successfully completed the maintenance and capital spending outages we had planned at a number of our plywood facilities during the quarter. We also adjusted our plywood operating rates to accommodate additional EWP production in the fourth quarter, as demand remains stronger than expected.

The $337 average net sales price in fourth quarter was up 26% from fourth quarter 2016. Plywood demand and pricing remain more favorable through the fourth quarter than we expected at the time of our last earnings call, and pricing and demand for plywood has remained strong since the start of the year. OSB has also seen solid demand in pricing to begin in 2018. We will continue to watch operating rates and order file lead times for both plywood and OSB. As announced, industry capacity additions in OSB come online this year.

Moving to Slide 7. BMD's fourth quarter sales were $932 million, up 21% from fourth quarter 2016. By product area, BMD sales of commodity products increased 30%, general line products increased 9% and EWP increased 20%. Gross margin percentage for BMD in fourth quarter was 11.6%, down 10 basis points from the 11.7% reported in fourth quarter 2016. BMD's EBITDA margin was 2.9% for the quarter, up from the 2.5% reported in the year-ago quarter. Sales volume growth and expense leverage was once again 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 $14 million during the quarter. Seasonal declines in accounts receivable in both BMD and Wood Products more than offset the seasonal declines in accounts payable. Inventory levels increased modestly in both businesses during the quarter. As a reminder, this statistical information filed as Exhibit 99.2 to our 8-K has receivables, inventory and accounts payable data, broken down by segment for those that are interested in more detail.

I'm now on Slide 9. We generated an additional $5 million of cash in the fourth quarter, finishing the year with $177 million. Our total available liquidity at December 31 was approximately $557 million, which reflects our cash balance and our availability under our committed bank lines. We are currently below our stated leverage target of 2.5x gross debt-to-EBITDA. Each quarter, we review our business outlook, as well as acquisition opportunities and other uses for our cash with our board. From those discussions, our board initiated a regular quarterly dividend late last year. The quarterly dividend is one more avenue for allocating free cash flow to benefit our shareholders, in addition to our share repurchase authorization.

Our capital spending is expected to be between $75 million and $85 million this year, and we do not anticipate major changes in our spending as a result of the recent tax legislation. Based on our preliminary analysis, we expect the recent tax legislation to result in our effective book tax rate declining from approximately 37% to around 25%. Our cash tax rate for 2018 is expected to fall around 18%.

Tom, I will turn it back over to you to go over the outlook.

Okay. Thank you, Wayne. The February consensus estimate for 2018 U.S. housing starts is 1.28 million, up from 1.2 million in 2017. Many builders are facing continued challenges on labor availability, building lot constraints and cost driven margin pressures, which may present some headwinds to the growth prospects, as we move through the year, but demand for new housing appears to be strengthening. We continue to believe that demographics in the U.S. will support an eventual return to normalized housing starts of 1.4 million to 1.5 million.

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. As we mentioned, we announced list price changes for our EWP last month, and believe the increases will be supported by the growth in house -- home construction activity. 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 allows us to be more flexible in responding to changes in the plywood market.

We have systematic operational and reliability improvement efforts in place in Wood Products, which are at least as important as what we are trying to achieve on the pricing front. We recognize that generating competitive shareholder returns requires that our mills operate safely, produce quality output, and do so at a cost that provides an appropriate return on capital.

The Roxboro, North Carolina EWP facility we acquired has not operated with the efficiency and cost structure we expected when we made the purchase in early 2016. We have focused considerable resources on improving our operations at Roxboro in the last year and continue to make progress. However, cost effectiveness and manufacturing remains a challenge.

In the distribution arena, 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 first quarter was at better levels than we have seen at the start of recent years. Prices for structural panels and lumber have increased in the last few weeks. It is difficult to predict where panel or lumber prices will head this year, with demand likely to improve, industry capacity additions coming online, and trade issues garnering a lot of attention. Clearly, the direction and rate of change in pricing has a big impact on earnings in both of our businesses.

2017 was a very good year for our company, and I want to thank our employees for putting us in a very good position to take advantage of the opportunities ahead in 2018. 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) Our first question comes from the line of Brian Maguire with Goldman Sachs.

Just wanted to dig into the question of kind of input cost inflation, and obviously, OSB cost would be up a little bit for you. But aside from that, just thinking about general chemical cost, freight, logistic costs, maybe give us some color on kind of what you're seeing to start 1Q off?

