Boise Cascade Co (BCC) 2018 Q1 法說會逐字稿

Good morning. My name is Bruce, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Boise Cascade First Quarter 2018 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, Bruce. Good morning, everyone. I would like to welcome you to Boise Cascade's First Quarter 2018 Earnings Call and Business Update. Joining me on today's call are Tom Corrick, our CEO; Dan Hutchinson, Head of our Wood Products Operations; and Nick Stokes, Head of our Building Materials Distribution Operations.

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

Now I'd like to 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 first quarter sales of $1.2 billion were up 21% from the first quarter of 2017. Our net income was $37.1 million or $0.94 per share, up substantially from the year ago quarter. The first quarter results reflect the stronger performances in both businesses.

Our Wood Products manufacturing business reported much stronger segment income of $26.1 million in the first quarter when compared to $7.4 million in the year ago quarter. Wood Products pricing improved on plywood, EWP and lumber compared to last year's first quarter, with the benefit of the higher pricing partially offset by higher log and OSB input costs.

Our Building Materials Distribution business recorded an outstanding first quarter with segment income of $32.4 million on quarterly sales of $992 million. BMD executed well in the quarter by growing volumes and taking advantage of tailwinds in commodity, EWP and general line pricing.

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

Thank you, Tom.

I'm on Slide 4. Wood Products sales in the first quarter, including sales to our distribution segment, were $398 million, up 22% from first quarter 2017. As Tom mentioned, Wood Products reported segment income of $26.1 million in the first quarter. Reported EBITDA for the business was $43.7 million, almost double the $22.5 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 log costs in the Pacific Northwest and OSB costs used in the manufacture of I-joist.

BMD sales in the quarter were $992 million, up 22% from first quarter 2017. Sales prices and sales volumes increased 14% and 8%, respectively. BMD reported segment income of $32.4 million or EBITDA of $36.6 million. This compares to segment income of $20 million and EBITDA of $23.7 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 $6.8 million in first quarter 2018 compared with negative $5.8 million in first quarter 2017.

Turning to Slide 5. Our first quarter sales volumes for LVL and I-joist were up 6% and 2%, respectively, compared with first quarter 2017. Pricing in first quarter for LVL and I-joist was up 4% and 6% from the year ago quarter. We expect to continue to see favorable pricing comparisons to 2017 for EWP as we move through the rest of this year.

Turning to Slide 6. Our first quarter plywood sales volume in Wood Products was 360 million feet, up 7% from first quarter 2017. While we directed a significant amount of our internally produced veneer for EWP production in the quarter, our veneer and plywood mills operated well during the quarter, allowing us to take advantage of unusually strong plywood pricing.

The $356 average net sales price in the first quarter was up 26% from first quarter 2017 pricing for plywood. Plywood pricing in the first quarter, frankly, was much stronger than we expected. Pricing and demand for plywood has remained strong early in the second quarter. However, we do expect plywood pricing to moderate as new industry capacity and oriented strand board comes online later this year and the transportation constraints experienced in a number of regions in the first quarter in Canada and the U.S. are addressed. Changes in the volume of plywood imports from Brazil have not had a meaningful impact on the supply-demand balance in the first few months of 2018.

Moving to Slide 7. BMD's first quarter sales were $992 million, up 22% from first quarter 2017. By product area, BMD sales of commodity products increased 29%, general line products increased 14% and EWP increased 16%. The gross margin percentage for BMD in the first quarter was 11.8%, up 20 basis points from the 11.6% reported in first quarter of 2017. BMD's EBITDA margin was 3.7% for the quarter, up 2.9%, which was reported in the year ago quarter. Sales volume growth and expense leverage was once again a meaningful part of BMD's earnings improvement this quarter.

On Slide 8, we have set out the key elements of our working capital. Company net working capital, excluding cash, income tax items and accrued interest increased $107.6 million during the first quarter, representing a significant seasonal use of cash. The seasonal increase in accounts receivable and inventories was not fully offset by the increase in accounts payable. As is normally the case, we also use cash to pay out incentive compensation and customer rebates accruals during the quarter, reducing accrued liabilities. As a reminder, the statistical information filed as Exhibit 99.2 to our 8-K has receivables, inventory and accounts payable data broken down by segment for those that are interested in more detail.

I'm now on Slide 9. We finished first quarter with $134.7 million of cash. Our total available liquidity at March 31 was approximately $530 million, which reflects our cash and our availability under our 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. Capital allocation to create shareholder value remains a strong focus for management and the board.

We did close our acquisition of Lumberman's Wholesale Distributors in Nashville during the last week of April, and executing on similar opportunity remains a high priority for the company.

Our capital spending, excluding the acquisitions, 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 changes.

Our book tax rate was lower than we expected in the first quarter as a result of share price appreciation, creating a higher tax deduction for equity incentives invested in the first quarter. We continue to expect our effective book rate to normally be around 25%. Our cash tax rate for 2018 should be around 20%, unless we elect to make a discretionary pension plan contribution in the third quarter prior to finalizing our 2017 federal tax return.

We are considering a modest pension contribution to take advantage of the 35% deduction rate in effect for 2017, but no final decision has been made.