Brian, this is Wayne. I'll start and I'll invite Dan to chime in here. I think the most serious cost inflation that we faced that falls to our bottom line is in the Wood Products side. In Nick's business, to the extent we get inflation in product prices, we obviously tried to put our margin on that and pass cost through in terms of purchase and resale materials. In the Wood Products business, probably the sharpest increase we've seen is in log cost in the Pacific Northwest, which would impact mainly our Western Oregon operations. If you look at January of '18 compared to January of '17 on a spot market basis, log cost are up about 30%, and a lot of that's in response to the strengthened dimension lumber markets, as well as export log activity. We're really not seeing much in the way of log cost inflation in the Southeast, some pressures around kind of hauling and availability of trucking, but really not much movement on stumpage. The other place, and you mentioned it on resin and glue cost, that is a place where we're seeing price escalation. Again, I think if you look at on an annualized basis, so it's probably high-single digits, probably in the $5 million to $7 million range, if prices stay where they are today. So it's a meaningful escalation and then the one that we pay the most attention to is just movement on OSB cost. We have generally a trailing one quarter average to set the input cost for OSB going in as an I-joist component to the web. And I think you can tell from Random Lengths that we got a little bit of relief late fourth quarter, as the average moved down. But panel composites have moved out very sharply since the beginning of the year. So we are anticipating OSB costs will be remaining a headwind on our I-joist input cost as we moved in -- certainly into the first half of '18.

Okay. And then on the EWP volumes, and maybe some comments on 1Q, I know last year when you announced that pricing increase, you had some pre-volume activity in 1Q. Are you seeing any of that in response to the January increase that you did last month? And any kind of commentary generally on where EWP volumes coming in?

Yes. We had a pretty mild winter, particularly in markets that were hit in the Pacific Northwest and West Coast by winter in Q1 in '17. So the takeaway volumes, it's hard to sort out how much the weather phenomenon this year, this time in housing activity, and then, again, as you pointed out the response to price increase. We are trying to manage the volume and allocate essentially based on what we think the flow-through demand is and where people have previous takeaway volumes. But clearly, on the West Coast, we're seeing a lot of demand for product out of our Oregon facility. But as I say, if you look at the overall demand we're seeing through Nick's business in areas that -- were weather impacted a year ago, we're seeing very substantial changes in volume this year. And again, part of it's housing, but we think part of it is because the base levels were lower in '17 because of weather issues in first quarter. The other parts of the country, Nick experienced some more normal winter in '17. We're seeing volume and business activity changes that are more consistent with the changes in housing starts.

Okay. Last one for me. You mentioned in response to the tax law change, no real change in your CapEx spending plans or internal investment plans, it sounds like. I'm just wondering then what your goals would be for redeploying the sort of windfall of cash you're getting from there? Is it starting the regular dividend is a step, but just wondering how you're balancing, you're thinking about redeploying that incremental cash flow between acquisitions, share repurchases and potentially, special dividends down the road?

Yes. I think the way I would describe it in terms of sequence of priorities normally would be get the balance sheet to where we want to be on our gross debt-to-EBITDA target. Clearly, we're below that today. So we're not envisioning needing to use cash that's being generated to further reduce debt. Second priority is make sure we support the organic needs in the business. If you look at Nick last year added over $500 million of revenues to his top line, and dropped about $47�million into incremental working capital for receivables and inventory, offset by payables. And then we had around $8 million of CapEx. So the organic fees is meaningful. And then, again, as Nick's revenue growth, we think it's about $0.10 on every incremental sales dollar, so supporting him on the working capital needs is a meaningful portion. We do continue to pursue acquisitions, particularly in the distribution arena. As you noticed, we've got the modest dividend. But again, if we don't find acquisitions, given our capital spending, we think we will throw off significant free cash flow again this year. We'll need to work with our board, again, depending on where share price is, to look at where the most efficient way is to get capital back to our shareholders. We won't need it to support organic growth, and we don't need it to pay down debt. But again, we need to pay attention to where the share price is and what's realistic in terms of being able to deploy cash through that mechanism. And again, it's an ongoing dialogue with the board. In the first half of '18, I would expect us to see a fair amount of cash go out for seasonal working capital build. So it's probably a topic that comes up as we get into second quarter and early third quarter.

Our next question comes from the line of George Staphos with Bank of America.

This is actually John Babcock on the line for George. Just wanted to quickly follow-up here on the capital allocation side of things. If you could talk about some of the major projects that you're spending on this year, and remind us also what the maintenance level spend is, that would be great.

John, in the distribution business, given that we're approaching $4 billion of revenues, I think the base capital in that business, if you just look at transportation needs, preparing, paving, roofing taking care of the occupancy side, we're probably now at about a $20 million to $22 million range. There may be an opportunity to take titles on some of the real estate in key markets, but again that would be an opportunistic basis. I think the base in BMD is again in the $20 million to $22 million range. In the Wood Products business, I would tell you today's capital is probably in $45 million to $50 million range, based on the number of facilities we operate today. And strategic spending, the limited amount that we're planning for '18, we'll really be looking at log utilization centers and dryers, and where we can continue to lower the cost of our veneer production. We've done the majority of the spending that we need to do at Roxboro and Thorsby since we acquired those from GP. And so I would tell you that of the spending in Wood Products in '18, probably 90% of that or so is really going to be driven around maintenance capital and continuing to work down our cost.