One more item of note, we completed a pension risk transfer with Prudential Insurance late in April for approximately 1/3 of our pension obligations. We transferred $151.8 million of pension assets to Prudential, and they will assume ongoing responsibility for administration and benefit payments for a portion of our retirees that are already in payout status. They will take over those benefit payments starting July 1. We will record a $12 million noncash pension settlement charge in the second quarter as a result of the transaction. Other than the onetime settlement charge, the transaction is not expected to result in a material change in our book pension expense going forward.

Tom, I will turn it back over to you to wrap up.

Thank you, Wayne. The April consensus estimate for 2018 U.S. housing starts is 1.29 million, up from 1.2 million in 2017. While many builders are facing continued challenges on labor availability, building lot constraints and cost-driven margin pressures, the demand for new housing remains very encouraging and is providing support for our key product markets. We continue to believe the 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 also have a number of areas within our control in Wood Products and BMD to continue to drive revenue and earnings growth. Our pricing efforts on EWP are gaining traction, and we believe the increases will be supported by the growth in 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 are seeing measurable results from our operational and reliability improvements in Wood Products, which are just as important as our activities on the pricing front.

We recognize that generating competitive shareholder returns requires that our mills operate safely, produce a quality output and do so at a cost that provides an appropriate return on capital.

In the distribution arena, BMD has done a terrific job of executing and responding to market opportunities at both the local and national level. Effectively managing the impacts of commodity price changes will remain at the forefront for our distribution group this year.

On the growth side, Nick and his team are active in seeking acquisitions in specific geographic markets, looking at product line extensions and pursuing other avenues to push up sales and earnings.

BMD completed its acquisition of Lumberman's Wholesale Distributors in Nashville, Tennessee last week and also announced its planned acquisition of Norman Distribution in Medford, Oregon earlier this week. I'm pleased to see our efforts to add geographic infill locations to BMD, which we have been discussing for the last year, start to gain traction with these acquisitions.

Commodity wood product markets pricing at the beginning of the second quarter was very robust compared to historic levels, while structural panels and lumber are hovering near peak pricing levels. It is difficult to predict where panel and 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.

Our first quarter results has set us up for another good financial performance in 2018, but a lot will depend on commodity pricing for the balance of the year.

To close, I want to thank our employees for doing an outstanding job of leveraging the strong market in the first quarter with excellent execution and doing it safely as we enjoyed our best safety performance in the history of the company last quarter.

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

(Operator Instructions) And our first question comes from the line of George Staphos from Bank of America.

I'll ask 2 or 3 questions to start and turn it over. Tom, on the supply side, what would you say in terms of how quickly the supply chain would adjust for the dollar in your view? If the dollar went up another 5% or 10% from here given where spreads are versus cash cost, how quickly do you think we'd see some impact from Brazilian imports? Or should we not worry so much about that because of Europe? That's question 1. Question 2, just how much do you think the plywood markets right now are taking their cue from the OSB markets where, obviously, there have been some pretty well-noted delays and operating issues with existing and new capacity coming on? And then my last question just out of curiosity, are you seeing any pickup in demand for residuals given some of the fiber issues coming out of Asia?

You bet. Thanks, George. On Brazil, I would tell you that from our perspective, the currency currently, I think it's pretty close to 3.5. And with the pricing in the U.S., it's a very attractive market for the Brazilians. We've seen, similar to last year, pretty similar increase in shipments into the U.S. So far, it hasn't had a major impact on the supply-demand balance here. But clearly, this would be a very, very profitable market for the Brazilians at this point. From our perspective, it feels like the European market is more profitable for the Brazilians than the U.S. market right now. But at the same time, there's obviously limits on how much they're going to sell into Europe. So I think the real question's going to be is what underlying, unutilized capacity exists in Brazil that could continue to add additional volume into the U.S. markets. Is that -- you got where you need to go, George?

Yes, it's a good comment. I will follow up later on that point perhaps. But on the OSB and plywood equation, what would you say there and then -- and the question I had on veneer?

Well, I think we have a good situation in supply and demand on plywood right now, frankly, particularly with growth that we're seeing in EWP. Veneer supplies are tight and some veneers are being pulled away from the plywood market. But I would also tell you that the OSB markets are very tight. We had a couple major outages on large plants in the March-April time frame. We've had continuing outages related to freight issues in Canada. And that very tight supply -- supply for OSB has driven high prices. And as a substitute for OSB with plywood, I think there's clearly -- when we're in this type of pricing environment with OSB, it helps to lift plywood pricing.

I mean, Tom, on that just quickly, do you think OSB will drive up plywood from here or do you think they can disconnect? That was kind of where I was going with that question. I didn't frame it well.

I think if OSB continues to tick up, plywood will tick with it just driven by the underlying substitution effect and vice versa, George. And your third question again, George?

Just residual shifts. Are you seeing any kind of pickup in demand there just given some of the well-advertised issues in Asia in terms of virgin fiber?

Yes. We are definitely seeing higher residual pricing in the Western U.S. right now.