And then if you could talk about -- you talked a little bit about Roxboro earlier on, could you talk about some of the issues that you're experiencing there? And then also just in general, how the integration of the Georgia Pacific EWP assets was going so far?

Okay. On Roxboro, when we acquired it, as you know, most of the facility was idle. They were running I-joist with a skeleton crew kind of on a minimal basis. And where we stand today, we really view the mill as four, if you will, major machine centers, and there's one was the -- the log preparation and the veneer dryers and we've concluded that we think it's better economically for us to provide veneers in the neighboring plywood plants in Chester, South Carolina, and Moncure, North Carolina, not trying to resurrect the Woodyard and trying to process it at Roxboro. We focused initially on improving the I-lines that were in existence to deal with -- make Boise quality products and to work with an LVL plan. We've made very good progress, particularly in the last 4 or 5 months on the I line, and we will be running I-joist out of that facility in '18 in support of the business in the Southeast. The other machine center we focused a fair amount of time on was the first of the LVL process that uses four foot veneer. And very pleased, particularly in the last couple of months, on the progress we've had on that press and we will be running that in support of the business, particularly in second, third quarter this year. There's also a six foot LVL press there that we've spent some money on reconditioning. But during the slower building housing starts in the Southeast, we're not currently planning to run that press in 2018. The cost position of our Alexandria, Louisiana facility and Thorsby, Alabama facility we acquired from GP are far better than the cost position at Roxboro. So the way I would describe it is picture the LVL process at Roxboro as really our peaker. And again, very good quality coming out of there, very pleased with what they've done in the last several months on cost position, but we're considerably lower cost still on the Alexandria, Louisiana and Thorsby facility. So that's our first go-to place to manufacture LVL in the South and the Southeast.

And how does that kind of change your outlook as far as the earnings that you can generate out of those assets?

Well, I think when we initially went into the GP acquisition in early '16, we thought we would get about $40 million of incremental EBITDA broken down with about $13-ish million of EBITDA coming out of Thorsby, a similar amount out of Roxboro, $6 million to $7 million of incremental margins, so the distribution business being able to provide and pull through additional engineered wood. And then about $6 million to $7 million in freight synergies. And if you broke that down today, I would tell you that I feel very good about where we are on Thorsby, and a $13-plus million of EBITDA to that business. I feel very good about the $67 million of pull through in BMD. And we're probably seeing $2-ish million on freight synergies. The place where I think we will end up short is based on the cost profile at Roxboro today, I think we'll be challenged to generate $13 million that we expected out of that mill. I think volumes that we're generating, we can get the facility EBITDA neutral. Operating one LVL press and the I-joist in '18, that would be good. And then we'll get additional freight synergies as we bring up the volumes in the North Carolina facility that really allows us to ship the truck market. Without Roxboro running completely full, I don't think we'll get to the $7 million synergy number, but I think we could probably approach 3 on the freight synergies.

And then just lastly, on the EWP side of things, if you could just talk about the price hikes, what was the actual percentage change you announced on the list price? Is that for LVL and I-joist?

In January, we went out with 6% to 10%. We led the increase. So what we do really is, starting late in '17, we gauge supply and demand in each market, frankly, the composition within the market of national dealers, builders, et cetera, and the days in markets. And then we announced list price changes that are by product, by geography, and we announced 6% to 10%. Several of the major competitors, followed with list price changes of their own, and we are finalizing those list price changes as we speak. I would expect that price change to start to show up late second quarter into third and fourth quarter, and then where we have longer price protection will really be early '19 before we get all of it. Think about the increase we put in place in '17. Other than the adjustment we took for some additional volume rebates in the fourth quarter, I think we have a pretty decent price progression in '17, certainly on the list price side if you look at where we were, in Q1 of '17, progressing with the third quarter. I think that's more what we expect and certainly, going into the beginning of this year, some of the price protection that we had on '17, some of the conversion allowances that we had for new customers will fall away. So I would expect us to see pretty decent price progression as we move through '18. And then again, the list price changes we announced in early '18, I think will, the last of those will show up as we get into the early part of '19.