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

Just a question on the EWP volume. They're a lot stronger than we had modeled. And I know it's a really tough comp a year ago when you had some prebuying. Just wondered if -- similarly if there could have been some prebuying in this quarter. And then could you just comment on your overall production ability there? I mean, if the demand continued to be robust, just from a production point of view, what's your capability to catch -- to keep up with it for the rest of the year?

Yes. This is Dan, Brian. On the first question, typically when you have a price increase like we had, you do see some prebuying, if you will. And I think you saw a little bit of that. But I will tell you that our order files today, and this is quite some time after the price increase, remain very strong on both the East and the West. So it looks like there's some real demand going on. And your second question had to do with our capacity going forward?

Yes. Just looking at -- yes, I mean, if we continue to see the housing market grow high single digits, maybe even double digits, would you be able to ramp your production kind of in line with that?

On the West Coast, we're in a pretty tight situation right now. So we're kind of at our capacity. But in the Southeast, we bought the -- we do not have all of those assets running at full speed yet. So in -- we are maybe limited a little bit on our ability to find veneer, but I think we can find some more of that. And we're still ramping up our Roxboro facility. So yes, I think if it moves 8% or 9% in the Southeast, we're fine.

Okay, appreciate that. And then, Wayne, any update on the Winston mill? And how that is making progress ramping up and any other rumblings of new capacity beyond that you're hearing in the plywood markets?

Brian, this is Dan again. I think the Winston mill is moving along through a start-up curve. And I don't think they're quite where they want to be yet, but I think they're making progress.

And I'm not hearing anything about new capacity. There continue to be multiple dryer rebuilds, and those always put some creep into the industry. But I'm not hearing anybody talk about greenfield-ing a plant or a major, major capacity expansion within a plant right now.

Okay, appreciate that. Just one last one then. [Any way we] can maybe frame or ballpark the size or EBIT contribution from the 2 acquisitions that you've announced so far this year, just maybe kind of rough rule of thumb on how to think about those?

Yes. We are very purposely not going to put out sales or EBITDA on either one of those just given the materiality. But I think one way to think about it is if you take Nick's top line and took it across the 30-plus locations he has, you end up with a number north of $100 million, and that includes very large markets like Dallas, Houston, Denver and others. I would view Nashville well below that in terms of scope and scale. And the product mix at Nashville with Lumberman's is more narrow than Boise's today. And again, we think it's a great acquisition. But one of the reasons we really wanted to get into Nashville is it's one of the faster-growing markets in the country. We've been serving it with truck hauls out of our Memphis location. And we think we've got a substantial opportunity to ramp up the top line revenues and the EBITDA in the Nashville market. And a similar story in Southern Oregon. It gives us much better freight access in the Northern California, Nevada and the Southern Oregon area. So again, the Norman acquisition will be relatively small in terms of the route -- relative revenue impact, but we think it presents a good market opportunity for us in that part of the world.

And our next question comes from the line of Ketan Mamtora from BMO Capital Markets.

First question. I'm just curious, I mean, with this rally that we've seen in lumber prices and you've hit kind of record levels on actually some of the grades, are you seeing engineered wood kind of gaining any market share from lumber?

This is Dan again. Obviously, it's the substitute product and the higher price the lumber is the -- the better it is to sell EWP. But I would say that our demand for EWP is very strong. It's maybe being impacted by that. But we continue to have strong demand, strong growth in EWP demand, particularly on the LVL side in spite of what lumber prices do.

Yes. Ketan, this is Wayne. We generally model LVL volume slightly ahead of single-family starts because we still think there's some penetration on the LVL side. With a number of the housing starts being in the Southern U.S. or Southeast, there's more slab-on-grade construction. So the penetration on I-joists is actually lagging single-family starts a little bit. And again, I think there is some substitution effect with lumber, but it's not a back-and-forth issue. It's a longer-term trend. And you'll see some of the multifamily guys maybe swing based on price. But for most of the homebuilders, once they design with LVL or I-joist, it's pretty sticky in both directions.

I think the key point there, Ketan, is it's really, I-joist in particular, pretty mature product at this point. It's very sticky in both directions. So I wouldn't expect a significant drop in I-joists used if we saw a significant drop in lumber prices.

Perfect. That's helpful. Second question, relative to your expectations at the start of the quarter or at the end of last year looking out into Q1, what are the 2 or 3 things that you think kind of exceeded your expectations in Q1?

Clearly, where we've gone on panel and lumber prices are levels that normally we would only see in peak summer months and when things are very tight. I think this year, particularly in the West, the weather has been cooperative. The Northeastern U.S. has had kind of a normal winter and had a number of storms roll through. So I think in that part of the world, volumes have probably been a little bit weaker in the first quarter than prior year. But again, overall, I think the balance has been good. And the transportation issues, I think, have clearly contributed to some tightness on the supply side or longer lead times. And frankly, I think there's a number of people down channel that are having either nervousness around committing working capital at these pricing levels or difficulty getting product. We're funding the working capital requirements at these price levels. So I think the demand has been good and people are continuing to go hand-to-mouth on a lot of products, again, because of transportation and because of the absolute valuation. So as long as the demand side is in there, I think there's a lot of support for the pricing because frankly I think there's a pretty good balance on supply and demand and there's a lot of people with some nervousness. But clearly, material needs to move to job sites given what builders are seeing in terms of demand and construction activity.

Ketan, I would add -- go ahead.

No. Go ahead, please.

I would just -- very quickly,, I would add from my perspective at a tactical level, I think the strength of the markets in the Western U.S. has been a surprise, and the corresponding really rapid escalation of log cost in the Pacific Northwest has been a surprise as well. And those are, I think, pretty meaningful impacts on how we performed in the quarter.

Got it. So just on those 2 things, have you started to see these transportation trucking issues kind of ease as you move into May? Or you think it is going to take longer to get back to kind of normal trend?

Ketan, this is Nick Stokes. At this point, we have not seen a significant improvement, particularly in rail out of Canada. The trucking issues south of the border didn't get as bad as the rail out of Canada is in, but it's still a challenge. And I don't see anything at least over the next several weeks to a month that indicate that it will be less challenging going forward.

Got it. And then one very quick one. How much was the West Coast log prices and high OSB kind of a drag on your results either year-over-year or quarter-over-quarter?

Impact of OSB pricing and higher log cost.

I would tell you that the primary spot for log cost increase has been in Western Oregon, Pacific Northwest. And it's -- probably, if you look at it on the first quarter compared to first quarter a year ago, the price component is about an $8 million drag. And OSB, similarly if you compared first quarter '18 to where we were a year ago, on the web input, it's about $6 million negative drag.

And your next question comes from the line of Reuben Garner from Seaport Global.

So just following up on that last question. You gave a couple inflation numbers. Can you kind of -- maybe at today's pricing levels, where -- what that drag would be over the next couple of few quarters as it pertains to log cost and OSB prices? And then maybe if you could add in transportation costs, what the drag was in Q1 and what's your kind of outlook is for the next few quarters?

I think on transportation, as Nick alluded to, I think the change in trucking was probably in the 5% to 10% range. But particularly in distribution, we try to pass that through in pricing to the customers. And on Dan's business, you're going to see it on -- increased costs on inbound delivered logs. And we haven't seen a huge ramp in transportation costs in wood. On log costs in the Northwest, the absolute levels, I think as long as dimension lumber persists at the levels it's at, it's going to drive higher log cost, particularly in the West. And if there's an export situation demand in Asia, we're likely to see that continue at the level it is. It's starting to move up late last year, so you will probably be -- from a pricing standpoint in the Northwest, that $8 million per quarter drag will likely continue through most of this year. And we'll start to anniversary that as we get into the latter part of '18 and early in '19 if it doesn't roll over before then. On the OSB side, we had very strong panel pricing, particularly following the hurricanes in late '17. So I don't know that we'll see the same kind of $6 million drag as we get into like third quarter. But certainly, we've still got a negative comp on second quarter. And we'll see what happens as OSB plants come on in late second quarter, early third quarter, what that does to panel prices. But certainly, we'll have another negative comp in 2Q on both of those issues.

Okay, Wayne, very helpful. And then on the distribution side, a couple of acquisitions to start the year. Can you, one, update us on your geographical exposure now, maybe how many markets do you have left that you can better serve either through greenfield or M&A? And then maybe discuss what you think the impact may be from the big merger in the space earlier this year, whether positive or negative in the near term or long term?

Yes. I think in terms of the geographic fill-ins, Norman, in my mind, will represent the third kind of recent one we've done. I mean, we've ended up with a team in St. Louis where we decided it's essentially greenfield. Nashville is a fill-in. Southern Oregon is a fill-in. I think if you take the U.S. map, there's probably 4 or 5 other markets where we're continuing to spend a fair amount of time and working in a couple of cases in conversations with people where we currently do business. And we'll see how that develops. But I would tell you it's probably 4 or 5. It's not 10 or 15 in terms of the geographic fill-in. And Nick's team is spending a lot of time on product expansion and also spending a lot of time in multifamily, light commercial and in the industrial category. And we're getting pretty good sales lift on those efforts as well.

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

Could you give as an update, and I apologize if you talked about this, I wasn't on the first few minutes, but where Roxboro stands? It seemed like that the expectations longer term were a little diminished, but yet the market obviously continues to develop and grow. And is there any plan there to maybe see that plant -- the Roxboro plant run more consistently, especially if the demand stays strong?

Chip, this is Dan Hutchinson. Yes, there certainly is a plan to have it run more consistently. I think we're seeing over the last couple of quarters real progress on the prep that we restarted there. We're starting to feel really comfortable about how that's going. It's getting up towards -- on a consistent basis, toward the levels we need it to. We restarted the I-line a little while back and we'll be shipping I's out of there by the end of the quarter. So starting to feel better about it. And clearly, our intention is to get it running on a consistent, steady basis. And with the demand situation we've got, I'm sure it will be a good contributor for the company.