John, this is Tom Corrick. One thing I'd note on the GP acquisition is we've continued -- I -- obviously, we have challenges at Roxboro. But I have to tell you, I'm very pleased we have additional capacity in the East and the Southeast, where we're seeing considerable growth. And as we continue to see consolidation in the industry, I think it puts us in a really favorable position relative to our customers in terms of being able to supply them, going forward, and has helped drive our growth in the business.

Our next question comes from the line of Mark Wilde with BMO Capital.

I'd like to start, Tom, just with sort of kind of a broadbrush question. And that is the really strong start that we've seen to the year in terms of pricing on really the whole gamut of Wood Products. What do you think kind of the key elements are in driving that?

Well, it's an interesting question, Mark, because the thing that I go look, obviously, in the West, I think Wayne hit the fact that we are seeing much, much stronger demand this year, which obviously, we had a huge weather impact last year. But I would tell you, we also -- it also feels like the West is significantly stronger just in terms of overall activity. And so that clearly has played a role, but I think we have -- the thing I always go look at is, so what does underlying demand look like? And I know we had awfully robust number printed for housing starts in January. But if you go in and dig into the actual numbers in January, it represented about a 10% increase over the prior January, which is still way under the number of starts that we'd see in the middle of the summer of 2017. And so I see a little bit of disconnect between what's going on in pricing today and what's happening in underlying demand. I think, clearly, everybody expected a pretty major correction in the fourth quarter, played it pretty close to the vest. When that didn't happen, people got behind and came in and had order the pretty long lead times. I think we'll see that situation adjust as we get further into the year.

And Tom, I guess, one of the other questions I'm just curious of is the impact in the near term of sort of freight and logistics issues, especially all of this rail upheaval coming out of Western Canada, which is a big exporter of lumber, but also a big producer of OSB. And we've had company say, they couldn't get rail cars in for a couple of weeks into some of their facilities. So I'm just trying to figure out, as we hit the seasonal pickup and we've had these constraints coming out of Western Canada, has that been a big element?

Well, Mark, let me -- I'll hand it over to Nick and Dan real quickly. But clearly, in both businesses, freight, both truck and rail, is playing a real role in things. And Nick, I'll let you start, maybe Dan, you can follow up with the impact it's having on you guys.

Good morning, Mark. From a receiving product standpoint into our distribution centers, it's been a challenge. And on the rail side, that challenge is as you articulated in some regions. Certainly, the severity of the service disruption's kind of due to weather and just capacity and volumes. And then, of course, as we've talked on numerous calls, the demand for trucking, driven by new regulations in terms of how drivers have to behave and those kinds of things, has made that tougher to find. And so the impact to us is extended lead times, extended order files in terms of some of the products that we're used to getting a little bit more quickly, which may have played a little bit in terms of some of this pricing environment that we're seeing on the commodity wood products.

Yes, Mark, Dan Hutchison. We did run into some issues earlier this year relative to rail coming out of Canada relative to our OSB for web stock on the West Coast. We worked through that. We had to do a little scrambling. But when I think about our freight and logistics issues, we are -- we're certainly experiencing the same thing everybody else is. But I feel like we've done a pretty good job. And as I listened to the other calls from folks in the industry, it seems like we're pretty well positioned as we work with shifting stuff maybe from truck to rail. We are -- it, so far, I don't think, had a negative impact on our customers on the outbound.

Okay, all right. Then I wanted to just toggle over to engineered wood because I think [I] was a little disappointed by both kind of pricing and volume. And I'd start on volume just by pointing out that your annual volumes in '17 in both engineered and LVL seemed to lag the APA data by about 400, 500 basis points, and that's despite having like a really good boost in the first quarter because you had GP coming in. So I wondered if you could talk about that. And also pricing last quarter, you were suggesting sort of a sequential 2% gain and we were down 3%, and your biggest competitor actually reported up 1.5% to 2%. So just help us understand what's going on there.