Okay. And then on -- a second question. You gave us the guidance for the CapEx for this year. And you sure have the situation where -- well, first of all, I'd love your opinion on this. Do you feel that housing activity is still constrained relative to what people would like to be able to do in terms of build because of labor and permit -- permitted land and lot availability? But -- so first of all, I'd like to know if you still see evidence of that because it does seem strange that if we kind of just parachute out of the here and now and you look at us talking about under 1.3 million starts 10 years after the crisis, 12 years, with a population that's 50% bigger when we used to see 1.6 million, 1.8 million, you kind of wonder why it is still down. And with that in mind, do you feel the right course in terms of your CapEx is to stay at or near current levels? Or are you thinking of cutting back or actually maybe expanding in some significant way in the next couple of years in maybe ways we don't know about?

This is Wayne. And a lot of finger pointing saying I should answer this one. I'll be honest with you, I think on the manufacturing side, we're going to continue to fill out our EWP mills, as Dan alluded to. I don't see us adding meaningful capacity to what we do on our manufacturing footprint. I'd rather be short than long and add to overcapacity. And while there's, as you know, good continued demand on single-family growth, the recovery is long in the tooth and it's been, to your point, much slower than any of us anticipated. And I would rather put, frankly, at this point in the cycle, put dollars into the mills that we really want to defend and make sure they're low cost, well maintained. And that will give us some productivity creep. And more importantly, it will position us from a cost standpoint for the eventual downturn, whenever it comes. Having said that, on the distribution side, we continue to work with Nick's group pretty heavily to make sure that he's got the real estate and the footprint to support continued organic growth. And he's got a number of markets where we've added to the footprint. We're working on some stuff in New Jersey. For example, we've done the St. Louis build-out. We'll, I'm sure over the next 18, 24 months, scale up the footprint in Nashville. And similar to Dan's situation, I think if we deploy additional capital, it's probably partially to support what Nick's doing from a growth in this cycle, but it will be to increase the resiliency of his business and reduce fixed costs for the eventual downturn in the next cycle.

And I would add, Chip, on that, that from our perspective that $75 million to $85 million number that we've been talking about for a years now, I think, reflects what we think we need to spend on the assets that we own today to keep them competitive. And there may be some things on the margin that will make sense. But I don't see anything that would materially change that number significantly up or down relative to the current asset base we have.

Got you. And one just very general question. When you guys became public, what, 6 years ago, I think you were talking in terms of a mid-cycle EBITDA of around $250. And since then you added the plywood mills in the East. You added the GP, EWP mills. And I know maybe those aren't going to be quite what you thought. And then, of course, now you've made these acquisitions in distribution, not to mention, I would guess that business is doing better than certainly we would have thought. It's a great business. With all that added together, would your view of a mid-cycle not peak, but certainly not trough, be north of $300 million?

Well, Chip, let's make sure we're both talking about the same definition of mid-cycle. Where do you think housing starts are at mid-cycle, 1.3 or 1.4? Or what do you view as mid-cycle?

I would say that, that's probably a good place to be. Certainly, in my heart, it feels like that. But my head keeps telling me it should be higher given the population, but let's say it's 1.35. So that means we're not even there yet.

Yes. I think the efforts we've got underway in Nick's business with the organics and with the geographic fill-ins, we originally said we would get that business to somewhere around $3.8 billion to maybe $4 billion of revenues. I think given what we're seeing and given what he's been able to do from a growth standpoint in some of these geographic fill-ins, there's probably another $0.5 billion of revenue there that I think where we were in early '13, I would not have said that we will be pushing towards 4.5 or 5. And obviously, some of that depends on where we are on commodity prices. So we originally said somewhere around $120. We thought we would get $5 of synergies or $6 of synergies out of the GP acquisition that would fall on Nick's side of the ledger. And so I think we've got a pretty decent shot at Nick's business mid-cycle being in the $130, $135 kind of area and with any luck, $140. Again, some of that may be funded with acquisition, so you've got to be a little bit careful. And on the Wood Products side, relative to what we thought in '13, if you take a snapshot today, plywood prices are well above where we thought we would be. We thought we would be somewhere around the $295 level. And obviously, this quarter, we were $356. We would not have thought we would see the OSB costs or log costs that we're currently seeing. So I think in the wood business if we can push towards the $175, $180 kind of area, based on what we're seeing on input cost, I'd feel pretty good about that. But I wouldn't sit here today and tell you that we're anywhere close to mid-cycle pricing on plywood. I think we've got upside pricing from here on EWP, and we're working hard every day on the realizations. Hopefully, we'll see a little retrenchment on input costs on OSB and logs. But I think that business is probably a $175, $180 business based on what I see today. So I still think in total, we're probably north of $300 at mid-cycle, but I think more of the contribution is likely to come out of the distribution side than we would have anticipated and slightly less out of the Wood Products side.

Got you. That's very helpful. And by the way, just as a way of observation, it seems like the marketplace is a lot higher value per dollar of EBITDA in distribution businesses than manufacturing.

And our next question comes from Dan Jacome from Sidoti.

Just a couple questions. Just want to go back to Lumberman's really quickly. Very high level, just wondering if they brought you any new third-party relationships or it was just more overlap with your current relationship base? And as you said, you wanted to get into the Nashville market first. And then I don't know if you could talk about this, but maybe their LVL, I-joist penetration or maybe -- just very high-level thoughts on what sort of mix they may have brought to you guys.

Dan, this is Nick Stokes. As you would expect, there are some regional suppliers that have a heavier presence in Nashville than we have historically been exposed to. So there was a little bit of a drag along. One of the key attributes for both Nashville and Medford was the relationships that they have with suppliers and customers and how well regarded they are. And in many cases, those suppliers are ones that we're currently doing business with. As it relates to EWP in Nashville, obviously, that's a big component of their current business. They've been very successful at doing that, and we expect that to continue.

They are a distributor for Boise Cascade on the EWP side and we've had a very longstanding relationship with the management team there on a commercial basis. And as Nick said, they overlap on some of the key suppliers that we would want in place as we go into a new market. So the transition knowledge of the management team, integration risk, we considered quite low, and the same is true for Norman.

The other thing I'd add is we expect 0 supplier issues based on the integration of both of those operations.

Okay. That's very helpful. And then just thinking about future opportunities on the distribution infill side. Do you think the low-hanging fruit is on like things of, I'm no expert here, but like bulk, break packaging or maybe just straight plain-vanilla customer service and marketing? Or is it all of the above?

It's all of the above.

All right. Fair enough. And then do you have a very high-level outlook on repair and remodel as we think about the next 18, 24 months? And that was it for me.

Yes. I think generally, we think repair and remodel activity will be favorable. We've had good employment growth, good move-up in home values, interest rates are still reasonably low. So the backdrop you need in terms of existing home sales, employment, et cetera, are all very favorable. So we are still thinking that you'd probably see 4% to 5% growth in repair and remodel, and that's a pretty positive impact in general.

We have a follow-up from the line of George Staphos.

I want to dig in a little bit to BMD and the incremental margins that you saw in the quarter. And you mentioned that between getting some favorable pricing tailwind, as you would expect in this kind of environment, as well as I think you said good operations and leverage there, that's what drove the margin. Were you surprised when you look back at how you converted that revenue and pricing in terms of the incremental? I think I got like 7%. And is the typical benchmark still around 4% on a going-forward basis? Or do you think you've, through various means, have raised your ability to convert revenue growth into EBIT or EBITDA growth going forward?

Well, I would be remiss and I think Nick would kick me if I told you that 7% wasn't the appropriate number to think about. I think in our internal conversations, we're still thinking 4 to 4.5% is the right number to think about, and that somewhere in the 3%-plus, I think probably towards more of the 3.5% on the EBITDA margins just given the scale and the occupancy leverage that we're getting at this point. But I would caution everyone as you think about like where we are today, second quarter versus first quarter, first quarter benefited from going from low to high and about a 20% or 25% lift on commodities as we went from January to March. We are at those elevated price levels today. But if they held constant in the second quarter, Nick's business will not have the same tailwind on gross margin that he would have had in first quarter. So he'll get the benefit of the higher revenue dollars and the expense leverage. But on a percentage basis, you'll get more lift in gross margin in a rising environment than you will at an absolute level that's static and higher. So I'd be cautious on implying that we will get 7% leverage on revenues going forward. I still think the 4 to 4.5 over some kind of reasonable commodity pricing environment is a more appropriate level. And again, given the volumes that Nick's group has been able to do on growing the business and capturing share, the EBITDA trend level may be more towards the 3.5% than the 3% we've spoken about in the past. But I'd be very cautious about assuming that we'll be 7-plus percent EBITDA leverage on new revenues.

That's helpful. I just ask the question, and Chip teed it up a little bit in a different way, if I apply even 3.5% to kind of an incremental revenue growth, you're saying at one point in time $3.8 billion to $4 billion of revenue and now maybe you can push towards $4.5 billion, the EBITDA goal for mid-cycle winds up mathematically higher than what you appear to be comfortable with. So recognizing we're probably overanalyzing this, is there a reason other than just the law of big numbers and what kind of pricing cycle we've seen and the benefit it would give to BMD, why the next tranche of revenue growth, again, that business doesn't quite convert at a normal incremental margin for BMD?

Well, again, I mean, if I take 3.25% on $4.5, I get $146 for EBITDA. So whether it's $145 or $155, I'm not that smart. But Nick did $132 on EBITDA on $3.7 of revenues. So if I put $15 million of incremental EBITDA on $700 of incremental sales, it would take the 3.5% -- it would imply a leverage of 2% roughly, if I'm doing my math right. And I would caution you that 3.5 may not be the trend level EBITDA. And again, I think we had favorable commodity pricing in '17 and clearly had very favorable pricing in first quarter of '18. And while I'm comfortable with our execution, I also don't want people to get ahead of what is an appropriate return on capital for the business and what we've seen in terms of returns on investment because, again, we compete with a number of people and we've got large vendors, large customers. And we're realistic about what return on investment we think we can sustain before people look at reload or look at going direct who are willing to take more working capital risk. And I think at these price levels, Nick's guys have done a very nice job of selling material out of warehouse and taking advantage of some reluctance on the buy side to take inventory positions. I think his guys are doing a great job of managing the commodity volatility and getting out of warehouse business or using our willingness to take risk on commodities as a way to leverage business and profitability. But I don't know that, that will be a sustained environment.

Understood. It reminds me of the phrase, "No good deed goes unpunished," Wayne. So anyway...