Mark, this is Wayne and I'll take a shot and then I'll let Dan fill in. On the volume we continue to make in GP, that actually made the comps somewhat more challenging in '17. We -- when we bought the GP operations, they were obviously running their own brand. And when we picked it up in second quarter of '16, they were running the Thorsby facility reasonably full and were making I-joists at Roxboro. And when we went in following the acquisition we announced over a couple quarters, discontinued the GP brand and realigned with our wholesale channel partners and downstream retailers and builders. So the organic volume that was in second quarter of '16 and a portion of it that was in third quarter of '16, we essentially seeded all but about 28% to 30% of the volume that was coming out of the GP mills got dispersed within the industry, and we kept about 28% of the volume and then rebuilt those volumes with channel partners that, frankly, from a pricing standpoint, were, in some cases, lower than the pricing mix that GP had. If you exclude the GP volume and just look at the Boise-branded volume and where we were in '16 versus '17, we were up about 10%. But again, because of the GP business was in the base in '16, our volume growth looks like it was behind the stats from APA, which is a fair observation on your part. And then again, on the pricing, if you looked at who we are partnered with, in certain cases the people that came in, in essence the marginal incremental consumer of Boise product in '17 was lower than what GP in some cases had in their business mix in '16. So -- and your observation on the sequential decline, I would tell you I was likewise surprised in fourth quarter. Business held up stronger in the fourth quarter than we expected in the accrued additional sales allowances where some people had hit tiers on volume for the full year. And I will take some of that responsibility from an accounting standpoint and maybe we could have been a little more conservative on some of those estimates earlier in the year, but, again, I'm quite pleased with the volume we had in fourth quarter. I think your observation is correct that we had a fair amount of pull forward in the first half of '17 in response to the price increases. But I feel very good about the tone of the business going into '18 and the takeaways and feel very good about what Nate Jorgensen and his team are working on in terms of trying to improve the net realization both from a list price standpoint but also kind of work down the level of back-end deals that we have in EWP.

This is Tom as well, and I would tell you one of the things I watch closely is customer losses, which is, really at the end of the day, the core driver behind share loss. And other than the activity that Wayne just mentioned related to GP, we had no significant customer losses in 2010 -- in 2017 and continued to have some wins on a smaller scale. So I feel pretty good about our position in the marketplace.

Okay. All right, last question for me as I wondered, Tom or Wayne, in terms of the growth in distribution, you've talked, I think, mainly about 2 different things. One would be sort of geographic fill-ins. But the other thing you've talked about is adding some new products to the portfolio, maybe some adjacent products, and I wondered if you would just give us a little color on both of those.

(inaudible)

Well, Mark, it's...

Go ahead, Nick.

Mark, this is Nick. I think you hit on the 2 keys. Obviously, from a growth standpoint, we believe there's 2 opportunities there. The first and foremost that happens every day of the week, every week of the year is growth in our existing markets from our existing distribution centers. And to your good point, we're continuing to look at product line additions, product line extensions and adding capacity from that standpoint. And that's a combination of maybe half a dozen kind of major things and then 4 dozen minor things that all add to that. The other thing I would tell you that's happening in every location is looking for customers beyond our traditional segment, traditional segment being lumber yards and home centers. We continue to believe there's customers out there from an industrial standpoint that don't represent channel conflict, and folks are engaged in identifying those opportunities at any given time. It's hard -- at the end of the day, it's hard to uniquely articulate how much of the growth comes from that, but we're pretty confident that if you measure our growth relative to housing starts in each market or certainly in addition to -- or on a national basis, there's growth opportunities that exceed starts. So we're penetrating the markets and taking share as well as just expanding the base. The second area of growth that we've talked about is obviously geographic opportunities that we see. We're continuing to look at those opportunities, and we've done a little bit of that over the last little bit in terms of what we've announced in Kansas City and St. Louis. And there's another handful of markets that we're pretty actively engaged in and looking for expansion opportunities.

And our next question comes from the line of Kurt Yinger with D.A. Davidson.

If my math is right, I think about 52% of Wood Products sales this year were internalized versus 47% last year. Could you maybe talk about at a high level the benefits to Boise as a whole in that mix shift and then also how the kind of financial benefits sort of flow through to the Wood Products and distribution segments?

Yes, Kurt, this is Wayne. I think on intercompany sales, what you're really seeing is the transition of additional EWP through our distribution business. And particularly following the GP acquisition, the lion's share of the incremental EWP growth in that transition went to Building Materials Distribution. And then we've also had teams from both sides on Wood Products and BMD that have looked at how to optimize the plywood portion of the business and where we can get, in essence, a higher net sales realization for the company overall by trying to move more plywood through DCs that are closer to our mills and, in some cases, get a better sales realization by reducing the freight component. And we've had some success in doing that in '17, and I'd expect that work to continue into '18. But again, the EWP portion of the business, about 70% of the product moved -- 70% to 75% of the product moves through internal company distribution. So as the proportion of Wood Products sales continues to skew more heavily towards EWP, you should expect that intercompany percentage of sales to continue to track upward.

Okay, I think that...

But Kurt, I would also add that if -- there's a clear attempt in both plywood and EWP to make the pricing between the 2 businesses the market price. And given that Wood Products sells product to other customers on both those product lines, we have a pretty good sense of where the market exists as the pricing is determined. So the temptation is to leave the profits in the appropriate business unit.

Yes, and we saw -- to Tom's point, we saw very good volume growth through our independent wholesalers on EWP in '17 as well as our BMD business.

Okay. All right. and then we've seen a couple anecdotes now regarding lower volumes of plywood imports available in the South. Is that something you guys are seeing too? And can you point to anything that might be causing that just given the dollar and the real exchange rate doesn't seem to have really moved all that much?

Yes, Kurt, we've seen declines in the volumes coming in from Brazil. If you look at the volume late last year in December, it was 31.5 compared to November when it was 53. And in January, it's back up to 46.1. But we think what's going on is a little bit better pricing for the Brazilians into Europe, and there are some tariffs that go in place that we think will go -- essentially will hit the quotas on the tariffs sometime late March, early April. So we'll see if they ship some more volume back towards the U.S., particularly given the strength we've seen in pricing. But we've had a bit of a reprieve from the imports out of Brazil in the latter part of fourth quarter and into the first part of this year.

And then last question. You cited higher per-unit conversion costs as far as offsets to some better pricing in Wood Products. I'm wondering if you could talk a bit more about that and whether that's more a process-oriented pressure or just a bunch of different inflationary pressures in cost?

Dan, you want to take that one?

Yes. Yes, this is Dan Hutchinson. It's really both things. We've seen increases in, as we talk about earlier, in resin, also labor, those sorts of things. But it's also process. When you look at -- I'll give you an example -- the way we have run Roxboro, it has not run efficiency -- efficiently, and that has caused our conversion costs to go up. So if you look at the document that the guys went through today, we are targeting some significant improvement in process and, quite frankly, yield to deal with the price issue to improve our conversion costs in '18.

Our next question comes from the line of Chip Dillon with Vertical Research.

This is Salvator Tiano filling in for Chip. So a couple of questions. So firstly, can you delve a little bit on the (inaudible) being sensitive towards the prices? How many -- what volumes do you expect, for example, to buy this year, to purchase this year?

Well, is that a question for the Wood Products side, on the I-joist...

Yes, yes, that's correct.

Oh, okay.

So Tom, do you want...

Yes. Just as a general rule, it's about 1 square foot per lineal foot of I-joist production. And I would think that housing starts increase, whatever you have for that, relative to prior year I-joist production would be a pretty good way to getting us on where we'll be in 2018 on I-joist -- or on OSB purchases.

Yes, I generally think of it as about -- at our current run rate, it's about 60 million lineal feet of I-joist per quarter.

Okay. And then a little bit on -- you mentioned in your capital allocation priorities that, of course, you'd rather leverage where you want to be and probably below 2x net debt. So where are you? You're still generating a lot more free cash than your existing dividend. So how long are you willing to let the net debt go before doing something a little bit more drastic in terms of capital allocation and shareholder returns?

Now this is Wayne. The conversations we've had with our board had centered around trying not to let our cash position get above $150 million. And obviously, I think what the -- the way the business is operating, once we get through the seasonal changes in working capital in the first quarter, we will push back up above those levels as we get into second quarter. And that's as I had mentioned earlier, that I think this conversation will become increasingly relevant if we're unable to find acquisitions that we think add value for shareholders. And as Nick mentioned, we've got a number of things on the somewhat smaller side in distribution where we're looking at in-fill opportunities. So if we can start making additional progress on that front, that would help use up that cash. But we think given our current gross debt levels and given our EBITDA, it's, to your point, pretty inefficient for us to sit on cash above $150 million. Our preference would be to take the cash balances down closer to $80 million. And again, we'd like to do that through value-adding acquisitions if we can. But if we don't, then we will be having conversations with our board again in second and third quarter about what the most effective way is to get cash back to shareholders.

Sure. And the last thing, previously, when you commented on share buybacks, you mentioned looking at your share price, and I just wanted to get some more color how you're feeling about exactly that relationship, spending on buybacks versus what are the (inaudible) use of the current -- right now and whether if it still goes lower, that would speed up your kind of shareholder return even in the first half of '18.

Yes, I think the conversations we have with our board, particularly around the share repurchase, is -- we view that as an opportunistic program. And we're not always perfect, but we view that as an opportunity when the share price is such that we're highly confident that we're going to add value for the remaining shareholders. So obviously, as the share price is -- gets higher, while we always want the chart to go upward into the right, the level of conviction we have changes. I mean, obviously, in early '16 when the share price was in the teens, we had a pretty high conviction that we thought we can add value by buying back shares. So again, as we get further into this year, if we don't see acquisition opportunities, that would be one potential mechanism, would be the remaining balance on our share repurchase authorization. But we'll take a look and see where equity market values are and value for our stock, and it may require, again, thinking about dividend policy or the share repurchase. But we've got a couple of avenues and I wouldn't want to speak for our board. But the acquisition arena is the place where we're spending the most time today.

And our next question comes from Dan Jacome with Sidoti & Company.