Correct. And I think our guys are doing a great job. And I don't want this to be negative, but I also want to be pretty realistic.

We appreciate the color. Two last ones for me, and I'll turn it over. I think Ketan had talked about freight, and I had a question just on lead times. Is there a way to relay what average lead times are now across your businesses, dissect it however you'd like to, relative to, say, a year ago? That's question #1. And then if you look at veneer operating rates, I don't know if you could relay those, but where are you now versus a year ago?

This is Nick. As it relates to the lead times, I'd have to do a little bit of ciphering in the data to get you an exact number. My sense is that it depends on the products a bit. So if you think about wood commodities on the panel side -- on the plywood side, lead times are probably what they were a year ago. On the OSB side, they're probably a touch longer but not significantly longer, except for the associated rail issues out of Canada. Certainly, the dimension lead times both in terms of mill and rail issues in Canada are significantly longer than they were a year ago. On the general line side, probably about the same with the exception of some metal products that have been embroiled in a series of tariffs and those kinds of conversations. Those are longer than they were a year ago. And I think Dan's already talked about the EWP wood lead times on EWP products.

I don't recall that number. If you could relate that, I'd appreciate that.

That's the best I got. I think EWP lead times are out just a little bit longer than they would have been a year ago.

And this is Dan. If the question on veneer operating rates is what -- is that the question, what percentage of our veneer is going into EWP?

More right now relative to your available veneer capacity, what are you pulling at? And might you need to put in a little bit more capacity at some point?

Yes. So if you think about it, really kind of across the system, we are maximizing our internally generated veneer capacity where it makes sense to go into our EWP. We have some plants -- plywood plants that are too far away from the facilities, so we don't use those. We are also more aggressive than we were a year ago at outside purchases of veneer on both the West and the Southeast. In addition to that, you think about it, going forward, we have some capital projects in this, primarily in the Southeast, which we'll do over the next few years, which will increase our veneer capacity and that will increase our EWP capacity. So as we look forward, we will be spending capital to get at that as the market continues to grow and continuing to realign ourselves with outside suppliers of veneer.

What I would say though is as far as I'm aware, all the veneer capacity in the United States is running hard today, the dryers are full. And so at this point, to the degree EWP continues to grow, you're going to see diversion of veneer away from plywood towards EWP. And obviously, the Brazilians would be the wildcard on capacity in the U.S. right now.

And we have a follow-up from the line of Brian Maguire.

Couldn't let you get off without a question on capital allocation. So I think last quarter you talked about -- maybe coming back to this question about what do you do with the cash after you went through the seasonal working capital build at 1Q. In other words, sort of through that -- obviously, it was a great quarter. You've done a couple of smaller deals. It sounds like nothing massively in terms of uses of cash there. And I know before you said you didn't want the cash balance getting above $150. It seems like we might be, with the seasonal release of working capital and earnings pickup, might be getting to that level. So just maybe you can kind of frame how you're thinking about redeploying cash to shareholders in particular at this point?

So Brian, this is Tom. I would tell you I don't think we're thinking about it dramatically different than we have and pretty much the same queue we've gone through. We do have a few things in the pipeline on the distribution side, and those things come to fruition or they don't. But we continue to explore. I would tell you from -- while we haven't been successful on a couple of things recently, it feels like things we think should be the prices are getting closer to the things that other people think ought to be the price. So maybe we're a bit more competitive in that space, but we're continuing to look at infill. We continue to look at adjacent distribution opportunities. I think Wayne mentioned earlier that we are looking at a small contribution to the pension plan later in the year. But barring a significant acquisition issue and assuming continued performance along the line, I think your assessment on cash flow is correct. And I think this will be a topic as we sit down with the board. It's been an ongoing topic. But our fundamental view that we should -- we don't have a reasonable way to deploy our -- if there's a reasonable -- if we don't have a reasonable way to deploy the cash, we'll continue to think about how we return it to our shareholders.

And does the special dividend still enter that conversation? Or is that moved to the back burner relative to other options? Or is it -- is there anything that you think would be a preferred method for returning cash?

And this is just phrasing. But if we decided to go through the dividend mechanic, we will try to describe it in a way that doesn't leave the market thinking that it's a change in our regular dividend. But to Tom's point, I think we want to make it clear that this is a set of behavior that we would anticipate engaging in from a capital allocation on more than one occasion. So if our operations continue to generate significant free cash flow, if we don't have good organic uses for it, if we don't have acquisitions in the pipeline and if we don't need it from a leverage standpoint to reduce debt, our intent would be to return it to shareholders. And whether you call that a variable dividend or a special dividend or whatever, if we find ourselves in the situation we currently find ourselves in as we move through '18, we would not view that as a special in terms of the -- this is a onetime only. But again, we have various ways of getting capital back to the shareholders. And it was a conversation again with the board this week in anticipation of what the back half of this year is going to look like from a cash standpoint. And again, barring something more sizable than the Lumberman's-type deals and the Norman-type deals, even if we did a couple more of those this year, we would still find ourselves in a cash position that's longer than we need and longer than we think is appropriate. So it's likely to be a conversation when we meet with our board in August.