Let's just stay on the topic of acquisitions, please. Has there been any change on what you guys are seeing in terms of what the sellers might be asking for? So if you could give us a little flavor for what the valuations look like on the distribution landscape, that would be great.

Yes, Dan, as you noted, I think the challenge right now is there's a fair amount of capital sitting in the private equity space looking for a home. So we're trying to make sure that as we review opportunities, that they're clearly going to add value for our shareholders and not just pursue growth for the sake of pursuing growth. So I would tell you on the fill-in acquisitions, it's, as much as anything, looking at cultural fit and market position and supplier and customer relationships. And valuation feeds into that, but a lot of the fill-in acquisitions that we're looking at, particularly on the distribution side, will be smaller than what typically interest PE. There was a question earlier about what we might be looking at in adjacent distribution spaces, and there's a couple of things we're continuing to work. But the challenge is as you get larger in the distribution space or larger EBITDAs, you do find yourself potentially in more competition for -- from PE, and we want to make sure we're pretty thoughtful because we've seen a couple of deals in distribution that have gone, both PE and the strategics, that have gone north of 10 on the multiple. And it's pretty tough for us to pencil out a return that we think would benefit our shareholders in those cases unless we think we can bring revenue growth synergies or operating synergies. And again, that's tougher to do given -- particularly in the core distribution business we participate in because Nick and his team have a very, very strong footprint at this point. And in a lot of cases, there's dis-synergies if we buy a significant regional player.

Right. Okay, that makes sense. Nice segue to my next question. So on Roxboro, I just want to clarify this. You're looking for breakeven on EBITDA this year and then some modest improvement next year in totality. Is that the story?

Yes, the way I would describe Roxboro, I think Corrick hit it well. It is very important from a regional and supply diversification for us, and we continue to make progress on the operating cost. I think the lion's share of the economic asset on the EWP business is driven by what's going on at Alexandria, Louisiana and Thorsby. And Roxboro, in essence, is an insurance policy on production capability. It gives us a third node on the network. And as they continue to make progress on their cost position, we'll try to run incremental volume there. But it's not one that if you said, go chase the marginal customer today and, in essence, force-sell it by taking low business or high-back-end rebate business. It wouldn't make economic sense to force it. So we're trying to make sure that we can continue to support our customers and grow as they've grown and housing starts continue to recover. But we're really looking at Roxboro as continuing to work down the cost profile. But we feel very good about the quality that's coming out of the mill. We've made good progress the last couple of months. But if you think about that system in the Southeast, it's really our peak or, similar to what you'd see, utilities during the summer with air conditioning demand. We're running it to support the customer relationships that we have, and we'll continue to make progress there. But it's not one that we're out dying to try and build the capacity. We feel like we've got a footprint in Alexandria, Louisiana and Thorsby that's going to support our customer relationships as they continue to grow in '18 and into '19.

Okay. So insurance. No, that helps. What -- did you break down the EBITDA for Thorsby? Did I miss that? Did you mention that? Did you...

Thorsby right now is probably running, on an annualized basis, somewhere, around $13 million or $14 million on an EBITDA basis. It's been a very good facility. It's almost as low cost as our Alexandria facility.

I appreciate that. And then also -- and then the last question -- well, next to last. Resin prices, can you explain just at very high level what is going on there? Because I look at your kind of ended at 2016 call in resin, it sounded like it was -- you didn't expect it to be very volatile. And then on the 3Q '17 call and this call, it's been called out. So I was just curious, anything you could help us understand there?

Dan, you want...

Yes, this is Dan. We have contracts on -- with our resin suppliers that are tied to the underlying raw materials. The underlying raw materials tend to move with oil, if you will. And they have tended to -- they tended to move fairly well in '17. I think you're going to -- I think we're going to see some increased costs also in '18.

Yes. It's -- And I would tell you it's not necessarily the price -- this is Tom Corrick. It's not necessarily just the price of petroleum. I think this latest surge has been caused by some shortages and resulting price escalation in the benzene markets. And so there's a lot of underlying feedstocks that you -- that go into the price calculation. But as Dan said, it's very much a formula-driven pricing mechanism.

Okay. And then my last question, what are the industry experts calling for multifamily in the next year or 2? I know you mentioned your housing start outlook in totality. I was just curious what's the -- what's going to happen to the multifamily side longer term? I know it's not your key exposure, but I'm still curious.

Well, it's -- I don't think we would have predicted the drop that happened last year. So I'm not utterly confident in my prediction for this year. I think that there are -- continue to be some financing challenges around the multifamily markets, some concerns, particularly in the larger markets, that there might be some overbuild, and I think particularly concerns in larger markets that there's overbuild in the upper end segment of the marketplace. And as I've seen the other day, for example, that price is actually down a bit on the -- in the New York market, which was a bit of a surprise, which would be condos, not apartments. But I don't think we'll see substantial growth, but I'll be very surprised if we see the same sort of setback that we saw this year.