Assuming we stay on the current trajectory in terms of pricing.

And we have a follow-up from the line of Ketan Mamtora.

So just not trying to draw too fine a line on what you just said. But it sounded to me that you are more open to having a variable dividend than having -- than doing kind of a onetime special dividend. Would that be a fair characterization?

Well, again, I think our priorities are to grow the company in a way that adds value for our shareholders. So I don't want to describe it as a variable dividend because if we find ourselves with $100 million acquisition opportunity that we think is going to generate significant value for our shareholders, that would take precedent over any kind of a variable dividend or a special dividend. We've got the quarterly regular dividend that we view as being sacrosanct. And hopefully, over time, as we continue to grow distribution and move towards EWP, our cash flows normalize at a level where over time we can increase our regular dividend as well. But I think what Tom and I and the board are focused on is we view part of our stewardship as trying to generate compounded 10% returns on capital. And if we don't have good opportunities either organically or on acquisitions to do that, we're going to give the money back. And it will be some combination of share repurchases and dividends, TBD. But I think we don't view having high excess balances of cash if we don't see good opportunities in the acquisition pipeline. We don't think the option value on the cash -- it's appropriate for us to stockpile things. And again, we're very focused on making sure we capture the value [when there's] upside. And we will be making investments over the next 24 months to make sure that we have the resiliency to ride out whatever the next downturn is when it comes.

And I would add that as we think about it, we're going to continue to focus on our liquidity because I certainly, to Wayne's point, want to weather the downside. And I also would like to be positioned to be able to acquire in the downside because there are obviously more favorable values, but that doesn't mean sitting on a mountain of cash at 2% returns --

Got it. That's actually very helpful. And just one last question. I'm sorry if I missed this. But Wayne, any sense -- just order of magnitude and I know you all have not decided this yet, but if you were to decide on making the pension contribution, just order of magnitude, how much that -- could that be?

I would tell you, Ketan, that's open for a reasonable amount of debate. I would think about $20 million is kind of a midpoint. But I would tell you, it could be higher than lower than that, but it's certainly not $50 million or $100 million. I mean, it's a smaller number. And thankfully, having transferred roughly 1/3 of the liabilities and assets over to Prudential, relative to our market cap, the remaining plan is reasonably small. And when we remeasure, I think we'll be in a pretty good funded place. So I don't anticipate the pension being a big draw of funds. And if we did it, it would probably be more to set us up to be able to exit more of the pension liabilities sooner rather than later. That would be the tactical and strategic reason to do it and, again, to take advantage of the 35% federal tax rate in '17. We've got a limited window to do that.

And our next question comes from the line of George Staphos.

So when you talked about investing to ride out the next downturn, I was wondering if you looked at your operations right now and you assumed pricing consistent with what we saw back in 2008, 2009, across your system, how many of your mills would be below breaKevin in terms of EBITDA? How many would be -- or what percentage would be neutral or positive? Have you done that analysis? And where do you stand in trying to move down or up the curve depending on your perspective if, in fact, that's the right way to look at it?

That's one of those kind of "angels dancing on the head of the pin" question, and I hate to be flippant about it. But the reality is, in particular, both businesses are margin businesses. And the kind of the lever in all this is wood cost. And it's always a question of how long it takes for a log cost to adjust back, for OSB prices to adjust back if you're thinking about input costs into our EWP business. Our experience -- I think as those things do adjust, the really challenging part is -- in the downturn, typically, it's driven by a pretty major drop in demand, which really causes some challenges on the cost side that are harder to control internally. But we have not been through that exercise analytically. Although obviously, we've been through it from a couple of times experientially. And I think we tend to work through that pretty quickly.

Yes. I was going to say I think that's really 2 questions, George. If you said pricing alone drops but volumes fell by 8% or 10%, you get a very different outcome than if we're going back to 600,000 or 700,000 housing starts. So if the volume is there and we can amortize maintenance costs, overheads in Nick's business, if we can cover occupancy, you get a very different outcome than if you said volumes fell by 40%. I think given what we've done to support Nick's business on the real estate side, you'd have negative leverage obviously on occupancy cost. And in Dan's business, if we -- on the EWP mills in particular, if we're running those at 75% or 80% of capacity, you'd get a very different outcome than if they're running at 40%. And again, I think we did a very good job last downturn concerning how to manage that situation. So I think we will do better in the next downturn, whenever it comes. But it's really the volume component is as important as thinking about where the price level is.

Understood. And I was thinking probably more about the wood business and not to belabor it maybe more comment. Yes, whatever assumptions you would have ultimately in terms of pricing and volumes in the next downturn, it would be interesting to see what your capacity, how much your capacity would be, breaKevin versus above or below water. But again, you did real well last downturn, so maybe that's a lesson in itself.

Thanks, George. To wrap up today, I guess I have just a few quick comments. This is Tom. We're obviously pleased with our first quarter performance from a safety, operational and profit perspective. Distribution's progress in acquiring geographic infill distribution is particularly encouraging. And I believe we are very well positioned to take advantage of the strong market we are currently enjoying today.

Thank you again for joining us today, and have a great weekend.

Thanks, Bruce. Everyone, have a great day.

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