Okay. So a decline still but maybe not as bad is what you're saying?

Or I don't think we'll see a big increase. I don't know why we'd see a continued decline, but who knows?

And our final question comes from Mark Wilde with BMO Capital Markets.

I have 2 follow-ups. I wondered, first, you've got a new competitor who's going to be coming into the Southeast, I think in LVL, in about 18 months. And I wondered if you could just size their addition relative to kind of the overall size of the regional LVL market? And any thoughts on whether they're seeding the market already? And then just a question on Wood Products' performance.

TC, you want to take that or you want me to take Roseburg?

Why don' you start, Wayne, and I'll follow-up with some color probably?

Yes, Mark, the plant that they're building if you do the equivalent would be around, we think, 10 million cubic feet. So relative to the market, it would be a pretty significant scale. Roseburg does sell out of their West Coast operations into Texas and other Southeast markets, and I would expect them to continue to support customer introductions and, as you say, seed the market as they get into '19 and prepare to ramp up. But particularly where they're going to rely on third-party veneer to supply the inputs, they'll have a fair amount of flexibility in terms of pacing, how quickly they bring that facility up. But relative to the market, 10 million cubic feet is a large facility.

I would add that if we continue to see recovery back towards the 1.4 million, 1.5 million equilibrium number, that at a logical pace, they can bring that facility online that'll -- should be reasonably absorbed into the marketplace because to the degree that demand is flat or down, it will obviously have a significant impact on the pricing in the marketplace.

Okay. The other question I had just on Wood Products performance, if I go back, Wayne, in '14, you did $150 million of EBITDA. This last year, you did $117 million. And in those kind of 3 intervening years, you put $215 million into GP and $190 million into CapEx, and we basically got, between '14 and '17, kind of flat plywood prices and higher EWP prices. Can you just help bridge us through those elements? You've talked around a lot of this stuff this morning, but just what the big pieces are there?

Yes, I think the 2 biggest pieces, Mark, and I'd be happy to walk through this with you offline, but the biggest piece, if you look at '14, you had -- I'm doing this off top of my head -- you had lower dimension lumber pricing and weaker OSB pricing. And if you looked at where log costs were, particularly in the West, in '14 versus where they are today, there's been a significant step change in log cost in the West. And then, obviously, a pretty meaningful step change in what we're paying for web today for our I-joists versus what we would have paying for web back in '14. And then if you look at the acquisitions we made, Chester and Moncure were the first 2. In late '13, we had a pretty good run the first 6 to 9 months that we owned Chester and Moncure because we had very strong plywood markets in the back half of '14, and some of the what I would refer to as management turmoil hadn't really hit us yet. We ended up making significant changes in the salary supervision and we've gone through a fair amount of capital work, particularly at Chester, South Carolina. And that facility today is running far better than it did, but I would tell you it was reasonably dismal in '15 and '16 when we had weak plywood prices and we're going through a reasonable amount of operating turmoil in Chester. And we've still got today work to do at Moncure, though it's -- we've done some things around reliability management team that, that mill is making improvements. But the big step changes are going to log costs in the West and the OSB costs. And then the GP mills, if you added Roxboro and Thorsby together, net-net in '17, we've got a little bit of positive, but most of the positives would have been in mix business. And I look at what we're doing today on a run rate basis at Roxboro, and I continue to think it will get better based on what we're seeing in the last 60 days. Just run rate change in that mill, I think we'll probably see $6 million of improvement or so in '18 relative to what we experienced in '17. But we've still got a fair amount of work to do.

Okay, that's helpful. And then, Wayne, I guess just one other thing because I'm hearing that West Coast log prices have flattened out in the last 4 to 6 weeks. Are you guys seeing anything on that count?

I would defer to Dan on that.

Yes, I would -- they're flat but at a pretty high level. And Mark...

(inaudible) [reverse] lately.

Yes.

TC, do you want to make closing comments?

You bet. To wrap up, overall I'm pleased with our results in 2017. Looking forward, we continue to believe we'll see modest improvement in housing starts. Commodity prices, product prices have certainly started out the year quite strong. But we expect these prices to continue to be volatile going forward. We're really pleased that we've been able to implement the EWP list price increase in January, and volumes remain seasonally strong as well.

We're continuing to focus on the things that we can control, and I believe both businesses are executing well against their operating plans. I think we're -- I'm confident we're well positioned to take advantage of the opportunities of the growing market that we'll see in 2018.

And with that, thanks for calling in today, and good morning.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.